THIS DOCUMENT IS THE PROPERTY OF HER BRITANNIC MAJESTY *S GOVERNMENT
CP(76) 12
COPY NO
10 May 1976
CABINET
FIFTH ROUND OF OFFSHORE PETROLEUM PRODUCTION
LICENSING: BRITISH NATIONAL OIL CORPORATION
CONTRIBUTION TO COSTS
Memorandum by the Secretary of State for Energy
1.
On 15 April 1976 the MinisterialCommlttee on Energy (ENM) agreed
that there should be a further round of offshore petroleum production
licensing.
The method and timing of the financing of the British National
Oil Corporation^ (BNOC) participation in exploration and development
arising from the fifth round is however the subject of a difference of
opinion between the Chief Secretary, Treasury, and myself.
2.
It is my view that BNOC should contribute its share (51 per cent) to
the costs of exploration and development under fifth round licences, as the
costs are incurred.
The Chief Secretary, Treasury, has proposed that
B N O C s contributions should be deferred until such time as they can be paid
for out of revenues from successful developments.
3.
E N M remitted this issue to a group consisting of the Chief
Secretary, Treasury, the Chancellor of the Duchy of Lancaster,
Lord Kearton and myself, which has not been able to reach an agreed
solution.
4.
A decision on this issue is urgently needed if the fifth round is not
to be delayed.
5,
This paper sets out the main arguments. I have reasoned my case
at Appendix 1. The Chancellor of the Exchequer^ letter to the Prime
Minister setting out his main views on the question is at Appendix 2.
PUBLIC EXPENDITURE
6.
Figures of Exchequer c a B h flows under the two alternative courses
of action are shown in Appendix 3. In the next five years the additional
costs to the Exchequer of BNOC contributing from the outset to exploration
1
and development costs are estimated to be £22 million and £13 million
respectively. But as can be seen from the appendix early savings are
more than offset in the long run by the repayment of deferred contributions
with interest.
7,
My view, that BNOC must contribute 51 per cent to costs from the
outset is based on the following:­
a.
The round must be a success.
Deferment of BNOC'a
contribution to costs diminish the round's attractiveness to potential
applicants and introduces a serious risk of failure.
b.
Current participation negotiations have been given impetus
by companies belief that a co-operative stance on participation will
ensure favourable treatment in the fifth round allocation.
This
incentive to negotiate participation is diminished if the round is not
seen to be attractive.
1
c.
It would be difficult to reconcile the British Gas
Corporation^ and BNOC(Ex)'s ability (established under previous
Governments) to contribute from the outset, with a BNOC that was
unable to contribute from the outset. BNOC would clearly be at a
disadvantage vis-a-vis these corporations and indeed v i s - a - v i s
private sector companies. This disadvantage would be compounded
by the fact that BNOC are Inhibited from financing development costs
from overseas borrowings because this borrowing counts in the
Public Sector Borrowing Requirement, while companies such as
British Petroleum have no such inhibition.
d.
A decision not to back BNOC with money at least to the
extent that its private sector competitors enjoy would be very
difficult to justify to the Party at large and to the Trades Union
Congress.
e.
We have repeatedly given assurances that when in partner­
ship BNOC will act commercially.
f.
If BNOC is not a fully contributing partner from the outset
its ability to influence a range of decisions will be diminished.
g.
B N O C s contribution and hence the burden on the Exchequer
could only be deferred till perhaps the mid-1980s and would then
have to be paid with interest,
I do not believe it to be worth prejudicing the round for a deferment of a few
years in B N O C s contribution.
8.
