In the early months of 2006, the phrase "use it or lose it" received a great deal of attention in Newfoundland and Labrador’s offshore oil and gas industry. The idea that offshore licences should be relinquished if the holders have not worked them for a given period has been debated, off and on, over the past three decades. More recently, "fallow acreage" or "fallow field" regulations were raised during the consultation on Newfoundland and Labrador’s soon-to-be-finalized energy plan: stakeholders on all sides of the equation weighed in on the potential impacts of changing land tenure regulations. However, the concept shifted rapidly from theoretical to practical when it emerged in the public arena after Hebron negotiations were suspended.
From the word-smithy: The word fallow was originally a farming term, applied to land that was left unseeded for a season or more to allow it to build up nutrients and regain productivity. It is now applied to a variety of resources or markets that are inactive or undeveloped but potentially useful.The Government of Newfoundland and Labrador stated in its energy plan discussion paper Paper (released November 2005) that the consultation process would address, among other things, land tenure issues - including the apparent use of the Significant Discovery Licence to "warehouse" acreage with at least a show of hydrocarbons in virtual perpetuity. This discussion was intended to explore alternatives to the current system, with the ultimate objective of encouraging more timely petroleum development.
In the Newfoundland and Labrador offshore jurisdiction, once a significant discovery licence has been issued, it continues to be in force as long as the associated declaration is in force. The Canada Newfoundland and Labrador Offshore Petroleum Board (CNLOPB) can, under defined circumstances predominantly related to the need for national security of supply, order that a well be drilled on a portion of a significant discovery area [SDA] (Section 75 of the Canada-Newfoundland Atlantic Accord Implementation Act). Additionally, under Section 148 of the same legislation the CNLOPB can order commencement of production, when the chief conservation officer is of the opinion that the capability exists to do so and that not doing so will in some way allow the asset to waste. However, this instrument has been criticized as difficult to apply under an argument of commercial wastage, unnecessarily blunt and potentially counterproductive. Most importantly, an attempt to encourage activity in this way would in all probability heighten this jurisdiction’s current reputation as excessively proscriptive.
The good news is that some of the issues inherent in the current licensing system are being addressed, and more responsive regulatory instruments are being developed.
The 2006 Newfoundland and Labrador call for bids, for example, contained provisions for rentals during the term of an exploration licence [EL] awarded in that bid process and during the term of any resulting significant discovery licence [SDL]. The rates escalate, depending on how long the licence is held, however, rental paid can be credited to allowable expenditure.
During the province’s energy plan consultation, another SDL-related issue was raised by several stakeholders, including NOIA. Phonse Fagan, a St. John’s-based petroleum consultant, stated the case succinctly: “Ultimately the oil company should be required to prove that oil/gas can flow to the surface at rates that have some potential to be economic before a significant discovery licence is issued.” Under the current system, non-commercial discoveries can be held in perpetuity without a requirement for further testing to fully explore their potential. As a result, Newfoundland and Labrador is home to twelve significant discoveries containing fewer than 40 million barrels of oil and eight containing fewer than 0.5 trillion cubic feet of gas – well below the commercial threshold for this environment today, much less two decades ago when they were awarded.
The core licensing objectives - driving development without hindering competitiveness, identifying the full potential of a discovery and encouraging commitment to development - must all be addressed in order to establish a regime that is both competitive and sustainable. To a large degree, these issues have been addressed by the United Kingdom’s Fallow Initiative, which has received international attention for its positive affect on exploration rates on the United Kingdom continental shelf.
The UK’s Department of Trade and Industry (DTI) initiated the fallow acreage process in 2002 as a way to drive activity in inactive older licences. The oldest inactive licences had an initial term of 6 years with a second term lasting as long as 40 years and often covering multiple blocks. Under these terms, licences issued in the UK’s first offshore call for bids do not expire until 2010.
It is important to understand that although retroactive, the application of fallow field legislation in the United Kingdom is a cooperative process. As part of Promote UK, a joint initiative of DTI and the United Kingdom Offshore Operators Association (UKOOA) designed to attract new entrants, the Fallow Initiative is supported by a range of tools enabling market awareness and access to information.
Initially, fallow blocks and discoveries are identified in discussion with the operator and other licensees. The process then classifies these areas as either Class A (blocks with a recent change of ownership or technical barrier) or Class B (blocks with an identified misalignment of interests). For Class B blocks, a formal invitation is issued to the licence holder for an activity report to take the block out of fallow. If there is no progress, the block is placed on the LIFT (Licence Information for Trading) Fallow Register. The Fallow Register has been set up to encourage companies already working in the North Sea, as well as new entrants, to approach these lands with fresh eyes and come forward with new ideas for exploration and appraisal.
Once the block has been on the Fallow Register for nine months, DTI will request a firm strategy for activity from the licence holder or from those with interest in the block. Fallow Discoveries follow a similar process. However, discoveries remain on the Fallow Register for a period of 18 months prior to a request for activity. After the requisite period on the Register, the block/discovery is relinquished and offered for sale in a subsequent licensing round. Operators must also release land information to potential buyers through the Digital Energy Atlas and Library (DEAL), which catalogues geological data related to the UK continental shelf.
As of January 2006, the Department of Trade and Industry and its partners in the PILOT initiative published a new list of fallow blocks and discoveries. This release has added 40 new fallow blocks and 23 new fallow discoveries to the list. Hannon Westwood, a UK upstream oil and gas consultancy, maintains that the direct pressure of the Fallow Initiative and a parallel marketing drive to attract new investment have together changed the ownership landscape of the UK continental shelf.
Hannon Westwood also found that the Fallow and Promote initiatives generate deals and spur drilling activity. More significantly, the consultant determined that Fallow Acreage wells traditionally outperform traditional farm-in wells, adding the highest level of reserves per well to the existing resource base.
It is generally accepted that land tenure regulations are an important factor in a jurisdiction’s overall competitiveness. However, these regulations must also serve the goals of the jurisdiction. Clearly, therefore, a balance must be struck between attracting investment and requiring timely action toward exploration and development. The UK may well serve as a useful model for cooperation between regulators and industry in the development and implementation of regulations that achieve both.