OT30014 - Capital Gains

Reasons for Changes in Licensees.

Since 1983, the number of changes in the licensees and/or their proportionate interests during the term of a production licence has increased, particularly so in 1987 and 1991.

The reasons for change can be many and varied. The following examples are purely intended as a few helpful illustrations and by no means cover the entire range of circumstances which can be responsible for alterations.

Multi-national oil groups, and other conglomerates holding oil interests, may alter their perceptions of exploration and production prospects in the UK or UKCS generally, or future movements in the World oil market and oil prices as well as revising their views on the risks or prospects of particular licence areas. In 1987, many of the conglomerates sold out their North Sea interests to concentrate on core activities and few non-oil groups now remain.

Within oil companies themselves priorities may change e.g. there may be a decision to move away from exploration and appraisal and to concentrate on acquiring interests in established producing fields.

If and when mergers occur there can be changes in direction.

Smaller companies may find themselves with insufficient resources, and difficulties in raising finance, to meet their share of an expensive drilling programme or, if exploration is successful, the development of a field. Therefore they may be forced to give up part of their licence interest, or the benefit of a share of future profits or production.

Changes in the UK tax system (PRT and CT) have also been a material factor. The introduction of immediate PRT relief for exploration and appraisal costs from 15 March 1983 and retrospective legislation in FA 1988 deeming certain licence exchanges and work programme farm-outs to be for NIL consideration in particular have had a direct effect on the number of licence transactions. Somewhat similarly the removal of PRT relief for exploration and appraisal costs in FA 1993 again resulted in revised perceptions.

The transactions are effected either through the disposal of licence interests and related assets or shares in a company owning those interests/assets depending on a number of factors, commercial and legal (including tax). Companies seeking to balance their portfolios may agree to swap licence interests although such deals are difficult to arrange. There can be a number of incentives for swaps. One of them may be a wish to prevent existing participators from exercising pre-emption rights.