UK: A Green Light For Unconventional Oil And Gas?

Last Updated: 28 May 2015
Article by Emily Tetley-Jones

In 2010 the Supreme Court dismissed the appeal brought by Mohammed Al-Fayed's company, Bocardo SA, against the Court of Appeal's decision to award only minimal damages for trespass by an oil company which laterally drilled 800m under the appellant's land without its consent.

While for energy companies this removed the worry of large compensation payments, it nevertheless confirmed the principle that such incursions were, potentially, actionable trespass. As levels of public and protestor opposition have risen (to hydraulic fracturing in particular), so have the number of parties and action groups looking to use the trespass argument as a possible means to thwart or delay future projects. The new Infrastructure Act 2015 gives various automatic rights to access petroleum or deep geothermal energy, subject to various conditions and requirements.

The Act is, however, not quite (yet at least) the 'silver bullet' that it looks like at first blush. There are significant questions left open in terms of how the regime will work, and it will be a brave company which commences full-scale operations following the anticipated result of the 14th licensing round without further regulations from the Secretary of State (as envisaged by the Act) and/or Department of Energy and Climate Change (DECC) guidance in terms of how the anticipated compensation schemes are to work.

National (economic) interest factor

Securing a country's long-term affordable energy supply is clearly key to economic and political stability.

Since the peak of North Sea oil production in the late 1990s/early 2000s, we have seen a decrease of roughly 2.4 million barrels per day in domestic production and a corresponding increase in net import dependency (with the renewables industry so far only being able to slow the rate of that dependency rather than start to claw back the difference). According to DECC's 2013 figures, net natural gas imports to the UK account for around 44% of supply.

Given carbon reduction targets and climate change, it is generally accepted that there is a fine balance to be struck between (a) reducing our reliance on fossil fuels while (b) establishing and safeguarding the country's future energy supply at predictable/affordable prices, thereby enabling the UK to remain a globally competitive economic entity.

We know what can happen when significant supplies are jeopardised by aggressive foreign policy or competing economic interests. The blackouts and civil unrest caused by the nationalisation of Iranian oil in 1951, the Egyptian Suez crisis in 1956, together with more recent political upheavals, highlight dramatically to producers and consumers alike the dangers of an energy policy massively reliant on imports.

At the time of writing, the uncertainty of factors such as:

  •  international foreign and trade policy;
  • the (one would assume) untenably high and continued supply levels;
  • low oil prices; and
  • a consequently depressed renewables market,

means that the necessity of hedging fuel costs and, wherever possible, reducing dependence on foreign supplies will continue to be of paramount importance.

In light of the continued low oil price, the government has decided that domestic oil and gas producers need assistance to continue to remain competitive in the market and to encourage investment in new well sites, as well as for the maintenance and upgrade of existing infrastructure. So far the government's reaction has been to:

  • lower taxes for the North Sea oil and gas industry;
  • implement the Infrastructure Act which will facilitate the obtainment of the necessary rights for new projects; and
  • make the planning process for new projects faster and more streamlined.

This is with a view to encouraging the development of the unconventional oil and gas industry (in the knowledge that in the best-case scenario we are still looking at a lead time of 20 years to full-scale production).

What's new?

The new rights being granted by the Act, in respect of accessing petroleum deposits and deep-level geothermal energy, are as follows:

  • Pursuant to s43 there will now be an automatic right to access land which is 300m or below (ie by subterranean lateral access).
  • The right will apply to exploration and production.
  • Crucially this includes the right to leave the deep-level land in a different condition than it was in before the access (this is significant as reinstating such deep land and removing all related infrastructure is, in most cases, impossible).

See s43-44 in the box below.

  • The Secretary of State may, by regulations, require relevant energy companies to make payments to the owners of relevant land or interest and to other persons for the benefit of areas in which relevant land is situated.
  • The Secretary of State may also by regulation impose various notification procedures.

