UK's 26th Licensing Round to Boost A&D Activity?

Posted: 02/28/2010

At the end of January, two announcements came from the government that look set to provide a boost to the oil and gas industry and potentially ramp up acquisition and divestiture (A&D) activity in the sector.

Chancellor Alistair Darling unveiled a plan to provide tax breaks to oil companies operating in the most difficult to exploit areas of the UK Continental Shelf (UKCS) and on the same day energy and climate change minister Lord Hunt announced a new round of offshore licensing which could prompt A&D activity in the near future.

Legislation to Aid A&D

The Treasury is proposing new legislation to provide up to £160 million worth of tax relief for each gas field in the West of Shetland that qualifies for the support, which represents a total package of up to £12 billion.

It is estimated that the area—the last major section of the UKCS to be developed—contains 20 percent of the UK's remaining oil and gas reserves. Infrastructure will be critical to fully unlocking the potential of this region, so stimulating A&D activity in the area is key.

"The government recognises the importance of the UK oil and gas industry to our economy and the dependable foundation it provides for the UK's energy security," Darling said.

He added that the legislation would "continue to support investment in the North Sea, the fuel this delivers, the contribution this makes to our economy and the jobs and skills the industry supports and develops."

The legislation remains subject to approval by the House of Commons and this will be sought no later than the end of March.

Record-breaking Round

Lord Hunt announced the 26th licensing round for offshore oil and gas exploration during a visit to a platform manufacturing yard in Fife. For the first time since 1998, the round offers blocks in all areas of the UK seas for new licensing.

"This record-breaking 26th round includes areas of the continental shelf not as yet explored and will provide a new boost to activity in the basin," Hunt said.

"The round will help to secure the future of the UK's oil and gas industry which still provides three-quarters of our energy needs and some 350,000 jobs," he added.

Estimates suggest that there are still around 20 billion barrels of oil, or possibly even more to be produced so there is plenty of potential for A&D activity surrounding the UKCS. Hunt said the new licensing round would help to ensure this potential is realised.

"As we make the transition to a low carbon future, we must ensure we have secure energy supplies by making the best use of our indigenous energy resources in a safe and environmentally-sound way," he commented.

The majority of the areas that were licensed in the first round in 1964 have not been allowed extensions and have therefore been relinquished so will be available to bid for this time. In addition, 14 blocks that were classified as 'fallow' under the government's scheme to stimulate activity on blocks where there have been no significant developments for three years have also been fully or partly relinquished.

As part of this 26th round, the government has introduced a new frontier licence with an extended nine-year exploration term for the West of Scotland area. The aim is to encourage oil and gas exploration in a region for which geological data is as yet scant.

Potential

Hannon Westwood has released a study on the potential resource opportunity offered in the licensing round, suggesting there are 80-plus discoveries in the unlicensed acreage. It calculates that there are gross unrisked potential reserves of 800 MMboe and estimated unrisked potential reserves of 35 billion boe.

Chris Bulley, executive director of Hannon Westwood, said that the round offered "free rein to explorers with new ideas," so A&D activity may be set to increase in the area.

He also predicted that the new field allowance regime, which exempts a certain amount of production income from tax, would "provide some boost to the smaller or more difficult developments."

"However, the gas potential in both the Southern North Sea and West of Shetlands could benefit from a strengthening of the gas price," Bulley said.

"Improvements in the fiscal regime to improve the economics of gas projects are particularly important to allow the development of marginal gas discoveries before the ageing Southern North Sea infrastructure is decommissioned," he concluded.

Abu Dhabi-owned Taqa Bratani and Canada's Static Energy Corporation have already stated an intention to bid in the 26th licensing round.

Posted: 02/28/2010

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