Statfjord agreements

This set of agreements is fairly intricate and complex, but nevertheless makes the whole operation possible. They include:

• the dividing line treaty
• licences
• unitisation deals
• the Statfjord treaty
• the bridging agreement
• the production swop agreement

Dividing line treaty

The hierarchy of agreements actually starts with the treaty between the UK and Norway which defines the median line between their continental shelf areas in the North Sea. Signed in 1965, this agreement is rooted in international law pursuant to the UN Convention on the Law of the Sea adopted in 1958.

This convention provides several possible principles for dividing up a continental shelf between states. But Norway opted for the median line principle when it began negotiating on North Sea boundaries in 1963. That means the dividing line is drawn midway between the base lines – which define the coasts – of the states bordering the continental shelf area in question. This principle is applied in all the treaties entered into by Norway on North Sea boundaries in 1965. Only the treaty with the UK is significant in Statfjord’s case.

A minor curiosity which had consequences for Statfjord arose as a result of the dividing line treaty. The boundary with Denmark, Germany, the Netherlands and the UK was determined in 1965 from the Swedish-Norwegian border northwards to 61°20’40”N. Those responsible for defining the dividing line thought they had settled it for many generations to come. But a need to extend the boundary further north arose within a few years.

This was also the origin of the Norwegian practice of referring to operations on the NCS as being south or north of the 62nd parallel. When Norway put parts of the North Sea on offer to oil companies in 1965, it informally extended the boundary northwards to 62°N and then along this parallel of latitude to the Norwegian mainland. That established a northern limit to the North Sea. The only motive was the desire for a practical division of the blocks to be put on offer, since the boundaries of each full quadrant of 12 blocks is defined by one degree of both latitude and longitude.

Since Statfjord lies mainly north of the 61st parallel, this rather unclear boundary meant that the British refrained from extending licences right up to the dividing line when awarding acreage in this part of the UK continental shelf during 1971. That created problems later on.

A rather amusing story can also be told in relation to the determination of continental shelf boundaries. During the negotiations on the law of the sea convention in the late 1950s, Norway’s sole concerns were to safeguard freedom of the seas for shipping and clear fishing limits. As a result, Norway did not ratify the convention until 1963. And it was not until 1973 that the boundaries of fishing zones in the North Sea coincided with the median line. So before it could offer licences for petroleum exploration, Norway had to ratify all parts of the law of the sea convention, declare Norwegian sovereignty over the NCS and then negotiate dividing lines in accordance with the rules in the convention.

Out by 13 kilometres. When the dividing line with the UK was under negotiation in 1964, a mapping error could have cost Norway the whole Ekofisk field and thereby billions of kroner in oil revenues.The evening before the boundary treaty negotiations between the two countries were to be concluded, the representative of the Norwegian Hydrographic Service at the talks began to wonder whether there might be something wrong with the calculations used to determine the dividing line. He contacted the geodetic department at the Geographical Survey of Norway (now the Norwegian Mapping Authority) and asked it to check the matter.Because time was short, the department had to work on mathematical formulae throughout the night under the leadership of Gunnar Jelstrup to check the coordinates involved.“The results were almost frightening,” Bjørn Geirr Harsson, former principal engineer at the Norwegian Mapping Authority, told the Aftenposten.no website. “They discovered that the southernmost point lay almost 13 kilometres closer to the Norwegian coast than the British. In addition, the two sides had used the wrong map to determine the median line.”

Licences

Shell and Esso contacted the Norwegian government in the autumn of 1972 to report that the recent Brent discovery in the UK North Sea might extend onto the NCS. That presented the authorities in Norway with a problem. According to the regulations, blocks on the NCS could only be awarded through advertised licensing rounds. That meant the first step had to be an amendment to the rules.
This was done in early 1973, and it was announced in March that blocks 33/9 and 33/12 were to be awarded outside the normal licensing rounds. Applications were received at the end of April and, following negotiations, Norwegian production licence 037 was awarded on 10 August 1973. Exploration on Norway’s side of the dividing line could thereby begin.

