Provisions regarding development, the second of the substantive Supporting Obligations, are stated in Paragraphs 13 and 14 of the Strategy. Limited by the Safeguards, the intention and effect of the Supporting Obligations is to expand on the Central Obligation.[1]

On Friday 13 May 2016, the Energy Bill attained Royal Assent to become the Energy Act 2016.

Paragraph 13

''Relevant persons must plan, commission and construct infrastructure in a way that meets the optimum configuration for maximising the value of economically recoverable petroleum that can be recovered from the region in which the infrastructure is to be located." [2]

''In this context “configuration” includes not only the geographic placement of infrastructure, but also the sort of infrastructure to be used.''

Paragraph 14

''In considering the configuration required by paragraph 13, relevant persons must give due consideration to:

  1. whether or not any infrastructure proposed to be constructed under such a plan or commission could be of benefit to others, who are recovering petroleum from that region or who may begin to do so, by increasing the recovery of economically recoverable petroleum from that region: and
  2. whether or not any infrastructure already in existence could be used in such a way to reduce costs or otherwise increase the recovery of economically recoverable petroleum from the region.

This includes consideration as to whether any such infrastructure (whether proposed to be constructed or already in existence) could be so used if reasonable adjustments were to be made to it.''

Paragraph 13 makes it clear that MER Parties must design, position and construct new infrastructure so as to maximise ''the value of economically recoverable petroleum that can be recovered from the region...'' This key principle is wholly consistent with the fundamental premise of MER in that MER Parties are obligated to take steps to maximise economically recoverable petroleum (ERP) across the oil province and not merely from their own licence areas.

In our last article on Exploration [3] we discussed the scope and resource categorisation of ERP: does this concept refer only to proven resources, or could it also extend to contingent resources, or prospective resources? This question is equally pertinent in the context of development.

Paragraph 14 adds flesh to Paragraph 13, specifying that MER Parties, in determining the infrastructure configuration, must consider whether the new infrastructure ''could be of benefit to others, who are recovering petroleum from that region or who may begin to do so…''(emphasis added) and whether any existing infrastructure could be used ''to reduce costs or otherwise increase the recovery of [ERP]…''

Identifying those MER Parties presently recovering petroleum in any region where a development is planned ought not to be a difficult task. However, identifying those who “may begin to do so” will likely be more arduous. This wording also suggests that the MER Party considering the development may have to take into account contingent or prospective resources.

Paragraph 14 is designed to address the problem identified in the Wood Review, page 13, at which Sir Ian Wood notes that over the three years prior to 2014, ten FPSOs were selected to produce new UKCS fields. Sir Ian noted that while these were a cheap option, the FPSOs have high operating costs and poorer field recovery. In his view: ''Every effort must be made to use the existing infrastructure where available.''

Contribution to development costs

Identifying any relevant MER Parties to whom duties may be owed is clearly going to be crucial for the MER Party responsible for the development of infrastructure. This is true not only because of the provisions of Paragraphs 13 and 14, but also because of the Safeguard set out in Paragraph 5. [4] This Safeguard permits the MER Party responsible for the development to require a “fair and reasonable” contribution to the costs associated with the development from those MER Parties who will ''wholly or partly benefit'' from the investment and development. Receiving a financial contribution towards development work is going to be a key consideration for any MER Party planning and carrying out such work.

Once any MER Parties that will wholly or partly benefit from the investment and development have been identified, the MER Parties must then reach agreement as to what is a “fair and reasonable” contribution to the development costs. There is no further guidance in the Strategy to assist the MER Parties in deciding on what would be a “fair and reasonable” contribution.

The Strategy has a considerable impact on any new development work and it expressly requires a MER Party planning such a development to think objectively about how the development could benefit the region as a whole. This was not a legal requirement prior to the Strategy.

The Oil and Gas team at Bond Dickinson have carried out a thorough review of the Strategy and is well placed to guide you through these changes and the impact that it will have on your business.