An extract from The Oil and Gas Law Review, 8th Edition
The oil and gas industry in the UK is in a period of transition – while continuing to address the realities of the UK continental shelf (UKCS) as a mature and complex basin, the industry is also adapting to a net zero future, which has been accelerated by effects of the covid-19 pandemic. These factors have shaped trends in the UK oil and gas industry's transactional and operating landscapes in recent times, as well as informing a number of recent legislative developments – in particular relating to innovation and 'decarbonisation' initiatives.
In May 2020, the UK Oil & Gas Authority (OGA) launched a consultation to amend its formal 'maximising economic recovery' (MER UK) strategy (described in more detail below) noting the vital role that the industry has to play in the energy transition while continuing to ensure that energy demand is met, both in the UK and globally for at least the medium term. The UKCS still represents a significant resource in terms of both current production and future potential. In 2019, production from the UKCS accounted for 63 per cent of the UK's oil and gas demand and it is estimated that 4 billion barrels oil equivalents (boe) is yet to be discovered in the UKCS.
As part of the MER UK strategy, the OGA has encouraged an approach of 'right assets, right hands' – ensuring that assets (as investment opportunities) are in the most appropriate hands as a key enabler in the drive to maximise economic recovery. In the last five years, 35 per cent of the current production has changed hands and deal activity during 2019 was similar to 2018 with total M&A spend reaching approximately US$5.6 billion. M&A activity has slowed down in the first half of 2020 because of the declining oil price and the effect of the covid-19 pandemic, with the value of UKCS upstream deals announced in the first half of 2020 being approximately US$450 million. A variety of transactions occurred across all stages of the upstream oil and gas life cycle, including exploration prospects, pre-development opportunities, producing fields and late-life assets. Recent transactions have resulted in a more diverse ownership landscape on the UKCS and a significant trend that has developed is the increasing proportion of assets, production and investment opportunities that have been acquired by private equity-backed companies. Infrastructure investors have increased their exposure to the midstream across various asset classes including pipelines, storage and LNG.
The UKCS retains significant resources and a continued focus on exploration and development of new fields. Many exciting prospects continue to be developed, and production has been on the upswing. Six new Field Development Plans were approved by the OGA in 2019. Total production from the UKCS was around 600 million boe in 2019, or 1.6 million boe per day (similar to 2018 and 20 per cent higher than 2014). The OGA's estimate for proven and probable UK reserves as at the end of 2018 is 5.2 billion boe. The UKCS still retains over 10 to 20 billion boe yet to be produced which could sustain production from the UKCS for another 20 years or more.
Legal and regulatory frameworki Domestic oil and gas legislation
The principal legislation governing exploration and production of crude oil, gas and shale gas in the UK is the Petroleum Act 1998 (as amended) (the Petroleum Act). The Petroleum Act governs all oil and gas exploration and production in the UK (other than onshore in Northern Ireland), and underpins a regime whereby licences are granted, by the OGA (and by the Welsh Ministers, for onshore oil and gas in Wales, and the Scottish Ministers, for onshore oil and gas in Scotland), to persons to 'search and bore for and get' petroleum. Licence holders are granted the right to explore and develop a specified geographical area. Ownership of petroleum vests in the Crown, and petroleum produced within the licence area transfers from the Crown to the licence holder at the well head.
The Petroleum Act is supplemented by the Energy Act 2016, the Infrastructure Act 2015 and various environmental and health and safety legislative provisions.ii Regulation
The Department for Business Energy and Industrial Strategy (BEIS) is responsible for setting energy and climate change mitigation policies and establishing the framework for achieving the policy goals in those areas.
From 1 October 2016, the OGA was formally established as a fully independent regulator and a government-owned company, with the Secretary of State for Business, Energy and Industrial Strategy (the Secretary of State) as the sole shareholder. The Secretary of State is ultimately responsible to Parliament for the OGA.
The OGA is the entity responsible for petroleum licensing and regulation of the upstream oil and gas sector, including:
- oil and gas licensing;
- oil and gas exploration and production;
- oil and gas fields and wells;
- oil and gas infrastructure; and
- carbon storage licensing.
In response to the decline in production from the UKCS, the UK government commissioned a review of the UK offshore oil and gas recovery and regulation led by Sir Ian Wood. The concluding recommendations of this review included the establishment of a new regulator (the OGA). The key principle of the recommendations, and the stated policy of the UK government, is to maximise the cost-effective recovery of UK resources. The Infrastructure Act 2015 amended the Petroleum Act, to implement an official MER UK strategy, which was produced by the Secretary of State and came into force in March 2016. The MER UK strategy is binding on the OGA, various industry participants, the Secretary of State and licence holders, operators and owners of offshore installations. The OGA has enforcement powers in respect of compliance with the MER UK strategy, and it is required to act in accordance with its MER UK strategy when:
- exercising its functions under the Petroleum Act or part 2 of the Energy Act 2016;
- exercising functions or powers under a petroleum licence; and
- using its ancillary powers; for example, to assist or advise the government.
The UK is a signatory to treaties including the Energy Charter Treaty, which regulates energy-specific matters, and the Geneva Convention on the Continent Shelf 1958 and the UN Convention on the Law of the Sea, which sets the limits of the state's territorial sea and access to the continental shelf and beyond.
Additionally, the UK is a party to conventions governing the recognition and enforcement of foreign arbitral awards including the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the Geneva Convention on the Execution of Foreign Arbitral Awards 1972 and the UN Convention on the Settlement of Investment Disputes between States and Nationals of Other States.
In respect of tax, the UK has an extensive network of double tax treaties with other jurisdictions that are broadly designed to prevent a taxpayer from having to pay tax in more than one jurisdiction on the same income, profits or gains. The extent to which any UK taxing rights may be restricted under a particular treaty depends on the nature of the income, profits or gains in question and the terms of the relevant treaty.