Permission to explore
The upstream oil and gas business has always been more than a search for subsurface hydrocarbons. A quest for permission to conduct the search is central to the endeavor.
Traditionally, permission to search for hydrocarbons has come from the owner of subsurface rights. The permission itself takes the form of a legal transfer of rights to use the subsurface through a lease, concession agreement, or hybrid business partnership such as a production-sharing contract. Whatever the form of the transfer of rights, the effect is to convey to some company able to explore the requisite permission to do so.
In the past decade, the nature of exploratory permission has changed. Increasingly, parties other than the subsurface owner and prospective explorer enter and affect the transaction. And they do so typically to resist exploration. It is an interesting and important irony that this third-party resistance to exploration comes in an era during which government owners of subsurface rights around the world act keener than ever to encourage exploration by outsiders of what they own.
Two directions
Third-party resistance to exploratory deals comes, at present, from two principal directions.
One of those directions is U.S. foreign policy. Sanctions and embargoes have become levers for influencing foreign governments. When the behavior of a government strays from what the U.S. considers righteous, the U.S. severs commercial ties. For a U.S. company negotiating exploratory rights with the target government, the effect is sudden and decisive: permission denied.
And the effect isn't confined to U.S. companies. The U.S. supplements its trade sanctions with commercial threats against allies not otherwise inclined to lend support. The potential effect thus extends to non-U.S. companies hoping to explore the sanctioned countries: permission denied.
City governments are adopting this mode of political outreach. Later in June, New York City will become the 11th U.S. city to impose sanctions against foreign governments when it prohibits city contracts with companies operating in or doing business with Myanmar.
The federal government earlier this year blocked investments in the country in response to the Myanmar government's oppression of its political opponents. From even city governments, therefore, companies interested in international exploration now must fear a jolting message: permission denied.
The other direction from which this message can emerge at any time is rabid environmentalism. Without any foothold in law, the environmentalist group Greenpeace is trying to block Atlantic exploration west of the Shetland Islands in the U.K. Its demand is ridiculously absolutist and scientifically unfounded: Oil consumption dangerously warms the planet, so shut down oil exploration.
Laws in the U.K. support exploration west of the Shetlands and prohibit many of Greenpeace's signature publicity stunts, which include members' boarding production equipment in sea transit to disposal sites and chaining themselves to fixtures in oil company offices. Yet Greenpeace somehow wins political influence with its nutty lawlessness. Companies interested in exploring west of the Shetlands, therefore, may yet receive a message that conflicts with rights now in their possession: permission denied.
Authority yields
While sanctions and environmental activism may be the most immediate third-party threats to exploratory permissions, they are hardly the first. The legally questionable ability of coastal governments to prevent work on federal leases now governs exploration of much of the U.S. offshore.
Permission to explore is not what it used to be. The authority of entities formally granting permission increasingly yields to influence outside the basic agreement. In a world of many risks, this is one that oil and gas companies cannot afford to ignore.
Copyright 1997 Oil & Gas Journal. All Rights Reserved.