UK: The UK's Energy Act 2016: An Independent Regulator Gets Its Teeth

The publication of the draft strategy for the UK Oil and Gas Authority (OGA) to give effect to the maximization of economic recovery (known as "MER UK") was a welcome development, but further guidance and detail was needed on implementing the strategy. The next step in this process took place on May 12, 2016 with the granting of Royal Assent to the Energy Act 2016 (the "Act").

The Act furthers the recommendations of the Wood Review and establishes the OGA as the independent regulator for the UK oil and gas sector by transitioning it from an Executive Agency of the Department of Energy and Climate Change (DECC) to a company incorporated under the Companies Act 2006. Substantial changes for the UK oil and gas landscape1 are set out in the body of the Act addressing the core functions of the OGA, the resolution of disputes in the sector, information-gathering powers of the OGA, sanctions and charges, and access to infrastructure and decommissioning. This article summarizes the impact of the Act on each of those topics.

The OGA, Its Functions and Powers

From its establishment as an Executive Agency of the DECC, the OGA was given "sufficient operational independence to be effective from day one"2 and the responsibility for a range of functions of the Licensing Exploration and Development unit,3 including exercising certain statutory functions on behalf of the Secretary of State. Prior to Royal Assent being given to the Act, this was broadly managed pursuant to a Framework Document4 clarifying the OGA's operation and governance, and the exercise of rights, influence and control by the Secretary of State while the OGA remained an Executive Agency. These arrangements were designed to be consistent with the intended OGA operation and governance arrangements, post-­transition.

The Act advanced the transition, giving effect to the next stage by renaming the Oil and Gas Authority Limited as the Oil and Gas Authority,6 clarifying its relationship with the Crown7 and formally transferring to it certain functions of the Secretary of State for Energy and Climate Change.8  The Secretary of State was given the power9 to transfer property, rights and liabilities from the remit of a Minister of the Crown to the OGA. Staff were also transferred10 to the new corporate entity and arrangements made in relation to staff pensions.11  

While initially very little might change in OGA operations, the transition sets the platform from which long-term decisions for the industry can now be taken. A supplementary Framework Document reflecting the new arrangements is expected in Q3 2016 to clarify the nature of the relationship between the DECC and the OGA further, but it is expected that the day-to-day functions in matters such as licensing, licensing strategy and policy, exploration activities, decommissioning, field and area strategies, managing infrastructure, consents, metering, supply chain issues and commercial relationships and managing the industry portal will continue to be managed independently by the OGA.12 

However, certain responsibilities have been supplemented or developed further by the Act, as described in the remainder of this article.

Dealing With Disputes

It is widely accepted that the UKCS is a challenging jurisdiction in which to operate, being a mature basin with aging infrastructure and increasingly diverse operators. The Act also provides the OGA with the powers necessary to resolve certain disputes due to high operating costs, limited access to funding and a change in approach to regulation to achieve MER UK. The OGA has said that it "will use the new regulatory powers ... such as those relating to dispute resolution and sanctions, prudently to improve UKCS operating performance in line with MER UK."13 

So what are these new powers and to what disputes are they applied?

The Act gives the OGA power to consider and make recommendations to resolve "qualifying disputes"14  that involve issues relevant to the fulfillment of the MER UK or that relate to activities carried out under an offshore license, and are not the subject of a section 82 application.15  An OGA application for recommendation must be made by a "relevant party" (a party to the dispute who has a relevant purpose and is either a holder of a petroleum license, an operator under petroleum license, an owner of upstream petroleum infrastructure or planning and carrying out the commissioning of upstream petroleum infrastructure16) "in such manner as the OGA may require," and the Act permits the OGA to make different provisions for different cases.17 

Information Gathering by the OGA

The OGA's role as a primary regulatory body is reinforced by its power to request from industry participants, by notice in writing, a wide range of petroleum-related information and samples, provided they are acquired in relation to fulfilling the principal objective of MER UK or in the course of licensed activities.18  While such provisions arguably give the OGA access to a broad range of information, an affected party has limited appeal rights in front of a Tribunal. A certain degree of comfort is offered by the strict safeguards for any obtained information where the OGA is only allowed to disclose such information to other branches of government and regulators, and only to the extent such disclosure is relevant to their functions.

Sanctions and Charges

The Act establishes a comprehensive sanctions regime to allow the OGA to target and sanction different categories of non-compliance. The OGA's power to levy these sanctions is triggered by industry participants' breach of a "petroleum-related requirement" which captures: (i) a duty to act in accordance with the MER UK; (ii) compliance with the terms or conditions of an offshore license; or (iii) any requirement imposed by the Act which is itself sanctionable, for instance a failure to comply with an OGA information request.19  

Prior to levying a sanction, the OGA must inform the relevant person of the alleged breach by giving a warning notice. The actual sanctions are imposed through four gradated types of notices, through enforcement, financial penalty, revocation of a petroleum license and operator removal.

