First-step analysis: the oil market and regulation in United Kingdom

General

Describe, in general terms, the key commercial aspects of the oil sector in your country.

According to the North Sea Transition Authority (NSTA), previously the Oil and Gas Authority (OGA), the UK's oil and gas industry regulator, as of the end of 2021, 46.4 billion barrels of oil equivalent had been recovered from the UK continental shelf (UKCS). The NSTA estimates that a further 10 to 20 billion barrels of oil equivalent could still be recovered from the UKCS. Production from the UKCS peaked in 1999, reaching 137 million tonnes. This was followed by a general decline, with production falling by 5 per cent each year on average. 2018 bucked this trend, with oil and gas production increasing more than 4 per cent from 2017, averaging 1.7 million barrels of oil equivalent per day (Mmboe/d), before drop­ping to 1.61Mmboe/d in 2020. In 2021, oil and gas production was just over 1.35 Mmboe/d, representing a year on year decline of 17 per cent. This follows extensive maintenance that had been both planned and then delayed from 2020 as a result of the covid-19 restrictions put in place. This also reflects lower levels of brownfield and greenfield investments. Gas production reached a record low in 2021 at 363 TWh, a 17 per cent fall in comparison to 2020. This was largely due to a shutdown of the Forties Pipeline System. However, the NSTA has reported an increase of approximately 17 per cent from 2021 to 2022.

In 2020, 73 new development wells were completed, down from the 2019 high of 106. These consisted of seven exploration wells (the lowest since 1965), two appraisal wells (the lowest since 1970), and 62 development wells (the lowest activity levels since 1976). The 2020 levels were half the levels seen in 2019 as companies deferred and cancelled activities to preserve cash and reduce operational risk, due to the impact of the covid-19 pandemic and the oil price crash. As of the end of 2020, only 51 wells were planned for 2021. Offshore Energies UK (OEUK), previously ‘Oil & Gas UK’, the leading industry-representative body for the UK offshore oil and gas sector, reported that only 55 new wells were drilled in 2022, the lowest rate since 1970 and 60 per cent lower than 2019.

The UK has the fifth-largest total refining capacity in Europe and some of its six crude oil refineries are among the largest in Europe. The refining business has experienced several disruptions, including the sale of three refineries in 2011, the closure of the Coryton refinery in 2012 and the closure of the Milford Haven refinery in late 2014. Production of petroleum products by refiners decreased by 4.5 per cent after the first quarter of 2020 compared with 2019. Refinery production reached a record low of 48 million tonnes in 2020, down more than 10 million tonnes as compared to 2019.

Before the impact of the covid-19 pandemic hit, with stable market conditions expected, it was anticipated that capital investment in 2020 would be in the region of between £5 and £5.5 billion, in line with the 2019 levels. However, this fell by 33 per cent to £3.7 billion in 2020 as a result of activity deferrals and cancellations. An immediate rebound was not expected in 2021, and capital expenditure is anticipated to remain between £3.2 billion and £3.7 billion. OEUK estimates that a pick-up in new field approvals might lead to a slight increase in overall capital investment in 2022-2023 and expects it to be £3.5-£4 billion per year. This is higher than 2020 and 2021 levels, but still less than two-thirds of the pre-pandemic level in 2019 of £5.5 billion.

The NSTA's estimate for remaining proven and probable UK reserves as at the end of 2021 was 4 billion boe. On the basis of current production projections, this could sustain production from the UKCS for at least another 20 years.

2021 also saw an increase in capital approvals in the development of new fields, becoming the largest area of industry expenditure, rising 10 per cent in 2021 and making a return to pre-covid levels. OEUK expects that 10 fields will have started up in 2022 and early 2023, which, combined with the new fields in 2021 will bring approximately 450 million boe of new reserves.

There was a 10 per cent decline in operating cost expenditure in 2020 to £6.6 billion (compared with £7.3 billion in 2019), as companies deferred some offshore activities and reduced offshore personnel levels by around one-fifth to reduce covid-19 exposure risk. However in 2021, nearly all OEUK supply chain members reported operating costs that were typically 10 per cent to 20 per cent higher than in early 2021, as a result of increased input costs such as steel and the effect of rising inflation.

