Licences for oil exploration to go to highest bidder

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Oil exploration licences are to be auctioned off to the highest bidder for the first time in an attempt to encourage greater exploitation of mature areas of the North Sea, the Government announced yesterday.

Tim Eggar, the Energy Minister, said that 20-30 blocks in the UK Continental Shelf were likely to be put out to competitive tender this autumn. If the experiment proves successful annual auctioning rounds will follow.

Under the present system North Sea blocks are awarded to exploration groups on the basis of the work programme they commit to undertake. But this has led in some cases to oil companies sitting on unexploited acreage for long periods.

Mr Eggar said he wanted a licensing system that would stimulate "rapid and innovative" exploration of the UK Continental Shelf.

Awarding licences through competitive bidding would encourage exploration groups to bring fields to development promptly or relinquish them.

Bidders will still have to pass a "pre-qualification" test of their technical competence and financial viability. But beyond that licences will go to the highest bidder.

The bids themselves are likely to take the form of up-front payments but they could also feature staged licence fees or royalty payments.

Mr Eggar would not put a figure on how much the exercise might raise for the Exchequer or what the average block might be auctioned off for.

But he stressed that it was not designed to be a "way of paying off the national debt in a hurry".

He also stressed that the auctioning process would be limited to mature acreage and would not apply to frontier fields such as those to the west of the Shetlands.

In the Gulf of Mexico, where a similar experiment has been successfully tried, blocks have been auctioned off for a minimum fee of $100,000 and smaller exploration groups have not been disadvantaged.

Mr Eggar said he believed a similar pattern would evolve in the North Sea, enabling smaller and nimbler exploration groups to benefit.

The move to auctioning of licences will take place this autumn when the Government launches the 18th offshore licensing round. Licences will also be granted for a shorter period, probably of between three and six years, compared with the 12 years at present.

Earlier this year the Government conducted a review of fallow North Sea oil blocks which were originally awarded in 1983 but have since lain unexploited. Of the 115 blocks identified as fallow there are now plans for activity in 72 over the next 12 months while 14 are to be relinquished, allowing them to be relicensed to other exploration companies.

Since 1964 almost 6,000 wells have been drilled in the UK Continental Shelf while proven reserves of 2520 million tonnes of oil and 1750 billion cubic metres of gas have been established.

The development of increasingly sophisticated and cost-effective exploration techniques have allowed companies to exploit areas previously regarded as beyond their reach.

But Mr Eggar said it was important to get these techniques applied to as much acreage as possible, particularly areas not being drilled or surveyed in mature areas such as the North Sea basin.