The Infrastructure Act, the Energy Act and the MER Strategy have transformed the face of oil and gas regulation in the UK.
The new UK Energy Act received Royal Assent on 12 May 2016. Together with Sections 41 and 42 of the Infrastructure Act 2015, the Energy Act constitutes the statutory implementation of the influential Wood Review.
It heralds the transition of the old DECC from being a prescriptive/permitting authority to the new BEIS/OGA being directive or shepherding authorities. This creates a powerful OGA with substantial sanctioning power.
This short summary outlines some of the key issues arising from the Energy Act for UKCS oil companies.
Infrastructure Act 2015: Section 41
The Energy Act is built on the foundation of Section 41 of the Infrastructure Act 2015.
Section 41 of the Infrastructure Act 2015 adds new sub-sections A – I to the existing Section 9 of the Petroleum Act 1998.
Section 9A(1) defines the "principal objective" as being maximising the economic recovery of UK petroleum (MER) in particular through:
- development, construction, deployment and use of equipment used in the petroleum industry (including upstream petroleum infrastructure), and
- collaboration among licensees, offshore operators, owners of upstream petroleum infrastructure, persons planning and carrying out the commissioning of upstream petroleum infrastructure and owners of relevant offshore installations (MER Parties).
Section 9A (2) requires the OGA to "produce one or more strategies" to achieve the "principal objective". Under the Petroleum Act, MER Parties are only obliged to obey the Strategy (not the "principal objective"). The Energy Act allows the OGA to sanction the MER Parties for failing to abide by the Strategy.
However, the concept of "principal objective" remains hugely important to the whole legislative scheme embodied by the Energy Act. Many of the OGA's new powers are triggered by the "principal objective".
Establishment and functioning of OGA: Energy Act, Sections 1 – 16
The Energy Act establishes the OGA as an autonomous authority under the control of BEIS, transferring numerous licensing and regulatory powers to the new autonomous regulator.
As of 1 October 2016, the OGA is the government contracting party on all existing UKCS licences. However, BEIS retains significant elements of administrative oil and gas decision-making authority.
Section 8(1) of the Energy Act sets out the priorities which the OGA must observe in its decision-making, including the following:
- Minimising future public expenditure
- Security of supply
- Storage of carbon dioxide
- System of regulation.
Failure to adequately weigh these priorities, where relevant, could be used to ground a claim of judicial review.
Definitions & non-binding dispute resolution – Energy Act, Sections 19 - 26
The provisions around non-binding dispute resolution embody a key recommendation of the Wood Review.
A "qualifying dispute" exists if at least one party is a MER Party and the issue relates either to the fulfilment of the principal objective or to activities carried out under an offshore licence (excluding third party access applications under Energy Act 2011 Section 82).
A qualifying dispute may be referred for OGA resolution either by a MER Party who is party to the dispute, or by the OGA of its own motion.
The OGA is given considerable power to prosecute the dispute resolution process in procedural terms, including the right to seek information and to control the attendance of individuals. However, the ultimate decision is not legally enforceable and is therefore not appealable.
Although the non-binding dispute resolution provisions are without prejudice to the normal application of the dispute resolution mechanisms in a licence, JOA or other commercial contracts, there is a tension between the two systems, with some scope for conflict or duplication.
Disclosure of Information – Sections 61 – 69
One of the key recommendations of the Wood Review was that offshore data needed to be more widely available in shorter time-frames.
As a general principle, protected material must not be disclosed by the OGA. However, protected material can be published by the OGA if permitted by regulations of the Secretary of State.
Four key factors must be taken into account when deciding if disclosure may be permitted:
- Whether there is enough time for the owners of the protected material to achieve the main purpose for which they originally acquired the material.
- The potential benefits to the industry of the material being made available at a particular time.
- The potential risk that publication at a particular time could discourage persons from "acquiring or creating petroleum-related information or petroleum-related samples."
- Any other relevant factors.
In balancing the four factors, the Secretary of State must take into account the principal objective.
The OGA and "Relevant Meetings" – Sections 37 – 41
A "relevant meeting" means a meeting (either physical or electronic) between two or more MER Parties in order to discuss any issue "relevant to the fulfilment of the principal objective", or which relates to activities carried out under an offshore licence.
The issue may NOT be subject to legal privilege.
When a MER Party "knows or should know" that an upcoming meeting "will be or is likely to be" a relevant meeting, it is required to promptly inform OGA of the existence of the meeting and provide details regarding the agenda and relevant documents. The OGA is entitled to send a non-voting participant to the meeting but if it does not then the MER Party must provide OGA with a timely written summary of the meeting and any decisions reached.
The OGA has recently issued a statutory notice stating:
'The OGA wishes to use the powers it has been given in a manner that is appropriate to its needs and does not place undue burdens upon industry. It is, therefore, limiting the meetings in scope of Chapter 4 through this Notice.'
This has dramatically narrowed the meaning of "relevant meetings" to:
- Operator Committee Meetings in respect of the OGA's opportunity matrix
- Technical Committee Meetings on the opportunity matrix
- Exploration and Appraisal Well Pre-Investment Meetings (no matter the licence)
- Major Project Review Meetings which constitute "decision-gate meetings" for major investments worth £300 million or more whether for greenfield, brownfield or decommissioning projects (no matter the licence)
Sanctions – Sections 42 – 60
Arguably, Section 42 is the most important section in the Energy Act. It gives the OGA the power to levy a range of sanctions on any "person" who fails to comply with a "petroleum-related requirement".
Some of the most important points relating to sanctions are below.
- An enforcement notice must specify the petroleum-related requirement in question, detail the failure and require compliance with the requirement
- A financial penalty notice must specify the petroleum-related requirement in question, detail the failure and require compliance with the requirement, should that be relevant
- The penalty cannot at present be more than £1 million per occurrence, but the Secretary of State may raise the maximum penalty up to £5 million
- The licence revocation notice must specify the relevant petroleum-related requirement, give details of the failure and give notice of the revocation
- A revocation notice can only be given to a licensee
- An operator removal notice must specify the relevant petroleum-related requirement, give details of the failure and give notice of the removal
- The OGA may not issue a sanctions notice without first issuing a sanctions warning notice
- The Tribunal is defined as a "First-tier tribunal". The sanctions notice is effectively a judgement from the OGA which can be appealed to the Tribunal
- The OGA can publish details of any sanctions notice but must not publish anything which in the OGA's opinion is "commercially sensitive", "not in the public interest to publish" or is "otherwise not appropriate for publication"
- OGA has powers to require "a person" to provide information relevant to an investigation, or to assist the OGA in determining the nature and extent of any relevant sanction
- The OGA must draw up procedures related to "enforcement decisions". The key element of the procedure is that those taking enforcement decisions should not be the same person who established the supporting evidence.