26 Jun 2017

One of the signature tunes of the influential Wood Review has been the crying need for greater collaboration between UKCS oil companies, oil service companies and the regulators. Yet, collaboration is a tricky topic. In classic market theory, companies should collaborate with others when this is in their interest. However, if there is a lack of collaboration (and most agree that there is), is the answer legal compulsion or education/societal pressure? Should a company ever be required to collaborate against its perceived interest?

Amended Section 9 of the Petroleum Act 1998, the MER Strategy, the Energy Act 2016 and OGA guidance of various forms provide some answers to these challenging questions. The foundation of the new MER regime is Section 9A (1) of the Petroleum Act 1998, which defines the "principle objective" as follows:

The 'principal objective' is the objective of maximising the economic recovery of UK petroleum, in particular through:

  • Development, construction, deployment and use of equipment used in the   petroleum industry (including upstream petroleum infrastructure)
  • Collaboration among the following persons:
    • holders of petroleum licences
    • operators under petroleum licences
    • owners of upstream petroleum infrastructure
    • persons planning and carrying out the commissioning of upstream petroleum infrastructure
    • owners of relevant offshore installations.

Key therefore to the legislative concept of "maximising the economic recovery of UK petroleum" is the use of technology and infrastructure and the collaboration among licensees, operators, owners of upstream petroleum infrastructure and persons commissioning it and the owners of relevant offshore installations (collectively, MER Parties). Petroleum Act Section 9A (2) requires the OGA to draw up a "strategy" to achieve the principal objective. The result was the MER Strategy of March, 2016.

Now let us observe one or two points. Firstly, no one is required to comply with the "principal objective" as written. Instead, the OGA is tasked with drawing up a strategy to achieve the principal objective, but the principal objective concept is the lynch-pin triggering many of the OGA's enhanced regulatory powers under the Energy Act 2016. On the other hand, both OGA and MER Parties are obligated to comply with the MER Strategy. Lastly, note that the MER Parties (who are required to collaborate) do not include the supply chain (except for duty operators and operators of infrastructure). Thus, a huge technology-rich segment of the industry is not legally required to collaborate.

The Central Obligation of the Strategy is stated in Para, 7 as follows:

Relevant persons must, in the exercise of their relevant functions, take the steps necessary to secure that the maximum value of economically recoverable petroleum is recovered from the strata beneath relevant UK waters.

While collaboration in its broad sense runs through the whole Strategy, Para. 28 (part of "Required actions and behaviours", Paras. 26-34) speaks specifically to collaboration:

When considering how to comply with obligations arising from or under this Strategy relevant persons must:

  1. Where relevant, consider whether collaboration or co-operation with other relevant persons and those providing services relating to relevant functions in the region could reduce costs, increase recovery of economically recoverable petroleum or otherwise affect their compliance with the obligation in question.
  2. Where it is considered possible that such collaboration or co-operation might improve recovery, reduce costs or otherwise affect their compliance with obligations arising from or under this Strategy, relevant persons must give due consideration to such possibilities.
  3. Co-operate with the OGA.

Sub-paragraphs (a) and (b) of Para. 28 are worded in an awkward, repetitive fashion. Sub-paragraph (a) requires MER Parties to "consider whether collaboration or co-operation ….[with other MER Parties]…and those providing services [supply chain]….could reduce costs, increase recovery of economically recoverable petroleum or otherwise affect their compliance with the obligation in question" Sub-paragraph (b) requires MER Parties to give due consideration to collaboration and co-operation when the conditions of sub-paragraph (a) are satisfied. We do not believe that use of the word "consideration" can mean a mere formal "tick-the-box" consideration. In other words, Para. 28 requires actual collaboration.

Note that a MER Party can be compelled to collaborate with an oil services company but the reverse is not true.

A MER Party who does not wish to collaborate may of course, argue one of the four substantive Safeguards (MER Strategy Paras. 2 -6) which include illegality (Para 2), lack of satisfactory expected commercial return (SECR) (Paras 3-4), beneficiary contribution (Para. 5) and overall damage to investors (Para. 6). In this connection Para. 2 on illegality assumes a special importance. Para.2 is as follows:

No obligation imposed by or under this Strategy permits or require any conduct which would otherwise be prohibited by or under:

  • Any legislation, including legislation relating to competition law, health, safety or environmental protection
  • The common law, including the OGA's duty to act reasonably.

There is always a possibility that collaboration, as required by Para. 28, might be in violation of competition law.

The OGA have addressed this issue in a paper published in November 2016 called "Competition & Collaboration". This document refers to a letter written by the Competition and Markets Authority (CMA), (UK competition regulatory authority), to the then Secretary for State for DECC, Amber Rudd, on 3 December 2015. In the letter the CMA emphasised that the OGA should be careful not to encourage breaches of competition law. On the other hand the CMA recognised that collaboration can be beneficial and that concerns over competition law should not chill legitimate activity. The OGA notes that collaboration agreements may be horizontal or vertical in nature. In such cases, MER Parties are urged to consider whether in any case of proposed collaboration: (1) there may be pro-competitive outcomes (2) the agreement may be de minimis for the relevant market; or whether (3) there may be an applicable block exemption. While respecting the ambit of Competition Law, the OGA does not want to see collaboration derailed because of overblown regulatory fears.

The OGA has listed collaboration as one of its ten Asset Stewardship Expectations in a 2016 booklet entitled "Asset Stewardship Expectations". The Collaboration Expectation is that:

Licensees should build effective business relationships which aim to create more value than is possible alone, by embracing a culture of collaboration and utilising collaborative tools and processes. In particular, licensees should be able to demonstrate that collaboration forms a core part of their organisational culture, and that they are making use of appropriate collaborative behaviour tools.

The goals are to "unlock value in Joint Ventures" to develop self-awareness and self-help strategy, to recognise good examples of collaboration and encourage adherence to the Commercial Code of Practice (CCoP) and the Infrastructure Code of Practice (ICoP). Naturally, all this should promote compliance with MER Strategy Para. 28 (analysed above). The Expectation makes clear that collaboration needs to be evidenced and measured.

Very recently, in April 2017, the OGA issued the "Collaborative Behaviour Quantification Tool: Assessment Guidance Note" (CBQT Note) this outlines the methodology which the OGA will use in measuring how collaborative operators are. The process will begin this year and will be revisited every two years. Appendix A of the CBQT Note is a matrix listing eight headline collaborative values which are: 1. Reasonable; 2. Aligned; 3. Learning; 4. Strategic; 5. Change; 6. Respect; 7. Accommodating; and 8. Openness. Opposite each value, the matrix describes negative, middling and positive descriptions of behaviour.

To take one example, the first "Learning" behaviour is about reactions to failure. The lowest level score is "Failures are hidden"; the middling score is "Failures are mostly shared when asked about them"; and the top score is "Quickly and widely shares failures and learnings externally" No less than 33 behaviours are this described under the eight values. Scoring is from one to five.

The operator and the OGA separately will analyse the operator's activity through the CBQT test. This will produce two test results. The OGA and the operator will then take half a day to discuss the two test results. The OGA team will need to be familiar with the operator's activities. The teams will try to reach a synthesis and agree identification of areas of good and bad practice. If necessary the OGA can request an operator to submit an improvement plan to address improvement of collaboration. An example of an improvement plan is attached as Appendix C to the CBQT Note.

It is clear that the OGA is taking collaboration very seriously. Collaboration is now legally mandated by MER Strategy Para.28 but it is also upheld by the administrative tools of soft power such as CBQT. And in broader terms, collaboration underlies the whole Strategy.