oversight

The United Kingdom's Development of Its North Sea Oil and Gas Reserves

Published by the Government Accountability Office on 1977-09-23.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                           DOCUMENT RESUME
 03412 -   [A2723932]
 The United Kingdom's Development of Its North Sea
                                                   Oil and Gas
 Reserves. ID-77-51; B-118678. September 23, 1977.
                                                   31 pp. + 5
 appendices (21 pp.).
Report to the Congress; by Elmer B. Staats, Comptroller
                                                         General.
Issue Area: International Economic and Military Programs
Contact: International Div.                                (600).
Budget Function: Natural Resources, Environment, and
                                                     Energy:
    Energy (305); Natural Resources, Environment, and Energy
     (300).
Congressional Relevance: House Ccmmittee on Interior
                                                     and Insular
    Affairs; Senate Committee on Energy and Natural Resources;
    Congress.
Authority: outer Continental Shelf Lands Act (43 U.S.C.
                                                         1331 et
    seq.) .

          The United Kingdom's (UK's) philosophy,
 control over developmept of its North Sea oil and approach, and
 was examined in crder tc gain pertinent informationgas reserves
 be useful to the United States for managing resources that could
                                                          of the
Outer Continental Shelf. Findings/Conclusions: The
 decision to adopt a policy of rapid exploration       UK's
                                                  and development
 was facilitated by the basic resolution of mineral
 ownership, cil price increases, aiid the ability to rights
                                                     develop
needed technolcgy. The policies were implemented primarily
through a system of licensing, establishment of a
company, and a system of taxation and royalty. The  national oil
system encotraged rapid exploration because the costlicensing
                                                        of licenses
was low, two-thirds of the licensed area must be surrendered
after 7 years, and the Government stressed intensive
programs. The British National Cil Corporation, created work
January 1, 1976, provides the Gcvernment with a secure on
oil and gas because it is a 511 partner In all licenses.source of
and royalty system encourages development by allowing        The tax
to recover cauital costs early ir the production life    companies
fields. Majcr features include a petroleum revenue       of oil
                                                     tax, a
corporation tax, and a 12.5% royalty. (H1i)
   REPORT TO THE CONGRESS

   BY THE COMPTROLLER GENERAL
   OF THE UNITED STATES




 The United Kingdorn's
 Development Of Its North Sea
 Oil And Gas Reserves

 Departments of Stcte and the Interior

During the past decade the United Kingdom
began to develop its oil and gas reserves in the
North Sea. The British chose to rapidly ex-
ploit these energy resources and gained con-
siderable knowledge, improved technology,
and experience in doing so.
This report contains information on what the
United Kingdom has done and how it could
assist the Congress and the executive branch
in estaolishing a philosophy, policy, and ap-
proach for the United States to meet its in-
creasing energy demands in a safe and en-
vironmentally acceptable way.




ID-77-51                                  SEPTEMBER 23, 1977
      at4~      COMPTROLLER OGENERAL OF THE UNITED SATUS
                           WASHINGTON, D.C. 1o48




B-118678




To the President of the Senate and the
Speaker of the House of Representatives

     This report describes the United Kingdom's philosophy,
approach, and control over development of its oil and gas
reserves.

     In view of the recognized importance of energy supply
and availability, we believe that pertinent information on
the experiences and results of North Sea oil and gas de-
velopment could be useful to the Congress and officials
of the executive branch responsible for managing the oil
and natural gas resources of the Outer Continental Shelf.

     We made our review pursuant to the Budget and Account-
ing Act, 1921 (31 U.S.C. 53), and the Accounting and Audit-
ing Act of 1950 (31 U.S.C. 67).

     We are sending copies of this report to the Secretaries
of State and the Interior and the Director, Office of Man-
agement and Budget.




                                   Comptroller General
                                   of the United States
 COMPTROLLER GENERAL'S                 THE UNITED KINGDOM'S DEVELOPMENT
 REPORT TO THE CONGRESS                OF ITS NORTH SEA OIL AND GAS
                                       RESERVES
                                       Departments of State and the
                                         Interior


             DIGEST
             Th's report examines the United Kingdom's
             development of its North Sea oil and gas
             reserves as an information base for con-
             sidering pending legislation amending the
             Outer Continental Shelf Lands Act.
             Oil and gas development in the U.S. Outer
             Continental Shelf is of particular concern
             in light of the rising American dependence
             on foreign energy sources. In May 1977,
             the President urged expeditious passage of
             amendments to the Outer Continental Shelf
             Lands Act. He also directed the Secretary
             of the Interior to assess the size and
             scheduling of Outer Continental Shelf
             development in close consultation with
             governors of affected coastal States.

             Presentation of the United Kingdom's
             development of its North Sea oil and gas
             resources is not intended to be a compre-
             hensive assessment of the appropriateness
             of its approach for the United States'
             development of its Outer Continental Shelf
             resources. Moreover, GAO did not assess
             the success of United Kingdom development
             nor the extent of the Government's role
             in the results. Nevertheless, the British
             experience does provide a base for the U.S.
             Government to examine more closely aspects
             of United Kingdom exploitation which may
             apply to U.S. development.

             POLICIES AND CONDITIONS AFFECTING
             THE-UNITED KINGDOM'S NORTH
             SEA DEVELOPMENT

            Worldwide recession, severe imbalance of
            payments (due in large part to oil im-
            ports), and related problems combined to

TAr rt     U'pon removal, the report
cover Wd should be noted hereon.        i                     ID-77-51
place the United Kingdom in perhaps the
worst economic situation of any of the
larger Western European countries.
Britain needed to locate and develop
secure, and hopefully economic, energy
sources. It adopted a policy of rapid
exploration and development of oil re-
serves in the North Sea.  (See p. 6.)
This was facilitated by:
-- Basic resolution of territorial owner-
   3hip of mineral rignts between North Sea
   coastal countries following the 1958
   Geneva Continental Shelf Convention.
-- The oil price increase of 1973 by the
   Organization of Petroleum Exporting
   Countries.

-- The ability to develop the technology
   needed to operate in the hostile environ-
   ment of the North Sea. (See p. 7.)

GOVERNMENT CONTROL
PND RESPONSIBILITY

The pace and extent of the United Kingdom's
search for oil and gas is strongly influenced
by its Government's policies of rapid develop-
ment and control. These policies were imple-
mented primarily through a system of licens-
ing, establishment of a national oil company,
and a system of taxation and royalty. Al-
though it appears that the oil industry
would prefer not having a national oil com-
pany, the industry has accepted this situa-
tion.  (See pp. 11 and 15.)

United-Kingdom-Licensing-System
Determining who receives permission to ex-
plore and develop North Sea energy resources
is a matter of discretion on the part of the
United Kingdom Government. Licenses are not
awarded on the basis of competitive bidding.
The United Kingdom encourages rapid explora-
tion and development because



                     ii
-- the cost of iicen.as is low,

-- two-thirds of the licensed area must be
   surrendered after 7 years, and

-- the Government stresses intensive work
   programs in its licensee selection
   process.

Government powers to control production
levels are stated in every license and
each licensee must agree to provide United
Kingdom industry a "full and fair oppor-
tunity' in competing for oil-related goods
and services.  (See p. 11.)
The British National Oil Corporation was
created on January 1, 1976. The corpora-
tion provides the Government with a secure
source of North Sea oil and gas because it
is a 51-percent partner in all licenses.
Powers of the corporation include the right
to

-- explore for and get petroleum anywhere in
   the world;

-- transport, refine, store, distribute, buy,
   and sell petroleum; and

-- build, hire, or operate refineries, pipe-
   lines, and tankers. (See p. 14.)

Taxation and royalty
The tax and royalty system encourages develop-
ment by allowing companies to recover their
capital costs early in the production life of
oil fields. As a result tax and royalty re-
ceipts through 1976 were negligible. When
fields mature and initial allowances against
cost are used up, it is expected that the
Government income will amount to something
over 70 percent of the oil companies' net
revenue.  (See p. 16.)
Major features of the tax and royalty system
include a petroleum revenue tax, a corpora-
tion tax, and a 12.5-percent royalty. Also


                       iii
included are tax incentives for developing
marginal fields and provisions that prohibit
losses and allowances for activities outside
the North Sea to he used to reduce a company's
tax liability for activities there. Control
over the revenues is maintained;through a
national oil account.  (See p. 16.)
Dealing with oil spills
Government emphasis is placed on minimizing
the risks of oil spills and being prepared
to protect sea and coasts from damage. The
Government recognizes that despite all pre-
cautions, spills will occur when exploiting
energy resources below the North Sea.  (See
p. 17.)
A system for reporting oil spills has been
implemented and contingency cleanup plans
have been established by government and inr
dustry. Much responsibility for cleanup
action rests with local communities. Except
in very calm waters and ecologically sensi-
tive areas, the most effective way to treat
oil spills around the United Kingdom is con-
sidered to be dispersant spraying. Dispers-
ants are limited to those that have passed a
toxicity test. Several voluntary agreeme.nts
have been drawn up by tanker owners, oil com-
panies, and offshore operators to recover
cleanup costs and damage from oil pollution.
(See p. 19.)

SPIRIT OF COOPERATION IN
DEVELOPMENT OF NORTH
SEA OIL RESERVES

Development of the United Kingdom sector of
the North Sea has been marked by a spirit
of cooperation among government, communi-
ties, the oil industry, and private interest
groups. Government and oil industry offi-
cials said that there has been-frequent and
constructive interaction. In particular,
when important legislation was being con-
sidered, oil company views were solicited
and considered.  (See p. 26.)



                     iv
Land use planning in the United Kingdom
has allowed local communities to take an
early, active role and produced mutually
acceptable agreements among communities,
Government, oil companies, and private
interest groups. The persons interviewed
pointed to the construction of a large
oil terminal and pipeline A examples
where cooperation facilitated development.
(See p. 26.)

Agreement among the United Kingdom and the
fishing and oil industries facilitated the
creation of the Fisheries and Offshore Oil
Consultive Group--a body which resolves
problems of mutual concern between the oil
and fishing industries. One problem re-
solved by the group pr vides for claims
settlement resulting from damage to fishing
gear caused by debris from oil production
platforms.  (See p. 31.)




                     v
                          C o n t e n ts
                                                         Page
DIGEST                                                     i
CHAPTER

   1       INTRODUCTION                                    1
               Scope                                       3
               National boundaries of the North Sea        5
   2       PHILOSOPHY AND CONDITIONS RELATIVE TO
             UNITED KINGDOM DEVELOPMENT OF NORTH SEA
             OIL                                          6
               Philosophies                               6
               Factors relevant to development            7
               Impact of North Sea oil on world supply    9
               Benefit to the economy                     9
   3       GOVERNMENT CONTROL AND RESPONSIBILITY         11
               Licensing                                 11
               Majority state participation              14
               Changes proposed in U.S. leasing          16
               Taxation                                  16
               Prevention of and preparation for off-
                 shore accidental oil pollution          17
               Assessment of U.K. preparedness           24
               Industry's oil spill record               24
   4       SPIRIT OF COOPERATION IN DEVELOPMENT OF
             NORTH SEA OIL RESERVES                      26
               Central Government and oil industry
                 cooperation                             26
               Cooperation between Central Government
                 and local communities: land-use
                 planning and development                26
               Cooperation between local government,
                 the oil industry, and private in-
                 terests                                 29
               Special interest groups and the oil
                 industry: fisheries and offshore
                 oil consultative groups                 31
APPENDIX

   I       Bibliography                                  32
  II       Legislation governing offshore operations
             in the United Kingdom                       33
                                                          Page
APPENDIX

 III       One oil company's estimate of United Kingdom
             self-sufficiency and net exports from
             North Sea oil                                 39
  IV       Criteria and conditions for obtaining United
             Kingdom offshore production licenses          41
      V    Memorandum of understanding and cod-e of
             practice between the U.K. Government and
             oil companies giving U.K. industry full
             and fair opportunity to compete for oil-
             related goods and services                    48

                            ABBREVIATIONS

BNOC       British National Oil Corporation
GAO        General Accounting Office
OCS        Outer Continental Shelf
PRT        Petroleum Revenue Tax

U.K.       United Kingdom
                          CHAPTER 1
                        INTRODUCTION

     President Carter, in a message to the Congress on May 23,
1977, said that the United States should "satisfy our energy
needs from existing sources, both fossil and nuclear, in a
safe and environmentally acceptable way." Regarding Outer
Continental Shelf (OCS) leasing, the President asked the Con-
gress for expeditious passage of proposed amendments to the
OCS Lands Act and said he particularly favored provisions
of the bill which would

     -- permit full evaluation of the effects of oil production,
        and cancel leases or terminate operations when harm or
        damage to the environment outweighs the advantage of
        continued operations;
     -- improve consultation with States and communities to
        assure that they have a real role in decisions which
        affect them; and

     -- require that the best available economically achievable
        safety and pollution control technology in OCS operations
        are used.