Pursuant to s50(1) the Secretary of State may not issue the well consent required by the onshore licence unless the well consent imposes:

  • a condition that no hydraulic fracturing takes place above 1,000m; and
  • a condition that the Secretary of State's consent must be given.

The hydraulic fracturing consent will only be issued where 11 separate conditions are complied with. These include measures designed for environmental protection and ensuring appropriate restoration and notification procedures.

In addition there are two stand-alone conditions:

  • various monitoring results to be published; and 
  • pursuant to s50(3) there must be a scheme in place to provide financial or other benefits.
  • A breach of any of these conditions will be treated as if it was a breach of the relevant well consent.

See s50 in the box below.

Compensation: the theory While the Act sets out in sub-sections 45(1)-(3) and

s50(3) that compensation will be payable to interested parties, it is far from clear how this will work in practice.

The principle seems to be that the 'community' (s45 gives the examples of who the 'community' might be as 'owners' and 'other persons for the benefit of areas in which the relevant land is situated') will benefit from the future shale - gas revenue. See s45 in the box below.

Importantly, however, (as referred to below in 'Compensation: the problems') the Act does not go into further detail as to how these 'owners' or 'other persons' would be identified or selected.

The United Kingdom Onshore Operators Group (UKOG) has suggested that this compensation should constitute at least £100,000 per well to the local community.

INEOS by contrast has suggested going down a different route: 4% of future shale revenues going to landowners and 2% to the communities.

In contrast DECC guidance in respect of 'community benefits' considered appropriate in the onshore wind sector has a strong focus on the provision of benefits in kind (e.g. a local energy discount scheme, lighting schools, setting up recycling plants etc.).

Compensation: the problems

In summary, unless one company is prepared to take a risk and trailblaze without further regulations being made, the industry (especially in light of the anticipated results of the latest licensing round) will be wanting detailed compensation guidance from DECC.

In contrast with the onshore wind sector, compensation generated by shale gas is likely to generate higher sums, which could engender fierce competition/litigation in terms of those who feel their interests are not being given appropriate weighting.

Given the ability of the Secretary of State to retrospectively require companies to pay compensation to interested parties, they will not want to 'call it wrong'.

The obvious questions yet to be answered are:

  • Who is the community?
  • What are the criteria for selection?
  • Will there be an appeals process following selection and how will this be dealt with?
  • What purposes is the money to be used for?
  • Are benefits in kind appropriate and if so to what percentage?
  • When will the energy companies have discharged their obligations?
  • Which bodies should the monies be handed to, and on what basis? (One imagines that both the energy companies and the bodies receiving/allocating monies will want very clear parameters guaranteeing that, provided various procedures are followed, they will be deemed to have complied fully with the Act).
  • Is the money to be split? (One assumes that this might be a mixture of initial lump sum payments together with future percentage-based payments).

What stays the same?

  •  There will be a continued need to negotiate all necessary land rights above 300m (in absence of any compulsory powers being used). These comprise not only the usual rights to install infrastructure, pipelines and associated equipment etc, but also the necessary consents relating to any short-term or temporary rights such as working areas, lay down areas, haul roads etc.

Such consents typically take the form of conditional consents followed by leases and/or deeds of easement, dependent on the infrastructure and the promoter involved.

  • Energy companies will continue to need to keep a careful eye on overall project timings to leave enough time to invoke compulsory powers (if available) in respect of non-deep-level land.

Conclusion

The Infrastructure Act seems to be sending a clear message to the public and to the oil and gas industry, which is that the (current) government s actively supporting domestic exploration and production projects, by making the obtainment of the necessary rights and consents more streamlined and the statutory and planning framework more straightforward.

What will be interesting to see is how things will play out in the future, in the wake of the upcoming election. The Act can surely only have the desired effect of encouraging new energy projects and investment if the companies involved have the certainty of knowing what their ultimate exposure in terms of compensation will be, which in turn is likely to require guidance from DECC and/or regulations from the Secretary of State.

