Introduction

In the early stages of the development of the UK Continental Shelf, a large number of fields were developed by relatively few major oil companies. Over time, the landscape of the North Sea's development has altered significantly with the discovery of more marginal fields being operated by smaller oil and gas companies.

This has created challenges for the UK oil and gas industry, as it is increasingly more difficult for smaller fields or more mature fields in the North Sea basin to remain economically viable – a situation which has been exacerbated by the recent volatility in the oil price.

The rate of exploration in the North Sea fell from 157 exploration wells in 1990 to just 13 wells in 2015. Decreases in production and average production efficiency over the past decade have also reinforced the need for systemic change in the industry to ensure that the development of the UK Continental Shelf remains sustainable and profitable in the years to come.

Wood Review

In 2013 the UK government commissioned Sir Ian Wood to prepare a report outlining how economic recovery in the UK Continental Shelf could be maximised. The Wood Review, which was published on February 24 2014, advised that a new strategy for maximising economic recovery from the UK Continental Shelf was required (referred to as the 'MER UK' strategy). Among other things, it recommended the establishment of a new arm's-length regulatory body charged with regulating oil and gas recovery. In 2014 the government accepted all of the Wood Review's recommendations and has pressed ahead with implementing the proposals.

Establishment of OGA and MER UK strategy

The Oil and Gas Authority (OGA) was established on April 1 2015 to give effect to one of the principal recommendations of the Wood Review. The OGA is currently an executive agency of the Department of Energy and Climate Change and – subject to passage of the Energy Bill (which is still being considered in Parliament and is expected to come into effect later this year) – will transition into a government company during Summer 2016. The Energy Bill formally establishes the OGA as an independent regulator of the oil and gas industry and transfers certain of the secretary of state's existing regulatory powers to the OGA.

One of the OGA's key objectives is to implement the MER UK strategy; to achieve this, the OGA views itself as a "catalyst for change and facilitator of action". The MER UK principle has now been enshrined in statute by the Infrastructure Act 2015, the effect of which was to insert new provisions in the Petroleum Act 1998 which require the secretary of state to produce a strategy to meet the MER UK objective. Following a consultation period on the initial draft of the strategy, a revised draft was laid before Parliament on January 28 2016. The OGA is to give effect to the revised draft of the strategy, unless Parliament resolves not to approve the draft by early March 2016.

The strategy to be implemented by the OGA in relation to MER UK comprises a number of obligations on owners and operators of UK Continental Shelf licences, including requirements to maximise recovery of petroleum from licences (and to secure investment or sell their assets to another financially and technically competent person if they are unable to do so) and to allow third-party access to such infrastructure on fair and reasonable terms.

OGA's powers

The OGA is charged with licensing onshore and offshore oil and gas operations and carbon capture and storage, and is given wide powers to implement and enforce the MER UK strategy. The OGA is also empowered to consider disputes and impose civil penalties for non-compliance (including the ability to issue enforcement notices and financial penalties, and to revoke licences for breach of the MER UK strategy).

The Energy Bill prescribes that the OGA, in carrying out its remit, must have regard to the following non-exhaustive list of matters:

  • minimising public expenditure relating to oil and gas activities;
  • ensuring energy security for the United Kingdom;
  • working collaboratively with the government and industry stakeholders;
  • encouraging innovative technology and working practices; and
  • maintaining a stable and predictable system of regulation which encourages investment.

In addition to facilitating the development of discoveries and maximising economic recovery from producing fields, the OGA aims to revitalise exploration. To this end, the OGA is committed to providing geophysical data to help to improve the industry's understanding of underexplored areas of the UK Continental Shelf basin, with a view to attracting fresh investment. The OGA reported that the government-funded data acquisition stage (comprising 20,000 kilometres of new two-dimensional seismic lines over an area of 200,000 square kilometres) of its seismic campaign was completed in October 2015. The OGA has commented that the 29th round, which is expected in 2016, will focus on frontier areas of the UK Continental Shelf using data obtained from that seismic campaign.

