a. As Figure 1, shows the ability of the oil industry to work in waters deeper than 500 metres is recent: dating back only to 1974 for exploration activities and to 1990 for producing operations. The most significant developments to date have been in the US sector of the Gulf of Mexico and offshore south-eastern Brazil. Both of these locations have waters with generally less extreme conditions of weather and currents than the North European Atlantic Margin. Deep-water production, albeit on a relatively small scale measured by world standards (under 2% of world oil output in 1995), has already been achieved in these and a few other locations. It is scheduled to continue to increase in both areas, most notably the Gulf of Mexico where most of the international oil corporations are involved in the developments. The enterprise and experience offshore Brazil is mainly that of Petrobras (the Brazilian state oil company), but there, too, a number of international oil corporations - notably Shell - have also been involved.

b. The North European Atlantic Frontier (shown in Figure 2) is a much less hospitable region from the viewpoints of both weather and water conditions. As a result, interest in the exploitation of its potential hydrocarbon wealth is a more recent phenomenon. Though note that in British waters the Clair field was discovered by BP in relatively shallow water west of Shetland as long ago as 1977 and that two other discoveries were made in the same waters in 1984 and 1986. All of these remain undeveloped to date.

c. Compared with the North Sea, the North European Atlantic Frontier is a very much more extensive zone of potential hydrocarbons wealth. This is clear from Figure 2 in which the extent of the region is shown. It embraces waters to the west of Ireland, to the west of Scotland and beyond Rockall and the area between the Faeroe Islands and the Shetland/Orkney Islands. It then trends north-eastwards, north of the 62° parallel, to the west of the shallower Norwegian Sea and as far as the Lofoten Islands. The basins in which exploration activities have already begun are named on the map: these are the Porcupine Basin, the southern part of the Rockall Trough and the Slyne/Erris Basin in Irish waters; the Møre Basin and the Vøring Basin in the Norwegian waters; and, in the UK sector, the Faeroes/Shetland Basin which straddles UK/Faeroes waters (with an as yet undetermined boundary) and the north-eastwards extension (not shown on the map) of the Rockall Trough in deep waters to the west of Scotland.

d. Thousands of kilometres of high-technology seismic work has been, or is currently being, undertaken over extensive areas of the margin: in Irish and Norwegian, as well as in UK, waters. As a result of positive hydrocarbons indications from this work, all three governments have offered extensive areas (on block by block or by tranche of blocks bases) for allocation. Thus, in the Norwegian 15th licensing round in 1996, 13 of the 46 blocks granted were for acreage in the Vøring and Møre Basins in water depths of between 800 and 1500 metres. The companies which have been awarded the four licences covering these 13 deep water blocks are Shell, Statoil, Norsk Hydro, Saga, Conoco, Mobil, BP and Esso (with Shell, Saga, Statoil and BP stipulated as operators). Seismic work is now under way on the licences. Similarly, with Ireland where the allocation of blocks in earlier licensing rounds dating from 1993 included acreage in the Slyne and Erris troughs, and the Porcupine Basin. Exploration drilling on the flanks of these deep waters has already started (by Enterprise Oil, Marathon Oil and Total), in part related to the fact that there had been a much earlier (1979) discovery of an oil field on the edge of the Porcupine basin in a water depth of 374 metres. This old discovery is now to be developed by Statoil which not only took over the company holding the licence, but also acquired contiguous acreage in 1996 in a partnership with Chevron. Additionally, the Irish government has recently offered no fewer that 615 full and 35 part blocks over an area of 150,000 km2 in the Irish sector of the Rockall Trough. Water depths there range from 500 to 2500 metres. Allocations of licences in Rockall waters will be in 1997.

e. The other country with national interests in the North European Atlantic Frontier is the Kingdom of Denmark: through the Faeroe Islands. The government of the latter has had legal and administrative competence concerning mineral resources' development since 1992 and in 1993 the Faeroe Islands Parliament determined that offshore oil exploration should be undertaken. Seismic surveys were initiated and are now complete and being evaluated to provide a basis for the concessions arrangements. Issue of the first licences for exploration in the Faeroes sector of the Faeroes/Shetland basin is also scheduled for 1997, though there will be geographical constraints on areas which can be allocated, given the continuing absence of an agreement with the UK on the designation of the offshore boundary between the countries. There are three areas where the claims of the two countries overlap constituting the so-called "grey zone" within which, of course, allocations of acreage cannot be made by either country. The continuation of the dispute suggests it may well be referred to the International Court of Justice for resolution. If so, then the legal processes involved will inhibit exploration of a significant central part of the Faeroes/Shetland basin for up to two years. This limitation does, nevertheless, still leave very large areas with potential hydrocarbons wealth open for allocation by the Faeroes and at least three companies, already with major interests in other parts of the Atlantic Margin (viz. Enterprise Oil, Mobil and Statoil), have jointly contracted to examine the seismic data. The failure to date to resolve the dispute does, of course, also restrain the extent to which the UK can extend its area of exploration of this west of Shetland area.

