Shelf life: How will new entrants shape the future of the UKCS? | Fieldfisher
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Shelf life: How will new entrants shape the future of the UKCS?


United Kingdom

As the oil and gas majors continue to downsize their activities on the UK Continental Shelf, a spate of Australia-based companies are among those moving in and fundamentally altering its ownership structure.

The UKCS has entered a new era of ownership. In the North Sea, private equity-backed E&Ps and independents from the UK and abroad have taken up acreage no longer considered core to the oil and gas majors.

The UKCS has long hosted nearby European players, while Asian-owned operators are also fairly well-anchored in the basin.

More recently, the UKCS has witnessed the arrival of new Australia-based E&Ps in modest but noticeable numbers.

In the 32nd UK Offshore Licensing Round awards announced on 3 September 2020 (and subsequent transactions pursuant to the awards), four Australia-based businesses (out of 65 companies in total) obtained licences and/or are partnering on newly allocated blocks in the UK North Sea.

Privately-held Australian company Finder Energy was awarded a 100% interest in the 576 sq km P.2530 licence area in the Central North Sea while fellow private Australian company Spark Exploration was awarded a share of the P.2593 licence containing three blocks West of Shetlands (which it plans to develop as a 50:50 joint venture with UK-based operator Siccar Point).

ASX-listed Talon Petroleum, which secured a permanent presence in the UK via its acquisition of EnCounter Oil in May 2019, was awarded three new licences in the UK Central North Sea and in February this year, ASX-listed Ansila Energy completed its takeover of privately-held UK company Hartshead Resources Limited, after Hartshead was awarded five contiguous blocks in the Southern North Sea.

Elsewhere on the UKCS, in December 2020 Oilex Ltd, which is listed in London but headquartered in Australia, acquired a 100% participating interest in the Doyle-Peel licences in the East Irish Sea from Burgate Exploration & Production Ltd (Oilex agreed to dispose of all its Australian assets in May 2020).

An international basin

Although their numbers are still limited, the presence of small independent Australian companies on the UKCS is revealing of how far the shelf's appeal has travelled.

The shift in ownership of the UKCS has been influenced in recent years by UK government policy, promoted by the Oil and Gas Authority (OGA), which seeks to attract investment into the UKCS to boost production from a declining but still prospective basin.

Since March 2016, the OGA's Maximising Economic Recovery (MER) UK Strategy has had as its central tenet an obligation to "take the steps necessary to secure that the maximum value of economically recoverable petroleum is recovered from the strata beneath relevant UK waters".

The resultant economic model, through which the UK is trying to prolong production from the UKCS, increasingly rests on international entrants taking over existing assets or new exploration licences to maximise the value out of the basin's remaining (and not insignificant) unexploited reserves.

Australian entrants are typically at the minnow end of the spectrum and while some also have assets in Australia and/or Asia, or elsewhere in Europe, others are focused solely on the UKCS.

It is perhaps puzzling why Australian companies would choose this particular time to put down roots in a mature oil and gas province, when the UK is tightening its emissions rules and when less exploited opportunities exist closer to home.

The fact remains that the North Sea is a prolific oil and gas province both in terms of resources and infrastructure, with exceptional data coverage and quality.

The 32nd UK Offshore Licensing Round offered blocks in mature producing areas close to existing infrastructure and were awarded on flexible 'Innovate' licences, which allow applicants to define their duration and phasing for an 'optimal' work programme.

Significant volumes of data were also made available by the OGA to support the 32nd round and help stimulate new exploration.

In general, new entrants are allowed to focus exclusively on extracting oil and gas and have no obligations or incentives to move down the petroleum production chain into infrastructure ownership and refining.

This has made it worthwhile for Australian operators, among others, to take up opportunities on the UKCS.

Navigating 'Net Zero'

The flip side to the OGA's success in prolonging the attractiveness of the UKCS is MER UK's apparent contradiction of the UK's legally binding target set in 2019 to achieve 'Net Zero' carbon emissions by 2050.

To reconcile its approach with the UK's green commitment, the new "OGA Strategy" came into force on 11 February 2021.

Under this strategy, oil and gas companies operating on the UKCS are legally obliged reduce greenhouse gas emissions from sources such as flaring, venting and power generation — known as Scope 1 emissions — especially in new developments, and to support carbon capture and storage projects.

The OGA has promised to police these obligations and has now issued its 11th Stewardship Expectation to help the industry understand how its operations need to change.

How effectively the OGA can enforce its rules among privately and internationally-owned businesses, and whether this affects the attractiveness of the UKCS to foreign operators, remains to be seen.

The future of the UKCS

The rise of small independent E&Ps has helped wean the North Sea of its dependency on multinational majors – a development that has broadly been welcomed from an economic perspective, but has raised concerns about accountability, particularly regarding decommissioning.

Australian ownership will prove an interesting case study for the UKCS, particularly if more ASX-listed and privately held Australian-headquartered companies decide to consolidate their presence in the UK by listing in London.

Equally, stronger UK-Australian oil and gas relationships could pave the way for British companies to take advantage of new opportunities Down Under.

These include the c.A$50 billion ($40.5 billion) due to be invested in decommissioning Australia’s offshore oil and gas infrastructure starting in the next decade – according to the findings of a new report by Advisian, commissioned by National Energy Resources Australia (NERA) and published on 10 March.

In the meantime, it will be up to the OGA to ensure transparency and accountability among small, private and international players and to achieve an equitable balance between who reaps the benefits and who bears the costs of the UKCS' long-term future.

This article was authored by Paul Stockley, Head of Oil and Gas at Fieldfisher.