Commercial Terms

As a statutory undertaking, The Crown Estate is obliged to maintain and enhance the value of our estates, which now include the seabed for the storage of gas, whilst at the same time enhancing returns from those estates for the benefit of the UK taxpayer. The Crown Estate is absolutely prohibited from setting rents at monopoly levels – we have always taken these statutory obligations extremely seriously and will continue to do so as it facilitates the development of UK offshore gas storage.

There is no government requirement or policy which places an obligation on gas providers to maintain strategic reserves / storage. The offshore gas storage projects being progressed on The Crown Estate’s seabed at this time are commercial developments and as such we have a responsibility to make suitable consideration as to levels of rent. Rental income generated from these storage projects is passed back to the Treasury for the benefit of the UK taxpayer.

Negotiation of commercial terms is ongoing in respect to some projects. The rental terms which have been proposed were initially verified against a benchmarking exercise performed by Ernst & Young in the latter half of 2008.

In addition, The Crown Estate has commissioned a further independent valuation exercise, by an energy consultancy, to identify an appropriate rent to be attributed to The Crown Estate as landlord.

We are mindful to the requirements of developers and continue to address this matter as a priority in order that project progress is not adversely affected.

We aim to be transparent in our handling of offshore storage projects and plan to make the standard commercial terms available on this website, assuming that the current external exercise is delivered on time.

In every instance the potential storage entity has been offered and will continue to be offered the opportunity for the rent to be determined by an independent third party expert. In this instance both landlord and storage operator would be required to accept the rent, making it clear that The Crown Estate is not looking to impose a figure. This offer has so far been declined.

Policy Statement on Natural Gas Storage Projects

The Crown Estate plays an important part in the development of the UK’s renewable energy industry as owner of the UK seabed out to the 12 nautical miles territorial sea limit, with rights under the Energy Act 2004 in the Renewable Energy Zone (REZ) on the UK’s continental shelf out to 200 nautical miles. As from 6 April 2009 we obtained further rights under the Energy Act 2008 to award leases for the use of these offshore areas for natural gas storage and the unloading of liquefied natural gas (LNG). The Act enabled the UK to exercise its rights under UNCLOS beyond the territorial sea and extended up to 200 nautical miles with the creation of a Gas Importation and Storage Zone (GISZ).

The Crown Estate is committed to working with all stakeholders (government departments, developers and utilities) in realising the UK Government’s energy targets including security of supply related drivers. We recognise that successful exploitation of the geological features situated within both the 12 nautical mile limit and the continental shelf will play an important role in diversifying the UK’s energy supply mix.

In order that individual companies in the industry can make their own plans for the commercial development of gas storage, we set out below our proposed (initial) policy for the granting of rights for commercial development at suitable locations. We will operate in a fair and transparent manner at all times.

The Crown Estate has drafted a standard lease for gas storage projects which is available, on request, for developers with potential projects. In the next few months we aim to publish rental ranges that would be applicable to gas storage projects. We anticipate that the size and scope of each project will vary; however, the ranges will provide useful parameters against which individual projects can be assessed.

Any rights from The Crown Estate will be conditional upon the applicant obtaining a suitable gas storage licence from DECC, and a positive outcome from any relevant Strategic Environmental Assessment (SEA). The existing exclusive rights of petroleum licensees will not be affected whilst their petroleum licence remains in existence.

We currently propose to treat new applications for gas storage lease options for projects which will be subject to the Energy Act 2008 in the following way:

1. Non Hydrocarbon Features

Where preparatory work is required before a feature is suitable for gas storage (e.g. salt caverns), an open tender or expression of interest process will be run, the detail of which we intend to announce later in 2009. The grant of leases will be subject to the SEA that is due to be finalised in 2010. Projects of this type within territorial waters, which were brought forward prior to the Energy Act 2008 becoming law, will be progressed separately.

2. An Already Licensed Hydrocarbon Feature

Projects involving storage in currently licensed hydrocarbon features, which are in principle already in a state to be used for gas storage due to their previous use for hydrocarbon production, have already been subject to a tender and licensing process which has resulted in the licence holder being provided with exclusive rights to that site under their petroleum licence.

Therefore it appears to us that these pre-existing rights justify the granting of a lease for sites within the acreage of the petroleum licence without resorting to a tender, although any applicant will nonetheless be expected to satisfy certain minimum criteria and reach agreement on satisfactory commercial terms before a lease is granted. We are happy to receive these projects on a case by case basis, but rights to store natural gas will only be granted to the holder of a current petroleum licence.

3. Unlicensed Hydrocarbon Features

Similarly, we understand that going forward, currently unlicensed hydrocarbon features will be offered via DECC offshore oil and gas licensing rounds, which will involve compliance with detailed objective criteria to gain a combined petroleum production and gas storage licence. Where such a combined licence has been obtained via this DECC tender process, we propose to grant a lease to the licence holder (who will have obtained exclusive rights over the site) without a tender process, but subject to certain minimum criteria and satisfactory commercial terms being agreed.

This information is updated on a regular basis so please visit again to check for updates from time to time.