In August 2022, the NSTA updated its SCAP (Supply Chain Action Plans) guidelines to account for SE-12 (Stewardship Expectation 12), the updated NSTA strategy, Net Zero and the North Sea Transition Deal.

Production tax receipts returned to positive figures in the 2017/18 and 2018/19 tax years, with Her Majesty's Revenue and Customs generating £1.25 billion and £1.28 billion in those years respectively, having paid out £294 million on a constant currency basis in 2016/17. In those two more recent tax years, production tax receipts represented 0.21 per cent of all receipts. The Office for Budget Responsibility forecasted the upstream sector will pay £18.5 billion in direct production taxes between 2021 and 2025 and a total of £23.4 billion through to 2027, which is £13.5 billion higher than their previous forecast in October 2021. The new Energy Profit Levy (Windfall Tax), implemented in 2022 as a consequence of a large spike in oil and gas prices following Russia's invasion of Ukraine, will play a key role in these increased tax receipts.

The Oil & Gas UK estimates that in 2020, a total 120,000 jobs were supported directly or indirectly by the UK upstream oil and gas industry with a further 60,000 jobs supported in the wider economy.

The NSTA announced the North Sea Transition Deal on 24 March 2021, and set out plans incrementally to decarbonise the North Sea Energy oil and gas sector, complying with the government's net-zero emission agenda. The UK government and oil and gas sector plan jointly to invest up to £16 billion, including the replacement of the fossil fuel-based power supplies, on oil and gas platforms with renewable energy by 2035. By 2022, progress was reported to have been made, for example, with four carbon capture storage licences being awarded, and with two clusters (HyNet North West and the East Coast Cluster) being selected for Track-1 of the cluster sequencing process, putting them in with a chance of becoming eligible for support under the government’s £1 billion Carbon Capture, Usage and Storage (CCUS) Infrastructure Fund. In 2023, the NSTA expects to award licenses from the first carbon storage round, believing that the UK has enough storage capacity to sequester the equivalent of all of the UK's emissions since the industrial revolution.

On 21 March 2022, NSTA announced its re-brand as the NSTA in order to reflect its 'expanded role, which includes emissions, monitoring and carbon storage licensing' and to further its commitment to deliver the North Sea Transition Deal. This is alongside its other aims of creating value by maximising employment opportunities and revenues for the country and making space for investment and innovation, and its continuing aim of regulating and influencing the energy industry itself, with goals such as maintaining strong energy production, upholding good stewardship standards and maintaining a stable domestic supply. In the NSTA’s 2023 Overview, it sets out some of the ways in which it is working to achieve these goals. For example, in order to cut carbon dioxide emissions, the NSTA considers the electrification of installations to be crucial, with the potential to cut two to three million tonnes of carbon dioxide emissions per annum by 2030. Furthermore, the NSTA is also focusing on technologies to reduce emissions, including optimised flare combustion efficiency and optimising electrification scope and cost. Innovation and Targeted Oil & Gas (INTOG) is a leasing round managed by Crown Estate Scotland seeking to reduce emissions from oil and gas production, as well as boost innovation, supported by the NSTA. In the four months after August 2022, when applications opened, INTOG received 10 applications for Innovation (IN) leases, and nine applications for Targeted Oil and Gas (TOG) decarbonisation. The exclusivity awards will be made in 2023, and the Option Agreements will be entered into in Q1 of 2024. NSTA also reported that in 2022, 5 oil/condensate projects were approved and five more started producing.

The Bacton Energy Hub is another project that the NSTA is relying on to achieve its goal of generating hydrogen by 2030, and the catchment areas’ potential to provide low-carbon energy to London and the South East of England for decades. The NSTA believes that decarbonising energy in the area using blue hydrogen with carbon capture and storage, could deliver 15 per cent of the government’s net zero strategy target. A key milestone in the Bacton vision is the formation of Industry consortium(s) which is expected to take place in the first half of 2023.

What percentage of your country’s energy needs is covered, directly or indirectly, by oil or gas as opposed to nuclear or non-conventional sources? What percentage of the petroleum product needs of your country is supplied with domestic production?

