UK: The New UK Oil And Gas Authority Issues An Urgent Call To Action

The nascent UK Oil and Gas Authority ("OGA"), has issued an urgent Call to Action report setting out the main risks facing the UK oil and gas industry: insufficient profitablity leading to pre-mature asset decommissioning and a failure to commit to critical long-term investment. The Call to Action sets out the priorities for OGA, the UK oil and gas industry and HM Treasury in order to address these risks. It is a measure of how serious the challenges are for the industry that OGA has been tasked with producing the report even as it is being established.

The OGA will officially be established in April 2015 and will be charged - together with the oil and gas industry and HM Treasury - with developing and implementing the UK's strategy to maximise the economic recovery of oil and gas from the UK Continental Shelf's (the "UKCS"). In order to implement this strategy (the "MER UK Strategy"), OGA is intended to have certain powers that go beyond those currently held by the Department of Energy and Climate Change ("DECC").

These include: attending industry meetings; initiating and deciding on dispute resolution procedures; imposing financial sanctions; suspending, revoking or transferring licences; and greater access to data from licence holders. OGA will be partly funded by the UK Government; through charges for its services; and through a levy on licence holders.

Background

In June 2013, DECC requested an independent review of oil and gas recovery in the UKCS. The review, published in February 2014 (the "Wood Review"), recommended that DECC, HM Treasury and the oil and gas industry develop and commit to a new strategy for maximising economic recovery from the UKCS - the MER UK Strategy.

The Infrastructure Act, enacted on 12 February 2015, sets out the objective of maximising the economic recovery of UK petroleum. In order to achieve this, the MER UK Strategy will be developed in consultation with industry, and presented for Parliamentary approval via a "negative resolution"1 before coming into force. The UK MER Strategy will set out how to maximise economic recovery from the UKCS through: (i) prolonging infrastructure lifespan; (ii) deploying existing and new technologies effectively; (iii) a low-cost decommissioning strategy; and (iv) increasing exploration in the UKCS. The MER UK Strategy will bind DECC, licence holders, operators, owners of upstream infrastructure and those planning and commissioning upstream infrastructure.

The Oil and Gas Authority

The Wood Review recommended that the stewardship of the UKCS be moved to a new, better resourced, arm's length body, funded by industry, with additional powers to implement the MER UK Strategy – OGA.

OGA will initially be an Executive Agency of DECC. It will then become a Government Company2 by summer 2016 in order to have operational independence from the UK Government. It will be headquartered in Aberdeen and have a presence in London. Andy Samuel, former Managing Director of BG Group's Exploration and Production in Europe, has been appointed its Chief Executive.

OGA will be an independent arm's length body, accountable to DECC Secretary of State. DECC will set the strategic and operating framework and the objectives of OGA, however OGA will have the necessary independence to develop its own strategies and plans and be able to carry out its day-to-day operations in line with its agreed objectives.

The Oil and Gas Authority's Call to Action

OGA's urgent Call to Action outlined the main risks currently facing the UK oil and gas industry. Declining oil prices risk rendering producing fields insufficiently profitable, thereby leading to the premature decommissioning of key assets. This risks having a "domino effect" whereby further key assets are also prematurely shut down, as shared infrastructure costs are allocated across fewer platforms thereby increasing unit operating costs. The Call to Action also warned that confidence in the future potential of the UKCS could continue to decline resulting in the failure to secure critical long-term investment.

In order to address these risks, OGA's Call to Action sets out priority actions for itself, the industry and HM Treasury.

These include:

  • Protecting Critical Infrastructure

Encouraging operators to invest in new projects could have the opposite result of the "domino effect" by lowering unit operating costs, thereby attracting further investment. To facilitate this, OGA will prepare Regional Development Plans for critical regions of the North Sea and complete economic assessments of key production hubs by the end of 2015.

  • Improving Production Efficiency

Improving production efficiency could also counteract the 'domino effect'. In light of declining production efficiency, OGA will require the top 20 production operators by volume to present stewardship improvement plans by April 2015.

  • Creating a Competitive Cost Base

OGA will cooperate with the UK oil and gas industry to prioritise activity and monitor efficiency and is aiming for a 30-40% improvement in efficiency by the end of 2017, in order to counteract the 'domino effect'.

  • Revitalising Exploration

To enable critical long-term investment, OGA will encourage exploration programs in underexplored areas. The OGA will improve on the quantity, timeliness and reliability of data available to it and to the industry.

  • Improving Collaboration on Decommissioning

To further encourage critical long-term investment, OGA will oversee planning for future decommissioning of the UKCS in line with the MER UK Strategy. It expects the UK oil and gas industry to establish a single forum to drive innovation and efficiency in decommissioning by September 2015.

  • Driving Investment

OGA has expressed its support for HM Treasury's fiscal reform plans, which OGA considers will encourage critical long-term investment. It has stated it will assist HM Treasury with these measures which include: (i) an immediate reduction of the Supplementary Charge rate from 32 to 30%; (ii) the introduction of a basin-wide Investment Allowance; (iii) an immediate extension of the ring-fence expenditure supplement from six to ten years; (iv) a commitment in the 2015 Budget to financially support seismic surveys in under explored areas; (v) incentivising exploration through the tax system; (vi) improving access to decommissioning tax relief; (vii) considering reducing the Petroleum Revenue Tax rate when fiscal conditions allow; and (viii) considering reforming the fiscal treatment of infrastructure after consultation with industry in 2015. It supports HM Treasury's view that the overall tax burden will need to fall as the basin matures.

