UK Gets Tough On Oil Companies

The United Kingdom set tough new investment rules for North Sea licenses this week to slow the decline in output after a 30-year jackpot. Energy Minister Brian Wilson said more demanding conditions would force companies to invest or face losing existing licenses to other investors who were willing to squeeze the country's shrinking reserve base. "It is essential to have the right licenses in the right hands at the right time. We are moving towards that objective on a very encouraging consensual basis," Wilson said in a statement. The new rules set new investment deadlines on existing licenses, make trading licenses between companies more transparent and set shorter investment deadlines in new concessions, he added.

North Sea oil and gas discoveries are now much smaller than the giant finds of the 1970s and 1980s, and the region's resources are dwarfed by areas opening to foreign capital in Africa, Central Asia and the Middle East. "Many of the industry's practices today are based on methods of working that were effective for delivering the huge oil and gas projects of the 1970s and 1980s," said Paul Blakeley, general manager of Canadian Talisman Energy Inc, who participated in formulating the new guidelines. "We will have to change radically the way we do business if we are to access efficiently and effectively these reserves which lie in smaller, more complex reservoirs," he added.

Production of North Sea oil and gas peaked at around three million barrels of oil equivalent per day in the late 1990s, and dropped to an eight-year low in 2001. Industry analysts say the North Sea has probably pumped about two-thirds of its total recoverable oil and gas reserves of 43 billion barrels of oil equivalent in the last 30 years. But some executives say the offshore province may be only half way through its life as technological progress could yield higher recovery rates. Investment in the North Sea has dropped by half since 1998 when oil prices crashed, to about three billion pounds sterling ($5 billion) per year. Despite higher world oil prices since 2000, spending has failed to recover fully.

Under the new voluntary code, exploration and development licenses will be deemed fallow if no activity has taken place for four years. Wilson recently estimated that Britain had 250 fallow discoveries and another 200 unused licenses. After the four-year deadline, companies with fallow discoveries will have 27 months to start investing or face losing the license, while those with fallow blocks will have 15 months to come up with a development plan before jeopardizing it.

The change is not written into legislation, but agreed in a government-industry forum called PILOT. "It's a positive move because it will encourage a faster recycling of acreage and optimize its use," said David Cox, a North Sea analyst at Wood Mackenzie consultants. "The North Sea has peaked, but the potential is for production to plateau for a while," he added.

BP and Shell Expro, a joint venture between Royal Dutch/Shell and Exxon Mobil, pump about three quarters of Britain's oil and gas. But a growing slice of new exploration is done by smaller independents prepared to take bigger risks with tighter margins. Canada's Pancanadian, for example, made Britain's largest oil find in a decade with the Buzzard field last July. New licenses in this year's 20th round, for which bids close next month, will have two four-year initial terms, with a 50 percent relinquishment after the first period, and will only run into the third 18-year term if a development plan is approved. Previously companies could hold on to areas for 40 years with fewer requirements for investment.