With respect to domestic production, according to statistics published in 2022 by the Department of Business, Energy and Industrial Strategy (BEIS), oil represented 42 per cent of the UK's energy production in 2021:

• natural gas: 29 per cent;
• coal: 1 per cent;
• bioenergy and waste: 12 per cent; and
• electricity: 16 per cent (consisting of wind, solar, natural-flow hydro and nuclear).

According to statistics published in 2022 by BEIS (now DESNZ), total energy consumption was 5.9 per cent higher in 2021 than 2020, a rise which is attributed primarily to the easing of the COVID-19 pandemic lockdown restructions. In 2021,  represented 32.1 per cent of the UK's energy usage in 2021:

• natural gas: 42.8 per cent;
• coal: 3.4 per cent;
• bioenergy and waste: 10.5 per cent; and
• electricity: 11.2 per cent (consisting mainly of nuclear).

In February 2023, the UK government split BEIS into three new departments, to include the Department for Energy Security and Net Zero (DESNZ), which will inherit such responsibilities as publishing energy statistics, ensuring the UK is on track to meet its Net Zero commitments and passing the new Energy Bill.

The UK is now a net importer of all main fuel types, although it remains a net exporter of some products such as petrol and diesel for vehicles. In 2021, 38 per cent of all energy used in the UK was imported, a sharp increase from 28 per cent in 2020, and up its highest since 2015. This increase was attributed by BEIS to easing of lockdown restrictions following the covid-19 pandemic and reduced UKCS production due to maintenance.

For 2018, the contribution by the energy industries to the UK economy was 3.2 per cent of gross domestic product (GDP) (0.3 percentage points higher than the previous year). Of the energy total, oil and gas production contributed to over one-third of the energy sector's total contribution and 1.2 per cent of overall UK GDP (around £24 billion). In 2021, the energy industry contributed 2.5 per cent of gross Value added to the UK economy, an increase from the 2020 level of 2.1 per cent. 

Does your country have an overarching policy regarding oil-related activities or a general energy policy?

The Energy Act 2010, which became law in April 2010, implements some of the key measures required to deliver the UK government's low carbon agenda. It includes provisions for delivering a programme for carbon capture and storage and for implementing mandatory social price support. It also introduces a number of measures aimed at ensuring that the energy markets are working fairly for consumers and are delivering secure and sustainable energy supplies. However, it was the Energy Act 2008 that enshrined the UK's present policy for the energy sector. The primary aim of the government in passing the 2008 Act was to tackle climate change, reduce carbon dioxide emissions and ensure secure, clean and affordable energy. The Energy Act 2008 also provided a regulatory framework for offshore gas storage, introduced changes to the offshore oil and gas decommissioning regime and extended third-party access to upstream oil and gas infrastructure. The government has, over a number of years, encouraged smaller companies to apply for licences in the UKCS and has made a concerted effort to maximise recovery of oil from the UKCS through initiatives such as the fallow acreage initiative and the Code of Practice on Access to Upstream Oil and Gas Infrastructure on the UKCS (Infrastructure Code of Practice). This policy was given further standing when the Energy Act 2011 was enacted, providing for the secretary of state to enforce access to upstream infrastructure on behalf of an applicant. Since the publi­cation of the Wood Review in 2013, there has been a further shift in government policy towards maximising the recovery of hydrocarbons from the UKCS through the government entering into consultation with the industry.

The Energy Act 2016 formally established the NSTA (OGA) with the secretary of state for DESNZ (previously BEIS), as the sole shareholder, to replace the Department for Energy and Climate Change as the entity responsible for petroleum licensing and regulation of the upstream oil and gas sector. The 2016 Act also enabled a more comprehensive charging of the offshore oil and gas industry for permits and licences for environmental and decommissioning activity.