     President Carter said he has directed the Secretary of
Interior to assess the size and scheduling of the long-term
OCS program in close consultation with governors of affected
coastal States. In addition, the President directed the
Secretary of Interior amcng other things to
    -- establish an OCS information clearinghouse to receive
       inquiries about Federal OC3 activity;
    -- facilitate cooperative planning among industry, the
       Department of the Interior, the Department of Trans-
       portation, and the States for lease development, pipe-
       line locations, pipeline standards, and onshore facili-
       ties; and

    -- study the prospect of reorganizing the Interior De-
       partment's management of OCS resources.
     The Senate Committee on Energy and Natural Resources and
the House Ad Hoc Select Committee on the Outer Continental
Shelf have considered amendments to the Outer Continental
Shelf Lands Act (43 U.S.C.-1331 et seq.) to establish policies
and procedures for managing OCS oil and natural gas resources.


                              1
The Senate bill was passed on July 15, 1977, while the House
has not completed action on H.R. 1614. The Congress returns
from its summer recess in September.
     Some noteworthy findings of the Senate Committee report
of June 1977 included:

     -- The demand for energy in the United States ie increaning
        and will continue to increase in the foreseeable future.

     -- Technology is or can be made available to allow
        significantly increased domestic production of oil
        and gas without undue damage to the environment.
     -- OCS contains significant quantities of petrolem and na-
        tural gas and is a vital national resource which must
        be carefully managed so as to realize fair value, to
        preserve and maintain competition, and to relfect the
        public interest.

     -- Environmental and safety regulations relating to
        activities on the OCS should be reviewed in light
        of current technology and information.
     -- Funds must be made available to pay for prompt removal
        of oil spills and for damages to public or private
        interests including commercial fishing vessels and gear.

     -- The Federal Government must assume responsibility for
        minimizing or eliminating any conflict, including those
        among the oil, fishing, recreational, and public interest3.

     This report examines the United Kingdom's (U.K.'s) develop-
ment of its North Sea oil and gas reserves.  It focuses on
the U.K. control of and philosophy and approach to development
of its oil and gas reserves to identify ways that the United
States might benefit from U.K.'s experience. In view of the
recognized importance of energy supply and availability, we
believe that pertinent information on the experiences and
results of North Sea oil and gas development could be useful
to U.S. officials involved in energy matters. We had also
planned to include Norway's philosophy, approach, and exper-
ience in the North Sea, but becuase of a major blowout in one
of their offshore fields the U.S. Embassy asked us to delete
that portion of this study.

     We recognize that no subject as complex as OCS develop-
ment can be adequately covered by a report such as this.
Moreover, presentation of the salient features of the U.K.
approach to exploitation of its North Sea resources is rot

                              2
intended to be a comprehensive assessment of the approriate-
ness or applicability to comparable exploitation of U.S.
OCS resources. We did not assess the success of U.K. de-
velopment or the extent of that Government's role in the
results obtained. Nevertheless, we believe that the features
covered in this report provide a base for the Congress and
the executive branch to examine more closely those aspects
of U.K. exploitation which may apply to U.S. development,
especially in view of the pending legislation amending the
Outer Continental Shelf Lands Act.
     Although the report describes a current favorable climate
for developing North Sea resources, it should be noted that
many difficulties were encountered during the early years.
High development costs were experienced due to inflation,
sterling devaluation, supply and equipment shortages, and
delays due to technical difficulties. Also, oil companies
were faced with uncertainties from an ever-changing Govern-
ment policy. These problems were eventually overcome, ac-
cording to oil company spokesmen, because of the cooperative
attitude of the U.K. Government. As a result of this attitude,
most officials we interviewed indicated that present arrange-
ments are generally satisfactory.

SCOPE

     We focused on the U.K.'s experience in developing its
sector of the North Sea as it has the largest, and potentially
most productive sector. Also, as a result of its philosophy
to accelerate exploration and development, the U.K. has issued
exploration and production licenses for over 65 percent of
its sector.

     As there are philosophies for North Sea development that
differ from the U.K., we gathered limited information on
Norway's approach. Norway has potentially the second largest
guantity of energy reserves in the North Sea but has leased
only 35 percent of its sector.
      There have been many reports published on the various
aspects of the development and impact of the North Sea--we
made extensive use of these reports.   (See app. I.) We
performed fieldwork in the United Kingdom, including England,
Scotland, and Shetland Islands, during a 4-week period. We
interviewed officials from the U.S. Embassy, the U.K. Govern-
ment, local governing bodies, and U.S. and U.K. oil companies.
We examined the policies, laws (see app. II), and roles of
the Central and local governments in the North Sea develop-
ment.


                              3
     Informal comments on ou: draft report by officials of
the Departments of State and Interior were considered in
finalizing this report.




                              4
             NATIONAL BOUNDARIES OF THE INORTH SEA
 OILFIELD
 GASFIELD
. PIPELINE
- PIPELINE UNDER                THISTLE
   CONSTRUCTION                 DULINI
                           HUTTONr     tSTATFJORD
                        CORMORANT OO
                          HEYAHER O BRENT
                         ,HEVHR          NINI AN

                                                ALWYN                                                 A
                                       FRIGGO
                                                  H E IM D EH L
                              NTE
                                EWTT                                             GOG




                                   I   /   _I



                                                                      NCLAYMOREN
                                                            NORWEGIAN
                                 FORTIES \                   SECTOR


                                       OR
                                   MONTROSE

                                                      EKOFISK
                                            AUK
                   BRTISH SECTOR                                           DANISH SECTOR


                                                                           DAN
                                                                           DN     I        \DENMARl




                                                                                       GERMAN _
                                                                                       SECTOR

                                                          DUTCH SECTOR
                             R OUGH WEST
                                           E VIKING                10/11


       _-      A         C       LHWETLE M
                                                  E MAI                               _|
                                                                                                REPUBLIC
                                                                                            F    GERMAN




                                                                  _IA
                           CHAPTER 2

               PHILOSOPHY AND CONDITIONS RELATIVE
                  TO UNITED KINGDOM DEVELOPMENT
                        OF NORTH SEA OIL

     The United Kingdom attempted rapid exploration and de-
velopment of its sector of the North Sea to bol3ter its
saaging economy. In contrast, Norway, with a strong economy,
hds adopted a more cautious approach.

     The United Kingdom's efforts to ~apidly exploit North
Sea oil was facilitated by:  (1) basic resolution of terri-
torial ownership of mineral rights between North Sea coastal
countries following the 1958 Geneva Continental Shelf Conven-
tion, (2) the 1973 Organization of Petroleum Exporting Coun-
tries' oil price increase (North Sea oil is expensive to
produce), and (3) the ability to develop the technology
needed to operate in the hostile environment of the North Sea.
     It has been estimated that the United Kingdom will be
a net exporter of oil through the 1980s. One estimate shows
that all sectors of the North Sea hold about 2 percent of
the free world's known reserves.
PHILOSOPHIES

     Worldwide recession, severe external payments pressures,
and deep-seated structural problems combined to place the U.K.
in perhaps the worst economic situation of any major Western
European country. Therefore, it was desirable to locate and
develop a secure and, hopefully, cheap source of fuel from
indigenous sources, which would benefit the balance of pay-
ments.

     Discovery of the North Sea reserves in the U.K. sector
came when the United Kingdom's economy was being severely
strained by its reliance on foreign oil. In 1970, the U.K.
imported 100 million tons of oil with a net deficit effect
on its balance of trade of over $1.2 billion. As a result
of North Sea reserves, the U.K. is expected to became self-
sufficient in oil by 1980 and, later in the decade, be a net
exporter of oil with a resulting positive effect on its
balance of trade. The quick realization of this potential
has been the basic aim of the U.K.'s approach to the develop-
ment of the North Sea.


                               6
     Self-sufficiency depends on the potential reserves of
the North Sea and the speed in which they are used. Estimates
vary as to the projected proven and probable reserves of oil
in the U.K. sector; the U.K. Government estimates between
22 to 33 billion barrels. One oil company anticipates (based
on a projection of 25 billion barrels of oil.reserves) a
period of self-sufficiency and net exports through the 1980s.
(See app. III.) Even if the United Kingdom prohibits oil
export the period of self-sufficiency would increase only an
additional 2 years. By 1991, then, the U.K. could again
have to import oil to meet its needs.
     The United Kingdom Government has apparently recognized
the need for proper planning and use of North Sea oil benefits,
as summarized in its 1977 forecast of North Sea development:

     "This potential benefit must not be frittered
     away, and we need to run substantial current
     account surpluses in order to repay overseas
     debts and create conditions favorable to invest-
     ment which will strengthen the econo m y. There
     is also a case for using some part of the bene-
     fit for the development of alternative energy
     sources."
     The Norwegian approach to the development of its sector
of the North Sea has been characterized as a "cautious-go-
slow" policy. It now imports little oil and, in fact, is
already a net exporter. By 1980, it is projected that Norway
will produce about 1.1 million barrels a day with a consump-
tion rate of si,-ificantly less (according to one estimate,
less than 300,000 Darrels a day). The concern of Norway is
that oil revenue could "overheat" the Norwegian economy,
which already provides one of the highest standards of liv-
ing in the world.
FACTORS RELEVANT
TO DEVELOPMENT

     Serious petroleum exploration of the North Sea began
shortly after a giant onshore qasfield was discovered in
1959 at Gronigan, the Netherlands. The desire to explore
the waters of the southern area of the North Sea (where it
was thought there were additional substantial reserves of
gas) had to wait, however, for establishing legal territorial
ownership of the waters. Resolution was facilitated by the
1958 Geneva Continental Shelf Convention. The Convention
had the effect of extending the sovereign rights of the North
Sea coastal countries to include the exploration and

                              7
exploitation of the natural resources of the seabed on the
Continental Shelf. Boundaries were to be negotiated by any
set of principles. However, the Convention stipulated that
when mutual agreements between countries could not be reached,
in the absence of special circumstances, boundary lines would
be determined by the principle of equidistance (measuring
the width of the North Sea at the widest point between two
countries and giving half of the area to each country).

     The line demarcating the U.K. sector of the North Sea
was established by five separate agreements with each of the
coastal countries.
     A similar boundary question is relevant to tiLe United
States, which is working on questions on the extension of
coastal states' boundaries to the Outer Continental Shelf
and the resulting ownership of seabed rights.

     Hostile environmental conditions hamper North Sea ex-
ploration and development operations. Pipelaying operations,
resupply of drilling rigs and platforms, and rig and plat-
form towing can be delayed for days because of inclement
weather. The "weather window," a term used by industry,
is that period of time which enables resupply, pipelaying,
and towing operations to continue. One study of weather
conditions during a 180-day period in the winter showed that
the weather was unsuitable for resupply of platforms about
76 percent of the time. According to oil company represent-
atives, weather, being an uncontrollable variable, can play
havoc with production schedules.

     The cost of investment has been high--for instance, ac-
cording to one oil company, the cost to build, outfit, and
place into operation one production platform can be between
$800 million and $1 billion. As of April 1977 there were
14 oil production platforms installed in the U.K. sector of
the North Sea. Six more are under construction.

