UK: New Guidance And Updated Code Published On Access To Upstream Oil And Gas Infrastructure

Last Updated: 10 October 2008
Article by Lorna Dawson and Emese Duncan

ICOP: the Code of Practice on Access to Upstream Oil and Gas Infrastructure on the UK Continental Shelf has recently been updated, and accompanying Guidance Notes produced (available on Oil & Gas UK's website). The Guidance Notes have been welcomed by the oil and gas industry as setting clearer expectations for both Infrastructure Owners and companies seeking access to that infrastructure.

ICOP, in its current form, was created by the government and the oil and gas industry in 2004 as a substantially revised version of a 1996 code of practice, to ease development of new fields in the UKCS by creating a set of principles around accessing third party infrastructure. The Department of Business, Enterprise & Regulatory Reform ("BERR") expects all UKCS licensees to be signatories to ICOP (and to the Commercial Code of Practice, which is expressly endorsed by ICOP). ICOP applies to owners of UK infrastructure which has the capacity to accept third party business, and to those third parties seeking access to that infrastructure. (ICOP does however recognise that some UK infrastructure straddles national boundaries, in which case the terms of international treaties may then take precedence.)

ICOP creates a framework around negotiations for access to infrastructure. This has clarified the expectations of both infrastructure owners and parties seeking access to that infrastructure as to how negotiations will be conducted, what information it is reasonable to expect the other to produce, how to manage conflicts and what considerations to be taken into account in setting tariffs and allocating risk.

Although ICOP itself is not legally binding, nor does it have any statutory force, it applies a framework around the Secretary of State's statutory powers to grant access to infrastructure (under the Petroleum Act 1998, the Pipelines Act 1962 and the Gas Act 1995 as well as under powers to be enacted under the Energy Bill 2008) regarding upstream petroleum pipelines, gas processing terminals and pipelines connecting terminals to the National Transmission System or to larger users. By their endorsement of ICOP, companies make a commitment to be guided by its principles and procedures to reach agreement.

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ICOP: the Code of Practice on Access to Upstream Oil and Gas Infrastructure on the UK Continental Shelf has recently been updated, and accompanying Guidance Notes produced (available on Oil & Gas UK's website). The Guidance Notes have been welcomed by the oil and gas industry as setting clearer expectations for both Infrastructure Owners and companies seeking access to that infrastructure.

ICOP, in its current form, was created by the government and the oil and gas industry in 2004 as a substantially revised version of a 1996 code of practice, to ease development of new fields in the UKCS by creating a set of principles around accessing third party infrastructure. The Department of Business, Enterprise & Regulatory Reform ("BERR") expects all UKCS licensees to be signatories to ICOP (and to the Commercial Code of Practice, which is expressly endorsed by ICOP). ICOP applies to owners of UK infrastructure which has the capacity to accept third party business, and to those third parties seeking access to that infrastructure. (ICOP does however recognise that some UK infrastructure straddles national boundaries, in which case the terms of international treaties may then take precedence.)

ICOP creates a framework around negotiations for access to infrastructure. This has clarified the expectations of both infrastructure owners and parties seeking access to that infrastructure as to how negotiations will be conducted, what information it is reasonable to expect the other to produce, how to manage conflicts and what considerations should be taken into account in setting tariffs and allocating risk.

Although ICOP itself is not legally binding, nor does it have any statutory force, it applies a framework around the Secretary of State's statutory powers to grant access to infrastructure (under the Petroleum Act 1998, the Pipelines Act 1962 and the Gas Act 1995 as well as under powers to be enacted under the Energy Bill 2008) regarding upstream petroleum pipelines, gas processing terminals and pipelines connecting terminals to the National Transmission System or to larger users. By their endorsement of ICOP, companies make a commitment to be guided by its principles and procedures to reach agreement.

Under ICOP, Infrastructure Owners are expected to publish "relevant and up-to date information for Prospective Users" including current operational data, such as available capacity, standard specifications and processing capacity. Publication is by means of the company website interlinked with DEAL (www.ukdeal.co.uk). ICOP also encourages the use of standard form contracts and this has led to the production of a number of standard form transportation and processing agreements for infrastructure within the UKCS.

Once an export route is identified and negotiations have reached a point where they are expected to conclude within six months, the "bona fide enquirer" issues an automatic referral notice ("ARN") to BERR. This is an undertaking to apply for a notice under the Secretary of State's statutory powers if negotiations have not concluded with that six month period. This period can be extended if the parties and BERR agree.

Within one month of concluding the negotiations, summary of key commercial terms (including a range within which the tariff occurs but not the actual tariff) must be published on the infrastructure owner/operator's website or on DEAL.