In addition, the Climate Change Act 2008 introduced the world's first long-term legally binding framework to reduce greenhouse gas emissions and set carbon budgets. Separate additional legislation, the Climate Change (Scotland) Act 2009, is also in place. Also of relevance in terms of greenhouse emissions is the Greenhouse Gas Emissions Trading Scheme Order 2020 as amended. This sets out the framework of the UK Emissions Trading Scheme (ETS), which replaced the UK's participation in the EU ETS on 1 January 2021 following the UK's exit from the EU. The new UK ETS closely follows the EU ETS and provides a carbon pricing mechanism as a tool for achieving the UK's net zero emissions target by 2050. More recently, mandatory reporting require­ments were introduced for quoted companies incorporated within the UK to disclose details of their greenhouse gas emissions in their direc­tors' report or in a stand-alone strategic review. In addition, the Energy Savings Opportunity Scheme Regulations 2014 (ESOS) were introduced to implement article 8 of the Energy Efficiency Directive 2012/27/EU. The 2014 Regulations remain UK law. ESOS requires relevant under­takings (as defined in the legislation) and their corporate groups to undertake mandatory energy assessments by 5 December 2015 and every four years thereafter if they continue to qualify.

Following the Energy White Paper (December 2020), the Energy Bill 2022-23 was introduced to Parliament on 6 July 2022. It puts net zero at the forefront, as well as increasing jobs and regulating consumer energy prices and making the UKCS a net zero basin by 2050.

The NSTA's North Sea Transition Deal detailed how the oil and gas industry in the UK will play its part in the climate emergency. This underscored the UK government's commitment to transition to net zero by 2050, and set out some key messages in the run up to COP26.

On 7 April 2022, the UK government released a policy paper entitled the British Energy Security Strategy. This policy aims to make energy more affordable, clean and secure, driven by the surge in energy demand as lockdown restrictions lifted, and the Russian invasion of Ukraine increased gas prices globally. This policy will firstly attempt to improve energy efficiency by taking measures such as investing £6 billion on decarbonising homes and buildings, and reducing dependence on imported oil and gas, and by increasing investment in nuclear power. This paper was considered in Parliament in July 2022. On 30 March 2023, a number of stakeholders declared their support of the Energy Security Plan, including representatives from the Nuclear Industry Association, UK Finance and the Energy Networks Association.

The UK government is considering this Energy Strategy alongside its ‘Ten Point plan for a green industrial revolution’ and its ‘Net Zero Strategy’. An example of this can be seen in the government’s intention to move forward with clean energy developments, in order to reduce reliance on imports of energy.

As of 2022, the government had raised £22 billion in private investment in order to deliver on its ten-point plan, with £1.6 billion invested in the advancement of offshore wind, £4 billion of investment moving into the UK zero emission vehicle sector, and £615 million allocated from the Net Zero Innovation Portfolio in green finance and innovation. The plan is to mobilise £12 billion of government investment over the next decade and three times as much private investment by 2030.

Is there an official, publicly available register for licences and licensees? Is there a register setting out oilfield ownership or operatorship, etc?

The NSTA has disabled its previous online register of all existing licences and their respective licensees (the Oil and Gas Portal, latterly the Energy Portal), in favour of a new open data platform. Like the Oil and Gas Portal, the new platform is publicly accessible at no cost. However, the NSTA does not accept any responsibility for the accuracy of the information on its website and does not accept any liability as a result of reliance upon such information. There is a process of checking the accuracy of the published data upon lodging any assignment.

The NSTA also maintains an index setting out oilfield ownership, operatorship and production, which is publicly accessible at no cost through its website.

However, as with licences and licensees, the NSTA does not accept any responsibility for the accuracy of the information provided, and reports that anyone relying on the information does so at their own risk.

Describe the general legal system in your country.

The legal system in England and Wales, Scotland and Northern Ireland is one of the oldest and most established legal systems in the world. As such, many international agreements are governed by English law. The legal system is based on a well-established common law system that has been developed through the years by the courts and the creation of case law, which sets out tests and interpretative procedures that should be followed when determining the meaning of contracts. There is a well-developed appeals procedure from the High Court, to the Court of Appeal and finally to the Supreme Court. The judiciary maintains its independence from the government and, as such, is able to uphold the rule of law at all times.

Regulation overview

Describe the key laws and regulations that make up the principal legal framework regulating oil and gas activities.

