OGA consults on proposals to introduce ‘Innovate Licence’ and amend model clauses

The Oil and Gas Authority (“OGA”) has launched a consultation on proposed changes to the model clauses for Seaward Production Licences. The regulator is seeking to amend the date on which a licence is considered to have commenced, add new termination provisions, and introduce an entirely new type of licence: the ‘Innovate Licence’. Should the proposals be implemented, the new licence and altered model clauses will be available from the 30th Seaward Licensing Round onwards. The consultation can be accessed here.

The Innovate Licence

The ‘Innovate’ concept is essentially that of a ‘tailor-made’ licence. OGA devised the notion after discussions with industry prior to the 29th Seaward Licensing Round. Whilst elements of the concept have been introduced as part of the 29th round, OGA is of the opinion that “in order to introduce the full benefit of the ‘Innovate’ concept”, amendments must be made to the model clauses contained in the Petroleum Licensing (Production) (Seaward Areas) Regulations 2008.

The novelties of the ‘Innovate Licence’ can be found in the content of its Work Programme and the length of its Initial Term. According to OGA, applicants ought to be able to pitch a Work Programme that is divided into as many as three phases. For instance, there may be a Phase A for “activities other than seismic surveys and drilling and which come ahead of either in an applicant’s plans, such as the acquisition and reprocessing of existing data and other desk-based geo-scientific or engineering studies”; a Phase B for “the shooting of new seismic and other geophysical data”; and a Phase C for “drilling exploration and appraisal wells”. The particular division is for the applicant to propose according to their circumstances. Similarly, it is open to the applicant to suggest the appropriate length of the Initial Term. The duration of the Initial Term is, except in special circumstances, the same for all licences of a particular type (e.g. four years for all Traditional Seaward Production Licences in the 28th Round). Under the ‘Innovate Licence’, however, the applicant may suggest a term which better reflects the work to be undertaken in its ‘custom-built’ Work Programme.

OGA acknowledges that whilst these new features may herald greater flexibility, they equally have the potential to allow the retention of valuable exclusive rights throughout a longer Initial Term. In light of this, several amendments have been designed to act as a check on this benefit and ensure the Work Programme is being carried out as agreed:

• Amendment 1: The OGA proposes that the licence will expire at the end of each of the Initial Term Phases if the licensee has not achieved certain milestones that justify the retention of exclusivity into the next phase
• Amendment 2: Any individual element of a Work Programme may specify an associated deadline by which the work is to be done, and the Licence shall expire if the work has not been completed by then
• Amendment 3: A mechanism by which the licensee may propose, and the OGA may agree, an amendment of the Work Programme
• Amendment 4: The Petroleum Licensing (Applications) Regulations 2015 to be amended so that all of the provisions that previously applied to applications for ‘Promote’ Production Licences are applied to applications for Innovate Licences

Further Proposed Changes

Separately, OGA proposes two additional changes aimed at “simplifying” the model clauses. Firstly, it suggests altering the date on which a licence is considered to have commenced. Currently, a Seaward Production Licence will commence on the Start Date or the date on which the licence is granted – whichever is the later of the two. OGA finds that this can be “detrimental to Licensees” because the execution of a licence might be delayed for a significant period. In those circumstances, the licence would not come into force until after the Start Date, leaving the licensee with less time than expected to complete the Work Programme. In order to address this, OGA suggests that commencement ought to be the earlier of the Start Date and the day of execution. This would, in the regulator’s opinion, minimise the chances that unexpected delay will cut into the duration of the licence.

Secondly, OGA hopes to supply all licences with termination provisions that would allow them to last for “as long as justified by the need to cover continuing production, without further amendment to the Licence being needed”. Similar provisions were discussed with OGUK and licence-holders in 2009-2010. OGA now wishes for those measures to be incorporated as standard in the model clauses. This would allow licences to continue where production is ongoing or is just about to commence, and would allow rights to be terminated where production has not yet begun or else has permanently ceased.

Comment

Whilst the ‘Innovate Licence’ would offer applicants the freedom to be somewhat creative with the content of their Work Programme and the duration of their Initial Term, the final product nevertheless remains subject to OGA approval. The regulator would consider the proposed setup as a whole and will only offer licences that it is satisfied are appropriate to deliver the MER UK objective. OGA hopes that the new licence will offer greater choice, whilst allowing operators the option of retaining 29th round model clauses. On that basis, “it has been concluded that the proposed changes will … impose no additional cost on business”.

The consultation closes on 6 January 2017. OGA aims to publish a response within 12 weeks of the closing date.