The UK licence which covered the possible Statfjord field had been awarded in 1971. Block 211/24 (the P104 licence) covered most of the area. Because the eastern limit of the licence did not coincide with the dividing line, however, a new one had to be awarded as P293 to cover the narrow intervening corridor. This was done in early 1974. P293 moreover had the same licensees – Conoco, Gulf (later Chevron) and the British National Oil Corporation (BNOC – later BP) – as P104 to avoid any conflicts of interest. The only aspect which did not harmonise was the duration of the Norwegian and UK licences, but nobody saw the significance of that in 1973-74.

Unitisation

The dividing line treaty contained some vague formulations that, if a reservoir extends across the boundary, efforts will be made to reach agreement on mutual exploitation. The existence of a common reservoir or reservoirs on either side of the boundary must also be proven.

After the Statfjord discovery in the Norwegian North Sea was announced on 26 February 1974, the British had to establish through drilling that this structure extended into the UK sector. The British operator, Conoco UK, drilled a well in the summer and autumn of the same year which clearly showed that the discovery comprised several shared reservoirs.

Negotiations accordingly began on joint development and production, and lasted until the spring of 1976. Agreement was then reached by the licensees on the principles for an accord on joint utilisation. The Statfjord Unit was established in the summer of 1976, with the first management committee meeting in September 1976.

The agreement was not formally finalised and signed until 1979, but a unitised development of Statfjord began in June 1976. This meant that a separate joint venture was established to develop and produce the petroleum-bearing strata, with a common operator. The equity holdings of the licensees were allocated in accordance with their interests in the original licences, multiplied by the percentage division of the reserves between the two countries. It was estimated in 1976 that 88.88 per cent of the field lay on the NCS.

In other words, it was the sub-surface reserves which were merged and not the licences themselves. Formally speaking, the unit embraces a cube which begins 20 metres above the top of the uppermost Brent formation and terminates 20 metres beneath the base of the lowest Statfjord formation. It might seem confusing that the field and one of its formations bear the same name, but the reason is that the latter has been named after the field where it was first identified.

The 1976 pact has a simple and straightforward designation: the Unitisation and Unit Operating Agreement Statfjord Field Reservoirs in the Norwegian and United Kingdom Continental Shelf. Although dated 1 June 1979, this accord actually became effective from 1976. As the title indicates, it is also an operating agreement which regulates how the field should be developed and operated.

Each licensee has a vote in the management committee for the Statfjord Unit, which matches their calculated interest in the field. The agreement also provides that these interests will be calculated to five decimal places.

A binding decision requires the support of at least 70 per cent of the licensees, and only a few exceptions exist to this voting rule. The division of the reserves between the two countries requires 100 per cent support, for instance. So does the use of Statfjord’s facilities by other fields and the cessation of production.

The licensees also contribute to all investment and costs on the basis of their per-centage share of the field, and own a corre-sponding proportion of the oil and gas produced.

Other provisions in the unitisation agreement specify that the division of assets in the reservoirs can be reassessed at certain intervals. These “redetermination” rules (see separate article) have led to a number of bitter conflicts between the licensees and between Norway and the UK. The last process of this kind was concluded in 1998.

Should the percentage split be amended, all investments and the whole allocation of reserves back to day zero in the field’s history must be redistributed between the licensees. Since such a large proportion of the assets had been produced by 1998, any adjustment would have dramatic consequences for those licensees whose share is reduced. It was accordingly agreed that the redetermination in that year would be the last. This concluded that 85.46869 per cent of Statfjord is Norwegian.

The unitisation agreement has also been amended and updated a number of times. More than 20 change agreements to the original accord had been approved up to 2009. These alterations have been required to take account of conditions not foreseen in 1976.

According to the original agreement, the working language in the Statfjord Unit is American English. All agreements are accordingly written in that language with the exception of the Norwegian licence for PL 037. All documentation and reporting are also in English.

The unitisation agreement provides in addition for the resolution of possible conflicts between the licensees in the joint venture. In addition come provisions on where and how assistance can be sought if issues cannot be resolved. The Statfjord Unit licensees are to seek help from the international chamber of commerce in Switzerland’s Vaud canton, which embraces Lausanne. Such aid has never been required.