Treasury Ministers went to defer for as long as possible B N O C s
involvement In expenditure under licences, on the basis that every
commercial organisation naturally seeks to defer making payments, if
possible until there is revenue to cover them; that the BNOC does not have
to buy Its way into these licences; and that if it did there would be additional
public expenditure in the early years. Treasury Ministers also argue that
with interest payable on any deferred contribution the success of the round
will not be put at risk; but that if nonetheless it was considered that
deferred terms might make the round less attractive, then other terms could
be eased to compensate for this. I have looked at this last suggestion and
am satisfied that adjustments to the financial terms (eg royalty) would have
minimal compensatory effect due to their relative cheapness, and the point
that they are expansible for tax purposes.
CONCLUSION
9.
In view of the importance that we attach to a successful fifth round,
I invite my colleagues to agree that BNOC should pay its share of all
exploration and development costs under fifth round licences, as and when
those expenses are incurred.
10.
If however agreement cannot be reached on this basis, then in the
interests of settling the issue as soon as possible, to avoid dele ring the
round I am prepared to ptx forward the following as a compromise:BNOC will as the standard pattern meet its share of exploration
costs as they arise leaving open for decision case by case whether
BNOC should pay its share of development coats as tbey arise, or
defer them to be met out of revenue with an appropriate rate of
interest.
AWB
Department of Energy
10 May 1976
3
CJQN4FHMNTM0.
TH3 CA;53 FOR
1
PAT A3 YOU GO' 30UTJB
Objectives
I n o r d e r "to achieve success i n the round i t
v i e w t h a t B2J0C must c o n t r i b u t e
i s my
5 1 ^ t o c o s t s from the
BNOC must b e g i n to b u i l d up i t s e x i s t i n g c a p a b i l i t y
to f u l f i l
its
intended
beginning w i l l
role.
outset.
if
it
is
F u l l p a r t n e r s h i p from the
enable i t to g a i n experience and
influence
decisions.
2.
My main arguments
(a)
a r e as
follows
The a t t r a c t i o n o f the package i s e s s e n t i a l
success of the rotmd.
failure.
to
We cannot r i s k a
To add the f u r t h e r
burden of
d e f e r r e d c o s t s t o what i s a l r e a d y a tough
package w i l l ,
i n the view of our
a c t as a s u b s t a n t i a l d i s i n c e n t i v e
application.
consultants,
to
F a i l u r e of the round would be
p o l i t i c a l l y embarrassing,
would l o s e
confidence
i n the tTK S h e l f and income from f u t u r e
finds,
Employment i n o i l r e l a t e d i n d u s t r i e s would be
jeopardised.
For comparison purposes i t
is
worth mentioning t h a t the I r i s h and Greenland
p r o v i s i o n s a r e l e s s onerous than
propose,
This i s mainly because n e i t h e r
has a s p e c i a l o i l
(b)
what we
country
tax.
The imminence of the round has added impetus
to c o m p - n i e s '
participation.
.
w i l l i n g n e s s to
negotiate
This i s because they expect
the round to be a t t r a c t i v e .
If
l e s s a t t r a c t i v e by i n s i s t i n g
terms a r e made
on BlfOC b e i n g
c a r r i e d through, the development stage t h i s
f o r getti^.7; companies to t h e n e g o t i a t i n g
w i l l become v e r y much l e s s
effective.
lever
table
C o n t r i b u t i o n from the s t a r t by BNOC
would u n d e r l i n e the Government's
intention
t h a t J3II0C should be a b l e t o behave
commercially ( a p o i n t on which many HMO
'
a s s u r a n c e s have been g i v e n ) .
We a r e seeking f u l l
o i l company B t a t u s
BNOC w i t h aocess from the s t a r t t o
and d e o i s i o n t a k i n g .
for
information
D e f e r r e d payment could
w e l l i n v o l v e a t worst p a r t i a l s u r r e n d e r o f
v o t i n g r i g h t s and diminished s t a t u s a t the
best.
f
As a f u l l p a r t n e r BNOC w i l l be b e t t e r a b l e t o
influence
investment p o l i c i e s t o the advantage
of t h e UK o i l r e l a t e d
industries,
BHOC would a l s o have more i n f l u e n c e over the
pace of e x p l o r a t i o n and thus could a i d the
achievement of d e s i r e d d e p l e t i o n
^
policies.