UKOG proposals (extract)

  • Engage with individuals and organisations in the local communities from an early stage.
  • Monitor and evaluate the engagement process regularly.
  • Provide benefits to local communities at the exploration/appraisal stage of £100,000 per well site where hydraulic fracturing takes place.
  • Provide a share of proceeds at production stage of I% of revenues, allocated by approximately 2/3rd to the local community and I/3rd at the county level.

Extracts from the Infrastructure Act 2015

s.43 Petroleum and geothermal energy:  right to use deep-level land

  1. A person has the right to use deep-level land in any way for the purposes of exploiting petroleum or deep geothermal energy

[...]

(4)  Deep-level land is any land at a depth of at least 300 metres below surface level.

s.44 Further provisions about the right of use

(1)The ways in which the right of use may be exercised include —

(a) drilling, boring, fracturing or otherwise altering deep-level land;

(b) installing infrastructure in deep-level land;

(c) keeping, using or removing any infrastructure installed in deep-level land;

(d) passing any substance through, or putting any substance into, deep-level land or infrastructure installed in deep-level land;

(e) keeping, using or removing any substance put into deep-level land or into infrastructure installed in deep-level land.

(2)The purposes for which the right of use may be exercised include —

(a) searching for petroleum or deep geothermal energy;

(b) assessing the feasibility of exploiting petroleum or deep geothermal energy;

(c) preparing for exploiting petroleum or deep geothermal energy;

(d) decommissioning, and other activity which falls to be continued or undertaken, in consequence of activities undertaken for the purposes of exploiting petroleum or deep geothermal energy.

(3) The right of use includes the right to leave deep-level land in a different condition from the condition it was in before an exercise of the right of use (including by leaving any infrastructure or substance in the land).

s.45 Payment scheme

(1)  The Secretary of State may, by regulations, require relevant energy undertakings to make payments in respect of the proposed exercise, or exercise, of the right of use.

(2)  The regulations may require payments to be made —

(a) to owners of relevant land or interests in relevant land;

(b) to other persons for the benefit of areas in which relevant land is situated.

(3)  The regulations may —

(a) specify the amount or amounts of payments;

(b) make provision for determining the amount or amounts of payments.

(4)  The regulations may require relevant energy undertakings to provide the Secretary of State, or any other specified person, with specified information about

(a) the proposed exercise, or exercise, of the right of use;

(b) the making of payments in accordance with regulations under this section.

s.50 Onshore hydraulic fracturing: safeguards After section 4 of the Petroleum Act 1998 insert

'4A Onshore hydraulic fracturing: safeguards

(1) The Secretary of State must not issue a well consent that is required by an onshore licence for England or Wales unless the well consent imposes —

(a) a condition which prohibits associated hydraulic fracturing from taking place in land at a depth of less than 1000 metres; and

(b) a condition which prohibits associated hydraulic fracturing from taking place in land at a depth of 1000 metres or more unless the licensee has the Secretary of State's consent for it to take place (a "hydraulic fracturing consent").

(2) Where an application is made, the Secretary of State may not issue a hydraulic fracturing consent unless the Secretary of State —

(a) is satisfied that —

(i) the conditions in column I of the following table are met, and

(ii) the conditions in subsection (6) are met, and

(b)  is otherwise satisfied that it is appropriate to issue the consent.

(3) The conditions mentioned in subsection (3)(a)(ii) are —

(a) that appropriate arrangements have been made for the publication of the results of the monitoring referred to in condition 4 in the table;

(b) that a scheme is in place to provide financial or other benefit for the local area.

(4)  The existence of such a document of the kind mentioned in column 2 of the Table in this section is sufficient for the Secretary of State to be satisfied that the condition to which that document relates is met.

This article was first published in the May 2015 issue of the Property Law Journal (Legalease Ltd).

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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