CHAPTER 9 THE NORTH SEA

• Jurisdiction: United States

International Minerals Acquisition and Operations
(Oct-Nov 1974)
CHAPTER 9
THE NORTH SEA
James E. Horigan
Vinson, Elkins, Searls, Connally & Smith
London, England

TABLE OF CONTENTS

SYNOPSIS

I. INTRODUCTION

A. General Background

B. Licencing Practices

C. Regulatory and Jurisdictional Aspects

II. UNITED KINGDOM

A. The Law and Regulations

B. Exploration Licences

C. Production Licences

D. "Work Program" Applications for Production Licences

E. Structuring for U.S. Companies

F. Term of Licence and Other Provisions

G. New Legislative and Policy Proposals

III. NORWAY

A. Licencing Policy

B. The Law and Regulations

C. Reconnaissance Licences

D. Production Licences

IV. THE NETHERLANDS

A. General Licencing Policies

B. The Law and Regulations

V. OPERATING AGREEMENTS

VI. DRILLING AND OPERATING CONTRACTS

VII. NORTH SEA FINANCING

VIII. EXCHANGE CONTROL

IX. POLLUTION

X. GENERAL OBSERVATION

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I INTRODUCTION

A. General Background

There were mixed emotions on the part of the oil companies when the North Sea was first opened for exploratory drilling in 1964. The first well was drilled off the coast of West Germany as a total failure. It encountered an 85% concentration of nitrogen gas in addition to experiencing a blow out, and this occurred at almost the same time as the British were negotiating the first Production Licences on the continental shelf of the United Kingdom. The geologists were keen, however, on the southern North Sea basin because of its proximity to the second largest natural gas field in the world which had been discovered onshore in The Netherlands near Groningen in 1959. Nevertheless, there was a great deal of anxiety on the part of the drilling people.

The "pub talk" in London in 1964 was that very little indeed was known of the North Sea itself, except that it had been conquered by the courage of the Vikings centuries earlier and was also noted for its treacherous gales, herring boats, and for the movement of merchant shipping. The first drilling rigs, mostly imported from the Gulf of Mexico, experienced difficulties, such as the rig "Mr. Cap", which was given an early retirement from the North Sea when its legs were unable to sufficiently penetrate the sea-bed on the Dogger Banks to keep it from "dancing a jig" with underwater currents.

A unique aspect of oil and gas activity in the North Sea has to do with geography and jurisdiction. There are a number of independent coastal States which border on the North Sea which itself extends from the English Channel and its Western Approaches on the south, to far northern latitudes offsetting western coastal areas of Norway, and thence extending over to an area east of the Shetland and Orkney Islands. It is an arm of the Atlantic Ocean separating the British Isles from the continent of Europe. It has an area of about 220,000 square miles, with a length of over 600 miles and a width in places of over 400 miles. A still further area of interest, although not geographically a part of the North Sea, is the area west of Scotland extending down into the Irish Sea and on to the Western Approaches.

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Because of the scope of the subject matter which I have been assigned and the time factor involved, I will necessarily restrict this Paper primarily to the three main active areas of petroleum licencing and operational activity, to wit : the United Kingdom, Norway and The Netherlands.

Median boundary lines were established between certain of the bordering States to the North Sea on the general principle of equidistance as laid down in the 1958 Geneva Convention on the Continental Shelf.¹ Even though certain of the States did not ratify or otherwise agree to this principle of boundary subdivision, a series of bilateral agreements were subsequently concluded between the States which paved the way for the granting of licences to explore for and to produce petroleum. This included an acceptance of median boundary lines with the principal exception at the present time being between the United Kingdom and France in the Channel area and its Western Approaches where the matter has now been referred to an international arbitration. Some of the States have had long and protracted negotiations or disputes as, for example, certain areas as between Germany and Denmark and between The Netherlands and Denmark. However, early agreement was reached between the United Kingdom and Norway and between the United Kingdom and The Netherlands, as well as between Norway and The Netherlands.