The Petroleum Act 1998 governs oil and gas exploration and production activities in the UK. The Act vests ownership of petroleum both onshore and offshore in the UK continental shelf (UKCS) in the Crown and empowers the secretary of state to grant licences for the exclusive right to search for, bore for and extract petroleum in the area covered by the licence. Licences are acquired through competitive licensing rounds held each year by the North Sea Transition Authority (NSTA). For the 32^nd Licensing Round, on 3 September 2020, the NSTA offered for award 113 licence areas over 260 blocks or part-blocks to 65 companies. Following the 32nd round, the NSTA did not run a licence round in the 2020/2021 period because of a temporary pause from annual licence round activity. For the most recent Licensing Round (33^rd), which ran from 7 October 2022 to January 2023, the NSTA saw a total of 115 bids across 258 blocks from 76 companies. The NSTA, seeing CCS (Carbon Capture and Storage) as critical to the UK's net zero target, also ran the 1^st Carbon Storage licensing round in June 2022, offering 13 areas around the UK coastline. The round saw 26 bids from 19 different companies and it is predicted that the new storage areas could contribute significantly to the aim of storing 20-30 million tonnes of carbon dioxide per year by 2030.

A company will make (either by itself or as part of a joint venture) an application for a specific area. Licences may also be acquired through asset transfers between companies and the consent of the NSTA is required prior to any licence assignment. The conditions of a licence (known as 'model clauses') are set out in secondary legislation, which for existing offshore production licences are set out in the Petroleum Licensing (Production) (Seaward Areas) Regulations 2008. The model clauses set out in detail the conditions for the licence, including term, licence surrender, record-keeping, working obligations, appointment of operator, measurements and pollution. In awarding licences, the NSTA must also comply with the Hydrocarbons Licensing Directive Regulations 1995, as amended by the Pipelines, Petroleum, Electricity Works and Oil Stocking (Miscellaneous Amendments) (EU Exit) Regulations 2018, which set out additional rules that must be followed when issuing petroleum licences.

In August 2020, the Department for Business, Energy and Industrial Strategy (BEIS) (now DESNZ) announced it would review its policy on the future UK offshore oil and gas licensing regime as part of the wider aim of achieving net zero greenhouse gas emissions by 2050. In March 2021, BEIS confirmed that it would be introducing a new climate compatibility checkpoint before each future oil and gas licensing round to ensure licences awarded are aligned with wider climate objectives, including net zero emissions by 2050 and the UK's diverse energy supply. The checkpoint will use the latest evidence, looking at domestic demand for oil and gas, the sector's projected production levels, the increasing use of clean technologies such as offshore wind and carbon capture, and the sector's continued progress against its emissions reduction targets.

If the evidence suggests that a future licensing round would undermine the UK's climate goals or delivery of net zero, it will not go ahead. The consultation ran from 20 December 2021 until 28 February 2022, and in September 2022, the government published its response. Overall, it was found that continued licensing for oil and gas is not inherently incompatible with the UK's climate objectives and that, at that time, issuing a future licensing round for oil and gas would not materially impact the ability of the UK to meet its international commitments in relation to global warming. This was caveated by the acknowledgment that it cannot be said that continuing with future licensing rounds will always be compatible with the UK's climate change commitments. It is for this reason that the Climate Compatibility Checkpoint is key for providing key information to decision makers before permitting a future licensing round.

In addition to the regulatory requirements, there are a number of voluntary industry-based codes of practice to which many UKCS licensees have signed up to. The Code of Practice on Access to Upstream Oil and Gas Infrastructure on the UKCS (Infrastructure Code of Practice) is intended to facilitate access by a third party to oil infrastructure in the UKCS such that the parties involved can agree fair and reasonable terms. The fallow acreage initiative places pressure on licensees to deliver activity on old licences where companies have not been active for some time or relinquish licences in order for the acreage to be offered to other companies. With respect to transfers of licences, the Commercial Code of Practice establishes an agreed framework to minimise resources spent on negotiations and promote positive commercial behaviour.

The Bribery Act 2010 came into force on 1 July 2011 and created a number of offences including:

• a number of general bribery offences;
• the offence of bribing a foreign public official; and
• the offence of a commercial organisation failing to prevent bribery on its behalf (this applies to any organisation that has business operations in the UK).