     The cost to produce North Sea oil as compared to oil
produced by the Organizatioa of Petroleum Exporting Countries
requires that the selling price of oil remain high. As an
example, production costs for North Sea oil is approximately
25 times greater than Middle East oil and 2.8 times greater
than oil produced in the Gulf of Mexico. While a significant
reduction in Middle East oil prices could render the North
Sea oil fields unprofitable, many persons interviewed con-
sider it unlikely that such a reduction in price will ever
take place. One oil company representative said he believes
North Sea oil will not be large enough to stimulate such
action.

                              8
     The Organization of Petroleum Exporting Countries' oil
embargo of 1973 eventually caused the quadrupling of the
per-barrel oil price--from $3 to $12 (in 1974 the United
Kingdom paid $4.2 billion more for 2-percent less oil than
it imported in i973). This factor, among others, enabled
extensive offshore exploration and development of the
North Sea's energy resources to become a more commercially
attractive venture.
     The techology needed for exploration and development of
North Sea energy resources has been an important factor.
Although the technology has advanced rapidly, there have been
problems which affect production schedules that cost oil com-
panies a considerable amount of capital. Initially, plat-
form design was based on those used in the United States'
Gulf of Mexico. There rigs experience relatively mild weather,
and operate in water depths of about 200 feet. Because of
the severe weather conditions in the North Sea, platforms
now are constructed to withstand waves up to 106 feet high
and winds approaching 130 miles per hour. The technological
capability now exists for operating in water depths and
weather conditions worse than expected to be encountered
off the U.S. Atlantic Coast. Oil company officials stated
that the experience gained in dealing with environmental
conditions, cost increases, and technical problems are the
significant lessons learned from the North Sea.
IMPACT OF NORTH SEA OIL
ON WORLD SUPPLY
     In terms of free world supply, North Sea oil projections
of arolid 40 billion barrels of proven and probable reserves
of oil rank it, according to one source, 'Jtn in the free
world, with about 2 percent of known reserves. The people
interviewed (in both Government and the private sector) agree
that the North Sea's worldwide impact on supply and price
will be marginal, at best. Impact of the oil will be great-
est in We-tern Europe, where, according to a State Department
analysis, North Sea oil and gas in the aggregate are expected
to reduce Western Europe's dependence on oil imports in the
1980-85 period from nearly 60 percent to about 40 percent
of its total energy needs.
BENEFIT TO THE ECONOMY

     Britain's economy should be bolstered by the increasing
volume of oil and gas production. By the end of 1976, North
Sea wells were producing over half a million barrels of oil a
day. The U.K. Department of Energy predicts that by the end


                              9
of 1977 oil production should be equal to half or more of U.K.
consumption and estimates that the nation will be self-'
sufficient by 1980.

     Oil production is already having a favorable effect on
the U.K.'s financial situation. In the past year, the U.K.
realized substantial economic benefits from oil worth about
$1.2 billion in terms of balance of payments and another
$77 million in royalties (if gas was also to be valued at
the cost of imported energy it replaced, the total balance
of payments savings would be around $5.3 billion).

     The U.K. Department of Energy, in its April 1977 report
to Parliament, claimed an increase in employment directly
or indirectly related to offshore work of at least 100,000
jobs. The total includes an increase of 50 percent in the
offshore labor force of about 10,000 plus several thousand
more on pipe-laying, crane barges, and supply boats.




                            10
                           CHAPTER 3

                    GOVERNMENT CONTROL AND

                        RESPONSIBILITY
     The pace and extent of the U.K.'s search for oil and
gas is strongly influenced by Government policies of rapid
development and control. The policies were primarily imple-
mented through a system of licensing, establishing a national
oil company, and a system of taxation and royalty.

     Licensing in She U.K. encourages rapid exploration and
development because (1) the cost of licenses is low,
(2) two-thirds of the licensed area must be surrendered
after 7 years, and (3) the Government stresses intensive
work programs in its licensee selection process. Government
powers to control production levels are stated in every
license.

     On January 1, 1976, the British National Oil Corpora-
tion was created. The Corporation provides the Government
with a secure source of North Sea oil and gas because the
Government is a 51-percent partner in all licenses.

     The U.K.'s taxation and royalty system preserves a
share of profit for the nation approaching 70 percent of
oil company net revenues. The system is designed to en-
courage development by allowing companies to recover their
capital costs early in the production life of oil fields.
In addition, it provides incentives for the development of
marginal fields. Control over the revenues is maintained
through a National Oil Account.

     In terms of oil pollution, Government emphasis is
placed on minimizing the risks of such occurrences and being
prepared to protect the seas and coasts from damage. A re-
porting system for oil spills has been implemented, and con-
tingency plans for cleanup have been established by Govern-
ment and industry.

LICENSING

     Two kinds of licenses are issued: exploration licenses
and production licenses. The former is a nonexclusive  license
that entitles the holder, along with others, to conduct geo-
logical and geophysical surveys. A production license is ex-
clusive and authorizes postexploration searching for, and
drilling and removal of, petroleum.


                             11
     Quick exploitation was the main driving force for
designing the United Kingdom's licensing system. It is said
that the U.K. method for allocating production licenses en-
courages rapid exploration because:

     -- Intensive work programs which meet the Secretary of
        State for Energy's approval are required as a condi-
        tion for receiving a license.

     -- Each licensee is required to surrender two-thirds of
        his area after 7 years.
     -- The initial cust and annual rents of licenses (both
        exploration and production) are small, thereby placing
        minimal strain on the working capital of oil companies
        and enabling them to finance rapid exploration.

     Determining who does and does not receive a license is
a matter of discretion on the part of the U.K. Secretary of
State for Energy--licenses are not awarded on the basis of
competitive bidding and, therefore, the Government has con-
trol over who will develop the North Sea. Specific criteria
is used by the Department of Energy to evaluate license appli-
cations.    (See app. IV.) One of the most important of these
criteria is the requirement that prospective licensees submit
an "appropriate" work plan. The work program must specify
     -- the relevant work which the licensee proposes to carry
        out;

     -- the proposed locations of the work, the purposes for
        which it is proposed, and the times at which it is to
        begin and end; and

     -- the maximum and minimum quantities of petroleum the
        licensee proposes to produce in each calendar year.
     An "appropriate" work program is defined as one in which
any applicant (1) exploits the rights granted by a license,
(2) has the competence and resources needed to exploit these
rights, (3) is exploiting these rights to the best commercial
advantage, and (4) can reasonably be expected to carry out
the work during the term of the license.

     After 7 years, the licensee must surrender at least
two-thirds of the licensed area to the Government. It is
claimed that such a policy encourages the licensee to
actively develop his total area so as not to lose poten-
tially large amounts of revenue.


                             12
      Licenses are inexpensive. For instance, a production
license currently requires an initial fee of $1,710. Sub-
sequent fees amount to $13.68 per square kilometer for the
first 4 years, $205.20 per square kilometer the next 3 years,
-'42 per square kilometer the 8th year, and increasing $342
^;   square kilometer each year thereafter, not to exceed
   ,130 per square kilometer. In addition, a royalty fee of
12.5 percent on the value of petroleum is assessed.

     Some experts argue that the speed in developing the
North Sea was at the expense of some short-term loss to the
United Kingdom treasury, as a competitive system of awarding
licenses would almost certainly have produced higher annual
rental fees. Others say that, in the long run, revenues
from the U.K. licensing system tend to equal those revenues
generated by competitive bidding.

      In addition, some experts argue that U.K. licensing is
not the only way to assure quick exploration. In particular,
these people say that there is no reason to believe that an
auctioning system would prohibit rapid exploration. Indeed,
s.uctioning might lead to faster exploitation because, having
invested capital in buying a license, the licensee might jish
to obtain a return on that capital as quickly as possible.

     Another criteria used to evaluate license applications
is the applicant's past performance, and agreement that U.K.
industry be provided a full and fair opportunity to compete
for oil-related goods and services. When the applicant does
not already hold a license, he must agree that industry will
be given this opportunity. A company's performance is moni-
tored by the Government. It is hoped that U.K. industry will
acquire a larger share of the North Sea market and gain suf-
ficient expertise to compete worldwide in oil development.
Government emphasis on helping U.K. industry has resulted in
U.K. companies securing 52 percent of North Sea contracts in
1975 (worth $1.07 billion). According to a U.K. Government
official, the "full and fair" concept is not the same as the
U.S. policy of "buy American." He said that oil companies
do have the final say as to whom they buy from. The "full
and fair" concept was achieved through a memorandum of under-
standing and code of practice endorsed by oil company repre-
sentatives.  (See app. V.)
     Government powers to control future rates of oil deple-
tion are stated in every production license. Therefore,
should the need arise, the British Government does have the
control to regulate production. In fact, production levels
must be approved by the Department of Energy prior to extract-
ing oil or gas.


                            13
     More recently, the U.K. Department of Energy moved to
tighten controls on gas-flaring in North Sea oil fields.
The Government energy unit advised one-company that gas
reinjection equipment must be installed in a specific field
before production will be permitted to resume. The Depart-
ment of Energy emphasized that an effort must be mace to
conserve gas. Further, the Department of Energy announced
that, in the future, companies coming in with development
plans for North Sea oilfieids must have reinjection plans.
     Most oil company representatives spoke favorably of the
U.K. licensing system and cited two major reasons why they
felt this way:

     -- Licensing gives smaller companies the opportunity to
        participate (under competitive bidding, the smaller
        companies usually get out-bid).

     -- Inexpensive licenses allow oil companies to invest
        in exploration and development.

However, one U.K. financial analyst interviewed said the U.K.
licensing system has resulted in several smaller companies
not being able to fulfill their work plan, thereby requiring
that the interest be sold to another investor.

MAJORITY STATE
PARTIMIATIO)N

     To exercise more effective control over North Sea energy
resources, the Petroleum and Submarine Pipelines Act, 1975,
was enacted. Highlighting the act was the creation of the
British National Oil Corporation (BNOC), through which the
U.K. Government is guaranteed a majority participatory share
in all North Sea oil and gas fields. BNOC has been given the
power to

    -- explore for and get petroleum in any part of the world;
     -- transport and refine petroleum;

     -- store, distribute, buy, and sell petroleum and any
        products derived from it;

    -- take over the Government's participation interest in
       U.K. licenses;

    -- carry out consultancy, research, and training in
       petroleum matters; and

                             14
    -- build, hire, or operate refineries, pipelines, and
       tankers.

     The SecretaLt of State for Energy (who has responsibility
for the U.K.'s Department of Energy) has overall responsibil-
ity for BNOC operations. He may'qive BNOC directions, re-
quest it to perform duties of a financial nature, and provide
loans to the corporation. In addition, certain BNOC activi-
ties can be carried out only with the consent of the Secre-
tary of State (i.e., exploration and production abroad, re-
fining, and trading petroleum, setting up or acquiring subsi-
diaries, and giving loans). BNOC is required to notify the
Secretary of State before it begins any new activity or a
substantial expansion of an existing activity.

     BNOC, if it so chooses, became a 51-percent partner in
all licenses awarded after August 1976, and oil companies
had to accept this condition if they wanted a license after
that date. For those oil companies having licenses prior to
August 1976 an agreement was sought on existing fields to
give BNOC the right to purchase 51 percent of the oil and
gas at fair market prices. Seeking such an agreement was a
condition for fifth-round licensing. We noted one instance
where no agreement was reached and, in turn, the oil company
was not awarded a license. U.K. Government officials said
that BNOC's 51-percent ownership provides the Government
with 51 percent of the oil and gas produced. Appendix IV
describes criteria and conditions for obtaining U.K. off-
shore production licenses.

     BNOC has become a sole operator of some small North Sea
oil fields and has an operational interest in others. BNOC,
therefore, is in a position to respond, react, and offer con-
structive opinions on Government regulations as they affect
operators. Technical expertise is also being achieved which
is hoped will enable BNOC to explore and develrp other areas
of the Outer Continental Shelf, particularly marginal fields.
     Finally, BNOC, as an extension of the Government and a
commercial force, does provide feedback about events in the
North Sea. Government officials stated that the access and
abundance of needed information is enhanced through BNOC.

