UK: Eversheds' Clean Energy And Sustainability Briefing: Ministerial Statement On The Oil And Gas Clause Relevant To Offshore Renewables

Last Updated: 14 July 2011
Article by Michelle T. Davies, Jason Lovell and James Trafford

Summary

On 12 July 2011 Chris Huhne MP, the Secretary of State for Energy and Climate Change, laid a written ministerial statement before Parliament relating to the "Oil and Gas Clause".  This statement will be of immediate interest to all current and prospective developers and funders of offshore renewables and oil and gas activities on the UK continental shelf.

In summary, the Statement sets out the Secretary of State's position that, in the absence of commercial agreement or the provision of independently assessed compensation for a renewables leaseholder, the Secretary of State will not be prepared to rely on the Oil and Gas Clause to request the determination in whole or part of a renewable lease/agreement for lease in order to grant consent to a proposed oil and gas development.   

Background

The background to the Ministerial Statement is that for several years the developers of offshore renewables on the UK continental shelf have raised concerns surrounding the presence of the "Oil and Gas Clause" in renewable leases/agreements for lease. The Oil and Gas Clause enables all or a part of a lease for an offshore wind farm to be terminated, apparently without compensation, in circumstances where a conflict arises with a consent granted for oil or gas exploitation.

Under the current statutory regime the Secretary of State "may have regard" to activities in connection with the offshore generation of electricity in the exercise of the powers and duties conferred on him to grant consents to oil and gas exploitation activities. However, in the absence of a formalised framework for dealing with such situations, in particular any claims for compensation where a renewables leaseholder has to cancel or amend their development plans as the result of the grant of a petroleum licence, the renewables industry has sought clarity as to the likely operation of the Oil and Gas Clause.

The Statement

It should be noted that the Statement is offered as a clarification of the considerations that the Secretary of State will take into account, rather than a change of approach, in relation to the giving of consent under the Petroleum Act 1998. The Statement is limited to the situations where there is a request for a consent to an oil and gas development and it appears that the development can only proceed if the Oil and Gas Clause is invoked.

The Statement emphasises the "great importance" that oil and gas licensees, in planning their exploration work, and where relevant in working up proposals for producing a new field, should take full account of potentially conflicting interests. The following staged approach can be summarized:

Stage One: Consultation

Where there is a potential conflict the oil and gas licensee should seek to consult and agree a way forward with a renewables leaseholder "so far as possible" to seek an agreed way forward acceptable to both sides.

Stage Two: Agreement on appropriate compensation followed by a determination under the Oil and Gas Clause

If there is a need to invoke the Oil and Gas Clause to allow an oil and gas development to proceed the Secretary of State will only approve the development and request The Crown Estate to invoke the Oil and Gas Clause once "payment of appropriate compensation" to the renewables leaseholder for the loss of value of his interests has been assured by negotiation and commercial agreement between the two parties. What is likely to constitute "appropriate compensation" will be guided by the compensatory principles described further below.   

Stage Three: A requested determination under the Oil and Gas Clause in the absence of agreement

A requested determination is conditional upon the oil and gas licensee first having exercised "all reasonable endeavours" to reach the negotiated agreement contemplated in Stage Two but having been unable to do so. 

The Statement offers no further guidance as to the level of endeavour the oil and gas licensee is expected to be able to demonstrate. We note that the term "all reasonable endeavours" is familiar to English legal practitioners, being often resorted to as occupying the uncertain middle position between the use of "best endeavours" and "reasonable endeavours", but its application in the particular circumstances remains uncertain.

Once an oil and gas licensee can demonstrate it has used such endeavours the Secretary of State:

"may be prepared to consider requesting determination of some part of the lease or agreement for lease if the appropriate compensation for loss of value has been assessed by an independent third party, and the licensee commits to appropriate arrangements to secure the payment of that compensation."    

The valuation principles

Clearly the likely valuation given to the prospective loss of the renewables leaseholder by either the parties themselves (in Stage Two) or by an independent third party (in Stage Three) will be key. The valuation is to be based on:

"the general principle of equivalence as applied in circumstances of compulsory purchase"

The principle of "equivalence" is described as being intended to put the leaseholder in the equivalent position (so far as financial compensation can do so) as if the lease had not been determined. In practice this will not be a straightforward question, being likely to involve protracted discussion and evaluation. The issues surrounding the recovery of potential loss of revenue or profit from all or part of a wind farm, or consequent on its partial relocation during the planning stage, are by their nature uncertain, dependent as they are on wind projections, uncertainty of costs, turbine performance, ability to relocate and so forth.  

We take the view that:

  1. the referenced principles behind compulsory purchase also imply an obligation on a renewables leaseholder to mitigate potential loss and this is therefore likely to be required to be factored into any discussion; and
  2. it needs to assumed, it not being set out in the Statement, that the existence of the Oil and Gas Clause in the relevant lease would be disregarded for the purposes of arriving at a valuation.

Notwithstanding the above, the principle is to be cautiously welcomed as, the apparent intent of the Secretary of State is that the principle of equivalence would broadly extend to cover the types of revenue loss which a provider of finance would wish to preserve.

Practical arrangements, clarifications and points to take away

The Statement is a welcome step forward for renewable developers but the practical arrangements to put the policy behind the Statement into force have yet to be fully discussed. These include a process for appointing a suitable person or body to undertake  the independent third party valuation and the reflection of the principle in renewables leases. Our view is that arriving at a value for compensation is unlikely to be either a simple or a quick process, particularly before practices become established, but that in any event the valuation principle provides a useful back-stop against which parties will be able to open their discussions.

Whilst we don't yet have certainty as to the approach that The Crown Estate, as landlord, will take in relation to existing and future leases/agreements for leases, in a press release earlier today The Crown Estate stated its intention to work with DECC and the industries to resolve prevailing uncertainties. The Crown Estate also confirmed that, subject to resolving discussion on the compensation mechanism and the need not to further complicate or add additional risk to development finance arrangements, the Oil and Gas Clause could be adapted to accommodate the new arrangements.

The Statement confirms the position, as generally understood by oil and gas legal practitioners, but well worth repeating here, that the grant of an oil and gas licence does not in itself convey any further consent for development. Developments under the licence therefore require further consent(s) from the Secretary of State.

The need for offshore participants in both the renewables and oil and gas spheres to closely monitor the applications of each other in proximate areas remains of paramount importance.

Click here to view a full copy of the Statement.

For further information, please contact:

Michelle Thomas
Partner, Head of clean energy and sustainability
Tel: 0845 498 7553
michellethomas@eversheds.com

Jason Lovell
Partner
Tel: 0845 497 4554
jasonlovell@eversheds.com

James Trafford
Partner
Tel: 0845 498 7802
jamestrafford@eversheds.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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