The UK Licensing Regime

The UK’s approach to oil and gas exploration and production is characterised by licensing oil and gas activities both onshore and offshore.  Before considering this in more detail it is important to understand the issues surrounding the ownership of oil and gas resources within the UK.

1.1              Ownership of oil and gas resources

Section 2(1) of the Petroleum Act 1998 establishes that ‘Her Majesty has the exclusive right of searching and boring for and getting petroleum’, where ‘petroleum’ is defined as ‘any mineral oil or relative hydrocarbon and natural gas existing in its natural condition in strata’. As a result, rights to petroleum vest in Her Majesty and this right extends to petroleum ‘in Great Britain or beneath the territorial sea adjacent to the United Kingdom’[1]. This definition of petroleum includes shale gas.

The extension of the rights to petroleum ‘beneath the territorial seas adjacent to the United Kingdom’ is of less relevance to shale gas at this time.  This is because the exploitation of shale gas commonly requires a much higher volume of drilling than in the extraction of conventional oil and gas reserves.  Drilling offshore is a particularly expensive undertaking resulting in it being uneconomical to consider drilling for shale gas offshore for now at least.  

However, of interest is that with horizontal drilling techniques, it is envisaged that in the future drilling rigs onshore will be able to drill vertically and then horizontally into shale gas reserves located beneath the territorial seas and up to several kilometres offshore.

1.2              Licensing petroleum operations

Section 3(1) of the Petroleum Act authorises the Secretary of State, ‘on behalf of Her Majesty’ to ‘grant to such persons as he thinks fit licences to search and bore for and get petroleum’.  This is commonly referred to as a concessionary system, where ownership in the extracted hydrocarbons vests in the oil company.  These licences are issued in the UK through the Department of Energy and Climate Change (“DECC”).

The ‘consideration’ for such licences is determined by the Secretary of State ‘with the consent of the Treasury….and upon such other terms and conditions as the Secretary of State thinks fit’[2]

As can been seen, the Petroleum Act grants the Secretary of State very wide powers which has led to this licensing system being described as one of ‘discretionary allocation’ for reasons that ‘no single criterion is determinative of the Minister’s choice of whether and to whom a licence is awarded’[3].

Notwithstanding, as a result of the adoption of the EU Hydrocarbons Licensing Directive into UK law[4], the Secretary of State was generally restricted to only applying terms which were necessary for the performance of activities permitted under the licence and for payment of consideration.  

These terms are for the most part contained in model clauses prescribed pursuant to section 4(1)(e) of the Petroleum Act.  This section specifically requires the Minister to make regulations prescribing ‘model clauses which shall, unless he thinks fit to modify or exclude them in any particular case, be incorporated in any such licence’.  As a result, certain commentators have referred to the UK oil and gas licensing regime as a ‘regulatory and contractual hybrid’[5].

1.3            Licensing shale gas operations

Licensing of onshore oil and gas activities takes place pursuant to ‘landward’ licensing rounds, the most recent of which was the 13th round in 2008[6]. The 14th takes place in the summer of 2014.

‘Landward petroleum licences are proprietary licences in the sense that they emanate from the Crown’s ownership of the hydrocarbon deposits in strata’[7].   Pursuant to the Petroleum Landward Areas Regulations 1995[8], the licence available for exploratory landward activities is known as the Petroleum, Exploration and Development Licence (“PEDL”), and it is pursuant to this form of licence that current shale gas operations are taking place in the UK. Once commercial quantities of gas have been found, a further Field Development and Production Consent (“FDPC”) will be required from the DECC.

The 2008 licensing rounds saw fifty five licences granted for shale gas exploration.  

The role of the DECC does not end with these licences. The actual drilling of onshore wells requires a prior application for a ‘well consent’ from the DECC at least 28 days in advance of drilling[9].  This is usually made through the Well Operations Notification System (known as WONS).

In this application the DECC requires evidence of Planning Permission, and will assess geotechnical data provided by the Operator and review its well site operational plans, including the possibility of sidetrack wells, hydraulic fracture stimulation, and plans to save or flare gas in testing for hydrocarbons[10].

At any time the DECC may also require magnetic, gravity and other geophysical data.  In addition, the operator must notify the DECC of any well spud (as soon as possible and within two hours if possible), and provide a ‘Well Summary’ upon completion, suspension or abandonment of a well[11].

For a map of fields and PEDL licence areas as of 7 October 2013, please click here

[1] Petroleum Act 1998, section 2(2)

[2] Petroleum Act 1998, section 3(2)

[3] G. Gordon et al, Oil and Gas Law – Current Practice and Emerging Trends (2nd edition, Dundee University Press, 2011), page 74

[4] Hydrocarbons Licensing Directive Regulations 1995 (SI 1995/1434)

[5] G. Gordon et al., ibid, page 72

[7] G. Gordon et al., ibid., page 68

[8] Petroleum (Production) (Landward Areas) Regulations (SI 1995/1436)

[9] Known as a PON 4 form application

[11] see GOV.UK. ‘Pon 9b: Petroleum Operations Notice No. Pb – record and sample requirements for onshore geophysical surveys and wells’