JUS271A Energy Law

Accessing Petroleum:
Granting of Licenses
Dr Tina Hunter
Reader in Energy Law, University of Aberdeen; and
Associate, Aberdeen University Centre for Energy Law

Overview of Lecture
Upstream petroleum explained
Access regimes
Production Sharing Contracts
Licensing and Concession Systems

Comparison

jurisdictions

of LCS of several petroleum

STAGES OF PRODUCTION
ACCESS

PETROLEUM EXPLOITATION

LCS

EXPLORATION AND DEVELOPMENT(L2)

or

PRODUCTION: SAFETY IN EXPLORATION AND

PRODUCTION (L3)

PSC

PRODUCTION: REGULATING WELLS IN

EXPLORATION AND PRODUCTION (L4)

(L1)

PRODUCTION:ENVIRONMENTAL REGULATION
IN EXPLORATION, PRODUCTION
DECOMMISSIONING (L5)

Petroleum Regulatory Arrangements:

which is best for the parties?

THE REGULATORY FRAMEWORK:

PSC VS LCS

PRODUCTION SHARING CONTRACTS

(PSC)

Outline of PSCs

The host government owns all the mineral resources, and

retains ownership

offers International Oil Companies (IOC) areas to explore for and

exploit petroleum.

IOC assumes all risk in the in E&P of host States petroleum

resources,
in exchange for compensation

contract between a host State and IOC where the two

parties agree to share the product of the labours of the IOC.

State provides the resource oil

Company assumes risk, and provides the labour, capital, and risk

Features of PSC

isolate a project from general risk

by providing a stable contractual framework to underpin

investments, thereby encouraging project investment

host State not required to invest any capital into the E&P.
investment

and risk is assumed by the IOC.

If a huge discovery is made, the IOC recovers its costs plus has
large amount of profit. Opposite also applies
Profitability of a field dependent upon the current market price
for oil
As compensation for assuming risk, the IOC will receive a % of
production to sell.
Risks are normally accepted as the price paid for the prospect of
making considerable profit if the prospectivity of the field is as
believed (or better!).

Philosophy of PSCs

ownership of the petroleum shall always stay

with the Host Country, and that the
International Oil Companies are just acting as
Contractor to explore and exploit it.
Usually:
the

Stans,
some Middle Eastern areas (Iraq?)
some African and Asian countries.

No international uniform/model PSC but some

countries do see Kurdistan

Negotiation of PSCs

The PSC is a unique contract

a

contract for production, and

sets

out the specific terms as a petroleum fiscal regime

Contract is long term often set for life of field

negotiable?

Generally, terms are fixed for the duration of the

contract (encompassing exploration, development and
production), often 25 years or more,
provides

the IOC with legally binding assurances of returns

for its considerable capital investment

contracts

can only be altered by mutual agreement between

the IOC and the other party to the agreement (usually the
host State or a State Oil Company).

Economics of PSCs:
dividing oil between IOC and State

The proceeds of the petroleum are shared between

the State and the IOC on the
basis of the agreed formula in the contract, after costs
are subtracted

The percentage of petroleum received as

compensation is partly related to the capital and
operating costs incurred by the IOC, and partly
represents a profit element.
May

be set by legislation or individually negotiated

Ownership

of Oil is NOT transferred to the company

remains with the State

The oil and gas discovered will be divided into cost oil and
profit oil.

Cost Oil (remuneration for effort and risk).

calculated at the market vale.

The IOCs capital costs are either expensed in the current year of
depreciated over a number of years.

There is usually a cap on the annual amount of Cost Oil recoverable

from the gross annual revenue (%),

This ensures the State receives profit when field production commences,
even if no royalty payment.

After the costs have been recovered, the remaining oil in the field is
known as Profit Oil.

The IOC usually pays a profit tax, which may or may not be
equal to the rate applying to other commercial activities in
the host State

Case Study: Sakhalin II

The first ever Production Sharing Agreement (PSA) was

completed with Russia in 1994, with the signing of the Sakhalin II
project consortium

claim that the Sakhalin PSA structure transferred "most of the

risks of both construction overspend and change in the oil/gas
price to the Russian government.

The key issues and claims associated with the Sakhalin II

* overly advantageous to the IOCs;
* The government must forego share of revenues until the IOC recoups costs;
* Risk of cost over-runs and price volatility are shouldered mostly by
government;
* Russian 70% local content requirement not being met; and

Environmental abuses exist at Sakhalin II development

Issue of Equator principles and Shell investment

Comparison of Standard PSC

and Sakhalin II
Standard PSC

Sakhalin II PSC

Exploration risk carried by the

company

Hydrocarbons already found by the

state, so no exploration risk for SEIC

Costs recovered during the cost oil

phase, then profit oil split between
company and the State at an agreed
percentage

Costs and profits(17.5% IRR) go to

SEIC BEFORE State receives any
share

Annual cap on Cost Oil during the

early years, so the State receives
some share of the surplus

No cap on annual cost recovery

Clear definition of what expenditures

can and cannot be included in the
calculation of cost oil and profits tax

No clear limits to recoverable expenses

Typically Royalty is 10-20%

Royalty is 6%

LICENSING AND CONCESSION SYSTEMS

(LCS)

