The regulator of oil and gas licensing has begun a consultation on how it plans to assess the financial strength of companies.

The Oil and Gas Authority said the existing financial criteria needed to be updated because they were fragmented, repetitive and did not “reflect the new and innovative sources of finance that licensees are now using”.

Local communities have regularly raised concerns about the financial strength of some onshore companies when planning decisions were made for drilling or fracking. Several companies have reported continuing losses.

The OGA said the new proposed criteria would be used when it made decisions on:

• Awarding and assigning licences
• Changes of control of licences
• Progressing licences
• Granting well consent
• Field development
• Authorisation of pipeline works

The OGA said the new arrangements would enable it to carry out a more detailed analysis and ask for more information if needed. Some companies would be required to provide more information, it said.

The consultation document said:

“It is important to understand the Applicant’s financial capability, to be able to make a judgement as to the likelihood of that Applicant having the funds needed to meet the commitment on which the OGA’s decision is based.”

But it added that the OGA did not want to discourage innovation by “setting rigid requirements of how financial capability can be demonstrated”.

Viability

The criteria for judging companies include  financial viability. This is defined by the OGA as the company’s current and historic solvency. This would, the OGA said, provide assurance the company was currently solvent and would be expected to remain so in the foreseeable future.

The OGA proposes to look at the company’s track record through a review of financial information of up to five years, as well as details about breaches of law or regulation. The OGA said:

“Evidence of sustained solvent trading with strong and consistent profit and cash generation will have a positive bearing on the OGA’s assessment.

“Indications of significant losses, difficulties generating positive cash flow and/or breaches of lending covenants may negatively impact the OGA’s assessment.”

The OGA said it would also look at the company’s solvency through an analysis of assets, liabilities, profit and interest expenses. The capital structure would also be assessed.

Capacity

For new companies, the OGA said it would concentrate on the other criteria, financial capacity. This would assess the company’s ability to meet all known and anticipated future commitments and would focus on its financial forecasts.

“In most cases, the OGA will want to see evidence that the Applicant will have funds available as and when they are required to satisfy the Commitment.”

The OGA also proposed to assess a company’s net worth and would look at cash flow forecasts.

Exploration and appraisal wells

For drilling exploration and appraisal wells, the OGA said it would want to see evidence that applicants had sufficient funds to meet their share of the cost of drilling, plugging and abandonment and a minimum contingency of 50% of these costs.

If the OGA was not satisfied with a company’s financial capability it could require the company to provide financial security to ensure the funds were available for plugging and abandonment.

Consultation

The consultation applies to the entire UK offshore industry and the onshore industry in England and Wales until October 2018, when regulation in Wales is devolved.

The deadline for responses is 29 June 2018. The OGA said it would publish a summary of comments and its response by 10 August 2018.

Link to consultation document