The Act provides for the publication of guidance relating to the circumstances in which the OGA will consider a financial penalty,20 but no equivalent requirement is included for license revocation and operator removal notices. Any sanctions notice can be appealed within 28 days of issue.

Access to Infrastructure

Third parties seeking to access upstream infrastructure, but unable to agree on satisfactory terms of access with the owner, can make an application to the OGA to require access to be granted and to determine the terms on which it is to be granted a "section 82 application."21  The Act amends the Energy Act 2011 to allow for an application to access to be assigned to another party.22 It also introduces an element of continuity where the ownership of infrastructure that is the subject of an application has been transferred, by allowing all things done by the person to whom the application was made to be treated as done by its new owner.23  Any information provided by the third-party applicant to the OGA may be disclosed to the assignee of the application or to the new owner of the related infrastructure asset, provided that anything which might affect the commercial interests of the person providing the information has been removed. 

Decommissioning and Abandonment

With several fields in the UK North Sea coming closer to their end of life, there is naturally a great deal of focus on how the MER UK will interact with operators' decommissioning plans, whether or not submitted in connection with a section 29 notice.24  The Act creates a new section 28A to the Petroleum Act 1998 which expressly prevents abandonment or decommissioning of an offshore installation or submarine pipeline unless an appropriate program has been approved by the Secretary of State. It is an offense to start decommissioning without this approval.25  

The Act places an emphasis on keeping costs low in any decommissioning program, with a statutory obligation to frame any plan in such a way as to allow decommissioning to be carried out at the lowest practicable cost and be reasonably practical in the circumstances, without prejudice to existing obligations under primary and secondary legislation, such as in relation to environment or health and safety.

There is also a new duty on owners of offshore installations to act in accordance with the MER UK strategy when planning and carrying out the activities of an owner, or decommissioning an installation or infrastructure.26  The Act clarifies that this includes consideration of preservation or re-use and other uses than that for which the infrastructure was originally created. However, the Act remains light on specifics as to how such actions should be carried out beyond this general obligation.

Conclusions 

The approach of the reforms that might be described as "guidance before intervention" is commended. The Act has continued to entrench this welcomed approach. In this and many other respects, the OGA will act as a guiding hand to the industry, providing direction that is in the best interests of MER UK – a sensible development, particularly in light of the recent political uncertainty created by Brexit.

However, it is questionable whether the brevity of the strategy remains the right approach, and until the OGA has had time to build up a body of decisions and precedent, there will be uncertainty as to what is required to demonstrate that license holder plans are cost-efficient, or are indeed maximizing economic recovery. This will only be answered, as the OGA demonstrates, through action, that it is achieving its aims and meeting the industry's needs.

Footnotes

1 The "LED" unit within the DECC had responsibility for the oversight and administration of the regulatory regime established under the Petroleum Act 1998 and associated legislation.

2 The Oil and Gas Authority Framework Document, April 2015, Statement of Intent.

3 The "LED" unit within the DECC had responsibility for the oversight and administration of the regulatory regime established under the Petroleum Act 1998 and associated legislation.

4 The Oil and Gas Authority Framework Document, April 2015.

5 There are a number of formal differences between an Executive Agency and a GovCo, which will make it necessary for a new Framework Document to be entered into when the OGA becomes a private company.

6 S.1(1) of the Act.

7 S.1(2) of the Act.

8 S.2 of the Act.

9 S.3 of the Act.

10 S.4 of the Act.

11 S.6 of the Act.

12 These responsibilities were transferred to the OGA in their entirety at the time of the OGA's establishment as an Executive Agency.

13 OGA Corporate Plan, 2016-2021.

14 S.19 of the Act.

15 Section 82 applications concern the acquisition of rights to use upstream petroleum infrastructure under the Energy Act 2011. See also, "Access to Infrastructure," below. If the applicant and the owner do not reach agreement on the access application, the applicant may apply to the Secretary of State for a notice under subsection (11) which would secure to the applicant the right sought in the access application.

16 S.9A(1)(b) of the Petroleum Act 1998, as amended by the Act.

17 S.20 of the Act.

18 S.34 of the Act.

19 S.42(3) of the Act.

20 S.45(2) of the Act.

21 S.82 of the Energy Act 2011. See also "Dealing with Disputes," above.

22 S.89A of the Act.

23 S.89B of the Act.

24 I.e. a decommissioning plan submitted to the Secretary of State following a request made by the operator under s.29(1) of the Petroleum Act 1998.

25 S.28(2) of the Act.

26 S.73 of the Act, amending Part 1A of the Petroleum Act 1998 with a duty under a new s.9C(5).

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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