The UK has today launched its 33rd licensing round for companies to explore oil and gas in the North Sea. Senior Associate Tom Edwards and Partner Lewis Jones at the London office of Baker Botts L.L.P., a leading international law firm, provide commentary on this new development.
“Hot on the heels of lifting its moratorium on onshore fracking the UK Government has today launched its first licensing round for North Sea exploration acreage since 2019. The 33rd North Sea Oil & Gas Licensing Round sees 898 blocks and part-blocks offered with the UK Government targeting the award of 100 petroleum licenses to stimulate exploration activity in the basin. UK production from the North Sea has dipped to 1.5 million boed, from a peak of around 4.4 million in 1999, and today’s acreage offering represents the latest in a series of steps taken by the UK to promote its energy security in the face of prolonged underinvestment and the current geopolitical pressures affecting world energy markets. Stimulating domestic production may also ease the UK’s balance of payments at a time when Sterling is under sustained pressure.
The North Sea Transition Authority aims to reduce the average time from discovery to first production on the UKCS which stands currently at five years. To this end the 33rd Licensing Round has identified four high priority cluster areas in the Southern North Sea – historically a prolific natural gas producing area – and which benefits from technically matured prospects, in proximity to existing infrastructure connecting to the proposed Bacton hydrogen hub, identified as a key element in the UK’s Net Zero strategy. Acreage is also offered in the West of Shetland, Central and Northern North Sea areas, as well as the East Irish Sea.
The harsh operating environment in the North Sea makes it a high cost basin. The UKCS also faces the challenge of ageing offshore infrastructure, whilst the geological features of the remaining untapped reservoirs tend to render them economically marginal. In consequence, oil majors have in recent years announced their intention to focus their capital elsewhere, and exit the UKCS. These majors are being replaced by a new generation of private equity backed and smaller publicly listed operators, whose appetite for returns and lean operating models have in many cases sustained assets long beyond their expected operational life, and brought new reserves to the market that would otherwise have been ignored by the majors. Nevertheless, the changing profile of investors in the North Sea means the basin must compete harder than ever for international capital. It is hoped the market leading GHG emission reduction commitments, agreed by UK operators in the 2021 North Sea Transition Deal, will encourage investment in the UKCS at a time when capital is increasingly conscious of emissions intensity.
The North Sea has a long history of delivering energy security, jobs, and substantial revenues for the UK economy. Nevertheless, it remains to be seen whether the fiscal terms offered by the UK will be attractive to international capital at a time when there are calls for “windfall” taxes, and for the direct participation of the UK Government in the energy industry itself.
The application period closes at 14:00 GMT on 12 January 2023.”
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