1. UKCS INITIATIVES TO ENCOURAGE EXPLORATION Jen Brzozowska Head of Exploration

2. UKCS Initiatives to Encourage Exploration 20 th March 2007NPS Conference – EXPLORATION REVIVED Why did the UK need to encourage Exploration? How was it done? Has it worked?

3. UKCS Initiatives to Encourage Exploration 20 th March 2007NPS Conference – EXPLORATION REVIVED

4. UKCS Initiatives to Encourage Exploration 20 th March 2007NPS Conference – EXPLORATION REVIVED How was it done? Initiatives –Licensing Promote Licence Frontier Licence –Fallow Process –Promote UK & Relinquishment Report Publication –Stewardship

5. UKCS Initiatives to Encourage Exploration 20 th March 2007NPS Conference – EXPLORATION REVIVED Licensing –Traditional Licence: 1 st to 4 th Round(1964 to 1972) –6 year Initial Term –40 year Second Term –Multi-Block Licences –If Field Development Plan approved anywhere on the remainder of the Licence, it could be retained for the duration 5 th to 10 th Round(1976 to 1987) –Shorter Second Term (30 years) but still long 11 th to 19 th Round (1988 to 2001) –Three Terms (6 + 12 + 18); Relinquish all but Development after 18 years 20 th and subsequent Rounds(2002 to date) Amended Terms –4 year Initial Term –4 year Second Term –8 year Third Term only retain Field Development area

6. UKCS Initiatives to Encourage Exploration 20 th March 2007NPS Conference – EXPLORATION REVIVED Licensing –Promote Licence introduced for 21 st Round 2003 : designed to allow ideas to be worked exclusively, realising value by marketing (enables smaller companies without major resources to pursue an interest in a prospect) Initial Term 4 years but split; two year evaluation and promote period; two years to complete Work Programme if continued First two years 90% reduction on fees to £15 per sq km/year Successful Prospect Fairs held from December 2003 to December 2006 for the Promote Licensees to show and potentially sell their ideas –Frontier Licence introduced for 22 nd Round 2004 : allows application for larger amounts of acreage for scoping studies, initially in the area to the west of the Shetland Islands, SEA 1 & 4 only 90% reduction on fees in a First Term of 2 years to screen acreage Relinquish 75% to enter Second Term of 4 years to carry out the substantive Work Programme (drilling) Further relinquishment to enter a Third Term of 6 years

7. UKCS Initiatives to Encourage Exploration 20 th March 2007NPS Conference – EXPLORATION REVIVED Summary of Recent Round Success

8. UKCS Initiatives to Encourage Exploration 20 th March 2007NPS Conference – EXPLORATION REVIVED 24 th Round 17 New Players 246 Blocks licensed 16 Wells committed to 79 Traditional licences 6 Frontier licences 65 Promote licences

9. UKCS Initiatives to Encourage Exploration 20 th March 2007NPS Conference – EXPLORATION REVIVED Promote Licence Update to end 2006 23 of the original 54 Promote Licences issued in the 21 st Round have moved into Phase 2 15 with a Firm well commitment or Development Plan 8 to shoot new 3D seismic with a Contingent well; all must be drilled by September 2007 –7 of these have been drilled already 23 of the 58 Promote Licences issued in the 22 nd Round moved into Phase 2 in December 2006 13 with a Firm well commitment 10 to shoot new 3D seismic with a Contingent well; all must be drilled by September 2008 –2 of these have been drilled already

10. UKCS Initiatives to Encourage Exploration 20 th March 2007NPS Conference – EXPLORATION REVIVED SEA Process continues

11. UKCS Initiatives to Encourage Exploration 20 th March 2007NPS Conference – EXPLORATION REVIVED Fallow Why was an Initiative needed? Early round licences were multi-block, and if the initial term obligation was fulfilled with a Development somewhere on the licence, companies could retain acreage into the second term for up to 46 years without any further activity!

12. UKCS Initiatives to Encourage Exploration 20 th March 2007NPS Conference – EXPLORATION REVIVED Fallow Total Acreage held by Company in September 1994

13. UKCS Initiatives to Encourage Exploration 20 th March 2007NPS Conference – EXPLORATION REVIVED Relevant Model Clause Working Obligations –“If at any time the Minister serves a notice in writing on the licensee requiring him to submit to the Minister, before a date specified in the notice, an appropriate programme for exploring for petroleum in the licensed area during a period so specified, the Licensee shall comply with the notice;” The programme would be of a kind which a Licensee seeking to exploit the licence to the best commercial advantage could reasonably be expected to carry out in the specified period, assuming it had the requisite competence and resources.

14. UKCS Initiatives to Encourage Exploration 20 th March 2007NPS Conference – EXPLORATION REVIVED Fallow Block Process Flow Diagram

15. UKCS Initiatives to Encourage Exploration 20 th March 2007NPS Conference – EXPLORATION REVIVED Classification into 26 Identifiers (Blocks) A1 “Doing all that can be expected” A2“Wells AFE'd” A3“Proprietary Seismic AFE'd” A4“Seismic Reprocessing 2 year review” A5“Seismic Reprocessing 1 year review” A6“Infrastructure full or none available” A7“FDP in preparation” A8“Subeconomic” (from class B) A9“Median Line issues” M “Moratorium” BH “Class B Hold” BR “Class B Rescued” B1 “No activity” B2 “Low level activity” B3 “Delayed by partner misalignment” B4 “Delayed by third party issues” B5 “Delayed by infrastructure issues” B6 “Divestment planned” B7 “Non-economic accumulation” N1 “Not Fallow - Relinquished” N2 “Not Fallow - New proprietary seismic” N3 “Not Fallow - Well drilled” N4 “Not Fallow - FDP or new production” N5 “Not Fallow - no exploration area remaining” N6 “Not Fallow - Licence in primary term” R “Relinquishment notice submitted”