     Although it appears that oil companies would prefer not
having BNOC, it is a situation they have to live with. Most
corporate officials interviewed said that cooperation has
been good between oil companies and BNOC. There is some
concern that the confidentiality of corporate data shared
with BNOC may not be maintained.


                             15
CHANGES PROPOSED IN U.S. LEASING
     One U.S. Government leasing and management goal is
receiving a fair market value for leased resources. The
Secretary of the Interior, under changes proposed in the
Outer Continental Shelf Lands Act Amendments of 1977, would
be able to use alternative bidding and leasing systems not
specifically enumerated. Annually, the Secretary would be
required to evaluate and report on the bidding system to
include an evaluation and description of any additional
measures to encourage the entry of new competitors.

     Another proposal calls for leasees to submit a work plan
to the Secretary of the Interior for approval. Such a re-
quirement is quite similar to the U.K. work program approach.
Terms of leases would cover an initial 5-year period but not
exceed 10 years, and would require that leasees produce oil
and gas at prescribed rates. Also, the Secretary of the
Interior would have access to all data obtained from activi-
ties in exploration, development, or production of oil or
gas.
TAXATION

     The U.K. tdx and royalty system objectives for the
North Sea are to (1) secure a fair share of profits for the
nation and maximize the gain to the balance of payments, and
(2) assert control over oil company revenues. It is also
designed to encourage development by allowing companies to
recover their capital costs early in the productive life of
oil fields. The effect of the system is that tax and royalty
receipts through 1976 were negligible ($75.6 million).  How-
ever, total revenue from oil and gas production through 1980
is expected to be $9.4 billion at 1976 prices. In the early
1980s, as fields mature and initial allowances against cost
are used up, revenues are expected to amount to $7.3 billion
per year. It is expected that during the 1980s the combined
Government income from the tax and royalty system will amount
to something over 70 pe rent of the oil companies' net
revenues.

     Government income from the offshore oil fields is made
up of:

    --A royalty at 12.5 percent of the well-head value of
      the oil.




                             16
     -- A petroleum revenue tax (PRT) at 45 percent of receipts
        from oil sales less current and capital expenses and
        royalty.

     -- A corporation tax (currently 52 percent) on net revenue
        after deduction of royalty, PRT, and expenses (provi-
        sions prevent the tax from being eroded by losses and
        allowances outside the North Sea).

     The tax system also provides incentives to develop mar-
ginal fields by (1) increasing capital expenditure deductions
by 75 percent against the PRT, (2) allowing 1 million tons of
oil a year per field (not to exceed 10 million tons) free of
PRT, (3) canceling PRT if its application reduces annual pro-
fits to below 30 percent of capital expenditure, and (4) re-
funding royalties in whole or in part.

     Control over the enormous revenues generated by the
North Sea oil fields is accomplished through the National
Oil Account. All royalties, rentals, and license fees are
paid into the account, including those revenues generated
by BNOC. In addition, all BNOC expenditures are met out of
this account. The account is under the control and manage-
ment of the Secretary of State for Energy.

PREVENTION OF AND PREPARATION FOR
OFFSHORE ACCIDENTAL OIL-POLLUTION

     Current U.K. arrangements for preventing and dealing
with oil pollution resulted primarily from a large tanker
spill in 1967 that polluted beaches in the U.K. and France.
For this emergency the U.K. was without a detailed plan or
an organization capable of responding to a large pollution
disaster. Emphasis is now placed on minimizing the risks
of environmental pollution and being prepared to protect the
seas and coasts from damage. The Government realizes that
despite all precautions spills will occur when exploiting
energy resources below the North Sea.
Preventive measures

     Oil companies are required to take all steps practicable
to prevent the escape of petroleum into any waters in or in
the vicinity of the licensed area. All apparatus, appliances,
and wells are required to be in good repair. Operations are
to be conducted in a " * * * proper and workmanlike manner
in accordance with methods and practice customarily used in
good oil field practice."  (Some discharges of water that
contain small amounts of oil obtained during oil production

                             17
and processing are permitted. Companies are normally required
to maintain the oil content of any discharge below an average
of 40 to 50 parts per million and below 100 parts per million
96 percent of the time.)

     Every offshore installation operating on the U.K. Con-
tinental Shelf is required to have a valid certificate of
fitness issued by a certifying authority appointed by the
Secretary of State for Energy. A certificate of fitness
means that the offshore structure should be capable of with-
standing the environmental conditions to be experienced and
any other forces that the structure will be subjected to.
The materials to be used and the construction to be carried
out must be in accordance with drawings and specifications
approved by the certifying authority. A certificate of fit-
ness may be valid up to 5 years, during which time annual
surveys are made to assure that the installation is maintain-
ing satisfactory standards.
     Offshore installations have to be clearly identified
and lighted and their positions marked on mariners' charts.
As a further precaution, safety zones of a 500-meter radius
are prescribed around fixed platforms, into which vessels
may not enter without permission.
     The Secretary of State for Energy has the power to con-
trol the standards for pipelines and safety features. During
construction, pipeline welds are examined by X-ray or gamnra
ray processes and defects are repaired. Before operation
each pipeline is subjected to a pressure test which produces
stress in the pipe material equal to 125 percent of the
expected worki.ng pressure. Pipelines laid in water are
required to be buried wherever practicable to reduce the
risk of vessels anchoring or trawling across them.

     Single point moorings are used to load oil into tankers
either near the production platform or in an oil terminal
harbor area. The flow of oil is controlled by pumps at the
platform or terminal and is monitored at the Hanker. There
are automatic chutdown devices to minimize any spillage which
may occur from brea;:age or leakage of connections.
     Pollution could result from acts of sabotage to offshore
installations. Government protection measures include plans
to provide five offshore patrol vessels and four aircraft.
As of April 1977 two of the vessels were operational. All
vessels are expected to be in service by early 1978. Since
January 1, 1977, a long range maritimu patrol force has


                             18
provided surveillance effort equivalent to that of four
aircraft.

Preparation for dealing
with-oil spills

     Responsibility for dealing with oil pollution at sea
rests with the U.K. Department of Trade. Although not bound
to do so, local authorities have accepted responsibility for
clearing oil from beaches, banks of estuaries, and up to
one mile from shore. Oil pollution in docks and harbors is
normally dealt with by the dock and harbor authorities
concerned.

     Contingency planning
     Contingency plans have been developed at all levels,
including oil companies. The Department of Trade's plans
are essentially regional and based on the principle that
responsibility is firmly placed on one official--the Princi-
pal Marine Officer (a Department of Trade official) of each
of the nine regions covering the U.K. coastline.

     A typical contingency plan from the Principal Marine
Officer describes the communications network for reporting
oil spills and arrangements for obtaining accurate local
weather forecasts from which the likely movement of slicks
may be predicted. It also provides a directory of contacts
whose services, knowledge, or resources (e.g., boats) might
be called upon in an emergency. In addition, it indicates
the extent and location of stocks of dispersants and spray-
ing equipment and the means of communication (telephone,
telex, radio) by which contact could be maintained among
those involved. Finally, the plan defines particularly
sensitive lengths of coast and sea areas.

     As mentioned above, when oil spilled at sea approaches
the coast, responsibility for dealing with it shifts from the
Department of Trade to local coastal authorities. Contin-
gency plans prepared by local authorities are similar to the
plans of Principal Marine Officers in that they provide for
the designation of oil pollution officers responsible for
preparation of the plan, organization of local arrangements,
and execution of clearance operations. The Central Govern-
ment receives copies of these plans but does not formally
evaluate or endorse them. It sees its role as one of giving
the local authorities whatever advice and guidance it can.



                            19
     Each oil company has been asked by the Government to
submit oil spill contingency plans. As of April 1977 the
majority of these plans had been submitted and were being
examined by the Government to assure their adequacy and com-
patibility with Government plans.
     The North Sea Operators Clean Seas Committee, an in-
formal coordination and liaison body whose members represent
oil company organizations from seven countries, has estab-
lished a contingency plan. The plan provides for assistance
(in the form of equipment and materials) to any individual
oil company which is a member.

     Reporting-of slicks
     The Department of Trade has arranged that all U.K. ships
and aircraft, whether civil or military, report any accident
or casualty to a ship which is causing or likely to cause oil
pollution and the nature and extent of any slick seen in the
sea. Private fishing vessels and boats participate in these
arrangements. Offshore operators also participate and are
required to warn of escapes of petroleum from their installa-
tions under the terms of their licenses.

     All these reports are channeled to the U.K. Coast Guard.
The Coast Guard disseminates the reports in a standard lay-
out which gives such details as time, date, and place of the
incident, weather aqd sea conditions, the extent of the slick,
the name of the polluting vessel (if known) and an opinion on
whether the oil is likely to come ashore. These reports are
sent to interested parties (e.g., the Principal Marine Officer
and local authorities). Figure 1 illustrates the channels of
communication for reporting oil spills.

     These arrangements are complemented by international
agreement among the coastal states of Norway, Denmark, West
Germany, the Netherlands, Belgium, France, and the United
Kingdom. Under this agreement, any country becoming aware
of an accident or oil slick that threatens the coast of an-
other is required to warn the country concerned. Also, each
country is allocated an area of the North Sea within which it
has special responsibility for surveillance of oil slicks and
to take action to deal with them.
     Resources

     The Department of Trade's policy for the treatment of
oil slicks requires the provision of three essential items--
boats, spraying equipment, and dispersant. The Department


                            20
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                                                                      .21
does not own any boats for spraying but can call on both
Government and private vessels (assuming they are available
at the time) on a prearranged basis. Therefore, there is no
guarantee that a particular boat would necessarily be avail-
able in an emergency since vessels could have prior tasks.

     Except in very calm waters and in ecologically sensitive
areas, the most effective way of treating oil on the waters
around the U.K. Jf considered to be spraying dispersant on
the oil and then agitating the resulting mixture to accelerate
the natural process of degradation. Dispe'sants are limited
to those that have passed a toxicity test. The Principal
Marine Officers are provided with enough dispersant to allow
48 hours' operation during which time the Officer can seek
replenishment from other sources. To supplement stocks the
Officer first checks other regions and then the manufacturer.
Principal Marine Officers are also provided with spraying
gear, protective clothing, and pumps.

     Dispersant and devices to apply it are held in reserve
by most local authorities. Much of the equipment held for
other local authority purposes (such as pumps, tractors, and
bulldozers) can be used for beach clearance.

     Oil companies maintain clearance equipment at their off-
shore installations. The U.K. Offshore Operators Association
(which acts as the focal point on pollution matters in deal-
ings between the industry and Government) has stockpiled spray
gear and dispersant at various locations around the North Sea.
These resources would be made available to its members.

     Exercises

     To test the adequacy of its regional organization, the
Department of Trade conducts exercises to deal with simulated
pollution incidents. The aim is to hold one major exercise
in each region every 3 years. Since 1973 a total of eight
exercises have been mounted so that all but one region has
been involved.

     Voluntary agreements
     on compensation

     The Department of Trade, on behalf of the Government,
and the local authorities attempt to recover their cleanup
costs whenever those responsible for the pollution can be
identified. Voluntary agreements on compensation have been
drawn up by tanker owners, oil companies, and offshore
operators:


                            22
-- The Civil Liability Convention makes operators of ships
   carrying 2,000 or more tons of bulk oil liable for
   pollution damage and requires them to have appropriate
   insurance to cover this liability. This convention
   has been ratified by most states in Northwest Europe.
-- Where the Civil Liability Convention does not apply,
   compensation may be obtained through a voluntary
   scheme known as the Tanker Owners Voluntary Agreement
   Concerning Liability for Oil Pollution. Tanker owners
   are required to reimburse governments for the cost of
   any cleanup operations up to a maximum of $100 per
   gross ton of the tanker or $10 million, whichever is
   less.
-- A further voluntary scheme which supplements the above
   agreements provides compensation for situations where
   there is a shipowner's exemption or when compensation
   is insufficient.. This agreement among oil companies
   is known as the Contract Regarding an Interim Supple-
   ment to Tanker Liability for Oil Pollution; the maximum
   compensation available per incident is $30 million.
   An oil company which becomes a party to the agreement
   makes a periodic payment to a central fund, derived
   by assessing the crude oil and fuel oil receipts for
   the previous year. This voluntary scheme will be
   replaced by an International Fund for Compensation
   for Oil Pollution Damage.
-- At a conference in December 1976 several countries
   agreed on the text of an international convention
   under which compensation will be payable by offshore
   operators for oil pollution damage caused by their
   activities in waters off the coasts of countries which
   join the convention. Although not yet in effect, the
   maximum amount available for compensation will be at
   least $35 million per incident initially, and will rise
   to $45 million. As an interim measure, the U.K. off-
   shore oil industry has devised a voluntary offshore
   pollution liability agreement that came into force on
   May 1, 1975. The agreement provides up to $25 million
   per incident to compensate for oil pollution damage
   caused by the operations of members of the agreement,
   other than movement of tankers. The scheme has since
   been extended to any operators from several countries
  who may wish to join.




