The background

On 15 December 2016, the High Court granted permission to proceed for a judicial review of the lawful authority of the Secretary of State for Business, Energy and Industrial Strategy (the “Secretary”) to vary the terms of an existing UK Petroleum Licence (“Licence”).

Under review is the current practice of the Secretary to – on occasion – agree with licensees' changes to the terms of their individual Licences. Typically, such changes are to extend the final term of a Licence (for example where a field remains in production and capable of yielding further tax revenues past the originally envisaged Licence end date), or to extend the initial term of a Licence (but without extending the overall terms) to give a Licensee more time to appraise its acreage.

In the current case, the Oil and Gas Authority (exercising the powers of the Secretary of State under the Petroleum Act 1998) and the Licensee - Dart Energy - agreed to extend the period of the first term of Licence PEDL 189, but without extending the overall length of the Licence. Friends of the Earth sought permission to judicially review the Secretary’s legal authority to agree to the extension.

The substantive issues

The case is yet to proceed to a full hearing and the parties are yet to present fully their respective arguments. However the parties at the permission hearing did address the substantive issues upon which the judicial review is likely to be decided and this offers some insight into the respective positions of the Secretary of State and Friends of the Earth. In particular:

1. Whether a UK Petroleum Licence is contractual or regulatory in character;

a. if it is contractual (as counsel on behalf of the Secretary argued, citing the language of section 3(3) of the Petroleum Act 1998), then it is argued that the Secretary and the Licensee can vary the Licence as they see fit;

b. if it is regulatory (as was argued by counsel for Friends of the Earth, citing the case of IRC v Mobil North Sea [1987] 1 W.L.R. 1065), then it is argued that the Secretary must rely on express statutory powers - arising under the Petroleum Act 1998 and related regulations – or the express terms of the Licence in order to grant a variation (if such power exists).

2. Whether the Petroleum Act 1998 and accompanying regulations establish adequate powers for the Secretary to vary Licence terms;

a. counsel for both parties accepted that the Secretary has an express power – contained at section 4(1)(e) of the Petroleum Act 1998 – to modify or exclude the application of the published model clauses (which contain the applicable Licence terms and are set out in regulations) on the grant of any particular Licence;

b. the difference between counsel for the claimant and the Secretary is whether the absence of an express right to vary Licences after grant prevents the Secretary from agreeing any variation to the Licence which is not specifically contemplated in the Licence terms;

c. it was accepted by counsel for both parties that the Petroleum Licensing (Exploration and Production) (Landward Areas) Regulations 2014 had introduced into the terms of the most recent 14th Onshore Round Licences an express right for the Secretary to extend the first period of the terms of those Licences after they had been granted. It was argued by counsel for the Secretary that this change was not an admission that no such power had existed previously, but simply a change introduced for administrative convenience (to enable Licence variations to be documented by simple agreements, rather than requiring deeds of variation).

The court’s decision

The purpose of the hearing was not to decide the case, but merely to determine if it has sufficient grounds (and was suitable) to proceed to a full judicial review.

Permission was granted for the judicial review to proceed, with the court finding that the ground of challenge was at least arguable.

Next steps

Whilst offering the prospect of judicial guidance on the contractual or regulatory nature of the UK Petroleum Licence, a question of interest – to oil & gas lawyers at least – for some time, this case will be watched closely by the UK oil industry; not least because it calls into question the practices of the OGA (and its predecessors in function), and the industry, with regards the administration of UK Petroleum Licences - in particular the extension of a number of Licences under which major North Sea fields continue to be owned and operated. Crucially it marks the latest chapter in the on-going efforts of certain pressure groups to restrict the development of the nascent UK unconventional oil and gas industry.