ENERGY LAW
Accessing Petroleum: Granting of LicensesDr Tina Hunter
Reader in Energy Law, University of Aberdeen; andAssociate,
Aberdeen University Centre for Energy LawJUS271A Energy LawOverview
of LectureUpstream petroleum explained Access regimes Production
Sharing ContractsLicensing and Concession SystemsComparison of LCS
of several petroleum jurisdictions
STAGES OF PRODUCTIONACCESS PETROLEUM EXPLOITATIONLCSEXPLORATION
AND DEVELOPMENT(L2)or PRODUCTION: SAFETY IN EXPLORATION AND
PRODUCTION (L3)PSCPRODUCTION: REGULATING WELLS IN EXPLORATION AND
PRODUCTION (L4)(L1)PRODUCTION:ENVIRONMENTAL REGULATION IN
EXPLORATION, PRODUCTION DECOMMISSIONING (L5)Petroleum Regulatory
Arrangements: which is best for the parties?
THE REGULATORY FRAMEWORK: PSC VS LCSProduction Sharing Contracts
(PSC)Outline of PSCsThe host government owns all the mineral
resources, and retains ownership offers International Oil Companies
(IOC) areas to explore for and exploit petroleum.IOC assumes all
risk in the in E&P of host States petroleum resources, in
exchange for compensation contract between a host State and IOC
where the two parties agree to share the product of the labours of
the IOC.State provides the resource oilCompany assumes risk, and
provides the labour, capital, and risk The host government owns all
the mineral resources, and retains ownership of the resources, but
offers International Oil Companies (IOC) areas to explore for and
exploit petroleum.In return, the State gives the IOC company the
right to receive a share of the production (or revenue), in
accordance with the Production Sharing contract (or Agreement)The
IOC assumes all of the risk in the exploration and development of a
States petroleum resources, in exchange for compensation Therefore
PSC is a contract between a host State and IOC where the two
parties agree to share the product of the labours of the IOC.State
provides the resource oilCompany provides the labour, capital, and
risk
7Features of PSCisolate a project from general risk by providing
a stable contractual framework to underpin investments, thereby
encouraging project investment host State not required to invest
any capital into the E&P. investment and risk is assumed by the
IOC. If a huge discovery is made, the IOC recovers its costs plus
has large amount of profit. Opposite also applies Profitability of
a field dependent upon the current market price for oil As
compensation for assuming risk, the IOC will receive a % of
production to sell. Risks are normally accepted as the price paid
for the prospect of making considerable profit if the prospectivity
of the field is as believed (or better!).
investment and risk is assumed by the IOC. If the IOC does not
find oil, it loses investment (assumption of risk)If a huge
discovery is made, the IOC recovers its costs plus has large amount
of profit. Profitability of a field is also dependent upon the
current market price for oil the higher the market price the larger
the profitability for the IOC.As compensation assuming risk, the
IOC will receive a % of production. These risks are normally
accepted as the price paid for the prospect of making considerable
profit if the prospectivity of the field is as believed (or
better!).
8Philosophy of PSCsownership of the petroleum shall always stay
with the Host Country, and that the International Oil Companies are
just acting as Contractor to explore and exploit it.Usually: the
Stans, some Middle Eastern areas (Iraq?) some African and Asian
countries. No international uniform/model PSC but some countries do
see Kurdistan
Negotiation of PSCsThe PSC is a unique contracta contract for
production, andsets out the specific terms as a petroleum fiscal
regime Contract is long term often set for life of field
negotiable? Generally, terms are fixed for the duration of the
contract (encompassing exploration, development and production),
often 25 years or more, provides the IOC with legally binding
assurances of returns for its considerable capital
investmentcontracts can only be altered by mutual agreement between
the IOC and the other party to the agreement (usually the host
State or a State Oil Company). Economics of PSCs: dividing oil
between IOC and StateThe proceeds of the petroleum are shared
between the State and the IOC on the basis of the agreed formula in
the contract, after costs are subtractedThe percentage of petroleum
received as compensation is partly related to the capital and
operating costs incurred by the IOC, and partly represents a profit
element. May be set by legislation or individually negotiated
Ownership of Oil is NOT transferred to the company remains with the
State
The oil and gas discovered will be divided into cost oil and
profit oil. Cost Oil (remuneration for effort and risk). calculated
at the market vale. The IOCs capital costs are either expensed in
the current year of depreciated over a number of years. There is
usually a cap on the annual amount of Cost Oil recoverable from the
gross annual revenue (%), This ensures the State receives profit
when field production commences, even if no royalty payment.After
the costs have been recovered, the remaining oil in the field is
known as Profit Oil. The IOC usually pays a profit tax, which may
or may not be equal to the rate applying to other commercial
activities in the host State
Case Study: Sakhalin IIThe first ever Production Sharing
Agreement (PSA) was completed with Russia in 1994, with the signing
of the Sakhalin II project consortiumclaim that the Sakhalin PSA
structure transferred "most of the risks of both construction
overspend and change in the oil/gas price to the Russian
government.The key issues and claims associated with the Sakhalin
II* overly advantageous to the IOCs; * The government must forego
share of revenues until the IOC recoups costs; * Risk of cost
over-runs and price volatility are shouldered mostly by government;
* Russian 70% local content requirement not being met; and
Environmental abuses exist at Sakhalin II developmentIssue of
Equator principles and Shell investment Comparison of Standard PSC