f. The UK's interests in the North European Atlantic Frontier are thus geographically limited by the designated offshore areas of Norway, Ireland and the Faeroes. Though the companies involved necessarily have to work within the context of the political boundaries and in accord with the offshore hydrocarbons exploitation regimes of the four countries involved, their characteristics as multinational organisations still enables them to treat the exploration and exploitation of the whole North Atlantic Frontier region in a partially integrated manner, especially from the scientific and technological viewpoints. There will thus be exchanges of information for cross-frontier interpretations of the region's geology and prospectivity and, at least equally important, a near instantaneous diffusion of expertise concerning both exploration and exploitation of these deep waters and their challenging environments, with respect to meteorological and marine conditions. These include environmental impact issues (for which Norway has already established more stringent requirements under its new Petroleum Act). In other words, the speed and process of development of any sector of the Atlantic Frontier will depend, in part, on the progress overall in this extensive new petroliferous region. All countries except Norway are, of course, members of the EU, while Norway is part of the related European Economic Area. Norway's 1985 Petroleum Act already accepts the validity of EU directives for its offshore operations. Thus, the requirements of the Union for offshore hydrocarbons exploitation will apply to the full extent of the European Atlantic Frontier; and the EU will necessarily be involved in the determination of any new requirements concerning possible environmental impacts related specifically to the more extreme conditions of the region (compared with the North Sea).

g. Meanwhile, the UK is well in the lead in respect of knowledge of the prospectivity of the Atlantic Frontier and in the timetable for the initial exploitation of its resources. Over 100 wells were drilled west of Shetland (mostly in shallower waters until post-1990) before the discovery of the first commercial field (Foinaven) in 1992 in a water depth ranging from 400-600 metres. The field underlies two separate blocks in which BP and Shell between them have 100% interests (though the interests of the two companies differ between the blocks). Foinaven has estimated recoverable reserves of 250-500 million barrels. A year later the Schiehallion/Loyal group of fields was found (in a water depth of 375 metres), under parts of four blocks involving a complex pattern of ownership by eight companies. BP and Shell are, however, again the most important shareholders (each with a 37.5% interest). The fields' reserves are estimated at 425 million barrels. These two giant fields are both on "fast-track" development schedules, with Foinaven (originally scheduled for first production in 1996) now likely to come into production in mid-1997 and Schiehallion in mid-1998. In both cases the well heads will be sea-bed located, with production centralised on sea-bed development centres from which the oil will go into sea-bed flow lines leading to flexible risers. These will connect to a FPSO (a manned floating production, storage and off-loading system) from which shuttle tankers will export the oil. Foinaven's production of 95,000 b/d will necessitate a tanker loading oil every three days and Schiehallion's output of 140,000 b/d, a tanker every second day.

h. These fields' advanced production technology and their innovative organisational structures for the fields' development have massively stimulated interest in the west of Shetland area. More than 100 blocks have been allocated for exploration. The companies designated for exploring the blocks - always in joint ventures with partners to share the risks - are, in addition to Shell and BP, Mobil; Amoco, Conoco, Texaco, British Gas, Total, Elf, Kerr McGee, Amerada, Chevron, Esso, Arco, Deminex and Fina. These 16 companies represent a near complete roll-call of the world's most significant international oil companies, with the few absentees from the list mostly involved in partnerships in specific blocks. The allocations made require drilling in water depths ranging from 400 to more than 1500 metres over an area which has been estimated to have between 5 and 15 billion barrels of recoverable oil, from which an output of at least 500,000 b/d (25 million tons per year) will be derived from the seven fields that are expected to be in production by 2005. 14 exploration and 9 appraisal wells were drilled in 1995 and a larger number (total not known) in 1996. Data on the results have become "tight" over the last year, given the impending new round of allocations, but, according to a spokesperson for one of the companies involved in the exploration, "really big news which will make quite an impact" will be released in 1997.

