Contributed By Mayer Brown International LLP
In the United Kingdom, the Crown (ie the state) has exclusive rights to exploit petroleum resources. Relevant legislation, most notably the Petroleum Act 1998, governs the licensing of rights to other parties to explore for, develop and produce petroleum resources.
Petroleum activity in the UK is principally regulated by the Oil & Gas Authority (OGA): https://www.ogauthority.co.uk/ The OGA is a government company, the sole shareholder being the Secretary of State for Business, Energy and Industrial Strategy (BEIS). The OGA acts as an independent petroleum regulator with jurisdiction over the petroleum licensing regime, and has powers to:
Decommissioning activities are regulated by the Offshore Petroleum Regulator for Environment and Decommissioning (OPRED), a connected part of BEIS, although the OGA has its own decommissioning strategy linked to MER UK (see further at 1.4 Principal Petroleum Law(s) and Regulations below).
HM Treasury is in control of tax-related matters and all relevant taxes are collected by HM Revenue and Customs.
There is no UK national or state-controlled oil and gas company.
Petroleum Act 1998: vests ownership of petroleum in the Crown and grants powers for the award of licences to explore for and produce petroleum.
Infrastructure Act 2015: provides the legislative basis for the overriding strategy of the OGA, which is to ensure that all relevant parties maximise economic recovery of UK petroleum resources (MER UK). This Act also provides for the industry levy that funds the OGA.
Energy Act 2016: created the legislative framework to formally establish the OGA as a government company with many of the powers previously held by the Secretary of State. It also provides the OGA with the extra licensing regulatory powers listed in 1.2 System of Petroleum Ownership above.
The UK operates a licensing regime to grant rights to explore, develop and produce petroleum resources. The licence is granted by the OGA to the “licensee”. The licensee may, in practice, be a group of several companies, and being jointly and severally liable to the OGA under the terms of the licence.
Every licence contains “model clauses” which are uniform conditions imposed on licensees. The model clauses are determined by regulations made under the Petroleum Act. Recent licences include the currently applicable model clauses. However, historic licences, which do not include the now-applicable model clauses, are deemed to incorporate the clauses that were in place at the time the licence was entered into.
Licences are issued in regular (usually, annually) licensing rounds administered by the OGA. There is a uniform application form and a fee is levied upon submission. Licence applications are assessed according to the published criteria and the OGA releases all “winning marks” as part of the licence award process. The OGA is bound to act fairly and in a non-discriminatory manner under the EU Hydrocarbons Directive.
Applicants must demonstrate that they have the necessary financial and technical capability to undertake the proposed work programme and to exploit the exclusive rights granted by the licence. They must also evidence compliance with the EU Safety of Offshore Oil and Gas Operations Directive.
Each licence requires the licensee to make annual “rental” payments to the OGA, which are based on the size of the licence area on the relevant payment date. In the context of the industry, these are not considered to be material. There are no other fiscal terms in the licence. The UK government predominantly relies on taxation for its “take”.
Companies participating in upstream operations are required to pay UK corporation tax (CT) on their chargeable gains. This takes the form of ring-fenced CT (RFCT) at a higher rate than the “normal” CT (30% v 19% at current rates). Ring-fencing is aimed at ensuring that oil and gas companies cannot carry across losses to or from other parts of their business.
A supplementary charge (SCT) is also applied to ring-fenced profits, at a current rate of 10%.
Technically, a further petroleum revenue tax (PRT) also applies to chargeable gains arising from fields granted development consent prior to March 1993. However, as of 2016 the PRT rate was reduced to 0%, so, this tax no longer applies (although PRT remains important in the context of calculating allowable historic tax relief, hence the 0% rather than abolition).
There is no UK national or state-controlled oil and gas company.
There are no local content requirements in the UK.
Any proposed development of a new field (or a significant extension to an existing field development) requires the prior approval of the OGA to the licensee’s field development plan (FDP). The OGA has powers under the MER UK strategy to require revision and may even reject the proposed plan. The OGA also has the power to require the unitisation of fields prior to the approval of a FDP.
There are three types of upstream petroleum licences: seaward exploration licences, seaward production licences and (for onshore operations) petroleum exploration and development licences (PEDLs).
Seaward production licences relate to offshore operations and cover all phases from exploration to appraisal to production. They grant exclusive rights to the licensee over the licence area. They are split into:
All new offshore production licences are issued as “innovate licences” and have a variable initial term with the maximum being nine years, a four-year second term and an eighteen-year third term. The mandatory relinquishment area at the end of the initial term is 50%. The initial term is split into three phases: Phase A allows the licensee to conduct geotechnical studies and other data processing; Phase B is the period when seismic surveys are conducted; and Phase C is the drilling phase. Phases A and B are optional. Progress from Phase A to Phase B or from Phase B to Phase C is conditional on satisfying the OGA as to the licensee’s technical and financial capability.
Seaward exploration licences relate only to exploration and contain non-exclusive rights. They are usually used by licensees wishing to gather seismic data rather than to exploit hydrocarbons.
PEDLs are similar to seaward production licences in relation to the term they cover and the need to demonstrate sufficient progress before progressing to the next term. PEDLs are split into an initial term of five years, a second term of five years and a third term of twenty years. The mandatory relinquishment at the end of the initial term is 50%.
The direct transfer or assignment of any interest in a licence requires the prior approval of the OGA. Any breach of this requirement gives the OGA the right to revoke the licence. The OGA considers the financial and technical capability of the proposed assignee according to a set of published criteria. The OGA may require a parent guarantee as a condition to its consent. Offshore licence assignments are managed via an online portal while onshore assignments use a specific application form.
