The last two weeks have been rather busy in the North Sea, with both the UK and Norway announcing license awards. In the UK, the Department of Trade and Industry (DTI) announced the awards of 150 licenses for the 24th licensing round on February 1st, one of its largest licensing rounds ever. Just a few days earlier on January 29th, the Norwegian Ministy of Petroleum and Energy announced that the Cabinet had finalized the awards of 48 production licenses in its 4th APA (Awards in Predefined Areas) round, also its largest APA round ever. As such, with today's high oil prices and the new licensing options available in the UK and Norway, the mature fields in the North Sea are garnering a level of attention that has not been seen in years.

UK 24th Licensing Round
"This award matches last year's record breaking result and shows that by having a flexible and responsive licensing regime we are continuing to maximize the potential of the North Sea," said UK Secretary of State of Trade & Industry, Alistair Darling.

As Secretary Darling notes, the 24th licensing round was a very successful one for the UK. It resulted in 150 license awards, just one less than the 151 licenses awarded in the 23rd round during 2005, and well ahead of the 118 licenses awarded during the previous record-setting 4th Round in 1973. In the 22nd License Round in 2004, a total of just 97 licenses were awarded. And in the 21st Round of 2003, 88 licenses had been awarded to a total of 62 companies. So, the new level of licensing achieved in the last two rounds is a very remarkable 56% step up from previous years.

Part of the reason for this growth is obviously the high oil prices that have prevailed over the last several years. But, also of importance, as Secretary Darling also mentioned, are the new licensing options that the UK introduced over the last several years. In 2003, the UK introduced the "Promote" license to allow smaller companies access to UK offshore licenses. Within this type of license, the operator pays only 10% of the traditional fee per acre for the first 2 years and is able to bypass some of the more stringent licensing requirements, thus allowing new players to join the search for oil more easily. In 2004, the UK introduced the "Frontier" license for areas on the Atlantic margin west of the Shetlands, which allows an operator to license a very large area at just 10% of the traditional rate and then relinquish 75% of the area after assessments have been made as to its hydrocarbon potential.

While these new "Promote" licensing option has been very popular over the last several years (60% of licenses in the 21st and 22nd rounds and 50% in the 23rd round were Promote licenses), this licensing round marked a return to more traditional licenses. In total, 79 traditional licenses were awarded, accounting for 53% of the licenses awarded. This was the first time since the "Promote" license was introduced that more traditional licenses were awarded than "Promote" licenses. However, the "Promote" licenses still constituted a very significant proportion of the awards, accounting for 65 licenses or 43% of the awards. A further six "Frontier" licenses were awarded, which is just one less than in the previous round.

As part of the licensing requirements for these 150 awards, a total of 16 wells are required to be drilled, with a further 13 wells contingent on the results of seismic surveys.

Norway APA 2006
In 2003, the Norwegian Government introduced the system of Awards in Predefined Areas (APA) to lease offshore acreage in mature parts of the Norwegian Continental Shelf (NCS). This system, which replaced the annual North Sea Awards, is intended to ensure ongoing access to areas of the NCS with potential reserves close to existing infrastructure. Additionally, this approach allows smaller companies to get involved in viable opportunities in the Norwegian oil sector.

Since that time, the number of licenses awarded each year has increased. In 2003, 19 production licenses were awarded. That grew to 28 licenses in 2004 and 45 licenses in 2005. This year, a total of 48 licenses were awarded covering 85 whole or partial blocks, with 19 different operators and 33 total companies obtaining a share in the licenses.

In conjunction with the licensing of these areas, most of the operators will be running and interpreting seismic data in order to make a determination whether to hold on to the licenses. However, with these licenses a total of 10 exploratory or appraisal wells are also to be drilled to check for the presence of hydrocarbons. While 10 wells is a small number, combined with the 16 wells do be drilled in the UK, it is clear that these licensing rounds are having a direct impact on offshore rig activity in the region.

North Sea Rig Activity
The North Sea is home to the second largest fleet of offshore rigs in the world, with a total of 161 semisubs, drillships, jackups, and platform rigs working in the region. The region has the largest contracted fleet of rigs of any region, with a total of 157 rigs (97.5%) of the rigs in the area currently under contract.

Looking at the composition of the fleet, there are a total of 85 platform rigs in the region, the most for any part of the world. Additionally, there are 41 semisubmersibles, 34 jackups, and 1 drillship in the North Sea for a total of 76 of these rigs. Of those 76 semis, jackups, and drillships, 72 are currently contracted for a 95% utilization rate, putting the North Sea well ahead of the Gulf of Mexico, Persian Gulf, Southeast Asia, Far East, and the Mediterannean in terms of utilization rates.

Of the jackups and semisubs currently in the North Sea, more than half (40 of 75 rigs) are in the UK, which is currently home to 17 jackups and 23 semis. Another third of the fleet is in Norway, which currently has 18 semis, 6 jackups, and 1 drillship. And a further 12 jackups and semis are working in the Netherlands and Denmark.

Looking at the North Sea fleet in terms of operators, there are a total of 21 offshore rig operators in the UK and another nine companies operating rigs in Norway. Talisman, Shell, and ConocoPhillips are the only companies that are currently operating rigs in both countries.

Looking at the operators that garnered at least 5 operatorships in the UK 24th Licensing Round (as shown in table T1 above), only three of the seven companies have or currently do operate offshore rigs. Both Maersk and Nexen have operated rigs in the North Sea (and other areas) previously. Sterling has operated rigs in the US Gulf of Mexico, but although the company has had licenses in the UK North Sea for years, other companies, including Oilexco, have operated the rigs working on Sterling's blocks. Granby, Ithaca, Silverstone, and Wham are all new players that have no history of acting as operators on any offshore rig contracts.

In the Norway APA round, all of the operators with at least three licenses have experience acting as operators of offshore rigs in the North Sea. In fact, three of the top licensees, Statoil, Norsk Hydro, and ConocoPhillips, are also the three top offshore rig operators in Norway. Among the other operators that won three or more Norwegian license awards, Nexen is currently one of the top offshore rig operators in the UK, RWE Dea has operated rigs in both Norway and the UK, and Centrica and Lundin have both operated rigs in the UK over the last three years.

It is clear from this analysis that the UK is managing to attract and allowing to operate newer and smaller companies than are currently winning licenses in Norway. This is certainly due in part to the "Promote" licenses being offered by the UK, the generally shallower water depths of UK licenses, as well as the greater number of blocks available to be licensed. All of these factors combine to make entering the UK market more attractive and economical for smaller players.

As these new operators enter the region, the potential demand for offshore rig time increases. And with rig utilization already at the highest levels that have been seen in many years, the North Sea rig market is tight and therefore may see some growth as new rigs move into the region either from the Gulf of Mexico or as they come out of the shipyards. That growth in fleet size certainly will not come quickly enough to cool rising day rates for jackups and semisubs, which have increased about 50% in the last year and doubled from two years ago. All things considered, it's a very good time for the North Sea rig fleet.

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