 The Statfjord treaty

Talks over the unitisation agreement were paralleled by negotiations on a separate treaty for Statfjord. This Statfjord Treaty of 1979 between Norway and UK was finally ratified on 16 October 1979. It was also ready in principle in 1976, but was only finalised just before production began. The treaty makes it possible to produce Statfjord as a single unit. It contains provisions on joint exploitation of the field even though it is split between two different countries.

Why is such unitised development and production important? During the earliest era of the petroleum industry in the USA, and later in Mexico, an oil and gas discovery acted as a signal for all and sundry to rush in and start drilling and producing from neighbouring properties. The result was that many fields were damaged by over-exploitation, so that only a fraction of their reserves were recovered. A unitised and planned development ensures that a much larger proportion of the assets can be produced.

The Statfjord treaty also contains provisions on how possible conflicts between the two countries should be resolved. This has permitted a coordinated and peaceful utilisation of the field. Governments in many other countries have marvelled that this has been possible, and have wanted to develop similar treaties and agreements.

According to the treaty, operations on the field will be pursued in accordance with Norwegian law and statutory regulations. This is because all the installations are on the NCS and operated from Norway, and because the operator is a Norwegian company.

Another treaty covering the nearby Murchison field was signed at the same time as the Statfjord accord. This made it possible to produce Murchison as a single unit in the same way as Statfjord. Since the Norwegian PL 037 licensees originally held 22 per cent of Murchison, it has been developed and produced from the UK side. So the Murchison treaty is a mirror image of that for Statfjord.

 Bridging agreement

The bridging agreement was entered into by the British and Norwegian licensees in the Statfjord Unit. Known as the Agreement between P104 (293) and PL037 Groups, this was ready at the end of 1990 but not signed until 1 June 1991 at the same time as the first change agreement. The reason for the delay was that it was not needed before then, and the first change agreement corrected an oversight about redelivery points for petroleum from the field. Such a point is one or more locations whether those delivering oil and gas to Statfjord for processing get their products handed back for onward transport.

A bridging agreement was required because the unitisation agreement contains provisions that petroleum which might be proven in the original Norwegian and British licences would have the right to use the production facilities on the three Statfjord platforms for processing if spare capacity was available. Substantial additional reservoirs – Statfjord East and North – had already been proven in PL 037 before unitisation in 1976. Terms were accordingly incorporated in the unitisation agreement on the way “non-unit operations” were to be pursued. But supple-mentary rules were needed in order to develop Statfjord East and North.

Work on developing these two satellites began in 1986. The position of Statfjord North was straightforward, since the whole field lies within PL 037. But it falls outside the Statfjord Unit area. That means that the Norwegian licensees in Statfjord, which had the sole rights to Statfjord North, were entitled to use the production facilities if spare capacity was available. Although this was incorporated in the unitisation agreement, the British licensees had reserve-tions and wanted certain details to be specified more precisely.

Statfjord East, on the other hand, lay only partly in PL 037. The rest extended into the adjacent PL 089 licence. The Norwegian Statfjord licensees accordingly had the right to process half of Statfjord East under the provisions of the unitisation agreement, but not the part which lay in PL 089.

The British licensees were concerned in 1986-87, with good reason as it turned out, over what was colloquially known as the prioritisation rules. According to the unitisation agreement, oil and gas produced from the Statfjord Unit reservoirs had a prior right to use the processing and export facilities. If production capacity was to be sold to others, the external volume had to accept that it took second place – in other words, rest content with the capacity available after the Statfjord Unit’s needs had been met.

So the bridging agreement set a number of conditions which mean that the Statfjord facilities can be used by others – providing this does not interfere with the Statfjord Unit’s own output. The licensees of other fields are welcome to invest in increased processing capacity and to acquire the prior right to use this, but the Statfjord Unit’s licensees must unanimously agree on how much capacity can be offered to others.

The bridging agreement also states that all oil from Statfjord East is to be regarded as produced within the PL 037 licence. That issue should therefore have been resolved, or so people thought in 1991. But a couple of complications were to emerge.

