For this weekend’s long read, Ben Dean explores the rules behind onshore Petroleum Exploration and Development Licences (PEDLs) and examines the decisions to be made for a group of PEDLs this year.
Onshore petroleum licences since the mid-1960s have been issued in rounds. The licences granted in 2004 are referred to as the 12th round and the licences granted in 2008 are 13th round.
The licences awarded in December 2015 are 14th round. There are no proposals currently for a 15th round of PEDLs.
When a PEDL is granted what happens during the period of the licence is set out in its so-called model clauses.
Before the 14th round, PEDLs incorporated the model clauses set out in Schedule 6 of the Petroleum Licensing (Exploration and Production) (Seaward and Landward Areas) Regulations 2004. These were known as 2004 model clauses. All the PEDLs I discuss later in the article still incorporate these 2004 model clauses.
The 14th round PEDLs incorporated the 2014 model clauses and some pre-14th round PEDLs have now also adopted these model clauses.
Since 1995, all onshore PEDL model clauses have been drafted to provide for three terms of the licence period. These are:
- Initial Term or exploration – six years or five years for 14th round licences
- Second Term or appraisal – five years
- Third Term or production – 20 years
A PEDL is therefore granted for a period of 31 years, or 30 years for 14th round licences.
Contracts or licences?
The Oil and Gas Authority (OGA) manages PEDLs on behalf of the government and ultimately the Crown, which has the exclusive right of searching, boring for and getting petroleum.
The government considers that PEDLs are common law contracts. This means that model clauses can be varied by mutual agreement between the PEDL holder and the government.
This position was upheld by a High Court judgement in August 2017 (reference Administrative Court (Planning Court) CO/4951/2016). DrillOrDrop report
The High Court ruling has been referred to the Court of Appeal and a decision is pending on whether an appeal will be permitted. The Claimant’s case is that PEDLs are licences governed by a suite of statutory legislation.
If the Claimant’s case is upheld then the licence-holder would have to comply with the Model Clauses in its PEDL or relinquish the licence.
What is potentially a problem for the government and the industry is the Hydrocarbons Licensing Directive Regulations 1995.
Article 4 (b) of the Directive states that the duration of a licence should not exceed the period necessary to carry out the activities for which the licence is granted.
Before the 14th round, PEDLs had a term of 31 years. The OGA has been juggling the time periods of the Initial and Second Terms of PEDLs but so far it has kept the overall length at 31 years, which falls in line with the 1995 Directive. If the OGA extended licences beyond 31 years for 12th and 13th round licences, then it could be in breach of the Directive.
What a PEDL licence-holder has to do
Initial Term (exploration)
All PEDLs have a Work Programme, which the licence-holder is required to complete in the Initial Term to establish whether there are recoverable hydrocarbons in the PEDL area.
The Work Programme can comprise:
- Seismic surveys
- Geotechnical studies
- Drilling of one or more wells
In all PEDLS, unless a well is drilled the licence will not continue after the Initial Term.
Second Term (appraisal)
This Term is to enable the licensee to move from a technical understanding of the potential hydrocarbon field to a commercially-viable position whereby a Field Development Programme (FDP) may be submitted for approval to the OGA.
Works undertaken in the Second Term may include:
- Drill further wells to increase understanding of the field (appraisal)
- Design the engineering facilities and plan further wells required for production
- Purchase or lease land for well pads and pipelines and any other infrastructure required for the development
- Gain the necessary planning permissions and other permits and permissions to construct and operate the developments
- Raise funding
If the OGA consents to the FDP then the PEDL is moved to the final term.
Third Term (production)
This Term is for extraction of hydrocarbons for commercial sale or use directly for feedstock in petrochemical production.
What will happen in 2018?
This year, a group of PEDLs issued in the 13th round see their Initial Term expire on 30th June. One 12th round PEDL has an Initial Term that expires on 30th September 2018.
No Second Term licences expire in 2018 but there are numerous expiries in 2019.
It should be noted that the OGA can progress a PEDL to its next Term in advance of the Term expiry date and did so on a number of PEDLs in 2016. But a PEDL cannot move from its Initial Term to Second Term without drilling a well.
So where are the PEDLs that have a term expiry in 2018? I have referred to the PEDLs by their popular name or the main town in the licence area.
Leith Hill, Surrey
This 12th round licence, PEDL143, was granted from 1 October 2004 and has been subject to numerous extensions of the Initial Term. The most recent extension expires on 30 September 2018.
So far, no well has been drilled in the PEDL but the licence-holder, Europa, is negotiating final permissions for a site near Leith Hill.