                        23
ASSESSMENT OF U.K.
PREPAREDNESS

     In 1976 the U.K. Department of the Environment published
the results of a detailed study on the present organization
for dealing with accidental oil spills, and included sugges-
tions for future resources and organization. As of May 1977,
the U.K. Government was collecting comments on the study and
its recommendations to have better knowledge of the situation
before arriving at decisions on the recommendations. It is
possible, therefore, that in the near future some of the pro-
cedures described above could change. Some of the more im-
portant findings and recommendations of the study are sum-
marized below:
     --The more closely the U.K. examined the way that emer-
       gency arrangements might best be organized, the more
       it feels that the present division of responsibility
       is essentially correct (Government responsibility at
       sea and local responsibility when oil approaches the
       coast).

     -- Within the constraints of its resources, the present
        organization has, on the whole, coped well with a
        number of oil spill emergencies at sea.

     -- The supply of backup stocks of dispersant could become
        a real constraint on cleanup efforts and therefore
        clear agreements with manufacturers should be reached
        over the rate that dispersant will be supplied within
        2 days of notification.

     -- As there are no contractual arrangements for securing
        the use of spraying vessels, the Government should
        satisfy itself (whether by establishing a system of
        retainers or by other means) that a sufficient number
        of vessels will be available when needed.

     -- Responsibility for cleaning up spills during offshore
        operation should be directly upon the industry (with
        Government intervention only if needed).
INDUSTRY'S OIL-SPILL RECORD

     With the exception of the Ekofisk blowout described
below, industry has maintained a good oil spill record con-
sidering the intensive activity in the North Sea. According
to one oil company study, as of March 17, 1977, a total of
793 wells had been drilled with no reported oil spill during


                              24
the drilling of these wells. The study also pointed out
that during the same period 84 oil fields were identified,
of which those in production produced some 874,000 bbls/day
in January 1977. One minor spill, an estimated 3,000 barrels
of oil, was reported in the study. However, this spill was
cleaned up without incident or significant environmental
effect by industry's own United Kingdom Offshore Operator's
Association.

     The Ekofisk oil spill occurred on April 23, 1977, in the
Norwegian sector of the North Sea. An estimated 88,000 barrels
of oil was discharged into the North Sea over 8 days. Esti-
mates are that the cleanup bill for the Ekofisk spill will be
about $6.6 million.
     Although the Ekofisk accident was classified a major oil
spill, little environmental damage has been reported. The
oil slick associated with the spill dissipated before reach-
ing shore.

     In the wake of the Ekofisk spill, Norwegian and U.K.
Government officials, as well as other North Sea nations,
have been studying the effect of oil spills. A Norwegian
panel designated to conduct a thorough study of the Ekofisk
incident had not completed its study by early August. The
European Economic Community Commission has developed some
proposals of its own. Among others, the Commission has
proposed:

     -- Creation of a data bank to help deal with oil spills,
     -- Joint research into technologies for collection and
        dispersion of hydrocarbons, as well as what becomes
        of hydrocarbons spilled at sea and their effects.

     -- Appointing a high-level group to study the implica-
        tions of Ekofisk-type disasters and the possibility
        of environmental impact statements for North Sea
        installations.

It seems that the unfortunate Ekofisk experience may, in the
final analysis, improve Government and industry's capability
and resolve to deal with oil spills.




                             25
                           CHAPTER 4
            SPIRIT OF COOPERATION IN DEVELOPMENT

                  OF NORTH SEA OIL RESERVES
     Development of the United Kingdom sector of the North
Sea has been marked, according to most persons interviewed,
by a spirit of cooperation among Government, the oil industry,
and private interests. There has been, they claim, a recogni-
tion by all parties involved of the importance of North Sea
oil to the U.K.
CENTRAL GOVERNMENT AND
OIL INDUSTRY COOPERATION

     Government and oil industry officials said that there
has been frequent and constructive dialogue between them.
Views have been solicited and considered, and this has pro-
duced excellent cooperation.

     Oil company representatives frequently point to the
formulation and passage of the Petroleum and Submarine
Pipelines Act as an example of the cooperation which they
believe has aided in the successful development of the North
Sea. They claim there had been a great deal of consultation
between representatives of their association (the United
Kingdom Offshore Operator's Association) and Government re-
presentatives in drafting the act. This dialogue continued
through the legislative process and produced the enactment
of a law which is satisfactory to both Government and oil
companies. The Government achieved its goal of assuring
Government participation in North Sea development and the
oil industry was satisfied that its views had been solicited
and given consideration.

     On November 12, 1975, the Petroleum and Submarine Pipe-
line Act received Royal Assent. The act provides for the
creation of BNOC, through which the Government has achieved
one of its major goals of assuring a majority participation
in the development of the North Sea.

COOPERATION BETWEEN CENTRAL GOVERNMENT
AND LOCAL COMMUNITIES: LAND-USE
PLANNING AND DEVELOPMENT

     The pace and extent of all offshore oil and gas develop-
ment can have a tremendous effect on communities. If not
properly planned, severe environmental, social, and economic


                             26
effects can occur. The probability of these occurrences
taking place increases when a rapid exploitation policy
is undertaken. In essence, the U.K. set two goals for
onshore oil-related development

     -- minimize the disruption that would occur on land,
        and
     -- involve local communities in the planning process.

      Land-use planning in the United Kingdom has allowed
local communities to take an early, active role in the plan-
ning process and, according to Government officials, caused
people to be caught up in the spirit of planning their own
future. This involvement also caused cooperation and mutually
acceptable agreements among communities, Government, oil
c -panies, and private interests.

     Government involvement has taken several forms, in-
cluding (1) planning guidance, (2) financial assistance,
and (3) research.

Planning guidance

     To assist regional and local governments in preparing
and dealing with North Sea oil development, the Central
Government provides planning guidance. Guidance has taken
the form of (1) setting forth a national strategy for coastal
development, (2) establishing preferred development zones
and preferred conservation zones, and (3) suggesting tech-
niques which can be used to measure the effects that proposed
major developments may have (i.e., noise, water pollution,
landscape, ecological factors, social, and economic aspects).

Financial assistance

     Heavy demands, often in comparatively remote areas of
Scotland, for many kinds of supporting services have been
created by the rapid growth of oil-related industry. Some
local authorities in particular have had to undertake heavy
expenditure to provide infrastructure for offshore develop-
ments, placing an undue burden on their resources. The
Government considered that the local authorities needed fi-
nancial assistance and in November 1974 announced that the
authorities affected would receive special support to take
account of their extra spending. The first year this ar-
rangement operated was 1975-76, and $4.3 million in special
assistance was paid. For 1976-77, the figure was $8.5
million. Specifically, monies are being paid for housing,


                              27
roads, and improving railways, airports, ports, water, and
sewage systems; educational, social, cultural, and
recreational facilities; health facilities; and police
services.

Research
     The Scottish Office of the United Kingdom Government
is directly involved with the promotion of oil-related re-
search and development projects.  It has commissioned several
research projects in universities. A 3-year study on the
impact of North Sea oil on the Scottish economy was completed
by the Department of Political Economy at Aberdeen University
in September 1976. The study included Government representa-
tives.

     The Institute for the Study of Sparsely Populated Areas
and the Department of Sociology, Aberdeen University, have
carried out a short-term analysis of some of the social con-
sequences of oil developments in Scotland. According to a
Government publication, this study will enable the Scottish
Office of the Government to better guide local authorities
following rapid industrialization in sparsely populated areas.

      In addition, the Geography Department of Aberdeen Univer-
sity was c-mmissioned to develop techniques to make a balanced
appraisal of the potential effects of industrial development
on the physical environment. The aim was to evolve methods
for general application. The research drew on experience
of oil developments in Scotland and work done in the univer-
sity's economic and social impact projects. The results
were published in the form of a manual for local authorities.
A further 2-year commission has been awarded to improve the
manual in the light of practical experience.

     A panel based in Glasgow, Scotland, has been set up
to devise research into the social and economic effects of
North Sea oil on Scotland through 1979. Government officials
are included as panel members.

     Various other Government publications are available to
deal with the whole spectrum of North Sea development (i.e.,
coastal planning guidelines, environment, training, and im-
pact on fishing).




                             28
 COOPERATION BETWEEN LOCAL GOVERNMENT,
 THE OIL INDUSTRY, AND PRIVATE INTERESTS

      Cooperation between local government, the oil
 and private interests has also been very good and industry,
                                                    has con-
 tributed to the development of North Sea oil. Examples
                                                          of
 this are the development of the Sullom Voe oil terminal;
 the Forties oil pipeline; and an agreement among Govern-
 ment, fishery interests, and the oil industry resulting
 in the establishment in 1974 of the Fisheries and
                                                    Offshore
 Oil Consultative Group--a body which seeks resolution
 lems of mutual concern between the oil and fishing     of prob-
                                                     industries.
 Development of the Sullom
 Voe oil terminal
     Some of the largest oil fields in the North Sea are
located east of the Shetland Islands--in fact, it is expected
that over half the North Sea production will come
                                                   from the
northern part of the North Sea. Because of the proximity
to the Shetland Islands, most oil will be piped to
thus necessitating an oil terminal for storage and the Islands,
                                                    loading
into tankers for transshipment.
      The Shetland County Council recognized this need and
                                                             com-
missioned a study to identify potential oil terminal
in the Islands. The council then initiated two actions sites
serve as the basis for the relationship between            which
                                                 it and the
oil industry. First, the council drafted a statement
powers which put it in a position to control land       of
to participate as partners with the oil companies  use  and
                                                   in
landside operations of piping oil ashore. These powers the
were granted by Parliament in 1974. Secondly, the
                                                    council
commissioned a major multidisciplinary study of likely
shore requirements of the oil industry and how best      on-
                                                      to meet
them.

     The council also publicized its
construction of the oil terminal and proposed plans for the
                                     the likely changes it
would bring. Results of these public hearings were
porated into the proposed plan and a formal planning incor-
ment wa3 then adopted--it serves as an approach to    docu-
velopment of the terminal and includes planning for the  de-
                                                     the
fect on employment, housing, transportation, community ef-
facilities, and environment.
     The council has also organized a nonprofit association
which will serve as "landlords" of the terminal--the
                                                      oil
companies will pay for use of the terminal based on
                                                     landed

                             29
oil. Revenue generated from oil will be used to help main-
tain current industries which are affected by the oil in-
dustry, as well as used in attracting new industry.

