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 Is C C I~~~- .2 no -S~~~~~~~~~~~~~~~~~~~~I oE "gAr~BEIr5Ebffii 9eA taF S 3~~ gd a : . It Bge i .H g~ 3 U g9" b F ni*~ - a~~~I II I ·g 8' ~~~~~•d i ' - Sjz u a9L 5~~~ Hg E~~~e ts ~~~~~~~~~~~~'"I' 8 c o ~~~4 U Is~~~~~~~ ~~~~i B fiS Dem ~.e a o ~~ % '5S i- H .·s a. 8 f .821r .S6 .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
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)