and Sakhalin IIStandard PSCSakhalin II PSCExploration risk carried
by the companyHydrocarbons already found by the state, so no
exploration risk for SEICCosts recovered during the cost oil phase,
then profit oil split between company and the State at an agreed
percentageCosts and profits(17.5% IRR) go to SEIC BEFORE State
receives any shareAnnual cap on Cost Oil during the early years, so
the State receives some share of the surplusNo cap on annual cost
recoveryClear definition of what expenditures can and cannot be
included in the calculation of cost oil and profits taxNo clear
limits to recoverable expensesTypically Royalty is 10-20%Royalty is
6%Licensing and Concession Systems(LCS)Licensing may be defined as:
the identification by government of potential (upstream) petroleum
investment opportunities in the national territory, their
subdivision into discrete contract areas of prospective size, their
offering to the international oil companies by a suitable tendering
process and the establishment and negotiation of technical,
financial and contractual terms and conditions (for award)
consistent with their petroleum prospectivity and with the national
interest.[1]
[1] Michal Bunter, The Promotion and Licensing of Petroleum
Prospective Acreage (2001)Important partsRegulatory Structure:
identification by government of potential (upstream) petroleum
investment opportunities in the national territory, Blocks/Acreage:
their subdivision into discrete contract areas of prospective size,
Licensing Process: their offering to the international oil
companies by a suitable tendering process establishment andTerms
JOA/Contract Terms negotiation of technical, financial and
contractual terms and conditions (for award) Role of Government
Policy: consistent with their petroleum prospectivity and with the
national interestFeatures of LCSA petroleum licensing system is one
where a license is granted for a specific type of petroleum
operation, usually for exploration or production. License is for a
specific area (the license area), for a specific period.Depending
on the regulatory framework governing the LCS, the license may
confer exclusive rights, in the sense that for as long as the
license is valid, and subject to certain conditions, the licensee
is authorised to exercise the rights conferred in the license
against third parties.Exclusivitynon exclusive licenses are
conferred for geological and geophysical prospecting, compare
Australia and Norway for exploration licenses exclusive license is
usually conferred for exploration work that involves drilling, as
well as for production operationsTypes of licences
ExplorationNorway non exclusive UK Exploration License Seaward
Exclusive Australia exclusive leads to production licence (or
retention licence see lecture TH2)Production Licence Norway
exclusive exploration and productionUK Seaward Production
LicenseOther types of licenses Frontier Licence (Seaward) UK
Promote Licence (Seaward) UKSpecial Prospecting Authority -
AustraliaPromote Licence (seaward) - offers the Licensee the
opportunity to assess andpromote the prospectivity of the licensed
acreage for an initial two-year period without being assessed
against the stringent criteria required of a Traditional licensee.
For two years, the licence rental fee will be only 10% that of a
Traditional licence (i.e. it will be 15 per sq kilometre.) However,
the Promote Licensee will not be approved as Operator (and
therefore will not be permitted to drill any wells) until it has
met the criteria appropriate to those for a Traditional licensee
and also made a Firm Commitment to complete an agreed Term Work
Programme.Frontier Licences (seaward) (two types: Frontier Six
Years or Frontier Nine Years)- allow companies to apply for
relatively large amounts of acreage and then relinquish three
quarters of that acreage after an initial screening phase during
which the normal rental fees will be discounted by 90%.
Additionally, the Exploration and Development periods are longer
than those on a Traditional licence (six years or nine years
respectively, instead of four). These types of licence are
available solely for difficult/unexplored areas (west of the
Shetlands or West of Scotland).
19Exploration and LicencesRelevant LawNorway - Petroleum
Activities Act, Chapter 2 - In Conjunction with Directive
94/22/ECAustralia s96 133 OPAGGSACondition of Award of LicenceWork
ProgramContribution of DataMandatory Drilling in lesser Explored
areasNon-Exclusive Right to ExploreComparison to Australia special
prospecting licence( non exclusive) Exclusive rightProduction
LicencesRelevant LawNorway - Petroleum Activities Act Chapters 3
and 4 - In Conjunction with Directive 94/22/ECAustralia - s159-191
OPAGGSARequirement for licence, and grant of exclusivityThe
Production LicenceAward of licenseRights, area and DurationFees
chargedWho appoints the Operator?Production LicencesObligatory Work
Requirements and commitments to the stateWhat if you want to change
participants and/or operator?THE PAPERWORK/CONTRACTSComparison
Australia and NorwayJOA Licencing Agreement Accounting
Agreement
13 April 1965 first licences granted
Blocks/Acreage
General License ProcessProcess EU Directive 94/22/ECHydrocarbon
Directivehttp://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:31994L0022&rid=2
Process Norwegian Law
Process Australian law
Regulations (PR 97)
Selecting the winning applicant s10 PR97
Conditions of grant of license
Process Australia
Licence Iceland
Terms/JOANot required in all jurisdictionsJOA in NorwayModel
Clauses in UK Ernst to discuss JOA in detail
Grant of a license comparisonHow are licenses awarded
BiddingAlways get best?Best vs deepest pocketsFairest?Realise value
of field? eg EkofiskWork program bidding can go wrongAustralia
example Cornea fieldDiscretionaryChoose best APA Norway and
Avaldsnes/AldousMust comply with Hydrocarbon DirectiveWas used pre
1994 to build up local industry and promote economic
diversificationNo longer able to be utilised struggle for new
countries eg Iceland