     We were advised by a council representative that to
date there has been a good relationship between the oil
industry and the council--both sides have been willing to
discuss and compromise to resolve problems. The Sullom Voe
terminal is currently under construction and oil is expected
to begin flowing into the terminal in the spring of 1978.
DP-elopment of the
Forties pipeline
     In 1970, when the North Sea's Forties Field ws found
to have oil in commercial quantities, one of the big deci-
sions to be made was how to get the oil t, a refinery. After
much thought and analysis of the various options, a decision
was made to construct a pipeline linking the offshore oil
production platforms with a refinery near Edinburgh, Scot-
land. The pipeline was to be built in two sections: a
106-mile underwater leg from the platforms to land and a
130-mile underground land pipeline to the refinery. Oil
company representatives believe the events leading up to
the actual ccistruction and completion of the land pipeline
provide another example of the cooperation among the oil
industry, local communities, and special interest groups.
In addition, they believe this project demonstrates that a
pipeline can be laid in coastal areas without adversely af-
fecting the area's ecology or environment.
     Early in the planning process, the proposed land route
had to be mapped and discussed with the U.K. Government. A
number of public meetings were held, where objections were
voiced and which subsequently caused some route changes.
The pipeline pathway involved obtaining permission and
negotiating p.yment to cross land owned by some 300 land-
owners.  Landowners were given the fullest information
about the pipeline and what it would mean to their surround-
ings, and local communities were also kept apprised of pipe-
line developments.
     During construction, much thought was given to the
conservation of wildlife: two river crossings were planned
and carried out at times of the year so that salmon and
other riverlife would not be seriously affected, and diver-
sions were made around fragile ecological areas. Never
more than a mile of trench was open at any one time. The
pipeline was laid primarily in farm areas and topsoil was

                             30
put over the trench after it was dug and the pipeline put
in.

     Today, after a number of growing seasons, it is virtually
impossible to trace the pipeline's route. The only things
still missing along the route are large trees (because their
roots might disturb the pipe) and permanent buildings (which
might block emergency access).
SPECIAL INTEREST GROUPS AND THE
OIL INDUSTRY: FISHERIES AND
OFFSHORE OIL CONSULTATIVE GROUP
     Agreement among the U.K. Government and the fishing and
oil industries caused the establishment in 1974 of the Fisher-
ies and Offshore Oil Consultative Group. The group consists
of representatives from the British Trawlers Federation,
the two Scottish fishing federations, and the United Kingdom
Offshore Operators Association, together with representatives
of a number of U.K. Government departments. These include
the Department of Agriculture and Fisheries for Scotland;
the Ministry of Agriculture, Fisheries, and Food; and the
Departments of Energy and Trade.

     The group has studied areas which are of mutual concern
between the oil and fishing industries:

     -- Navigational questions (placement and markings of
        buoys, navigation of vessels).
     -- Seabed problems (oil-related debris, pipelines,
        underwater installations, long-term effects of off-
        shore oil on fishing industry).

     In this area, agreements were reached whereby claims for
damage or loss of fishing gear would be directed at the com-
pany identified as being responsible for the debris. In the
case where it is not possible to identify a particular com-
pany, a voluntary fund provided by the operator's association
was set up--the fund is administered by the three fishermen's
federations.

     In its annual report, the group concluded that:
    "Its work has been useful and has led to a better
    understanding between the two industries. The
    cooperative attitude adopted by the industries
    has led to the solution of some problems and the
    group is confident that as it continues its work,
    difficulties will be successfully overcome."


                             31
APPENDIX I                                           APPENDIX I



                         BIBLIOGRAPHY
 U.S. Govtrnment Publications:
      The Library of Congress, Congressional Research Service,
         North Sea Petroleum Operations in-the-United King am
         and Norway, (Committee Print, U.S. Government Printing
         Office,-977)
      Senate Commission on Commerce, North-Sea Oil-and-Gas:
         Impact-of Development-on-the Coastal Zone
      Staff Report, U.S.-Foreign'EconomicPolicy-Issues2 -The
         United Kingdom, France, and-West-Germany, (Committee
         Print, U.S. Government Printing Office, 1977)
 U.K. Government Publications:
      Reports to Parliament by the Secretary of State for
         Energy, Development-of-the Oil-and-Gas-Resources-of
         the United Kingdom 1976an         ,  He Majesty's
        Stationary Office)
     Scottish Information Office, Developments in-Land-Use
        Planning in Scotland, October 1973
     Department of the Environment, Central Unit on Environ-
        mental Pollution, Pollution Control-in-Great-Britain:
        How it Works, (Her Majesty's Stationary Office, 1976)
     Department of the Environment, Central Unit on Environ-
        mental Pollution, Accidental Oil Pollution-of the-Sea,
        (Her Majesty's Stationary Office, 1976)
     Department of the Environment, Assessment-of-Major-In-
        dustrialApplications, A Manual, 1976
Other Publicatio      n-s:
     MacKay, D. I. and MacKay, G. A., The-Political Economy
        of North Sea Oil, (Martin Robertson and Co., Ltd.,
        1975)
     White, Irvin L., Kash, Don E., Chartock, Michael A.,
        Devine, Michael D., and Leonard, R. Leon, North-Sea
        Oil and Gas:    Implications-forFuture United States
        Development, (University of Oklahoma Press, 1973)
     New Hampshire Department of Resources and Economic De-
       velopment, The-Impact-of Offshore Oil:--New-Mampshire
       and the North Sea-Experience, 1975
     Francis, John and Swan, Norman, Scotland in-Turmoil,
        (A social and environmental assessment of-the-impact
       of North Sea-o6l=and gas), The Saint Andrew Press,
       1973




                             32
 APPENDIX II                                      APPENDIX II



           LEGISLATION GOVERNING OFFSHORE OPERATIONS

                     IN'THE UNITED KINGDOM
 Continental Shelf Act 1964

     The 1958 United Nations Convention on the Continental
Shelf recognized the right of a coastal state to exercise
sovereign rights over its continental shelf for the purpose
of exploring and exploiting its natural resources. In 1964,
the Continental Shelf Act was enacted. The act enabled
relevant provisions of the Convention to be given effect.
It vested in the Crown the right to explore and exploit the
seabed and subsoil outside territorial waters, and provided
a framework in domestic law for the granting of licenses
for its exploration and exploitation by extending, to the
continental shelf, relevant provisions of the Petroleum
(Production) Act 1934.

     Under these provisions five rounds of licensing have
been held.

     Under the terms of the act, the Secretary of State for
Energy has the power to make orders specifying safety zones
around offshore installations employed in the exploitation
of the U.K. Continental Shelf.

     The O0ders prohibit all shipping from going within
500 meters of an installation except under certain condi-
tions or with the express permission of the Secretary of
State. By mid-1976 safety zones covering 50 installations
had been designated.

Petroleum (Production)
Act 1934

     Licenses to explore for and exploit petroleum oil and
gas on the United Kingdom Continental Shelf are issued by the
Secretary of State for Energy under powers conferred upon him
by the Petroleum (Production) Act 1934 as applied by the Con-
tinental Shelf Act 1964. The Petroleum (Production) Regula-
tions 1976, made under these acts, and the Petroleum and Sub-
marine Pipelines Act 1975 set out model clauses which are in-
corporated in licenses. Failure of licensees to abide by the
terms and conditions contained in these model clauses renders
the license liable to revocation.  The model clauses provide
that license operators must execute their operations in ac-
cordance with good oilfield practice.


                              33
APPENDIX II                                       APPENDIX Ii



The Mineral Workings (Offshore
Installations) Act 1971

     Under the Mineral Workings (Offshore Installations) Act
1971, a comprehensive code of safety regulations is being
introduced covering the safety of the installations on the
U.K.'s Continental Shelf and the safety, health, and welfare
of the persons on board them. To date, regulations have been
made covering the

     -- registration of all installations with the Department
        of Energy;

     -- appointment of installation managers to be responsible
        for overall installation safety;

     -- keeping of logbooks, and the registration of deaths of
        persons on installations;

     -- functions and powers of the Department's Inspectors,
        and the notification of accidents;

     -- holding of public inquiries into accidents;

     -- surveying of offshore structures and the issuing of
        Certificates of Fitness by appointed certifying
        authorities;

     -- safety of diving operations from or in connection
        with installations;

     -- extension of the Employers' Liability (Compulsory
        Insurance) Act 1969 to require that employers of
        persons working on offshore installations obtain
        insurance coverage against employee claims for
        injuries;

    -- day-to-day personnel safety, the safety of equipment
       and working procedures, and the provision of medical
       facilities;

    -- life-saving appliances; and

    -- emerging procedures and the holding of regular drills
       and practice musters.




                            34
APPENDIX II                                         APPENDIX II



     The Department of Energy's Petroleum Engineering
Inspectorate is responsible for enforcing these regulations.

     Further regulations are being prepared which will cover
the provision of firefighting systems and equipment.

Petroleum and Submarine
Pipelines Act-1975

     This act came into force on January 1, 1976.    Its main
provisions include:

     1. The setting up of the British National Oil Corpora-
        tion (BNOC) with powers to:

        -- explore for and produce petroleum;

        -- transport and refine petroleum;

        -- store, distribute, and buy and sell petroleum and
           products;

        -- take over the Government's participation interest
           in U.K. licenses;
        -- carry out consultancy, research, and training in
           petroleum matters;

        -- build, hire, or operate refineries, pipelines, and
           tankers.
     Certain activities (e.g., exploration and production
abroad, "downstream" activities such as refining and trading
in products, setting up or acquiring subsidiaries, giving
loans and guarantees) can be carried out by BNOC only with
the consent of the Secretary of State for Energy.

    2. The introduction of additional controls over explora-
       tion and exploitation of the U.K. Continental Shelf to
       assure its orderly development; this includes Govern-
       ment powers to control future rates of oil depletion.
    3. The introduction of controls over the construction
       and operation of submarine pipelines, including the
       use of third parties of both proposed and existing
       pipelines. The Act also empowers the Secretary of
       State to assure the safety of pipelines and the
       safety and health of people working on them.


                             35
APPENDIX II                                      APPENDIX II


     4. Powers to control the construction of new refineries
        and the expansion of existing refineries.

     5. The setting up of the National Oil Account.

     The Submarine Pipelines (Diving Operations) Regulations
1976, which came into force on July 10, 1976, relate to diving
operations carried out in respect to submarine pipelines and
associated wDLks. They closely follow the Offshore Installa-
tions (Diving Operations) Regulations 1974 and the Merchant
Shipping (Diving Operations) 1975.

     With the introduction of these regulations there are
statutory safety provisions for all commercial diving opera-
tions taking place in U.K. territorial seas, and all diving
in connection with offshore petroleum operations on the U.K.
Continental Shelf.

     These regulations have been adopted almost in their
entirety by Norway and are currently being used as a basis
for drawing up a code of practice for diving operations in
Europe by the European Diving Technology Committee.

Oil Taxation Act, 1975
     This act established the current taxation and royalty
system used in the United Kingdom sector of the North Sea.
Its main features include the petroleum revenue tax of
45 percent, a corporation tax of 52 percent, and a
12.5-percent royalty. Also included are tax incentives for
developing marginal fields, and provisions which prohibit
losses and allowances for activities outside the North Sea
to be used to reduce a company's tax liability for activities
there.

The Offshore Petroleum Development
(Scotland) Act 1975

     In this act the Government took control of certain types
of oil-related developments in the public interest. The act
provides for the acquisition and reinstatement of oil sites in
Scotland and for the control of certain oil-related operations
within territorial waters.

     The Secretary of State for Scotland is given the power
to acquire land either by agreement or compulsorily if it is
required for one of a number of defined oil-related purposes.
Where such land is urgently required (and planning permission
has been given) the Secretary of State may acquire it by an


                             36
APPENDIX II                                      APPENDIX II



expedited acquisition order. A statutory instrument contain-
ing such an order cannot be made unless a draft of it has
been laid before, and approved by resolution of, each House
of Parliament.

     The act stresses the rehabilitation of oil sites after
use, and local authorities are empowered to make financial
arrangements with developers to assure that money is avail-
able for restoration.

Town and Country Planning
(Scotland) Act 1972

     This act provides local government with the authority
to plan for land development. It requires that each proposal
for development be the subject of a planning application to
the planning authority for review and decision.

Merchant Shipping (Oil
Pollution) Act 1971

     The act places a liability on the owner of a tanker from
which oil escapes and requires him to carry insurance against
the liability.

Merchant Shipping Act 1974

     The Merchant Shipping Act 1974 provides that oil impor-
ters contribute to an international fund that will compensate
for pollution damage in the U.K. where persons suffering the
damage are unable to obtain full compensation under the Mer-
chant Shipping (Oil Pollutionj Act 1971. The act also enables
the Secretary of State to regulate the design and construction
of British oil tankers and the admission of foreign tankers
to British ports.