The burden, on the Exchequer of BHOC c o n t r i b u t i n g
from the s t a r t 2 3 r e c o g n i s e d ,
r e l a t i v e l y modest.
but the c o a t s a r e
i
BlIOCs i n i t i a l o u t l a y on
e x p l o r a t i o n i s estimated t o be £50m between 1977
and 1983, -
I f t h i s were c a r r i e d by p r i v a t e
p a r t n e r s the r e a l saving could be s m a l l e r as
(
companies a r e o f t e n a b l e t o expense such c o s t s
f o r t a x purposes,
1
The a d d i t i o n a l net burden on the Exchequer by the pay
as you go r o u t e of development c o s t s might
approximate t o £100m a y e a r i n 1 9 8 2 - 1 9 8 4 , £150­
200m nxoaa).
D e f e r r i n g c o n t r i b u t i o n would
result
i n the burden on the iixchequer b e i n g d e f e r r e d to
1986-1989i
t o g e t h e r with any i n t e r e s t t h - t might be
agreed on the c o n t r i b u t i o n (Xl75m a t 1 $ ) ,
I t in
q u e s t i o n a b l e whether i t i s worth p r e j u d i c i n g the
round f o r a d e f e r m e n t ^ o f Exchequer burden
starting i f i ^ Y ^ j ^ r y a e a r s
time.
BGC & BNOC(Ex) contribute to costs as they
arise,
BNOC would be seen as a half-heated
participant compared with these corporations
if it was not able to contribute.
BNOC would
also he at a disadvantage in comparison with
these corporations and with the private sector.
If BNOC were to follow the practice of major
companies such as BP in borrowing abroad to
finance its developments then the Exchequer
costs would be eliminated. While X understand that
B N O C s foreign borrowing would count as part of
the public sector borrowing requirement, this
should not be an inhibiting factor if BNOC are to
be allowed to compete on level terms with the
private sector.
\
'.. Treasury Chambers, Parliament Street, SW1P 3 A G
O1-90O
1204-
PRIME MINISTER
. -
F i f t h Round North Sea L i c e n s e s
Government C o n t r i b u t i o n to C a p i t a l
I have seen E N ( 7 6 ) 9 ,
Costs
in which the S e c r e t a r y
of
State for
r e p o r t s ' a disagreement with the T r e a s u r y about one aspect
proposed f i n a n c i a l
terms
to make my p o s i t i o n
12th
April.
2.
I t may help i f
BNOC- should
start,
clear
his
contributing
having access
round l i c e n s e s ,
in advance of
in f u t u r e
and development
expenditure,
a Government c o n t r i b u t i o n
also give
3,
costs
The q u e s t i o n
option to j o i n
automatic
obligation
individually.
the o i l .
interest
My s u g g e s t i o n
to c o n t r i b u t e .
its
share
during
of
is
is
the
making.
although
that
exploration
stage.
Provided
is
powers
the
BNOC has a
declared
safeguarded.
should c o n t r i b u t e
that there
Each case
There should be a strong
put up c a s h , but that
process
that
I b e l i e v e we can
in once a f i e l d
then i s whether i t
as they a r i s e .
large.
at the development
us h a l f
I think the p u b l i c
to e x p l o r a t i o n ,
and the d e c i s i o n making
licensing
Participation
commercial,
from
and a pact to p l a y in d e c i s i o n
to i n f o r m a t i o n
like
Lord.
to e x p l o r a t i o n
participation
interest'
licenses.
agree
partner
p h a s e , and through
'carried
We a l l
to be an a c t i v e
we need through the o r d i n a r y
will
and I should
the EN meeting on Monday
fifth*rbund
the sums I n v o l v e d are not p a r t i c u l a r l y
s e c u r e the access
the
Corporation
to information
I "see.no case f o r
fifth
I s e t out my p o s i t i o n a f r e s h .
