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UK Completes Successful 32nd Offshore Licensing Round Against a Backdrop of Energy Transition Initiatives

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Key Takeaways:

  • The UK Government has reaffirmed its commitment to North Sea oil & gas exploration and the continued role of oil and gas in the UK’s energy mix as the economy transitions to net zero emissions by 2050.
     
  • Against a back drop of initiatives focused on reducing CO2 carbon emissions in the UK oil and gas sector, including increased use and integration of renewable power technologies, the Roadmap 2035 industry led actions to support the energy transition, and the review of the UK’s strategy of maximising economic recovery of offshore oil and gas, the announcement of the award of licences under the 32nd Offshore Licensing Round evidences the continued potential for exploration and production in the UK offshore. 
  • For companies engaged in exploration and production, oilfield services, and related supply chains & technologies, and for investors and participants in the UK offshore there remain significant opportunities, as well as new challenges, as the UK’s energy transition progresses and the oil and gas sector transitions to lower carbon emissions.

On 3 September 2020 the UK Oil and Gas Authority (OGA) offered some 113 licence areas for award under the UK’s 32nd Offshore Licensing Round to 65 companies, covering 259 blocks or part-blocks. The 32nd Offshore Licensing Round was launched in July 2019 and applications closed in November 2019. 

Whilst the 31st Offshore Licensing Round of 2019, which offered 37 licence areas for award to 30 companies focused on frontier areas, the 32nd round focused on mature, producing areas close to existing infrastructure in the central, southern and northern North Sea and the West of Shetlands areas. The OGA made available significant data sets and survey results to applicants in support of 32nd licensing round applications with the aim of stimulating applications and exploration activity. Participation in the 32nd round, the quality of applications and associated work commitments is generally considered to have been a success.

Licences have been offered for award to a range of companies including BP, Apache, Equinor, Chrysaor and Shell as Innovate Licences.  Sixteen of the 32nd Offshore Licensing Round licences are offered for award as “Straight to Second Term” licences, including to Operators such as EnQuest, Premier and Neptune. For further information please refer here to the list of awards, including blocks, successful applicant / proposed licensees and work commitments published by the OGA. 

Innovate Licences were introduced for the 29th Offshore Licensing Round and are the new flexible form of licence available for offshore exploration and production which replaced the earlier forms of licence: the Traditional, Promote and Frontier. Innovate Licences enable the applicant companies to execute a more favourable work programme through defining the duration and the phasing of work commitments. Applicants for Innovate Licences propose the duration of the Initial and Second Terms within certain parameters, giving them more flexibility. It is possible to apply to develop or redevelop an existing field and not to propose exploration, in which case an Innovate Licence may be awarded without an Initial Term, a so called “Straight to Second Term” licence.

Initial Terms are subdivided into three phases: A, B, and C. Phase A (geotechnical studies and data reprocessing), Phase B (seismic survey acquisition of data) are optional, whilst Phase C (drilling an exploration well) is required, on a contingent (drill or drop) basis. The Innovate Licence may only continue from one Initial Term Phase to another Phase if the work for the earlier Phase is completed.

The awards in 2020 under the 32nd Offshore Licensing Round come against the backdrop of renewed focus by the OGA on energy transition. The UK oil and gas sector has been challenged by the OGA to adapt and demonstrate action in the reduction of carbon emissions if it is to “survive and thrive” and play a leading role in energy transition, including through delivery of carbon capture and storage in the UK and in UK Continental Shelf (UKCS) energy integration projects.

The UK has committed to legally binding net zero carbon emissions by 2050 and such commitment will require a material reduction in CO2 equivalent emissions by the UK oil and gas sector whilst it remains tasked to maximise recovery from the UK offshore, seen as necessary to contribute to meeting the UK’s long term energy demands, particularly in gas. 

Developing the projects and applying the technologies to reduce, capture, store and use CO2 are the challenges facing the sector and which will enable it to play a significant role in the UK’s energy transition. The OGA led UKCS Energy Integration project is part of this approach and aims to integrate oil and gas operations (and specifically power generation) with renewable energy sources both onshore and offshore UK and potentially from Norway and through energy integration technologies, including Hydrogen. Phase 1 (technical assessment) of the Energy Integration project is completed and Phase 2 (economic & regulatory assessment) was due to complete by mid-2020.

In its 2019 Roadmap 2035 industry body Oil and Gas UK (OGUK) set out its blueprint for net zero emissions identifying more than sixty actions required to be taken by the sector to support the transition to lower CO2 emissions, whilst continuing to meet the UK’s energy needs, support jobs and develop new technologies. Now, one year on, OGUK reports that eight Roadmap 2035 actions deemed essential have been delivered, and a  further twenty are underway. 

The UK Government’s 2019 General Election manifesto reaffirmed support for the North Sea oil and gas industry and its role in the transition to a net zero economy, identifying potential for a transformational “sector deal” including initiatives around funding and taxation. Referred to as the “North Sea Transition Deal” submissions to the Government from OGA with input from a range of stakeholders including OGUK are expected this year with an expectation that the Government will advance proposals for the North Sea Transition Deal within this Parliament. 

In parallel to these various initiatives, OGA is consulting on plans to change its maximising economic recovery (MER UK) strategy for the UK offshore in order to align it to net zero targets and to evidence how the requirements under the MER UK strategy to maximise oil and gas production from the UKCS is compatible with the UK’s legal commitment to net zero emissions by 2050. The revised strategy for MER UK is expected in coming months following the end of the consultation period in July 2020.

Separately the UK Government announced 3 September 2020 that it intends to review the UK’s offshore oil and gas licensing regime in view of emissions reductions targets and that it expects to publish findings in an Energy White Paper later in 2020.

Notwithstanding the success of the 32nd Offshore Licensing Round, and no doubt in view of the range of initiatives ongoing relating to energy transition, the OGA has confirmed that it does not plan for a licensing round in 2020 / 2021, pausing licensing and encouraging companies to acquire data and progress studies in anticipation of future licensing rounds and to progress and complete existing work commitments.

 

 

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