UK: A Strong Wind Blows Cold Over The Oil And Gas Industry

Last Updated: 27 July 2011
Article by Judith Aldersey-Williams and Munir Hassan

The government's White Paper on reform of the electricity market published on 12th July made clear the great reliance which is being placed on offshore wind energy to fulfil the government's ambitions to decarbonise the UK electricity sector.  However, at the same time the Government is keen to continue to develop the oil and gas assets of the North Sea in order to increase our security of supply of oil and gas for the remaining life of the basin.  Inevitably, there are occasions on which these two uses of the marine space will conflict - so how are these conflicts to be resolved?

A recent statement from the Secretary of State for Energy and Climate Change, Chris Huhne, on this issue has received remarkably little publicity.  In effect, he has announced that in future he may refuse to grant consent for oil and gas developments which conflict with wind developments unless the oil and gas developer agrees to compensate the wind developer.

For some years, Crown Estate leases and agreements for lease for offshore renewable projects, and more recently for the cables transporting the electricity to land, have contained a clause allowing the Crown Estate to terminate the lease, in whole or in part, at the request of the Secretary of State, where necessary to enable an oil or gas project to proceed. As you might imagine, the existence of a clause in a lease enabling the lease to be terminated makes it rather difficult to obtain finance for a renewables project and so the renewables industry has pressed for some sort of compensation if such an event occurs. 

The clause does not refer to any right to compensation to the lease holder. However, the Petroleum Act 1998, as amended by the Energy Act 2004, provides that in making a consenting decision, the Secretary of State may have regard to activities for the generation of electricity, or proposals to carry on such activities.  The Secretary of State is therefore proposing to use his powers to consent to oil and gas developments to achieve that right to compensation.

Following discussions by DECC with Renewable UK and Oil and Gas UK, the two trade bodies involved, the Secretary of State, has issued a statement clarifying his approach to the giving of consent for any oil and gas development (including drilling of wells, the installation of production facilities, or the construction of pipelines), where it appears that the development can proceed only if the oil and gas clause in a renewables lease is invoked. This new approach recognises that to deliver the UK's energy strategy will require co-existence of various users of the seabed.

First, where it appears that the envisaged oil and gas development may in practice conflict with activities already permitted, the licensee should consult with the other rights holders and seek an agreed way forward acceptable to both sides. Further guidance on how this consultation should be conducted, and on the consenting procedures, is likely to be produced by DECC in due course.

Secondly, where an oil and gas licensee seeks consent for a development, and it appears that the development can proceed only if the oil and gas clause in a renewables lease is invoked,  the Secretary of State has stated firmly that he will not request the Crown Estate to exercise the termination right, or give consent to the proposed development, unless he is assured by the affected leaseholder that payment of appropriate compensation for the loss of value of his interests has been agreed between the two parties.

Exceptionally, where the licensee has used all reasonable endeavours to reach a negotiated agreement, but has been unable to do so, he may request termination of some part of the lease on the basis of an undertaking by the licensee to pay appropriate compensation for the loss assessed by an independent third party. The loss should be valued on the same basis as in circumstances of compulsory purchase, which aims to put the claimant in the same position, so far as practicable, as if the lease had not in fact been terminated.  This statement of the principles to be applied where no agreement can be reached is likely to become the starting point for calculation of compensation in negotiations – it effectively requires the oil and gas licensee to compensate the wind developer for the profits which it would have obtained if the lease had continued in full.

The process outlined in the Ministerial statement is primarily intended to drive the various users to exchange information on their proposed developments to identify potential interfaces, and to seek to resolve these in a manner that allows, wherever possible, both activities to proceed.  With the right motivation, which the guidance now to be developed by DECC will need to encourage, the hope is that the two industries will find ways of accommodating each other's developments within the same overall sea area, rather than to "land bank" or be overly sensitive to interface issues.

The Secretary of State's view is that these issues should not impact the granting of oil and gas licences, as these do not convey any consent for development.  He notes that licence applicants will have access to-up-to date information on consented developments, and on areas leased or zoned for other types of development, so that licence bids can be based on an up-to-date understanding of potentially conflicting development intentions in the area in question. 

It will be interesting to see whether this policy has any chilling effect on applications for oil and gas licences in areas zoned for offshore wind and how easy it is in practice for the two industries to find an accommodation where there are apparent conflicts.  Beyond this, however, the policy has clear potential implications for other uses of the marine space which may conflict whether these are carbon capture and storage, gas storage, wave or tidal generation or even dredging.  In an increasingly crowded island, anyone wishing to exploit any of the resources of the continental shelf will need to take careful note of others with rights in the same area and expect to have to engage in some sensitive and sometimes expensive negotiations to find a way to get on with their neighbours.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 22/07/2011.

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