In August 2004, the UK Offshore Operators’ Association, in consultation with the UK Government, published a code of practice on access to upstream oil and gas infrastructure. The code contains radical measures to provide greater transparency. It also contains an automatic referral to the government in the event of a deadlock.
For the first time, infrastructure owners must now publish short summaries of tieback deals and transportation and processing agreements. These summaries must include information on the tariffs, indexation, send or pay, capacity rights, priority rights, and contributions to capex/opex. This information is to be posted on the company Web site within one month of the agreement becoming unconditional. The code also requires transparency of technical information, including available capacity data.
The UK government has the power to require access to third-party infrastructure and to fix the tariff. Although the government has not exercised these powers, their existence, and the mandatory referral to the government if negotiations continue after a certain period without resolution, sets the negotiating context. The government’s published guidance states that the infrastructure owner should receive a tariff that reflects the costs incurred by it, plus a reasonable profit. The government cannot charge a higher tariff merely because the economics of the field can support it or because a higher tariff would be more attractive than the fully built up cost of the next best alternative export route.
Only in certain circumstances, such as where there have been upgrades or where the infrastructure has been oversized to capture third-party business, can the tariff include an element to reflect past capital costs together with a reasonable return on such costs. Owners might already have recovered capital costs of older pipelines from throughput or from previous third-party production. In such circumstances, the tariff only reflects one off and future costs.
As UK production declines, the majors, which own most of the infrastructure, see the midstream as an increasingly important business in its own right and not just as an evacuation route for their own equity production.
There are good commercial reasons for infrastructure owners to engage in making the smaller deals happen, quite apart from the political and regulatory pressure. A good example of such engagement is BP’s Forties pipeline system “small pools” transportation offer for new fields with reserves of less than 20 MMbbl and a maximum flow rate of 15 MMb/d. It has also published its “new field terms” designed for fields with recoverable reserves of 20-100 MMbbl.
The small pools offer relates tariff to oil price and contains no send or pay provisions. This approach provides a lower base-case tariff than would otherwise exist, which improves the economics and metrics at the resource owner’s oil price planning assumption. This facilitates the sanction of marginal projects while providing BP with increased tariffs at high oil prices, thereby maintaining the commercial balance.
The government is also trying to facilitate lower tariffs through the tax system. There are three tiers of oil and gas taxation: corporation tax at 30%, supplementary charge of 10%, and petroleum revenue tax (PRT) at 50%. Not all infrastructure is subject to PRT, but the marginal rate of tax for those that are is around 70%. When PRT is assessed on infrastructure, there is a reduction in the scope for host platforms, pipelines, and terminals to reduce their tariffs on new business.
To address this issue, the UK government has removed new tariff business from the scope of PRT where the tariff is payable in relation to a field that received development consent on or after April 9, 2003, or which has never made use of assets that qualify for PRT relief. To secure this concession, the industry gave assurances that the benefit of PRT removal would be passed to the resource owners in the form of lower tariffs.
There are signs that the industry recognizes that the right behaviors are required to make things happen. There is a commitment at a senior level within the companies, articulated through the commercial code of practice, to “promote cooperative value generation” by establishing a framework to minimize resources spent on negotiation and to promote “positive” commercial behavior.
These principles include agreeing to a timetable to complete the deal, adopting fit-for-purpose solutions, ensuring that appropriate personnel resources are made available, and adopting a “non-blocking” attitude.
Bruce McLeod
Partner - Energy at Paull & Williamsons solicitors in Aberdeen.
This page reflects viewpoints on the political, economic, cultural, technological, and environmental issues that shape the future of the petroleum industry. Offshore Magazine invites you to share your thoughts. Email your Beyond the Horizon manuscript to Eldon Ball at [email protected].
