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Petroleum Resource Management

How Governments Manage Their Offshore Petroleum Resources

John A.P. Chandler

This thought-provoking book examines how countries manage their offshore petroleum resources by comparing the different approaches to licensing and regulation taken by Australia, Norway and the UK. It is based on extensive research into their policies and management practices, including interviews with government regulators and companies. These countries all face similar challenges as their offshore petroleum basins mature which means smaller discoveries, marginal production and ageing infrastructure. John Chandler analyses how their petroleum policy, systems of regulation, and regulators developed up to the present, and how they are responding to these challenges, as well as how they deal with exploration, development, infrastructure sharing and production.
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John A.P. Chandler

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John A.P. Chandler

The chapter explains that governments confer exclusive rights on companies to exploit offshore petroleum in a defined area through a bargain in the form of a licence or contract such as a production sharing contract (PSC). Regulation plays an important role in achieving the outcomes government seeks by conferring these rights and managing the risks involved. This is made more complex because offshore petroleum has special features which creates inter-dependence between licensees in different licence areas. This inter-dependence increases in the mature phase with more fields, smaller discoveries and the need to maintain and share infrastructure. The chapter then briefly introduces the main differences in approach between Australia, Norway and the UK, before explaining the radical change made in the UK in 2016 with a strategy (MERUKS) which means that licensees have to consider maximising recovery across fields and making the most efficient use of infrastructure.

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John A.P. Chandler

This chapter first explains how allocation systems for the award of rights to companies to explore and produce petroleum work and draws a distinction between the two main types: licences and production sharing contracts (PSCs). It sets out the common elements in the licensing systems of Australia, Norway and the UK and in their processes for marketing licences to the international oil industry. It traces the development of licences from concessions in which the concession-holder, or latterly licensee, takes the risk of finding commercial quantities of petroleum and then producing it profitably. The chapter then explains the licences that are issued in the three countries, their main rights and obligations and their financial terms. In each case the main licence is a production licence.

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John A.P. Chandler

This chapter explains the ministries and other government regulators involved in licensing and petroleum resource management in the three countries, the relevant statutes and regulations and how the regulatory architecture developed. Australia is a federal system and important decisions are made by relevant ministers through a body called the Joint Authority, which is advised by the National Offshore Petroleum Titles Administrator, or NOPTA. In Norway important decisions are made by the Minister for Petroleum and Energy (NMPE), with advice and other administration being provided by the Norwegian Petroleum Directorate (NPD). In the UK the regulator is the Oil and Gas Authority (OGA). The chapter analyses changes in regulation methodology since the 1990s, particularly in relation to accountability, governance and risk, and their impact on petroleum resource management. It then develops what it calls State Petroleum Governance Criteria which can be used to assess the effectiveness of an offshore petroleum governance framework. It examines the responsibilities and powers of the relevant ministers, the OGA, NOPTA and the NPD and their regulatory style.

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John A.P. Chandler

This chapter first classifies the companies involved in offshore petroleum by dividing them between international oil companies from the super majors down and national oil companies. It then looks at the challenges they are facing, including climate change, the ‘Grand Transition’ from fossil fuels to alternative energy and growing social responsibility, reflecting on scenarios prepared by those companies and organisations like the World Energy Council and the International Energy Agency. It examines the published strategies of the eight largest IOCs to see how they plan to deal with those challenges and how they report on sustainability and corporate social responsibility. It considers how the use of unincorporated joint ventures can affect resource management.

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John A.P. Chandler

The chapter examines how states seek to recover value when they allocate rights to companies and how this relates to their stewardship obligations. It examines resource rent and how the fiscal systems of Australia, Norway and the UK capture a share. It compares how companies perceive value. The chapter explores the meaning of stewardship for both companies and states. One of the prime motivations for companies is the legal obligation of directors to manage the company for the benefit of shareholders, which leads to a corporate focus on maximising profits. This is supported by corporate culture. In comparison the stewardship obligations of states are generally less defined and do not link recovery of value with ensuring operations are conducted to an appropriate standard. State stewardship depends on the objectives set for the resource management system – which the book suggests should be based on the licensing and production of petroleum being the disposal of a national asset and require a comprehensive governance system. The chapter then examines how MERUKS has developed ideas of state stewardship in the UK.

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John A.P. Chandler

This chapter looks at the concepts and tests, particularly economic tests, used to guide licensing systems and seeks to find if there is any common ground. The chapter starts by comparing the Australian, Norwegian and UK approaches. The Australian approach is based on following good oilfield practice and optimum long-term recovery, both of which are examined in this chapter. The Norwegian system is based on high-level principles including what this book calls the Prudent Production Principle, which is also examined – so too is the UK approach contained in MERUKS which relies on maximising economic recovery of UK petroleum, but subject to safeguards including one of protecting ‘satisfactory expected commercial return’. This chapter also examines ideas of efficient recovery and waste developed in the US.

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John A.P. Chandler

This chapter examines offshore petroleum policy from the 1960s through to the present. Australia is characterised by its federal system and broad policy to maximise national prosperity by creating a framework for companies to explore and produce with limited state intervention. In contrast the Norwegian state’s policy has set objectives to benefit Norwegian society and uses a greater degree of state intervention. UK policy was similar to Australia’s and was based on attracting companies to become energy suppliers. The Wood Review in 2014 identified a need to evolve the licensing system to deal with the maturity of the UKCS. This saw the introduction of MERUKS and a new independent regulator, the OGA. The chapter compares the different approaches and discusses how they perform against those of the State Petroleum Governance Criteria dealing with stewardship.

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John A.P. Chandler

This chapter looks at PSCs to see what can be learned from them about resource management. It starts by identifying similarities between licences and PSCs (for example they both confer exclusive rights over an area). PSCs are different from licences in that the oil company is a contractor and obtains a share of the petroleum which it produces. Petroleum is shared by reference to a formula which allows the contractor to recover costs and profit oil. Some of these are based on rates of return or R-factor calculations. The chapter examines the effects of these formulae on performance. It gives examples of management and governance provisions in PSCs and also examines development approvals and other resource management provisions.