ICOP does not remove the rights to gain access to infrastructure which already exist under legislation. Under the current law, if a third party is unable to agree satisfactory terms of access with the owner of upstream infrastructure, an application can be made to the Secretary of State to resolve the dispute, asking him to grant appropriate access and to set the terms (including tariff) of such access (the decision reached by BERR is open for the parties to challenge by judicial review). ICOP simply supports this procedure by making the statutory dispute resolution procedure an automatic, acceptable action.

The existing legislative framework is not complete in that some types of upstream infrastructure are not covered. Some gaps exist in relation to access to oil processing facilities, certain gas processing facilities and services associated with pipelines. The Energy Bill 2008 increases the Secretary of State's powers with respect to this infrastructure by widening access rights to upstream petroleum pipelines (section 10E of the Pipelines Act 1962), to gas processing facilities (section 12 of the Gas Act 1995) and to controlled petroleum pipelines (section 17F of the Petroleum Act 1998).

Since 2004, Infrastructure Owners have worked hard to comply with ICOP, both in making information available, and in complying with ARN processes. To date, industry co-operation has meant that no ARN has resulted in an application to the Secretary of State for a notice securing access to the infrastructure in question.

However, a review of compliance with the 2004 version of ICOP and a later PILOT "Changing Gear" review identified issues in the application and interpretation of ICOP, leading to inconsistent practices and behaviours, and ultimately detracting from ICOP itself. The ARN process was poorly understood and it was felt that it failed to provide either the drive for completing negotiations or the backstop determination that was intended. Additionally, it became clear that agreement of liability and indemnity provisions was proving to be contentious and delaying negotiations. Therefore the review recommended that ICOP itself should not be changed, but that practical guidance should be produced focussing on key elements:

  • the instigation of bona fide enquiries and the commencement of the deal-making process;
  • submission of the ARN and the process of follow-up and satisfactory close-out; and
  • liabilities and indemnities, especially the application of liability caps.

As such ICOP has been left substantially intact, while the Guidance Notes provide a consistent outlook and an insight into how BERR and Oil & Gas UK expect ICOP to be applied.

The changes to ICOP itself are cosmetic: primarily changing DTI to BERR and UKOOA to Oil & Gas UK. It is the publication of the Guidance Notes themselves which will prove most useful.

In a nutshell, the of Guidance:

  • sets out the expected actions and involvement of each of the various groups affected: Infrastructure Owners, Infrastructure Users, Code of Practice Champions, Senior Management and Oil & Gas UK, and clarifies BERR's role in the process;
  • sets out procedural guidelines, timing, and suggestions on what information should be supplied by the Infrastructure Owners and the parties requesting access (and in what form and when that information should be provided – an important clarification from the Infrastructure Owner's point of view as they cannot put an offer in place without technical information from the enquirer, and previously they often found themselves under pressure to commit to an offer without such technical information in place);
  • advocates the use of Code of Practice Champions (which is not as specific an obligation under ICOP), who should be at senior level within the organisation, committed to good negotiating practice and having the authority to ensure that ICOP (including the Commercial Code of Practice) is understood and adopted by the organisation as the basis for UKCS negotiations; and
  • sets out a number of issues around liabilities and indemnities, without actually imposing any standard liability and indemnity regime, which would not have been appropriate. This section of the Guidance:
  • provides general guidance on what to take into account in setting indemnity caps;
  • sets out what risk considerations the parties may think about during any tie-in and construction phase; and
  • identifies some specific issues which have proved contentious in the past, including the extension of any regime to contractors and issues to consider in relation to off-specification hydrocarbons.

ICOP should be interpreted in line with the Commercial Code of Practice (January 2002) and the Guidance on Disputes over Third Party Access to Upstream Oil and Gas Infrastructure (2005). Additionally, ICOP is not a substitute for professional legal or insurance advice – there are many issues which arise in negotiating transportation and processing arrangements, both regulatory (such as competition issues) and contractual (such as putting in place a liability and indemnity regime) and ICOP advocates obtaining separate advice on all these issues.

ICOP recognises that there are many stages involved in accessing third party infrastructure: technical analysis; deal negotiations; agreeing fully termed agreements; and completion of the deal and therefore it creates a structure to facilitate these various stages, by highlighting issues traditionally seen as sticking points in negotiations. It does not cut across a company's legal right to seek access to infrastructure under existing legislation, although application of ICOP is likely to be a factor in the Secretary of State's decision on whether to intervene.

ICOP will be reviewed on a regular basis going forward. The Guidance Notes are a useful tool to help in ICOP's application, but there will be issues in the future which require further consideration and updating (not least any effect of the Energy Bill when it is enacted).

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 06/10/2008.

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