  • Supporting the Supply Chain and Developing and Retaining Skills

OGA will support the work of the Oil and Gas Industry Council and ensure that it is aligned with the MER UK Strategy. OGA will also support the Technology Leadership Board in developing a strategy on technology development by the end of 2015. OGA will, on an on-going basis, encourage companies to retain apprenticeships, trainee and graduate schemes and to consider alternatives to redundancy during downturns to avoid losing capability in the UK.

  • Integrating Plans and Delivery

OGA will hold individuals and groups to account for the delivery of agreed projects and initiatives and will coordinate meetings with the Oil and Gas Industrial Council. OGA will also align existing initiatives such as PILOT (the UK Government and oil and gas industry forum) with the MER UK Strategy and integrate the Fiscal Forum3 by June 2015. It will work to integrate and reduce the overall number of groups and initiatives across the sector by September 2015. OGA will also take over DECC's Licensing Exploration and Development responsibilities. These include:

  • awarding petroleum licences and issuing consents for related activity;
  • regulating third-party access to upstream petroleum infrastructure;
  • promoting sound commercial behaviour and efficient use of infrastructure, information and technology;
  • developing with industry upstream emergency plans for the security of supply; and
  • providing input for long-term plans for gas storage and carbon capture.

The Oil and Gas Authority's Powers

OGA will likely receive additional powers, including the following:

  • The Power to Attend Industry Meetings

It will be allowed to attend as an observer in key meetings where licence obligations, the MER UK Strategy, or matters for which it is providing (or may provide) dispute resolution services are to be discussed. OGA will be allowed to attend meetings between JV parties or where one company is operating alone. OGA would be allowed to pose and answer questions but would have no voting rights. This would keep it informed and help it cooperate with industry. Companies would be obliged to inform OGA in advance of key meetings and provide it with agendas and papers. Failure to do so could result in sanctions. It will be for OGA to prioritise which meetings to attend.

  • The Power to Access Data from License Holders

DECC already has the power to require access to any data pertinent to the terms of a licence and is considering requiring licensees to submit data relevant to licence terms to OGA more regularly on a monthly basis. Licensees may be required to provide seismic data on a yearly basis rather than on a three or four year basis, as is currently the case. DECC is also considering an IT portal allowing licence holders to upload discussion documents before and during licence rounds as well as a publically available website with accessible data and information. Individuals and companies refusing to give access to data, in breach of their licences and the MER UK Strategy, may be subject to sanctions.

  • Dispute Resolution

DECC has indicated that the dispute resolution scheme (including its scope, referral requirements, time limits, OGA's information gathering powers and sanctions) will be defined by legislation. OGA will likely be able to define the detailed process by which it will determine disputes, including the use of independent assessors, similar to Ofcom's dispute resolution scheme. The UK Government has said it believes that OGA should have the ability to require parties to enter dispute resolution and to instruct experts or require parties to undertake studies where necessary.

The UK Government is currently considering interested parties' views on who else should be able to initiate the dispute resolution process, the timeframes for the process, whether to impose sanctions for non-compliance with the process and what (if any) additional powers OGA should have in the dispute resolution process.

The Wood Review suggested that if industry is unable to provide a satisfactory framework within which to simplify and reduce the time required for UKCS commercial and legal negotiations, OGA should impose its own recommendations. The UK Government is considering interested parties' views on the specific difficulties in legal and commercial negotiations and on how OGA can address them.

The Oil and Gas Authority's Sanctions

DECC envisages providing OGA with a wider, more gradated set of sanctions, as is available for example to Ofgem, Ofwat or the FCA. The sanctions currently available such as licence revocation are extreme, making their use often difficult and disproportionate.

DECC envisages OGA imposing sanctions on licence holders or operators in breach of the MER UK Strategy. Any formal sanction would be preceded by a discussion between the companies involved and OGA, followed by an informal, private notification indicating the time period in which the issue should be resolved. If the issue is not resolved by then, the finding of a breach will be made public and a formal Improvement Notice will be issued. The Improvement Notice would set out how the company should improve its performance. If these steps prove insufficient, OGA may make use of financial sanctions. These would grant OGA flexibility to apply the appropriate sanction to each breach. The penalty amounts will be determined, among other things, by the nature of the breach, including the company's intent or recklessness, the impact of the breach and the affordability of the penalty amount. The financial penalties will be capped at a ceiling set at a level so as to retain a deterrent effect while not driving business away from the UKCS. If financial penalties are insufficient, OGA may suspend, transfer or revoke a licence.

The Oil and Gas Authority's Funding by Industry

The UK Government is planning to contribute £3 million annually towards OGA from 2016-17 for a period of five years. It intends to introduce a cost-recovery mechanism, including charges for services such as issuing licence consents and permits.

The UK Government also intends to introduce a new levy, beginning from October 2015, on licence holders in order to cover OGA's remaining costs, such as those associated with developing and implementing the MER UK Strategy, preparing future license rounds, supporting the supply chain, research and development work and data collection and dissemination. The charges will not exceed OGA's best costs estimates. They will be subject to Parliamentary scrutiny and will be set annually. Licence holders will pay their portion of the levy annually in single payments in advance at the beginning of the financial year. Subject to DECC's approval and Parliamentary scrutiny, OGA will have the authority to adjust levy rates upwards or downwards within the year, should unforeseen circumstances significantly change expected costs.

The levy is proposed to be apportioned based on the acreage of the licence holder, with different rates based on licence type, licence terms or licence age. Pre-production licences will have a lower rate per acre. The UK Government will consult with interested parties on the rates to be applied to each type of licence.

Footnotes

1 I.e. The Strategy will come into force if within 40 days if neither House resolves to oppose it.

2 I.e. A private company limited by shares under the Companies Act 2006, with the Secretary of State of DECC as the sole shareholder.

3 The Fiscal forum was established by HM Treasury in September 2011 to discuss with oil and gas tax regime with the UK oil and gas industry.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.