Comparative Offshore Oil & Gas Conference UK-Norway-USA

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Leo Amos Conley
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1 Comparative Offshore Oil & Gas Conference UK-Norway-USA MARCH 12-13, 2015 LSU LAW CENTER BATON ROUGE, LA Page 1

2 Theme III Lease/License Terms Comparative Analysis Michael P. Darden Latham & Watkins LLP 811 Main Street, Suite 3700 Houston, TX Page 2

3 Primary and Secondary Terms United States OCS Comprised of primary term of varying length (5, 8 or 10 years, depending on water depth) and secondary term ( so long thereafter as oil or gas is produced in paying quantities ) Delay rentals paid each year prior to discovery of oil or gas No drilling commitment; and no deadline for conducting activities, with exceptions for 8 and 10 year primary term leases Page 3

4 Primary and Secondary Terms (cont.) United Kingdom Varied over time, but now standardized 4 year initial term exploration and appraisal; perform work program; surrender half of area 4 year second term appraisal and development; submit development and production plan; surrender remaining area 18 year production period Terms vary for Promote License and Frontier License Page 4

5 Primary and Secondary Terms (cont.) Norway Initial period up to 10 years; normally 5 to 8 years If work obligation has been carried out, may be extended by up to 30 years for production; in some cases up to 50 years Page 5

6 Agency s Power to Extend United States OCS Suspension of Operations; up to 5 years; consecutive grants Suspension of Production; up to 5 years; most for 1 year Rejection of Development and Production Plan; 5 year extension United Kingdom Broad discretionary power when license still producing at end of production period; year-by-year basis Norway Not a license term; addressed in Petroleum Act Page 6

7 Drill or Drop Nature of Lease Obligations United States OCS Delay rentals paid each year prior to discovery No drilling commitment; and no deadline for conducting activities, with exceptions for 8 and 10 year primary term leases, which require commencement of exploratory well within 5 and 7 years to avoid cancellation Page 7

8 Drill or Drop Nature of Lease Obligations (cont.) United Kingdom Continuation from one phase into the next only if progress made Initial term work program must be performed in order to proceed into second term Second term production and development plan must be satisfactory in order to proceed into production period During production period, failure to perform a production and development plan could subject license to revocation Page 8

9 Drill or Drop Nature of Lease Obligations (cont.) Norway License contains work obligation, with each element of work obligation having deadline If work obligation is not carried out within applicable deadlines, license may be lost Page 9

10 Duties of Lessees as Prudent Operators United States OCS Agency reviews plans (EP, DPP, DOCD) for compliance and to ensure no harm or damage Enhanced effort to protect the environment (post-deepwater Horizon) Perform in safe and workmanlike manner; maintain equipment and work areas in safe condition Use best available and safest technology Control/correct oil and gas accumulations and other hazards Protect lease from drainage Bonding requirements (surety and supplemental) to ensure proper performance by lessee Page 10

11 Duties of Lessees as Prudent Operators (cont.) United Kingdom Wells and equipment to be maintained in good condition Perform in proper and workmanlike manner and in accordance with good oilfield practice May be some right for the government to influence or control the pace of operations fallow field initiative and stewardship initiative Page 11

12 Duties of Lessees as Prudent Operators (cont.) Norway Not addressed in license; Petroleum Act addresses indirectly in the interest of furthering the best possible resource management Technical competence and financial capacity requirements Inadequate efficiency or inadequate responsibility of existing licensee may be taken into consideration Page 12

13 Unitisation Provisions United States OCS Agency tasked with the duty to prevent waste of natural resources Lease provision seems to task lessee as well Lessees may request approval of unitisation ( voluntary ) or Agency may require unitisation ( compulsory ), both of which are supported by lease provisions as well as regulations Duty to protect against drainage based on same premise as unitisation; i.e., prevent waste and protect correlative rights? OCS Model Unit Agreement typically utilized Page 13

14 Unitisation Provisions (cont.) United Kingdom Unitisation has been utilized in the UK from very early on Government may compel unitisation to secure maximum ultimate recovery of hydrocarbons and to avoid competitive drilling To date all unitisations have been done voluntarily, but in many cases motivated by the possibility of compulsory unitisation Norway Unitisation is addressed in the Petroleum Act, as opposed to license If reservoir covers multiple licenses, unitisation may be required; effected by Unit Agreement Page 14

15 Force Majeure United States OCS Not addressed in lease or regulations Suspension of Operations might be used as a force majeure provision; but it is not a unilateral right of lessee United Kingdom No force majeure clause Arguments amounting to force majeure could be utilized in the event license revocation is proposed due to failure to fulfill obligations Failure to recognize the force majeure circumstances as justification for failure to perform could be grounds for judicial review Page 15

16 Force Majeure (cont.) Norway Not a license term; addressed in Petroleum Act Page 16

17 Provisions on JOAs United States OCS Lease does not contain provisions relating to JOAs, but the regulations address certain items, such as designation of operator and transfer requirements, that are often the subject of JOA provisions United Kingdom Government must consent to JOAs to be entered into by licensees Pre-emption rights banned from JOAs Operator must be approved by Government Government must consent to transfer of assets and may have input into a change-of-control transactions Page 17

18 Provisions on JOAs (cont.) Norway Signing of JOA is condition of license grant; required by Petroleum Act Execution of JOA is one of only two items contained in the license (the other being the work obligation); all other terms set out in Petroleum Act JOA form is fairly standardized Page 18

19 Agency s Powers to Sanction Lessees United States OCS Government may cancel lease in the event of a breach of the lease, or of failure to comply with the applicable enabling legislation or regulations Non-producing lease may be cancelled, after notice and failure to cure, subject to judicial review Cancellation of producing lease requires U.S. District Court proceeding Regulations also provide for civil and criminal penalties in many instances Page 19

20 Agency s Powers to Sanction Lessees (cont.) United Kingdom Government may revoke license in the event of a breach Government is allowed, in granting licenses, to discriminate against licensees guilty of lack of efficiency and responsibility Norway Not a license term; addressed in Petroleum Act Inadequate efficiency or inadequate responsibility of existing licensee may be taken into consideration Page 20

21 Dispute Resolution United States OCS Addressed in applicable enabling legislation and regulations, not in lease United Kingdom Dispute, difference or question between licensee and government to be arbitrated However, arbitration is expressly excluded for any determination, decision, direction, approval or consent Norway Not a license term; addressed in Petroleum Act Page 21

B. Legal Authority to Grant SOOs

B. Legal Authority to Grant SOOs any suspensions. In addition, BSEE indicated that Statoil needed to submit a reasonable schedule of work to support its suspension requests. Following up on those meetings, BSEE and Statoil exchanged e-mails