Are there any legislative provisions that allow for expropriation of a licensee’s interest and, if so, under what conditions?

At present, there are no legislative provisions that allow for the expropriation of a licensee’s interest. However, as the terms of a licence may be unilaterally altered by the government, any change in the law may allow for the expropriation of a licensee’s interest.

May the government revoke or amend a licensee’s interest?

The NSTA can terminate licences for breach, and there is indeed a process of surrender, but otherwise there can be no amendment without agreement. A petroleum licence is an instrument (a mix of contract and regulation) between the licensee and the Crown, that can only be amended (or, absent a breach, terminated) by agreement (as held in R (Benjamin Dean) v The Secretary of State for Business, Energy and Industrial Strategy [2017] EWHC 1998 (Admin)). The court noted that the problems for offshore licensees – and the consequent need for flexibility – would be much greater, as their costs are typically an order of magnitude greater than those onshore. The fact that there were certain consent stages in an offshore licence, which must satisfy further regulatory requirements before certain works can begin (eg, environmental impact assessments), did not alter the nature of the grant of exclusive property rights by the Crown and the incidental power to amend the licence by agreement. The only restriction was that no agreed variation to the licence could override those further regulatory requirements.

Identify and describe the government regulatory and oversight bodies principally responsible for regulating oil exploration and production activities in your country. What sanctions for breach may be imposed by the regulatory and oversight bodies?

Historically, the Department for Energy and Climate Change (DECC) was the government authority primarily responsible for the development and regulation of the oil and gas industry in the UK. DECC was established in October 2008 following a transfer of powers from the Department of Business Enterprise and Regulatory Reform. On 1 April 2015, certain functions passed from DECC to the NSTA, a newly created executive agency of DECC structured as a company owned by the secretary of state. DECC's role in licensing, exploration and development was transferred to the NSTA, which is responsible for maximising the cost-effective recovery of oil and gas from the UKCS. In 2016, DECC was merged with the Department for Business, Innovation and Skills. In their place, BEIS was created. In February 2023, BEIS was split into the Department for Science, Innovation and Technology, the Department for Energy Security and Net Zero (DESNZ), and the Department for Business and Trade.

In the event that a licensee breaches the terms and conditions of its licence, the NSTA may revoke the licence and the rights granted under it (without prejudice to any obligations and liabilities owed by the licensee). The Energy Act 2016 introduced a right for the NSTA to issue a sanction notice on a person that it considers has failed to comply with a petroleum-related requirement. Such a failure can include, inter alia, a failure to comply with the terms and conditions of an offshore licence. Prior to service of such sanction notice, the NSTA must first serve a sanction warning notice (to include a specified period in which the recipient may make representations to the NSTA). A sanction notice may take one of four forms:

• an enforcement notice (requiring the recipient to comply with the terms specified in the notice);
• a financial penalty notice (requiring payment of a fine not exceeding £1 million, although the secretary of state reserves the right to increase such a limit to £5 million by way of new regulation);
• a revocation notice (revoking the recipient's licence); or
• an operator removal notice (requiring a licensee to remove its operator).

If a recipient fails to comply with an enforcement notice, the NSTA may serve one of the other sanction notices. A recipient may appeal a sanction notice on the basis that there was no failure by it to comply with the petroleum-related requirement or that the sanction given in the notice was unreasonable or not within the powers of the NSTA. Sanction notices issued by the NSTA may be published (subject to redaction of information that is commercially sensitive, not in the public's best interest or inappropriate).

Other regulatory bodies include the Health and Safety Executive (HSE), which is responsible for health and safety, and the Hazardous Installations Directorate, which is responsible for regulating and promoting improvements in health and safety across the offshore oil and gas sector. The HSE may also impose sanctions for breach of health and safety regulations.

What government body maintains oil production, export and import statistics?

The Office for National Statistics is the central data source, where the statistics for oil production, export and import are produced to a high professional standard. Since March 2019, the NSTA has also published its own information (known as North Sea Transition Authority Open Data), generated via the National Data Repository contributed to by licensees since February 2019.