Dispute resolution

The Energy Bill introduces new powers for the OGA to consider and make recommendations for the resolution of disputes relating to the fulfilment of the MER UK strategy or activities carried out under offshore licences between relevant parties (ie, licence holders, operators and owners of infrastructure). The scope of the OGA's jurisdiction is therefore potentially extremely broad.

In addition to a relevant party referring a dispute to the OGA, the OGA may consider a dispute on its own initiative. However, it seems unlikely in practice that the regulator would elect to do so, unless it could play a constructive role in the dispute resolution process.

The OGA is entitled to reject a dispute on various grounds, including where it deems the dispute to be vexatious or insufficiently material to the fulfilment of the MER UK strategy. Where the OGA elects to accept a dispute, it must draw up a timetable setting out milestones for consideration of the dispute and issuance of recommendation to resolve it. The OGA's recommendation must resolve the dispute in a way which best contributes to the fulfilment of the MER UK strategy, in addition to being economically viable for the parties concerned. Any relevant party that fails to comply with the timetable set by the OGA or any direction given may be subject to penalties.

Although a recommendation from the OGA is not binding, it is likely to be persuasive to the parties involved, particularly as the OGA may elect to publish its recommendation.

Penalties

The Energy Bill empowers the OGA to issue enforcement notices, financial penalty notices, revocation notices and removal of operator notices where it considers that a person has failed to comply with the terms and conditions of offshore petroleum licences, the duty to act in accordance with the MER UK strategy or certain other obligations in the Energy Bill. This power to impose civil penalties gives the regulator teeth to deliver the MER UK strategy. Parties can appeal a penalty within 28 days of the date of the notice and the OGA may – but is not required to – publish details of a penalty.

Any financial penalty imposed by the OGA may not exceed £1 million (although the secretary of state has the power to increase this cap to £5 million) for each breach and the OGA is required to publish guidance on the matters to which it will have regard when determining the amount of a financial penalty. Such guidance will be released by the OGA following passage of the Energy Bill.

Levy

On October 1 2015 the Oil and Gas Authority (Levy) Regulations 2015 came into force and made provision for a levy to be imposed on each licensee holding an offshore licence for the initial period of October 1 2015 to March 31 2016.

The purpose of the levy is to ensure that the OGA is sufficiently resourced to meet the challenge of delivering the MER UK strategy. The amount of the levy varies depending on whether the field is in the exploration or development phase. A licence holder will initially pay a levy of around £3,000 for a field in the pre-production or exploration phase; whereas a levy of around £30,000 is payable for a field in production. It is intended that a new set of regulations will be brought forward in 2016, which will set out the rate of the levy payable on an annual basis from April of each year.

The levy must be paid by licence holders within 30 days. Where the licensee is more than one person, the liability to pay the levy to the OGA is joint and several among licensees on the same licence (and it is expected that this will be dealt with by the operator of each licence making a single payment on behalf of all the licensees, which will then be charged to the joint account).

In order to assist industry with the increased financial burden, the government has said that it will contribute £3 million a year for the first five years of operation of the OGA as a government company, starting from 2016/2017.

Comment

The OGA has indicated that it intends to be a regulator that is close with industry participants and will not seek to unnecessarily wield its extensive power. Such a 'partnering' approach to execute the OGA's mandate in relation to the MER UK strategy is likely to bear greater results, particularly in light of the current economic constraints being endured by the industry. This will also likely appease any industry concerns regarding over-regulation and may also help to drive efficiencies that will deliver the MER UK strategy, facilitate the continued development of the UK Continental Shelf and, as a consequence, benefit the wider UK economy.

For further information on this topic please contact Darren Spalding, Eimear Murphy or Adam Waszkiewicz at Bracewell (UK) LLP by telephone (+44 20 7448 4200?) or email (darren.spalding@bracewelllaw.com, eimear.murphy@bracewelllaw.com or adam.waszkiewicz@bracewelllaw.com). The Bracewell (UK) LLP website can be accessed at www.bracewelllaw.com.

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