The MER Strategy marks a huge regulatory change for North Sea oil companies. UKCS oil companies will now have to act in large part based on principles determined by economic analysis. Through the introduction of the (pending) Energy Act 2016 the Oil and Gas Authority (OGA) will be given a huge amount of power over North Sea oil and gas companies. Central to its power will be the requirement for companies to take decisions for the benefit of the UKCS as a whole, rather than just their own interests, under the principle of Maximising Economic Recovery (MER) stemming from the Wood review.

Over the coming weeks Bond Dickinson will be issuing a series of briefings looking at the likely impact that the Strategy will have on the Oil & Gas sector as a whole. Each briefing will aim to identify the key elements of the Strategy and explain in more detail what they will mean for you and your business.

This first briefing looks in detail at the Central Obligation of the Strategy and the related Safeguards.

Introduction

The MER Strategy, enacted under Section 9 A(2) Petroleum Act 1998, is the substantive legal basis for the concept of "maximising economic recovery of UK petroleum"  first promoted by Sir Ian Wood in his landmark 2014 Wood Review.

Within a few weeks, we expect that the Energy Bill will attain Royal Assent and become the Act.  This extensive piece of legislation will create the OGA as an autonomous governmental agency and afford it extensive new regulatory powers.  Included in the latter powers are rights to sanction companies who fail to abide by the MER Strategy.  Section 9C of the Petroleum Act 1998 provides that only offshore licensees, operators of offshore licences, owners of upstream petroleum infrastructure or persons planning and carrying out the commissioning of upstream petroleum infrastructure (MER Parties) are bound by the MER Strategy.

(Click here to see the full Strategy)

The Central Obligation

The Central Obligation, Para. 7 states that MER Parties must:

"…. take the steps necessary to secure that the maximum value of economically recoverable petroleum is recovered from the strata beneath relevant UK waters.”

This Strategy seeks to create clear obligations on the OGA and MER parties. Going forward these parties will be required to act in accordance with the obligations set out in the MER Strategy in order to maximise the value of economically recoverable resources from the UKCS. These obligations require parties to collaborate with others when undertaking the following activities; Exploration; Development; Asset Stewardship; Technology and Decommissioning.

Consistent with the Strategy, the OGA has recently published a number of its priorities in its Corporate Plan (click to here to see Corporate Plan):

  • To implement a licensing regime that encourages high levels of exploration, using analysis and insights to proactively influence and help incentivise exploration on the UKCS
  • Stewarding the development of the UK oil and gas resources across the lifecycle, working within the industry to optimise efficiency while maintaining high standards of safety and environmental management
  • Seeing the big picture and maximising the sum of the parts helping to make sure that barriers to regional development are removed and critical infrastructure and production hubs are protected
  • Achieving the maximum extension of field life and ensuring that decommissioning is executed in a safe, environmentally sound and cost effective manner and that the UK gains competitive advantage
  • Ensuring that existing technologies are deployed to their full effect, relevant new technologies are developed and that the collection analysis and sharing of data is used to maximise economic recovery.

More on OGA powers

The Act will give the OGA new regulatory powers including a range of sanctions so that they are able to implement and enforce the Strategy. These sanctions range from financial penalties, enforcement notices, the removal of operatorships and the revocation of licences.

The Act will also give the OGA powers to resolve disputes by non-binding dispute resolution, to be informed of and participate in meetings relevant to MER and to access information relevant to MER.

How will this impact business?

UKCS companies will, to some considerable extent, now have to make investment decisions based not only on their own economic benefit but for the benefit of the oil province as a whole.

Safeguards

However the Strategy does also set out some fundamental safeguards for industry. These are;

  • clarification that the Strategy  does not cut across other legal and  regulatory requirements such as those required under Competition and  Health and Safety regulation;
  • that those bound by the Strategy can expect to receive compensation in respect of any investment they make for the benefit of others;
  • that no obligation under the Strategy should lead to those bound by it to make less than a satisfactory expected commercial return. The OGA could, however, force divestments if a MER party says it doesn't have sufficient economic commercial return, and
  • that no obligation under the Strategy  should require a party to do something which would on balance damage the confidence of investors in  UKCS oil and gas exploration and production projects.

The long term future of the UK North Sea oil and gas industry, which is so vital to ensuring that the North-east of Scotland retains the expertise to make it a respected hub for the oil and gas business, depends on the success of the OGA and the Strategy.