i. To the south-west of this now comprehensively allocated UK sector of the Faeroes/Shetland basin (except, of course, for the area disputed with the Faeroes) lies the much larger prospective area of the northern part of the Rockall Trough (which the UK shares with Ireland). In November 1995 the UK's 17th Licensing Round offered over 220 blocks (in 41 tranches) in this area in waters ranging down to over 2500 metres. New seismic work now being undertaken is giving a better interpretation of potential plays and most of the blocks on offer are thought likely to attract bidders. The allocations of blocks had been scheduled for November 1996, but the process has been delayed for six months in order that the new awards could become subject to revised government regulations on exploration and exploitation. Thus, the companies that have decided to bid for Rockall Trough acreage are not yet known. The delay will also put back the beginning of the more intensive seismic work required to determine drilling programmes. This is now considered unlikely to be complete until summer 1998. Any drilling thereafter, will, even if successful at an early stage, not lead to any prospects for the development of fields for production very much before the middle of the first decade of the 21st century: and could thus be subsequent to possible Irish sector Rockall Trough fields' development in the meantime.

a. The deep-water Atlantic Frontier developments (both UK and others, as described above) are not of short-term strategic importance for the companies: except in the context of a serious failure of any of the new production technologies which are being used in the Foinaven and Schiehallion fields' development, viz. subsea completion of the wells below diving depth and the FPSO concept in environmentally harsh environments (hitherto restricted to the gentler weather and water conditions of offshore Brazil).

b. For many of the US major oil companies as well as for Shell, it is deep-water developments in the US sector of the Gulf of Mexico which constitute the near future strategic component in their deep-water activities, in terms of both their financial commitments and in respect of the importance to them of the production achieved. In the absence of significant opportunities elsewhere in the United States for additional oil production, upstream investment by the companies is now skewed towards the deep waters of the Gulf. If this considerable effort fails to find large new reserves capable of generating large-scale production, then the companies will be obliged instead to buy more crude oil from elsewhere in the world to serve the still growing US markets for petroleum. They would be seen as "letting down" the United States, given that it would then inevitably become increasingly dependent on imported oil with consequential fears for security of supply.

c. On the other hand, if the companies are successful in the United States deep-water ventures, then their accumulated experience from those efforts will be exportable to serve their opportunities for developing deep-water production in the UK (and other countries) Atlantic Frontier areas. This could lead to a much lower level of risk in respect of the Atlantic Frontier potential development of the areas.

d. For BP, however, and for the other European companies involved in the Atlantic Frontier exploration and exploitation activities, their first experiences with the new technologies will be in these locations and the developments are thus of critical importance for their prospects - both financially and organisationally. In addition to BP, Statoil, Elf, Total, Enterprise Oil, Deminex, Fina, Agip, and a number of smaller companies fall into this category. Should they accept too high a degree of exposure to these frontier developments, then their continuity could come to depend on nothing serious going wrong with the commitments they undertake. Should they misjudge their exposure or make mistakes in their operations then they may have to be "rescued" by government intervention or become susceptible to take-over bids: in which processes their status as international oil companies would be called into question. To date, with only the Foinaven and Schiehallion fields in development, it is, however, only BP that has a significant exposure. In financial terms this is a commitment of upwards of £700 million as the company's share of the development costs. However, for BP, the fourth largest of the major international oil corporations, even the most unlikely total loss of all its investments in both of the fields' development would be equal to only about 40% of the company's net income in 1995. Even such a disaster would thus be a survivable proposition in purely financial terms, albeit a loss which would constrain its freedom of action as a mainstream player in the global oil market. For BP, failure in these Atlantic Frontier developments would certainly seriously affect the company's prospects and status, but it would hardly constitute a death sentence for the company as a corporate entity.

e. The other smaller European based companies are not yet committed to investments for other than exploration and for feasibility studies on Atlantic Frontier developments. By the time they have to take decisions on financing development expenditures, they will be able to benefit from BP's experience with the new technology in the hostile environments so that, in effect, risks for them will have been reduced. And, as indicated above, such companies in their role as the operator for a specific field's development have agreements with one or (usually) more other companies to share the risks (and, of course, the subsequent benefits or losses).

f. In terms of the anticipated contribution of Atlantic Frontier oil to the future crude requirements of the companies (so as to enable them to maintain their market shares in the markets in which they operate), there is clearly a medium/long-term strategic issue. All the companies involved also operate in the North Sea from which most of them secure a significant part of their crude oil requirements. Through the more intensive exploitation of their existing North Sea fields and from the development there of new - albeit relatively small - fields, most of the companies will be able to sustain their crude oil flows at around present levels until at least the turn of the century; and in some cases well beyond 2000. Supplementing these flows through production from the west of Shetland developments is thus not a near-future requirement: but, nevertheless, over the next two to three years they will need to find west of Shetland reserves and to initiate the process of fields' development so as to secure in-time supplies for satisfying their market needs in the early part of the 21st century. It is principally this consideration which has led to such a comprehensive effort by all the companies with downstream operations in Europe to secure acreage in the Shetlands/Faeroes basin. Potential oil production from the area is seen to be the best option for ensuring the continuity of supplies to their European markets for the early part of the next century.