If Europa successfully drilled a well in time, the PEDL could move to the Second Term on 1 October 2018. There would then be two years left for appraisal and 15 years for the Third Term (production).
If a well was not drilled before 30 September 2018, then PEDL143 would have to have an extension to its Initial Term. If the Second Term remained at two years, then the Third Term would be required to be reduced by the same amount of time granted for the extension of the Initial Term.
Formby and Halsall, West Lancashire
This licence, PEDL164, like the others below, was granted in the 13th round on 1 July 2008.
The Work Programme for PEDL164 required a minimum of one well drilled to 1,000m or 50m below the Top Collyhurst formation. Two wells were drilled in the PEDL in 2012 but they didn’t meet the work commitment because they were not deep enough.
The licence-holder, Aurora Energy Resources, is looking to submit a planning application in 2018 to drill and frack near Great Altcar. But the well won’t be drilled by the expiry date of 30 June 2018 and the OGA will have to extend the Initial Term.
At present, the Second Term is due to end on 30 June 2019. So if the OGA extends the Initial Term and also allows time for the Second Term, it will have to eat significantly into the time for production in the Third Term.
Other 13 round PEDLS
The Third Term is also likely to be reduced in the following list of PEDLs, also granted on 1 July 2008 under the 13th round. All the licences below have had no wells drilled since they were granted and the Initial Term is due to expire on 30 June 2018.
PEDL177 Scalthorpe, North Yorkshire, Third Energy
PEDL189 Upton, Chester, Cheshire, IGas Plc
PEDL204 Belvoir, East Midlands, Hutton Energy UK Ltd
PEDL214 Swansea, Wales, UK Methane Ltd
PEDL215 Port Talbot, Wales, UK Methane Ltd-
PEDL216 Bridgend, Wales, Coastal Oil and Gas Ltd
PEDL217 Bridgend, Wales, Coastal Oil and Gas Ltd
PEDL224 Newport, Wales, Sonorex Oil and Gas Ltd
PEDL 233 Graffham, West Sussex, IGas Energy Enterprise Ltd
PEDL235 Godley Bridge, West Sussex, Star Energy Weald Basin Ltd (IGas)
PEDL241 Brigg, East Lincolnshire, Egdon Resources
PEDL253 Brigg East Lincolnshire, Egdon Resources
Another option – relinquishment
Rather than extend the Initial Term, the OGA could decide that the licences listed above should be relinquished because the PEDL operators had failed to comply with their Work Programmes. All PEDL holders have, after all, had 10 years to drill a well.
At present all these 13th round PEDLs have been allowed 10 years for the Initial Term, one year for the Second Term and 20 years for the Third Term, production. As I have listed above, the works required in the Second Term are significantly more than the works required to be undertaken in the Initial Term.
PEDL254, around Cropwell Butler in Nottinghamshire and held by Hutton Energy UK Ltd, was due to see its Initial Term expire on 30 June 2018. But this PEDL now appears to have been relinquished and was not listed on the OGA site on 6 April 2018.
Broadford Bridge, West Sussex
PEDL234, held by Kimmeridge Oil and Gas Ltd, is also a 13th round licence which was drilled in the Initial Term. The operater drilled in May 2017 to a depth of 5,662ft, with a sidetrack drilled in July 2017.
The company’s accounts, released on 29 March 2018, stated that flow-testing indicated that oil flows were likely to be “sub-commercial”.
This PEDL has had a drill that met the Work Programme. While the results of exploration are questionable, I expect the OGA will move this PEDL in to its Second Term and adopt 2014 model clauses.
Midland Valley, Scotland
This licence, PEDL162, is another awarded in the 13th round with its Initial Term expiring on 30 June 2018.
This is an interesting licence, held by INEOS Upstream Ltd, where there has been no drill. So the decision will be to either extend the Initial Term or relinquish the PEDL.
The decision-maker, though, is not the OGA, but the Scottish Government.
Both conventional and unconventional onshore oil and gas licensing powers were devolved to Scottish Ministers under the Scotland Act 2016 on 9th February 2018.
The Work Programme contained a “drill-or-drop” commitment under which the licence-holder should either:
“drill one well, or
“elect to allow the licence to automatically cease and determine pursuant to Clause 3.”
If the Scottish Government is serious about banning fracking, then this is its opportunity to demonstrate its intent by terminating this PEDL for noncompliance with its Work Programme.
- I hope this article has cut through some of the legalise associated with PEDLs and helped explain the decisions the OGA and Scottish Governments will be making this year on PEDLs that may be near where you live.
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