 Licensing

may be defined as:

the identification by government of potential (upstream)

petroleum investment opportunities in the national territory, their
subdivision into discrete contract areas of prospective size,
their offering to the international oil companies by a suitable
tendering process and the establishment and negotiation of
technical, financial and contractual terms and conditions (for
award) consistent with their petroleum prospectivity and with
the national interest.[1]

[1] Michal Bunter, The Promotion and Licensing of

Petroleum Prospective Acreage (2001)

 Important
Regulatory

parts

Structure: identification by government

of potential (upstream) petroleum investment
opportunities in the national territory,
Blocks/Acreage: their subdivision into discrete
contract areas of prospective size,
Licensing Process: their offering to the international oil
companies by a suitable tendering process
establishment and
Terms JOA/Contract Terms negotiation of technical,
financial and contractual terms and conditions (for
award)
Role of Government Policy: consistent with their
petroleum prospectivity and with the national interest

Features of LCS

A petroleum licensing system is one where a license is granted for a

specific type of petroleum operation,

usually for exploration or production.

License is for a specific area (the license area), for a specific period.

Depending on the regulatory framework governing the LCS, the

license may confer exclusive rights, in the sense that for as long as
the license is valid, and subject to certain conditions, the licensee is
authorised to exercise the rights conferred in the license against third
parties.

Exclusivity

non exclusive licenses are conferred for geological and geophysical prospecting,
compare Australia and Norway for exploration licenses
exclusive license is usually conferred for exploration work that involves drilling,
as well as for production operations

Types of licences

Exploration
Norway

non exclusive
UK Exploration License Seaward Exclusive
Australia exclusive leads to production licence (or
retention licence see lecture TH2)

Production Licence
Norway

exclusive exploration and production

UK Seaward Production License

Other types of licenses

Frontier

Licence (Seaward) UK
Promote Licence (Seaward) UK
Special Prospecting Authority - Australia

Exploration and Licences

Relevant Law
Norway

- Petroleum Activities Act, Chapter 2 - In

Conjunction with Directive 94/22/EC
Australia s96 133 OPAGGSA

Condition of Award of Licence

Work

Program
Contribution of Data
Mandatory Drilling in lesser Explored areas

Non-Exclusive Right to Explore

Comparison

to Australia special prospecting licence( non

exclusive)
Exclusive right

Production Licences

Relevant Law
Norway

- Petroleum Activities Act Chapters 3 and 4 In Conjunction with Directive 94/22/EC

Australia - s159-191 OPAGGSA

Requirement for licence, and grant of

exclusivity
The Production Licence

Award

of license
Rights, area and Duration
Fees charged
Who appoints the Operator?

Production Licences

Obligatory Work Requirements and

commitments to the state
What if you want to change participants and/or
operator?
THE PAPERWORK/CONTRACTS
Comparison Australia and Norway
JOA
Licencing

Agreement Accounting Agreement

13 April
1965
first
licences
granted

Blocks/
Acreage

General License Process

Blocks to be offered decided
Licensing round announced
Advertised according to legal requirements
[prequalification] and application oil companies (JVs?)
Awarded according to process (Bid v discretion) and law
Contractual requirements

Process EU Directive 94/22/EC

Hydrocarbon Directive
http://eur-lex.europa.eu/lega
l-content/EN/TXT/PDF/?uri=CEL
EX:31994L0022&rid=
2

Process Norwegian Law

Process Australian law

Regulations (PR 97)

Selecting the winning applicant

s10 PR97

Conditions of grant of license

Process Australia

Licence
Iceland

Terms/JOA
Not required in all jurisdictions
JOA in Norway
Model Clauses in UK
Ernst to discuss JOA in detail

Grant of a license comparison

AUSTRALIA
Release of
Acreage
(APPEA)

NORWAY
Licensing
Round
announced

UK
Licensing
Round
announced

JV contract formed by
participants and
operator decided

Parties make
application to
MPD

JV formed by
participants and
operator decided

Work Bid by
Joint Venture

Award of
Licence

Exploitation
commences under the
Offshore Petroleum and
Greenhouse Gas Storage Act
2006

Award of Licence
(discretionary)
(conditional on JOA) &
Operator
announced

JOA formed between

participants (incl
government where govt
company involved)

Award of Licence
(discretionary
with work
program included)

Model Clauses for

license inserted
(Schedule 1 Petroleum
Act 1998)

Exploitation
commences
under the Petroleum
Activities Act 1996

Exploitation
commences
under the Petroleum
Act 1996

How are licenses awarded

Award of Petroleum Licence

Bid or Auction Method

Cash bid

Work program Bid

Discretionary Method

'Discretionary' discretion
(Pre 94/22/EC)

'Objective' discretion
(Post 94/22/EC)

Bidding

Always get best?

Best

vs deepest pockets

Fairest?
Realise value of field? eg Ekofisk
Work program bidding can go wrong

Australia

example Cornea field

Discretionary

Choose best
APA Norway

and Avaldsnes/Aldous
Must comply with Hydrocarbon Directive

Was used pre 1994 to build up local

industry and promote economic
diversification
No

longer able to be utilised struggle for new

countries eg Iceland