Prevention of Oil
Pollution Act 1971

     This act makes it an offense for ships of any national-
ity to discharge any oil into U.K. waters, and additionally
for U.K.-registered ships to discharge any persistent oil
anywhere at sea, except in accordance with very stringent
regulations.

     The act also controls discharge of oil or oily water from
installations on land into U.K. waters and from offshore plat-
forms or pipelines on the U.K. Continental Shelf into the sea.


                             37
APPENDIX II                                        APPENDIX II




The prevention of accidental pollution from offshore installa-
tions is essentially a matter of using safe working practices
which, while aimed primarily at the safety of men and in-
stallations, undoubtedly reduces the risks of pollution from
oil spills.

Coast Protection
Act 1949
                                                    of a collision
     Precautions are taken to minimize the riskBefore
between a ship  and  an offshore installation.           an in-
stallation (whether a mobile drilling platform or a     fixed
production platform) can be sited, consent has to be obtained
from the Department of Trade under the Coast Protection Act
1949 as extended by the Continental Shelf Act 1964. Naviga-
tional requirements are taken into account before consent is
issued. Consent also requires that installations be ade-
quately lit and marked and their locations be publicized in
notices to mariners and (for fixed installations only) marked
on charts. The Convention on the Continental      Shelf 1958
allows states  to establish  safety zones  of not  more than
500-meter radius around installations, and both     British and
foreign ships are   prohibited from entering  safety  zones un-
less they have  business  with an installation.

Dumping at Sea Act 1974
     The Dumping at Sea Act 1974 provides legislative support
in the United Kingdom for control of dumping at sea and re-
places a previous voluntary control scheme. It provides that
before any materials can be disposed of at sea by "dumping"
(excluding discharge through pipelines) a certificate must  be
obtained. The determining factor in deciding whether  to
grant a license is the need to protect the marine environ-
ment and its living resources.




                               38
APPENDIX III                                                                      APPENDIX III




                 ONE OIL COMPANY'S ESTMATE OF UNITED KINGDOM
              SELF-SUFFICIENCY AND NET EXPORTS FROM NORTH SEA OIL
                      (2% ELECTRICITY GROWTH, LOW ELECTRICITY PROFILE AND
                                     MIXED FUEL PREFERENCES)


Million Tons/Ysar

   160
               U.K. PRODUCTION                                U.K. CONSUMPTION



                                   FOR NET EXPORTS 3SOMT




   120 |20a                                                                          IMPORTS




    6.o
    80




    40




    209




     1974       77        '80      83        '86       '89      '92         '96       '98      2000




                                               39
APPENDIX III                                    APPENDIX III

1. The U.K. production profile shown is based on a feasible
   but not fastest development of U.K. reserves. The re-
   serves are assumed to be 25 billion barrels, of which
   about 15 billion barrels have been discovered and 10
   billion barrels remain to be discovered.

2. Production increases from virtually zero in 1975 to a peak
   of 170 mt (million tons) in the mid-1980s and declines to
   60 mt in 2000. U.K. oil demand increases from 92 mt in
   1975 to 120 mt in 1985 and 150 mt in 2000.

3. Thus the U.K. is expected to be a net exporter of oil
   throughout the 1980s but has to return to importing oil
   in the early 1990s. Total net exports will probably be
   around 380 mt which represents about 11% of total re-
   serves.

4. One alternative to this profile is for U.K. to adopt a
   policy of keeping oil at home--i.e. restricting oil
   production to U.K. oil demand with no net exports. The
   resulting profile is shown as an overlay. The effect
   is to maintain the U.K.'s self-sufficiency in oil for
   2 extra years (from 1991 to 1993) and to make the decline
   in oil production slightly less severe. Oil imports in
   2000 are reduced from about 90 mt in 2000 to about 65 mt.
   In place of exports of 380 mt the effect is to reduce
   total oil imports between 1990 and 2000 by about 270 mt
   and to increase reserves in the ground in 2000 by 110 mt.

5. Technically, it is doubtful whether such a profile could
   be arranged. In terms of national security the effect
   is small--it only delays the U.K.'s return to world
   markets for its oil imports by a few years.




                            40
APPENDIX IV                                           APPENDIX IV




              CRITERIA AND CONDITIONS FOR OBTAINING

         UNITED'KINGDOM'OFFSHORE PRODUCTION LICENSES
                 EXTRACTED' FROM THE GOVERNMENT'S

               ANNOUNCEMENT OF 5TH ROUND LICENSES

     Licences will be granted on     the basis that the British
National Oil Corporation (BNOC),     or one of its subsidiaries,
is from the grant of the licence     a co-licensee entitled to a
51% share in all the benefits of     the licence, except

     (a) that where another state corporaticr or subsidiary
         of such a Corporation is also to be a co-licensee,
         the combined share to be held in the licence by
         that other corporation or its subsidiary, and the
         BNOC or its subsidiary, shall total 51%; and

     (b) where the Secretary of State decides to grant a
         licence solely to a state corporation or its sub-
         sidiary.

     The consideration required in respect of production
licences granted as a result of this invitation will be:
     (a) in respect of the first period of four years of the
         licence a non-recurrent fee payable upon the grant
         of the licence of eighty pounds for each square kilo-
         metre comprised in the licence area; and in respect
         of any second period of three years, a non-recurrent
         fee payable at the end of the fourth year of one
         hundred and twenty pounds for each square kilometre
         comprised in the continuing part;

     (b) in respect of the first year after the expiry of the
         second period (on exercise of the option to continue
         as to the remaining period of the licence) the sum
         of two hundred pounds for each square kilometre in
         the continuing part; in respect of the second year
         four hundred pounds, and similarly by annual incre-
         ments of two hundred pounds until an annual sum of
         three thousand pounds will be payable for each
         square kilometre comprised in the licensed area;
     (c) a royalty at the rate of 12-1/2 per cent, either in
         kind or by value on all quantities of petroleum won
         and saved.


                                41
APPENDIX IV                                      APPENDIX IV



Licences granted may be subject to special conditions govern-
ing the notice required for, and the timing and circumstances
of, drilling.

     Applicants will be judged against the background of the
continuing need for expeditious, thorough and efficient ex-
ploration to identify oil and gas resources of the U.K. Con-
tinental Shelf, and the following factors will be particularly
borne in mind when examining applications:

     (a) technical competence to undertake a programme of
         exploration and production;
     (b) capability to produce funds commensurate with work
         programme obligations in respect of initial explora-
         tion and the extent of access to adequate funds in
         the event of a commercial discovery being made;
     (c) where the applicant already holds or has held a
         licence, his overall performance to date in meeting
         licence obligations;

    (d) exploration already done by or on behalf of the ap-
        plicant which is relevant to the areas applied for;

    (e) the extent of the contribution which the applicant
        has made or is planning to make to the economy of
        the U.K., including the strengthening of the U.K.
        balance of payments and the growth of industry and
        employment;

    (f) where a body incorporated in a country outside the
        United Kingdom applies for a licence or holds a con-
        trolling interest in the applicant, how far equit-
        able treatment is afforded in such other country;
    (g) the degree to which the applicant, or any existing
        licensee in whom he has a controlling interest, or
        any existing licensee who has a controlling interest
        in the applicant, has demonstrated his agreement to
        the conceding to the State a majority share in any
        discovery made under existing licences;

    (h) whether the applicant subscribes to the Memorandum
        of Understanding agreed by the Secretary of State
        and United Kingdom Offshore Operators Association
        to ensure that full and fair opportunity is provided
        to U.K. industry to compete for orders of goods and

                            42
'APPENDIX IV                                      APPENDIX IV



         services. Where the applicant is an existing licen-
         see, his past performance in providing full and fair
         opportunity to U.K. industry will be taken fully
         into account;

      (i) whether the applicant is willing to grant reasonable
          access to representatives of independent trade unions
          to his offshore installations, having in mind the
          Government's objective to negotiate a memorandum of
          understanding on this matter.

     The Secretary of State will in due course notify those
applicants who are being favourably considered for the grant
of a licence that they will be offered a licence if (a) they
settle a form of operating agreement with the BNOC to the
satisfaction of the Secretary of State and (b) in association
with the BNOC, they agree with the Secretary of State an ac-
ceptable work programme for the prospective licence. In re-
spect of the settlement of both the operating agreement and
the work programme, the Secretary of State will wish to be
satisfied that adequate exchange of information between the
BNOC and the prospective licensees takes place to ensure that
negotiations for this purpose are meaningful. Guidelines as
to the type of arrangements which the Secretary of State ex-
pects to be included in the operating agreements are set
out on the next page.




                              43
APPENDIX IV                                      APPENDIX IV



GUIDELINES AS TO THE RELATIONSHIP
BETWEEN BNOC AND CO-LICENSEES ON
LICENCE ACTIVITIES

BNOC to be a Co-licensee

1    Licences will be granted on the basis that the British
National Oil Corporation (BNOC), either directly or through
subsidiaries, is a co-licensee from the outset. It will
therefore be necessary for applicants for licences, who have
been notified that their application is likely to be success-
ful, t3 settle a form of operating agreement with BNOC in
advance of the grant of the licences.
Nature of the Guidelines

2    In exercising his discretion as to the grant of licences,
the Secretary of State will wish to examine the form of the
operating agreement settled between BNOC and its proposed co-
licensees in the licence. The Secretary of State will expect
to see that the agreement incorporates the substance of the
guidelines set out hereunder but he will be prepared excep-
tionally to consider variations which the proposed parties
can satisfy him are reasonable, and which are consistent
with the national interest, including any which may be neces-
sary in circumstances where the subsidiaries of BNOC or of
the British Gas Corporation (BGC) are involved.
BNOC's share in the licence

3    The form of the agreement is to provide that BNOC is to
be entitled to a 51% share in all the benefits of the licence,
including a corresponding share of the petroleum produced and
the income which accrues from petroleum discoveries within
the licensed area; except where BNOC decides not to partici-
pate in a development, in which case the arrangements should
be as described in paragraph 7 below.

Operating Committee

4    BNOC is to be entitled, from the date of issue of the
licence, to a vote, appropriate to its having a 51% share, on
any Operating Committee which is set up. It will be fully in-
volved before decisions are taken. It will nominate a repre-
sentative (and alternates) to attend all meetings of the Com-
mittee, and any sub-committees. BNOC's nominated representa-
tive will be entitled to cast BNOC's 51% vote after taking
part in the appropriate discussions in respect of both explo-
ration and development, save as provided in paragraph 7 below.


                              44
    APPENDIX IV                                      ArPENDIX IV

    Decisions of the Committee

 5    BNOC should not be able to decide questions brought
 before the Committee solely by the use of its majority vote,
 nor should holders of small percentages of the licences
                                                          have
 a power of veto. It should be left to the parties including
BNOC to decide upon suitable arrangements for voting by
ence to these parameters. Different voting arrangements refer-
different kinds of decisions would be acceptable in appro-for
priate cases. For example if majority decisions are to be
arrived at on the basis of percentage votes, arrangements
requiring votes representing no less than 60% of the shares
in the licence and no more than 90%, would be regarded
reasonable. Arrangements requiring votes exceeding 90% as
                                                         would
not generally be regarded as satisfactory, except where
are only two co-licensees, including BNOC, in which case there
decisions could be required to be unanimous. Where
decisions could not be obtained, work might be able majority
                                                     to proceed
under sole risk arrangements--see paragraph 11.

BNOC's liability to contribute
6    BNOC is to be liable for its share of expenditure prop-
erly incurred in the licensed area, except that related
                                                         to
(a) "sole risk" exploration or appraisal in which BNOC has
decided not to join; or (b) the development of a discovery
in which the Corporation has decided not to participate.
7    Following a decision by BNOC not be involved in any
particular development, its co-licensee(s) could proceed
with the development under the sole risk arrangements.
                                                         BNOC
should continue to be able to attend all meetings, to receive
information about the development and to take part in dis-
cussions. BNOC would not be entitled to a share in the
petroleum produced from that development; nor a share in
ownership of assets relevant to that development; nor to the
vote on matters arising in respect of that development: a
                                                          save
in the event it rejoined the venture under sole risk provi-
sions included in the agreement, as provided for in para-
graph 11 below.

