New consultation issued on OGA Financial Guidance

The Oil and Gas Authority (“OGA”) issued a new consultation on 1 June 2018, seeking industry’s views on revised “Guidance on the Assessment of Licensee Financial Capability” (the “Financial Guidance”) that it plans to use in assessing a licensee’s financial capability at the time of a licensing event offshore and onshore.

OGA has responsibility for regulating and authorising many activities in relation to the extraction and storage of petroleum on the UKCS and onshore in England. In assessing applications for those activities, OGA often requires to consider (amongst other things) whether an applicant will have the required funds needed to meet the commitment on which OGA is asked to base its decision.

The Financial Guidance is intended to describe how OGA will assess those financial capability considerations where OGA is required to take decisions on the following:

• Licence awards;
• Licence assignments;
• Changes of control of licensee;
• Progression under Innovate Licences;
• Well consents;
• Field developments (including extended well tests); and
• Pipeline Works Authorisations.

The existing financial guidance has not been updated since OGA took responsibility for these matters in October 2016 and OGA considers it to be unreflective of the innovative sources of finance that licensees are now beginning to use. OGA does not wish to discourage this financial innovation and so the proposed new Financial Guidance seeks to take a less rigid approach in considering licensees’ financial capability in light of the different funding models now being used, such as contractor financing and vendor assistance. It also felt that the earlier guidance was unclear, difficult to follow and created a pass/fail test rather than allowing a risk-based assessment. The risk based approach may require some applicants to provide more information than previously but OGA considers that this is intended to be largely information already available to the applicant.

The Financial Guidance sets out the key factors the OGA will take into consideration when reviewing an Applicant’s finances, covering the two broad criteria of financial viability and financial capacity.

The proposed assessment on financial viability is based on a company’s historic and current solvency, and assesses whether the company is expected to remain solvent in the future. A demonstrable track record of solvent trading should be shown along with a reliable financial structure. Current ratio, interest cover, gearing ratio and net assets will be calculated.

Financial capacity considers the applicant’s future commitments, both known and anticipated, along with OGA’s assessment of the applicant’s net worth, to determine whether the applicant has the financial capacity to meet the commitment it is making to OGA. Cash flow forecasts will be analysed to determine whether there will be a debt service cover ratio below two in any period. Sensitivity analyses will also be performed for oil and gas prices, interest rates, inflation, capex overruns, delays to field start-up and production rates. Detailed evidence of specific financing arrangements will need to be provided for OGA assessment. That evidence might include information on bank loans, parent company guarantees or loans, bonds, deferred payment arrangements, contractor financing, share issues, prepayments or other funding arrangements as well as details of assumptions underlying or conditions affecting the provision of that funding.

Specifically, any application in relation to the drilling of an exploration or appraisal well should be submitted alongside evidence that the applicant has the funds necessary to meet its share of the drilling costs, including for the plugging and any abandonment of the well if it is proven to be “dry” or non-viableplus a minimum contingency of fifty per cent.

In considering the extent of the evidence that OGA may insist is provided to it for assessment as to financial capability, it is worth bearing in mind that, under section 45A of the Petroleum Act, OGA can require financial information and documents from someone that has drilled, or started drilling a well, provided the well was spudded after 28 January 2009. If the licensee cannot provide this information, then OGA can compel the licensee to take further action to plug and abandon the well. This may include creating financial security to ensure funds would be available for the plugging and abandonment.

The output of the OGA’s analysis will be a risk based assessment, setting out the OGA’s assessment of the applicant’s financial capability along with a recommendation to the OGA decision-maker as to how to proceed. This recommendation will not be conclusive – when taking a decision on a licence event, OGA must also consider and balance various other factors, such as the technical capabilities of the applicant, as well as the requirements of MER UK and the matters set out in the Energy Act 2016 to which it must have regard. Ultimately, each application will therefore be assessed on a case-by-case basis.

The extent of the guidance applies to the UKCS and onshore England. Powers in relation to oil and gas onshore Scotland are devolved to the Scottish Parliament. Wales will fall within the scope of the guidance until onshore petroleum licensing powers are devolved to the Welsh Assembly, planned to take place in October this year.

Responses to the consultation are to be received by Friday 29 June 2018. The consultation document can be found here.