participate
KeaKton would l i k e
for
of
Energy
to
development
should be no
should be
negotiated
presumption t h a t HMG w i l l
the c a p i t a l
costs
/ contributed
should
not
be
retroactively
out
contributed
companies,
retrospectively
in exchange f o r
the Continental
the investment
out of
the r i g h t
until
revenue.
repayment.of
any f i e l d s
to e x p l o i t
it
discovered
share of
contribution
We would have to decide whether,
before
the f u l l
valuable
finance
,fields
finable
its
to an o i l
i t s own share of
discovered.
to r a i s e
If,
the c a p i t a l
But I b e l i e v e
capital
commercial
expenditure
development c o s t s .
real
capital,
to
developing any
oil
then BNOC has the power
to
package.should
in the normal c a s e ,
there
be
will
.
approach, not only
r e a s o n s , but because of
and the public
N
It
investment;
resources
itself
contribution.
for
the p r o s p e c t i v e
s e c t o r borrowing
to f i n a n c e
calls
requirement
50 per cent of
on
if
future
i s no answer to say t h a t t h i s would be
the d i f f i c u l t y
during the development
and of p u b l i c
stage.
lies
any BNOC c a p i t a l
in r a i s i n g
Our p r o j e c t i o n s
expenditure
and r e c e i p t s
f o r a Government take from any new f i e l d s
but not f o r
were abandoned
date..
that the whole l i c e n s e
the Government were r e q u i r e d
.finance
the
u n e x p e c t e d l y , any 1 I c e n s e e . f i n d s ' himself
I t 1s important to maintain t h i s
profitable
of
approach to the
c o s t s of
1
public
to i n t e r e s t on the
company, to be r e q u i r e d
the necessary
r
strictly
public
I t would be wrong f o r the Government, in conceding a
franchise
be no p u b l i c
out of the
the f i e l d
share of c o s t s to
c o n s t r u c t e d on the assumption t h a t ,
5..j
if
seems to me the c o r r e c t commercial
contribute.
sufficient
development c o s t s were recouped, BNOC would have
to c o n t r i b u t e
negotiations.
resources on
HMG's share of
produced
the costs
the
which i t made on behalf
BNOC.
4. " This
mineral
The company would be e n t i t l e d
the c a p i t a l
nevertheless
This means that
S h e l f , would be r e q u i r e d to finance
revenue to pay back the p u b l i c
share of
revenue.
contribution.
2 -
CQNfIDENTIAL
of
necessary
available
already
allow
which may be d i s c o v e r e d ,
As M i n i s t e r s
/ public
-
the
know,
expenditure
the
situation
public
expenditure
already d i f f i c u l t
field
situation
enough.
effect.
be borrowing
to finance
will
In most c a s e s ,
be ( i n d i r e c t l y )
field
is
BNOC investment
in
field
problems
finance
these terms
eased.
principle
rather
given the success of
e q u a l l y tough
resale
of
some of
In the e a r l y y e a r s of
contribution.
to
1
raise
the f i e l d
the
Irish
arrangements)
­
the
essential
Such
when the c o n s t r a i n t s
on
the package
concessions
of
than a Government c a p i t a l
the
field,
contribution
on p u b l i c
tightest.
The S e c r e t a r y of S t a t e has argued t h a t ,
included
viable).
the BNOC o i l ,
than to compromise on the
and would be more a c c e p t a b l e
be
always
companies
be a b l e
f u t u r e "revenues, extending over the l i f e
expenditure w i l l
in the
available
some other element of
of a Government c a p i t a l
would a f f e c t
will
remains
of
companies w i l l
in n e g o t i a t i n g
the r e n t a l ,
rate, etc.,
borrowing
needed.