8      In respect of

        (a) exploration work carried out under the licence; and

       (b) appraisal work undertaken on a discovery before the
           Corporation decides whether to participate
the Corporation will pay its share of expenditure as it
                                                        is
incurred.

                                 45
APPENDIX IV                                      APPENDIX IV


9    In the event of BNOC deciding to participate in the
development of a discovery, the method under which the Cor-
poration is to pay its share of expenditure on the discovery
and its development following the decision to participate
shall be a matter for BNOC:  the detailed arrangements for
payment will be for negotiation between the Corporation and
its co-licensee(s). If BNOC's share of expenditure is not
to be paid at the time it is incurred, interest shall be
chargeable to the Corporation, at a commercial rate until
paymen' is made.
Programmes of Work
10   The joint licensees should be entitled to agree by
majority decision (see paragraph 5) programmes of work to
be carried out other than at sole risk under the licence.

Sole Risk
11   The agreement should contain sole risk arrangements
including a requirement that the "sole risk licensee" is to
indemnify the other co-licensee(s) against all claims or pro-
ceedings brought by a third party arising out of the "sole
risk operation"; and against all damages and costs or losses
by interference caused to Approved Work Programmes. The sole
risk arrangements are also to include provisions enabling a
co-licensee, other than the "sole risk licensee", to join
the venture at a later date.

Detailed financial arrangements
12   The operating agreement is to include, or contain in
documents annexed to it, arrangements for the detailed finan-
cial management of the licence activities: such as the dates
on which the parties' contributions are to become due (but
subject to the arrangements agreed whereby BNOC is to pay
its share of development and operating costs), provisions for
default in such contributions, and accounting and auditing
procedures.
Disposal of petroleum

13   The operating agreement may provide for arrangements
between BNOC and its co-licensee(s) whereby respective
shares of petroleum produced may be transferred to any
(or all) of the other co-licensee(s) or to other persons
(subject to the restrictions contained in the terms of the
licence): and other mutually acceptable arrangements in
respect of up-take of production.


                             46
APPENDIX IV                                      APP.ENDIX IV



Appointment of Operator

14   BNOC should not solely by virtue of its share of the
licence be entitled to determine that it should itself be
the operator. Neither is BNOC ruled out from being the
operator. The appointment of the operator (which under the
licence will need the Secretary of State's approval) should
for the purposes of the operating agreement be determined by
majority decision such as outlined in paragragh 5.

Assignment of License interests to State Corporations
15   The operating agreement should recognize that in the
event of the Secretary of State directing BNOC or BGC to
assign its interest in the licence, together with all asso-
ciated rights and obligations, to the other corporation or
its subsidiary, BNOC or BGC will be entitled so to assign
its interest.
Disputes in respect of the Operating Agreement

16   There should be satisfactory arrangements for the resolu-
tion of any disputes between the parties to the operating
agreement.




                            47
APPENDIX V                                                  APPENDIX V




    JEWORAIDUM OP UNDERSTANING BETWEEN DEPRTiMNpT OF IMYm
    AID UNITED KINGDOM OPPFShO   OPERATORS ASOCIA-0ION LIMITED


    I    It is the declared intention of the Government that the U1
    offshore industry should pro ide, on a competitive basis, a major
    sad progressively increasing share of the goods and services
    required for the developsent of our continental shelf, and should
    establish a growing export sa-Met.     For this pirpose, the
    Government has made it clear that UX industry should be given
    ifla   and fair opportunity to compete and Members of the United
    Kingdom Offshore Operators Association Liited (MUOA) fully
    support this policy.
    2   The Offshore Supplies Office (030) of the Department of
    Inergy 'is responsible to the Secretary of State for ensuring
    the maximum possible involvement of UX manufacturers, consultants,
    contractore and service companies in the provision of supplies
    and seryices to the offshore hydrocarbon industry.    Tehis ioludea
    the creation of new industrial capacity to meet existing and
    emerging needs and measures to ensure that such new capacity is as
    tally and contimuously utilised &a possible.    P    or      poe,
      h Gooverment stands ready, in selected cases, to akee use of t
    resouroes of the Industry Act 1972, the new pouers to be ganted
    by the Industry Bill now before Parliament and the proposod
    Scottish and Welsh Development Agenoies.
    3 Members of UMDOk have undertaken to give UK industry a full
    and fair opportunity to Emanfactuu e and supply the goods and
    provide the services necessary for the programme of exploration,
    field delineation and the development of a field and a sociated
    faoilities to full production and beyond. Further, individual
    Members recognise the potential benefits of encouraging, through
    appropriate technical and contractual support, the creation of
    UZ capacity to meet the matually agreed needs, both existing and
    emerging, of their respective offshore aotivitie.     The Menbers
    shell use goods and services of British origin in these activities
    whenever they are competitive in regard to speoifioatinl, service,
    delivery and price.
    4    To satisfy the Secretary of State for Energy that the procedures
    and practices adopted by all Members are such as to support the
      overament' s policy described above, the Members of UKOOA (detailed
    in Appendix A of this Memorandum) have individually agreed to comply
    with the Code of Practice set our in the attached annex and to make
    available to officers of the 030 such information _- those officers
    may reasonably require to satisfy thesselves that the Government's
    objectives are besng mst.




                                   48
AIRMAt!XX   V                                                            APPENDIX V




     5 D·O ae OS      M .ognhbiethat Nubmrn zala           fUll responsible
     tor US, Safety and comereial            fuo"or failul
     op*=tlG&8 42id w= Uk6 AU       J1 msonable steps not oftotfiel
                                                                  dslJy the
     Umbers$ decision-ackUM pPSca·srs spd comereial prsetloosO·
           Isten* illft+L~t
                          the
     hpt~wz'        wtrictestotroonf±identta21ty
                  the                obu          In this 4ocume-uk).
                                                  vii be usintsalue b'y th
         8·~~rimez in r       t o@f oinpstiomp oeoeall o iCod afzatl
                   ta 060 unez tVe. terms @t the Oode of   OtWo..
        ' 1%a tssab&    .b.1 be in±oatezapz nd                    ipil±.4n
                                                                  La    uewor
    eosaiutut vith the provisions of the freaty             1uiabla4 4   u. the
    hBuoped& 3oomftio 0owsomilyo




    3   November 197




                                     49
APPENDIX V                                                      APPENDIX V



                                                      AmNEX TO MMORANDUM
                                                      OP UNDERSTANDINO




   CODE   OP PRACTICE FOR PURCHASEpR OF COODS AiD SERVICES FOR OIL
     ILLMED ACTIVITIES ON TIE UX COhiZIN=TAL SELT


   Introduction
      hia Code of Practice deflies the procedure which Members of UOQA
   have undertaken to apply in the procurement of materials and
   irvices        required to support oil related activities on the UK
   continental shelf.          while this Code of Practice applies to all
        hbasaees,   the principle of prior information of intent to Mue a
       chahe
       --         or place a contract outside the UK will not nmaally apply
   to orders for material and manufactures below i100,000         and
   conatraction and services coatracta below £'00,00, except into
                                                                        those
     ases in which OSO has a special interest as ar-eed in discussion
   with the' operators.
   In accordance with the associated iomorandum of Understanding
   betseen the Depart'meat of irner  and UOA dated 3 }oveDboer 1975
   the Department ur-derakes to observt   the strictest confidentiality
   otn all aspects roiatngt to .the comecially competitive data
   submitted to the= under the terms of this Code of Practice, and
   operators underta;c to maintain strict   coafidentiality on such
   discussions with OSO.


   Code of Practice
   I   To ensure that U1 orga;;isations are given a full and fair
   opporotunity ox each and every contract, the operator wil. *nsure

      (a)    all potential suppliers selected to bid receive a fully
     definitive anquiry 3areoc'at0on iolthe English la'auage for
     goods and/or services requ3rea;                               the

    (b)   the specification is in accordance with the accepted oil
    industry staar-d3 or Br'tish standards, it indicatesa     ilin-
    naes to accept equivalensa and saates the equivalent whenever
    possible;
     (a)   the specification is drawn in a manner which does not
     deliberately preclude UK suppliers from tendering or diminish
     their prospect. of submitting a successful tender;

    (d)   any amendments to the specification that emerge during the
    course of the tender preparation re notified to all bidders
    that there is fiull equality of information;                 so




                                    50
APPENDIX V                                                   APPENDIX V




        (e) all potential suppliers selected to .bid are given an equal
        and adequate period in which to tender, such period to take into
        aecount the need to meet demonstrably uaavoidable critical
        ooeatruction or production schedules of the operator;
        (t)     Waspecial conditions attached to the matrials, the
        SoUre0 of supply of oomnents and materilaland the inspection
        of soods are stted in th speclification or enquiry documents;
                                                                  than
        (j) ostated delivery requirements are not more stringentschedules
         a. noessary to meet the construction end/or production
        of the operator;
        (b) where the requirement includes the need to develop equipment
        or proposals in conjunotion with the operator, all bidders are
        _ives equal information at the same timet
        (1)   when the operator is unable to identify a reasonable number
        of suitably qualified UK suppliers for his invitation to tender,
        be wil oonault the 0C0 before issuing enquiries;
          J() the enquiry documents require the potential bidders to
        estimate the value of the O content of the. goods and/or services
        to be supplied.

    2      At the tender evaluation stage, the operator will ensure that:-
        (a)    anomalies or inequalities between the subissions and the
        enquiry documents are fully resolved relative to the short-listed
        bidders;
         (b) delivery premises of all bidders are assessed for their
        rality in the li1;ht of past performance and an assessment of
        cu-rent performance
        (c) when costs are compared, account is taken of financial
        assistance available to buyers;
        (d)    the foreseeable impact of currency fluctuations and the
        effects of esoalation clauses. are taken into account.

     3   When the operator has determined his decision for the award of
     contract, in the case of non-UX award he will inform 080 prior to
     notifying selected suppliers and will give OSO a reasonable time,
     in the circunstances applying, for representation and clarification.
     Thls procedure will be followed in the case of sub-contracts
     referred by main or sub-contractors to the operator for approval.
     bWhre the operator does not intend to call for prior approval of
     sub-contracts the prooedure for adherence to the Memorandum of



                                   51
APPENDIX V                                                    APPENDIX V




      mdaersetandine and this Code of Praetioe will be agreed between
    the operator end 080.      W'here this given 090 access to the
    operator's contractors and sub-contractors this procedure wil
    not diminish the direct and normal contractual relationship
    lbtwien the operator and his suppliers.       The principle shall be.
    adopted that follovinc disclosure of prior information to OS0 on
    intended awards no subsequent representation to the operator by
    a potential supplier, other than at the express request of the
    operator, bhall he entertained.

    4    To satisfy the 050 that full and fair opportunity is beltg
         T
     irven to UK suppliers operators will,on request, make avaiXllle
    to officers of the 0S0 such information as they may reasonably
    zquinre about:-
      (a)    the proern:m  of intemnled enquit:ie to industry necesary
      to implement the anticipated overall programe of exploration
      and/or development to tre extent that this info~ration has not
      already been made availa'bl to the Depertment of..ergy.     (The
      operators may supply ±.i i-'forumaion in any for.raa convenient
      to themselves provided it is sufficiently coCmreedsive to
       meDble 090 ;o assess the ponstla opportunity for UC industry);
      (b)    the specificatim.s and tender doauments at th' earliest
      poseible tid,L.a, ..- io to -a- issue o the docuents to the
      -suppliers, -.e li'; of   ppio0-s to vwho it is intended to
      l oiue invtations to tender;
      (o)   the bid sumaries so that when necessary and reasonable
      090 say request sight of bid summaries and all relevant documents
      for examination;
      (d) the names of appropriate representatives within the
      operators' organisation with who 030 can make contact should
      further discussions 'e requlred.




    3 loveoboe,   1975




     (46855)


                                   52