16. UKCS Initiatives to Encourage Exploration 20 th March 2007NPS Conference – EXPLORATION REVIVED

17. UKCS Initiatives to Encourage Exploration 20 th March 2007NPS Conference – EXPLORATION REVIVED Fallow Block Status 382 currently identified Fallow Blocks (pre 20 th Round)

18. UKCS Initiatives to Encourage Exploration 20 th March 2007NPS Conference – EXPLORATION REVIVED Fallow Block Impacts

19. UKCS Initiatives to Encourage Exploration 20 th March 2007NPS Conference – EXPLORATION REVIVED Status of 304 Blocks which have been released on website in 12 month process

20. UKCS Initiatives to Encourage Exploration 20 th March 2007NPS Conference – EXPLORATION REVIVED Fallow Discoveries Process Flow Diagram

21. UKCS Initiatives to Encourage Exploration 20 th March 2007NPS Conference – EXPLORATION REVIVED Fallow Discoveries Status

22. UKCS Initiatives to Encourage Exploration 20 th March 2007NPS Conference – EXPLORATION REVIVED Fallow Discoveries Impacts

23. UKCS Initiatives to Encourage Exploration 20 th March 2007NPS Conference – EXPLORATION REVIVED Fields which are now under Development or in Production that were Fallow Discoveries or on Fallow Blocks TOTAL RESERVES (P + P) : c 450 mmboe

24. UKCS Initiatives to Encourage Exploration 20 th March 2007NPS Conference – EXPLORATION REVIVED Promote UK BGS on behalf of DTI has mapped and helped promote 25 undeveloped discoveries and 101 leads since 2000 Posters on the UKCS Geology have been produced for display at NAPE and similar events in North America and the UK to encourage new entrants Prospect Fairs have been held annually in December for the last four years in conjunction with the PESGB

25. UKCS Initiatives to Encourage Exploration 20 th March 2007NPS Conference – EXPLORATION REVIVED Promote UK & Relinquishment Report Publication

26. UKCS Initiatives to Encourage Exploration 20 th March 2007NPS Conference – EXPLORATION REVIVED STEWARDSHIP Concern that some fields are not being invested in to their full economic potential Possible explanations: –Capital constraints –People constraints –Materiality of benefits –Partnership misalignment –Shadow of decommissioning … Work Group Recommendations –Construct a framework for raising the game on Stewardship –Replace Annual Field Report with simpler data submission –Construct filtering indicators to highlight issues –Map out process for Stewardship Improvement –JV involvement

27. UKCS Initiatives to Encourage Exploration 20 th March 2007NPS Conference – EXPLORATION REVIVED Annual Data Return Data analysis and feedback Clarification Discussions Any remaining issues following clarification? Alignment Reached? NoYes Options: DTI/JV meetings Technical and commercial solutions sought Full audit Use of expert for technical issues Review JV can revise programme Letter identifying concerns Notice served 1-2 months3-6 months Sanctions Development notice Change of operator Other sanctions

28. UKCS Initiatives to Encourage Exploration 20 th March 2007NPS Conference – EXPLORATION REVIVED Stewardship Current Status Stage 1 Data Gathering completed for first phase 2006 –224 Producing Assets –indications of increasing spend on future opportunities and development drilling –development drilling activity still below 2001 levels – 34 assets selected for detailed review Stage 2 Detailed Review of these 34 now in progress But this is an Annual process: Data Gathering commenced in January 2007 for selection of further assets to target The Energy Review 2006 required that Infrastructure Owners review surrounding Exploration potential in other Operators assets as well as their own

29. UKCS Initiatives to Encourage Exploration 20 th March 2007NPS Conference – EXPLORATION REVIVED Has it worked? Drilling Activity over the last 11 years

30. UKCS Initiatives to Encourage Exploration 20 th March 2007NPS Conference – EXPLORATION REVIVED Fallow Process Helping to Drive Activity

31. UKCS Initiatives to Encourage Exploration 20 th March 2007NPS Conference – EXPLORATION REVIVED Drilling Activity 2006 Exploration Offshore –29 wells Appraisal Offshore –39 wells Total 68 wells –18 of these were Obligation wells –12 wells were on Fallow B or B Rescued Blocks –4 wells were on Fallow B or B Rescued Discoveries Half the Exploration or Appraisal Activity in 2006 resulted from either Obligation or Fallow drilling

32. UKCS Initiatives to Encourage Exploration 20 th March 2007NPS Conference – EXPLORATION REVIVED Comparison of Company Held Acreage 1994 & 2004

33. UKCS Initiatives to Encourage Exploration 20 th March 2007NPS Conference – EXPLORATION REVIVED Comparison of Licensing pre Initiatives (2000 – pink acreage) to post 24 th Round (2007 – blue acreage)

34. UKCS Initiatives to Encourage Exploration 20 th March 2007NPS Conference – EXPLORATION REVIVED Acknowledgments Thanks go to Simon Toole, Director of the Licensing, Exploration and Development Branch, Energy Development Unit, at the UK Department for Trade and Industry, for permission to give this talk, and particularly to Toni Harvey of the Exploration Team and Helen Hichens, the Southern Field Team Leader, who compiled all the Fallow Facts.