Statfjord East was unitised and a joint venture established in 1991. This field thereby became a separate legal entity within PL 037, and a separate tie-in and processing contract was needed to use the Statfjord facilities. But this was not entered into with the Statfjord Unit but with PL 037, because the latter had the right under the bridging agreement to have the whole of Statfjord East processed pursuant to the provisions in the Statfjord unitisation agreement.

However, a minor point had been forgotten. Statfjord East, including the part which lies in PL 037, contains some gas. The oil from the whole field was covered by the bridging agreement and thereby ranked as a second priority, but nobody had thought about the gas. When the time came that this had to be clarified, the gas from that part of Statfjord East which originally lay in PL 089 was assigned fourth priority for using the Statfjord facilities. That might sound a little cumbersome – the oil and gas arrive at Statfjord C in the same pipeline and are separated there, but have different rights to use the facilities. In practice, this has functioned straightforwardly.

When Statfjord East and North were approaching the start to production, it was clear that processing capacity on Statfjord C was far too small to handle output from these satellites. Statfjord East was due to be ready to produce on 1 October 1994. The day before, on 30 September, a change agreement was adopted for the bridging accord.

This second amendment has been called the underlifting agreement. The satellite units purchased the right to process up to 156 000 barrels (25 000 standard cubic metres) per day on Statfjord C, and the Norwegian licensees in the Statfjord Unit reduced their production from that platform to make room for that volume. Since the British licensees were unwilling to accept such a reduction, they received their share of the output as if the satellites were not using the capacity. In reality, they received oil from Statfjord East and, from January 1995, from Statfjord North.

In order to give the satellites first priority in this way, the British licensees also received a fee of a few US cents per barrel from the satellite licensees. In principle, the Norwegian licensees purchased processing capacity for the satellites.

That made it possible to produce the satellite fields at full capacity, without restrictions. This was also important because they had been developed with subsea wells. Constant start-up and shut-down of such facilities, with pipeline transfer of the wellstreams on the seabed, can cause hydrate (a form of hydrocarbon ice) to form in the lines and block them.

Such hydrate plugs are extremely difficult to dissolve. Anti-freeze, usually methanol, can be injected into the pipelines. But methanol has the disadvantage that reacts with the gas and undermines the quality of the gas exported. If the gas falls outside the specified quality parameters, it attracts a lower price.

This underlifting continued for a number of years, and meant in reality that the UK licensees received too much oil in relation to actual production from the Statfjord Unit. Repayment for this British overlifting was supposed to have started in late 1998 but was postponed for five years until 2003. The Norwegian licensees benefited heavily from this, because oil prices were below USD 10 per barrel in 1998 but were rising in 2003 and three-four times higher.

The underlifting agreement is an example of how an issue can be resolved which could otherwise have caused problems for the satellite licensees, who had invested in their development and had to secure a return on that capital.

The production swop agreement

One of the first acts of the Labour government which took office under Gro Harlem Brundtland in 1986 was to order a temporary 10 per cent cut in Norway’s oil output. Intended to support Opec and boost oil prices, this measure also applied to Statfjord – particularly because that field was by far the largest on the NCS at the time.

But the UK government had no desire to reduce the country’s oil production, and refused to allow the British Statfjord licensees to participate in any diminution of the field’s output. The solution was that Statfjord was exempted from the Norwegian measure, and the cut which should have occurred there was switched to Gullfaks instead.

This arrangement was put in place by Statoil, and a swop agreement was entered into. The Gullfaks licensees would get back the production they had postponed in the years after the Norwegian measures had ended. It was not until the late 1990s that this account was finally settled and the agreement terminated.

A minor oddity can be noted here. When the Norwegian government announced its production restrictions in June 1986, oil prices immediately rose by USD 0.50 per barrel. On the same day, Statoil had an oil cargo from Statfjord ready to depart. It was resolved to wait to sell this consignment until it was clear what the new Labour administration would do. The cargo was sold after the price had risen. With 770 000 barrels on board, the company earned at extra USD 335 000 by waiting. That represented about NOK 2.5 million in additional revenue on this one cargo.