the s o l u t i o n might be to a d j u s t
royalty
The f o r e c a s t s
(which seems u n l i k e l y ,
fee,
their
of the BNOC involvement
it
will
the package as a whole seems u n a t t r a c t i v e
and Norwegian governments
the l i c e n s e
Some of the
should be improved and the o i l
finance
if
r a t h e r than using
development p r o v i d e d
the c a p i t a l
any c a s e ,
licensees
of ensuring t h a t resources
a l r e a d y assume that the o i l
TOO per cent of
-In
security
in r a i s i n g
development,
on the s t r e n g t h
to ensure i t s
So. the l e n d e r s '
­
have a
the p r o s p e c t i v e
cash r e s o u r c e s .
(which has the e f f e c t
be a v a i l a b l e
for
programmes.
own i n t e r n a l l y - g e n e r a t e d
8.
dire;t
I do not see why these terms need n e c e s s a r i l y
disincentive
7^
To r e q u i r e
on those assumptions
development would reduce, pro tanto the amounts a v a i l a b l e
other p u b l i c expenditure
6.
projected
in the l i c e n s e ,
if
my terms were
the whole round might become a f l o p .
/ not b e l i e v e
I do
this
not
believe
this
is
a real
The f i r s t
depletion
is
that
to
change o f
policy
(EH(76)4)
and o f
of
drop
the
the
indicate
in
(-without
saying
main p o t e n t i a l
idea
this
of a
strict
supplies
f
round'
year.
depletion
I
licenses.
to
importance
suggest
We c o u l d
say t h a t
it
necessary
t h e number
industry
flow
of
and t o
us much f r e e r
of
of
to adjust
with
the
the terms
were
Policy.
( D . W. H . )
A p r i l , 1976
of
the
any
designated
negotiate
individual
smaller
continuously
to
B u t 1n d o i n g s o , we
the consequent
the c r e d i b i l i t y
with
was o p e n t o
applicants
new e x p l o r a t i o n .
a 'flop'
^
to
could
licenses
licensees.
within
the
t h a t we
I n s t e a d , we
i s s u e new
block
of
t o o damaging t o
negotiations
a particular
the
defend a
separate
for
rather
policy.
industry,
of
go
announced
B u t we c o u l d
increasing
of a
studied
and b e g i n
s h o u l d a v o i d any r i s k
Sea
we have a l r e a d y
intention
t h a n we h o p e d , we w o u l d be a b l e
offshore
1f
which,
idea
how many)
t e r m s c a s e by c a s e , a n d i f
the
the
who have
c o u r s e were t h o u g h t
This course would leave
maintain
But
aj-s, t w o a l t e r n a t i v e s
we s h o u l d , on b a l a n c e ,
to the
terms our
company t o make a b i d
area.
given above.
officials
round t h i s
a fairly
if
of
Admittedly,
offshore
general
there
that
is
by r e f e r r i n g
Alternatively,
confidence
The a d v i c e
have a f i f t h
conservation
reasons
we s h o u l d a b a n d o n a l t o g e t h e r
new l i c e n s e s .
Intention
the
-..
round.
policy
slower w i t h
simply
danger,
consider.
1976 l i c e n s i n g
10.
would happen, f o r
considered
we s h o u l d
9.
this
damage t o
the Governments
the
North
1
KXPLOTfATIOii
UTATH CASH ioo;/
(PAY-AS-YOU-GO)
197.; i .;icj^)
j
)
(CARHIHD INTEREST)
1977
-2
1970
-5
1979
-5
1930
-10
19O1
-15
1902
-10
-117
1983
- 3
-126
*9
1984
- 70
+2A
1935
* 76
*66
+270
+1B7
-13
4-^30
19-7
*399
19R9
+5G1
-M84
19?0
*359
+49T
1991
+510
+A99
t437
+43T
UOT^S: 1.
Exploration costs based on 50 wells drilled, average cost ££Jewell,
5l£ net by BNOC.
2.
Carried interest at rate 7ji for illustrative purposes.