a. UK policy with respect to offshore oil and gas developments has, since the mid-1980s, been reoriented away from earlier attempts to maximise direct revenues for the state. Instead, the emphasis has been on policies which seek to ensure the continuation of the companies' interests in both the extraction of oil and gas and in investments for future production. Within this context, the policy has been eminently successful: the late 1980s decline in UK oil production was reversed in 1989 and the essentially flat gas output curve through most of the 1980s also turned sharply up in the same year. In oil equivalent terms, oil and gas production rose from under 150 million tons in 1989 to 230 million tons by 1995.

b. Likewise, in respect of reserves; annual additions to the UK's oil reserves since 1989 and to gas reserves since 1988 have exceeded annual use each year, so laying the basis on which annual production could continue to increase. This process will, under the country's present generous fiscal system, continue for a few more years on the basis of North Sea developments as detailed above, but its longer-term continuation depends on the successful opening up and exploitation of reserves in new areas. Detailed official studies of the west of Shetlands area have, as already indicated above, estimated undiscovered oil reserves there of at least 5 billion barrels and up to more than 15 billion barrels. For the UK, the potential volume of future oil discoveries from the Atlantic frontier areas creates the possibility for a continued rising production curve well beyond 2000. The achievement of sufficient annual additions to discovered reserves from the west of Shetland and, eventually, other frontier areas could well be more than sufficient to offset the impact of declining reserves additions from the North Sea.

c. Thus, the west of Shetland's development - as the first stage in the exploitation of oil from the UK's Atlantic Frontier - is critical for the continuation of the country's present policies towards oil (though not for natural gas with the same degree of urgency, as the North Sea's discovered and expected additional reserves can sustain increasing levels of production until at least 2010). As such favourable long-term prospects for oil and gas are considered to be important for the country's economy - in respect of its balance of payments and in direct and indirect job creation in a sector which is internationally competitive, in general, and for which there is little competition from other energy producers within the EU, in particular, then the creation of conditions under which west of Shetlands oil and gas exploitation can proceed is politically important.

d. It is worth noting that the political importance attached to the exploitation of the hydrocarbons' resources of the Atlantic Frontier would remain, even if there were to be a change of policy such that relatively more weight were once again given to raising direct revenues for the government from the industry. Except in the short-term, a higher government tax take can only be achieved if the oil and gas discovery and development processes are sustained (see also Section 4 below).

a. The UK tax regime for offshore oil and gas developments is second only to that of Ireland in terms of its favourable treatment of the companies. In essence, apart from royalties on production (at 12.5%) payable on the landed value of the petroleum (less an allowance for the cost of bringing it ashore and of processing it), the only tax now imposed on fields approved since 4 March 1993 is the Corporation Tax. This is charged at a rate of 33% on the profits of the oil and gas producing companies. (NB; royalties paid are deductible in the computation of profits). Profits from upstream oil and gas activities are "ring-fenced", so they cannot be reduced by any losses or reliefs arising from a company's other activities including downstream oil and gas operations.

b. As a consequence of the subsequent amelioration of the previously much tougher tax regime, the UK now secures only around £2 billion per year from its large upstream oil industry. Unit revenues to the government in 1995 were only about $2.25 per barrel of oil equivalent: compared with an average revenue per barrel of oil equivalent produced of about $15.50, thus giving an average unit tax rate on revenues of under 15%.

c. With these conditions the UK has become a very attractive location for investment in upstream oil and gas developments: particularly in the context of, first, the high prospectivity of the oil and gas basins; and, second, the proximity of the production to markets not only of the UK, but of the rest of Europe as well. Hence, the enthusiastic involvement of all the major international oil corporations and of the most important European oil companies (both state owned and private) in the search for hydrocarbons in the acreage which has already been allocated to the west of the Shetlands. As indicated in Section 1 above, all blocks lying within the prospective basin, as far out as is politically possible (towards the median line with the Faeroes), have been allocated. A similar response can be anticipated in respect of the prospective acreage in the Rockall trough (to be allocated in March/April 1997).