The establishment of median lines and the licencing of rights in the North Sea have nothing to do with navigation, fishing, or other international rights as pertain to open areas of the sea beyond the three-mile territorial waters of each State, but rather relate exclusively to petroleum and mineral deposits as may lie below the sub-soil of the sea-bed. It may be said, therefore, that the matter of title has its derivation in the national sovereignties of the respective bordering States in consequence of international agreements or other settlements. This contrasts with the earlier extension of United States sovereignty over sea-bed areas underlying the contiguous continental shelf area in the Gulf of Mexico which, as you know, did not result from similar bilateral agreement or treaty convention, but nevertheless served as a basic concept of sovereignty of the Geneva Convention on the Continental Shelf.

The first exploration and production licences were awarded by the United Kingdom in 1964 in the southern basin of the North Sea and, soon thereafter, the Norwegians and the Dutch opened up certain areas of their own continental shelf to licence.

The first major discovery of oil in the North Sea was by the Phillips Group in the Norwegian Sector relatively close to the median line with the United Kingdom in the Ekofisk Field. This field has been producing during the past two years in limited

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volumes by tanker/loading from field storage facilities pending the installation of permanent offshore platforms and pipelines. On account of the deep Norwegian trench lying between this field and the coast of Norway and the technological problem of running a pipeline across the trench, the Group is in the process of constructing a gas pipeline to West Germany where a better price for the gas has been negotiated than would be obtainable in the United Kingdom and, at the same time, a pipeline to convey the oil production from the same field is nearing completion to an opposite location on the coast of the United Kingdom. The Norwegian Government made a Treaty with the United Kingdom Government to assure, among other things, that the oil delivered in the United Kingdom for re-export would not be made subject to taxation and that the same would have re-export customs relief on transhipments to the extent not utilized in the United Kingdom. It also made a Treaty with the West German Government where a portion of the gas is to be consumed.

B. Licencing Practices

The concept of licencing as formulated by the United Kingdom, Norway and The Netherlands differs in various respects. These differences are reflected in the terms and conditions of their respective laws and regulations, as well as in policies. In the United Kingdom, the emphasis in the past has been on the achievement of a rapid pace of exploration drilling, and the blocks awarded for Production Licence are considerably smaller in size than those awarded by the Dutch or by the Norwegians where the licence blocks are about two and three times the size, respectively. In the southern basin, the United Kingdom blocks approximate 60,000 acres, and this size becomes progressively smaller in northern latitudes because of the narrowing of longitudinal lines. Smaller sized blocks, coupled with reasonable terms of licencing, promote the concept of denser drilling and greater participation by more companies. At the end of 1973 there had been approximately 500 exploration wells drilled in the North Sea, of which more than half had been drilled in the United Kingdom sector. This figure excludes appraisal wells and development wells.

The terms and conditions of licencing on the United Kingdom continental shelf have been more favorable in keeping with the above-stated objective although, as I shall mention, this situation is changing with new legislative and policy proposals.

There are a large number of unlicenced blocks still remaining in the United Kingdom sector. Less than half of the

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blocks are unlicenced in the Norwegian sector. By reason of a Round of Licencing in The Netherlands in 1972, the Dutch sector is almost completely under licence at present. Whether or not the area north of the 62nd parallel offshore of Norway will be opened for licencing in the future is still uncertain and, even then, it is further uncertain whether and to what extent private interests will be allowed to participate. The governments of the United Kingdom and of Norway are still seeking agreement on an extension of their median line to the north as extensions of their respective continental shelves and then, of course, there are the Russians further on to the north in negotiations with the Norwegians.

The Dutch alone have been content to prescribe a minimum work program commitment required of each licencee by explicit provision in the law itself. In contrast, the minimum work program to be performed on both the United Kingdom and the Norwegian sectors is a matter which is negotiated with the applicant as part of the decision-making process in the award of licence in the first instance. Unless the situation were to change in the future, a work program submitted is not called for at the time of filing application for licence but rather during a selective negotiation stage. Mention should be made, however, that the requirement in this regard is different in applications for a German offshore...