UK: A Very British Affair — Subtle Expropriation In The North Sea?

Introduction

Any discussion about the expropriation of upstream interests by host governments brings to mind events like the Argentinian government's sequestration of Repsol's interests in 2012 and, before that, upstream nationalisations by the Bolivian government in 2006 and by the Venezuelan government in 2007.

Upstream expropriation might appear to be a uniquely South American phenomenon and it seems quite improbable that Her Majesty's government would engage in such behaviour. Yet, this very suggestion has been made in respect of a concession originally granted in 1972 for the production of natural gas on the UK Continental Shelf which has only recently resumed production.

The Rhum Field

The Rhum field lies approximately 240 miles north east of Aberdeen, in roughly 110 metres of water. Natural gas was originally discovered in the Rhum field by exploration drilling in the early 1970s but attempts at commercialisation were later abandoned because of the high temperature and high pressure of the field's gas under reservoir conditions.1 The situation was revisited with appraisal drilling in 2000 and first gas production successfully came on stream in December 2005, using a long distance subsea tieback to the Bruce platform. The Rhum field is estimated to contain some 800 bcf of recoverable gas reserves, with anticipated maximum daily gas production rates of 300 mmscf.

The licence for Rhum, P198, was originally granted to BP (the operator) and the Iranian Oil Company (U.K.) Limited ("IOC"), which is a subsidiary of the National Iranian Oil Company, in July 1972. BP and IOC are still the 50/50 holders of the licence. The licence was granted to IOC at a time when Iran was ruled by the Shah, but since then the presence of IOC as an active licensee on the UK Continental Shelf has not been without issue because of the subsequent imposition of various sanctions against Iranian interests.2

Iran Sanctions and Production Restoration

In November 2010, gas production from the Rhum field was suspended in reaction to the initial imposition of European Union regulations concerning restrictive measures against Iran. However, in October 2013 the UK government (acting through the Department of Energy and Climate Change ("DECC")) announced the restoration of gas production from the Rhum field, in accordance with the terms of what it called a 'temporary management scheme' which was effected under the Hydrocarbons (Temporary Management Scheme) Regulations 2013.3

In October 2014, the production of gas from the Rhum field was resumed.

In order to commence the process of disapplying the EU sanctions which otherwise applied to the operation of the Rhum field, DECC originally wrote to IOC in July 2013. In the same month, IOC wrote back to DECC to express concerns and to make representations that the temporary management scheme should not apply. On 22 October 2013, DECC wrote a lengthy letter back to IOC to further explain its intentions. In the October letter the restoration of gas production from the Rhum field was declared by DECC as being necessary to avoid or remediate environmental damage and to prevent the permanent destruction of the value of the licence, citing the grounds set out within the Regulations.4More particularly, DECC expressed concern that there was an increasing risk of a sudden uncontrolled leak from the Rhum field causing environmental damage given that the gas production equipment had been left in a suspended state, and that the gas and liquids contained in the field were at high pressures. DECC also had a concern that decommissioning the field could be significantly less safe than doing so after the production of gas had reduced reservoir pressures.

The restoration of gas production from the Rhum field also had to address the continuing position of IOC as an entity still subject to the EU's Iran sanctions. The solution to this, which was offered by the DECC under the temporary management scheme, contained the following components:

  • IOC's share of the revenues from the sales of produced gas were placed in a designated temporary management account (and could be paid out from that account to suppliers where permitted);
  • DECC took temporary management of IOC's share of the Rhum field and said it would co-manage the field in accordance with good management practice; and
  • the temporary management scheme was declared to continue in force until the scheduled expiry of the Rhum licence in March 2018.

An Act of Expropriation?

In correspondence between IOC and DECC, it was suggested by IOC that the application of the temporary management scheme could result in a deemed or indirect expropriation of IOC's interests in the Rhum field. DECC declared in response in the October letter that it was not DECC's intention to expropriate IOC's interests and neither was this the effect of its actions, citing a number of factors in its own defence:

  • because the production of gas from the Rhum field had ceased since 2010 due to the application of the sanctions against Iran, IOC had enjoyed no benefits under the licence since that date and so in practical terms the temporary management scheme would make no difference to IOC;
  • it was not foreseeable that the production of gas from the Rhum field would start again before the EU's Iran sanctions were lifted and there was no guarantee that the sanctions would in fact be lifted before the scheduled expiry of the licence in 2018;
  • gas production would have the benefit of producing revenues from the sale of gas and those revenues would reside in a temporary management account for the eventual benefit of IOC;
  • the temporary management scheme did not affect the underlying ownership of the licence which continued to remain with IOC; and
  • the temporary management scheme would come to an end if IOC ceased to be subject to the EU's Iran sanctions.

If there is an allegation that the UK government has, by the implementation of the temporary management scheme, sought to expropriate IOC's interests in the Rhum field then, because of the various factors indicated above, it is perhaps a strangely benevolent, transparent and quintessentially British form of expropriation.

On the other hand, it is worth noting that the Hydrocarbons (Temporary Management Scheme) Regulations 2013 conveniently came into existence at the point in time when they were needed to allow DECC to take the actions which it did in relation to the Rhum field. These actions resulted in the UK government taking effective control of a concession and subordinating a concession-holder's decision-making rights within an underlying JOA. Due process was observed of course, and for what the UK government would argue was for all the right reasons, but the result impacted the sanctity of an investor's upstream rights.

Was this, in principle, so very different to what happens in countries where we like to think that the risk of expropriation is a cultural norm? The UK government's actions in respect of the Rhum field set an uncomfortable precedent, and could make such an intervention easier to defend if it ever needs to occur again.

Footnotes

1 With estimated downhole temperatures of 150 °C and pressures of 12,000 psi.

2 Most recently represented by EU Regulation No. 267/2012, as amended.

3 Hydrocarbons (Temporary Management Scheme) Regulations 2013 SI 2013/1329.

4 Although some commentators have more cynically noted that the position of the Rhum field as a contributor of up to 5% of total UK gas production, at a time of falling rates of gas production from the UK Continental Shelf and record levels of gas imports, would have been a powerful influencing factor for the UK government.

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