d. The UK's regime compares very favourably with that of Norway where, partly as a consequence, the companies generally show much less interest in potential development opportunities. This contrast seems likely to continue with respect to he two countries' Atlantic Frontier prospects. Ireland's tax legislation, on the other hand, is judged to be even more attractive than that of the UK, but this interpretation is based solely on the fiscal regime as defined in the legislation, as no developable oilfield has yet been found in Irish waters and there is thus no oil industry experience by the fiscal authorities. Moreover, Ireland has little oil related infrastructure in place (in respect of either the physical facilities for handling the requirements of the offshore industry or the service provision for its operations), so that operational costs for the companies will almost certainly be higher than in the UK, with its highly competitive and much experienced supporting facilities and services as developed over the last 30 years. Given these factors, then Ireland's tax-rates need to be lower than those of the UK in order, first, for the country to be able to attract investment and, second, to secure the development of any fields which may be discovered.

a. The companies have recognised - and have already taken action on - the potential environmental problems associated with hydrocarbons' exploitation on the Atlantic Frontier. The issues involved relate to the required use for the first time of floating production and oil storage facilities in conditions of harsh weather combined with strong ocean currents. Under such conditions any significant oil spill is very likely to generate pollution over an extensive area of sea: quite unlike the situation in the North Sea in which the impact of spills is generally localised. Thus, given that any one operator's problem is likely to become a problem for many other operators, the industry has created an Atlantic Frontier Environmental Network. Through this it is intended that collective studies will be made (and published). It could also serve as a vehicle for collective agreements on the prevention of problems and, if need be, on their amelioration.

b. The Network has since spawned another body, viz. the Atlantic Frontier Environmental Forum, through which outside bodies can not only be informed, but may also be able to contribute informed views. Some outline details of this Forum have recently been published in the Institute of Petroleum's Petroleum Review, October 1996. This published information is reproduced below;

c. For economic reasons (viz. high initial capital costs and the need to secure an early cash flow to service the capital outlays), there is a need by the companies undertaking the development work on the fields to achieve fast progress towards production, once the decision to proceed with the exploitation of a field has been taken. Thus,........

BP, the operator of both the west of Shetland fields already under development, created innovative "fast track" approaches. This allowed a time period, from field discovery to operation, of only just over four years, rather than the hitherto more usual period of up to eight years for North Sea developments. Thus, multi-lateral and horizontal well-drilling was used to enable the Foinaven appraisal drilling to be completed in six months, compared with a normal two years. Meanwhile, front-end engineering design work started before the appraisal work was complete; and, then, the tendering process for contractors began before the full design and project plan was in place. The pre-project phases were thus completed in eight months; and meanwhile the project's field exploitation vessel (the FPSO) was already undergoing major rebuilding from its original format: simultaneously, subsea facilities for production were also being created. All this work schedule was, moreover, put together and achieved within a re-thought and redefined set of critical relationships between BP (as the field operator) and the contractors. Within this new system of offshore oil development management, there were "numerous risk assessments and analyses of... design and operation... to identify and quantify risks to personnel, the environment and assets" on the basis of which construction decisions could be taken.

d. Thus, the Atlantic Frontier challenge - itself new to the oil industry - has been accompanied by an entirely new approach to management, engineering and completion: out of all of which an economically viable development in a hostile environment is to emerge. Thus, the "newness" of the exploitation effort for hydrocarbons on the Atlantic Frontier lies not only in the existence of the harsh environmental conditions which have to be faced, but also in the concepts and methods which are being employed in order to make the production of the Frontier's oil reserves commercially viable.

e. It seems not impossible that it is a degree of official concern for the highly innovative nature of the oil industry's approach to the west of Shetland opportunities that has delayed the progress of the UK's 17th offshore licensing round. The allocation of blocks for this round has, as mentioned above (in Section 1), been put back from 27 November, 1996 to the Spring of 1997. According to the DTI spokesperson "amendments to the Petroleum Production (Seaward Areas) Regulations of 1988 have taken longer to complete than had been expected... and it would be far better to have them in place ahead of the 17th round nominations." This could be to ensure that the revised Regulations are not only appropriate for the new challenges of the Atlantic Frontier conditions, but also compatible with the innovative procedures which the industry is establishing for the recovery of such deep-water oil. In other words, the offshore oil and gas industry as it is now being expanded onto the UK's Atlantic Frontier seems likely, from many points of view, to be a markedly different phenomenon from that which emerged over the past 30 years from the exploitation of the North Sea's oil and gas. And its accompanying on-shore requirements will, in part, impact on parts of the country even more rural and remote than the areas most affected by the North Sea developments.