The UK offers a concession-style agreement, and the general style is applicable to other countries as diverse as Argentina, Australia, Norway and the United States. UK licenses are for the most part awarded on the basis of competitive work program bids in licensing rounds. However, there is an element of discretion in the award process that takes account of the company’s overall performance previously in the country. It is also possible for companies to apply directly for open areas that adjoin existing acreage and where they can identify extensions to discoveries. The final approval for an award lies with the responsible Minister or Secretary, though as a practical matter all recommendations are made by the civil servants in the ministry (currently the Department of Energy and Climate Change).
Companies undertake exploration obligations at the time of license award, but beyond that are free to decide on the level of activity they wish to undertake. Field developments must be approved in advance, but license terms for the residual part (after initial relinquishments) of blocks is relatively long at 30-40 years, and companies generally have opportunity to defer or advance the timing of development activity as they see fit.
Applicable terms vary according to the vintage of the license granted, and in the case of field developments, the date that development approval was granted. The detailed terms have changed many times over the last 30 years. Presently a license covers a single block in mature areas, though it may cover several blocks in frontier areas. A “block” covers 10 minutes of latitude by 12 degrees of longitude, except where it is the award of a previously relinquished part of a block when it may have an irregular shape.
Early field developments were subject to a royalty of 12.5% of the wellhead value of the crude. However, for all fields approved for development after 1982, royalty has been abolished, and it was abolished in 2002 for all fields. Petroleum Revenue Tax (PRT, a form of rent tax) also applies at a 50% rate to all fields approved prior to 1993, but is not applicable to fields approved after that date. It is ring fenced on a field-by-field basis. Ring fencing will be discussed further in a subsequent blog.
Corporation Tax (CT) applies to all companies operating in the UK, and there are special rules that apply to the depreciation of certain assets. Thus, there are fields in the UK that PRT and CT or CT only. The UK went through a phase of lowering taxes, such that in the late 1990s new fields paid only a 30% CT rate; this was increased to 40% from 2003 and 50% from 2006 and was accompanied by the allowance of all capital costs to be immediately depreciated. Thus, companies effectively pay no tax to the government until all costs are recovered. In addition, companies that explore and have no production (or liability to CT) may uplift their exploration by a small amount for several years when they are allowed to deduct them.
Ownership of all assets lies with the company making the investment and title to the hydrocarbons passes to the company when produced. There is no national oil company in the UK (though there was for a while in late 1970s / early 1980s). The overall system is controlled by a number of government ministries or independent agencies such as the Department of Energy, Climate Change (licensing and general approvals), Department of the Environment, Health and Rural Affairs, Customs and Revenue, and the independent Health and Safety Executive.