OT30013 - Capital Gains

Licences. Additional Background Information.

The terms on which licences are awarded have varied from round to round. Usually they have involved initial payments on the application for and grant of a licence, periodic payments escalating over the secondary period and royalties on the value of oil won and saved. However, royalties were effectively abolished from 1 July 1988 for all fields which received development consent after 31 March 1982. In three licence issue rounds, certain blocks were auctioned. In the seventh round companies could nominate blocks in certain areas for a payment of £5M, if successful.

Before 1976, licences were granted only to companies incorporated and resident in the UK but there was no requirement that the holder should work the licence. Non-resident companies were able to obtain licences through a UK registered company and acquire the beneficial interest therein in return for meeting all the licence obligations under what is known as an Illustrative Agreement. Subsequently the requirement has been only that the company is centrally managed and controlled in the UK (i.e. it must be resident in the UK for tax purposes), or direct and control the operations and activities through a UK branch).

Other factors taken into account in deciding whether an applicant is successful will include a satisfactory previous record on other licences and the technical and financial resources to implement an agreed programme of exploration (usually 2-3 wells). However, no work programme obligations were set for auctioned blocks.

While a few licences have been awarded to single companies, in general they are applied for and issued to several different companies entering into a joint venture. The rights and obligations under the licence are regulated under a Joint Operating Agreement (JOA).

There is further information on the DTI role in the UK North Sea in a separate section of the Manual. As regards JOA's see OT00250 .