Indirect transfers of licence interests (ie by way of a change of control of the licensee) do not require the consent of the OGA. However, the OGA can, post-transaction, require a further disposal of the licensee to a third party or a sale of the licensee to the original owner. Failure to comply with this re-transfer requirement provides grounds for the OGA to revoke the licence. As a result, most sellers seek prior comfort letters from the OGA to the effect that, if the proposed change of control occurs, it will not exercise these re-transfer powers (although it is worth noting that such “comfort letters” are not binding on the OGA).
There are no quota-based production restrictions in the UK.
There are no industry specific regulations concerning private investment in downstream operations. Normal considerations (eg competition law) apply.
The Gas Act 1986 imposes certain restrictions on the transportation of gas and on LNG operations more generally.
There are no national oil and gas monopolies in the UK.
All companies wishing to carry out the transportation, interconnection, shipping or supply of gas are required to apply for a licence from the Office of Gas and Electricity Markets (OFGEM). OFGEM may impose conditions on the licensee and holds powers of enforcement (eg by way of a fine of up to 10% of licensee’s turnover or an enforcement order).
Downstream facilities are subject to general planning, development and HSE permits/consents.
There are no such terms in gas licences.
Normal UK corporation tax applies to chargeable gains made by companies owning downstream businesses.
There is no UK national or state-controlled oil and gas company.
There are no local content requirements in the UK.
Regarding domestic supplies, gas transporters can, on request, be required to connect premises located within 23m of the main, but reasonably incurred costs can be recovered.
Any company seeking to construct an onshore pipeline is required to evidence its prior consultation with interested parties, eg local landowners, local authorities etc. It must also identify the consents it requires from the same and the extent to which it has received these. If it cannot agree terms with third parties, the power to make compulsory purchases under the Pipelines Act 1962 resides in the Secretary of State.
The key rules for third-party infrastructure access are set out in the Energy Act 2011, which applies to all upstream facilities and pipelines. The owners are required to publish the commercial terms for access each year, which then form the basis for negotiation. Failure to agree such grants gives the third party the right to ask the OGA to review the application and subsequent approval. The OGA can intercede if it feels negotiations have gone on too long without resolution.
Under the Infrastructure Code of Practice, offshore gas pipeline owners are required to publish capacity numbers. Following negotiation and agreement on the terms, key information on the access deal must be published, including the rate paid.
Access to onshore gas pipelines, as well as storage, is regulated by the Gas Act 1986. Owners are required to negotiate with third parties, and failure to agree can lead to OFGEM imposing terms (including tariffs).
There are no restrictions on product sales into the UK market.
There are no special regulatory restrictions on the export of petroleum or petroleum products from the UK. Normal export requirements relating to duties or taxes apply.
The Secretary of State retains emergency powers to regulate energy supplies (including fuel products) in the case of an actual or threatened emergency affecting supplies in the UK (Energy Act 1976).
Any transfer of an interest in a Gas Act 1986 licence requires the prior consent of OFGEM. This requires the completion of an application form alongside the payment of an application fee and the fulfilment of the same criteria as would apply when making a new application.
Prospective upstream licensees must satisfy the OGA that they have a place of business in the UK. This means satisfying at least one of the following:
No such regulations apply to downstream operations.
The authorities that have regulatory powers in respect of the environment in the UK are the OSDR, BEIS (including OPRED), the Environment Agency, SEPA, Natural Resources Wales, the Maritime and Coastguard Agency, the Joint Nature Conservation Committee and Marine Scotland. The UK also participates in the EU Emissions Trading Scheme.
Some relevant applicable environmental laws include:
The Merchant Shipping (Oil Pollution Preparedness, Response and Co-operation Convention) Regulations 1998 state that all operations relating to offshore installations, pipelines, decommissioning, well operators and installation operators, among others that pose a risk of marine pollution, should have an oil pollution emergency plan (OPEP) in place. An OPEP is a plan setting out an immediate and effective response to an oil pollution spill. Additionally, all operators are required to be members of the Offshore Pollution Liability Association Limited (OPOL). Membership of OPOL usually requires having insurance from credible insurers in place, a financial guarantee or being adequately self-insured. Under OPOL, the members agree to accept liability (to governmental authorities and other third parties) for pollution damage and the cost of remedial measures up to a maximum of USD250 million per incident.
The Offshore Petroleum Productions and Pipelines (Assessment of Environmental Effects) Regulations 1999 require environmental impact assessments to be carried out prior to the commencement of certain categories of offshore oil and gas activities. The Offshore Petroleum Activities (Conservation of Habitats) Regulations 2001 require additional assessments for projects covering areas included in the EU Habitats or EU Birds Directives.
The Carriage of Dangerous Goods and Use of Transportable Pressure Equipment Regulations 2009, the Merchant Shipping (Prevention of Oil Pollution) Regulations 1996 (amended 2005) and the Merchant Shipping (Dangerous Goods and Marine Pollutant) Regulations 1990 cover the regulation of transportation of oil by road or sea.
The Offshore Installations (Offshore Safety Directive) (Safety Case etc) Regulations 2015 (SCR 2015) require that all offshore installations relating to the UK’s external waters must have an approved safety case, which is a document evidencing that the operating entity is able to control major accident risks. The safety case must be accepted by the OSDR and it is an offence to operate without one. The SCR 2015 also requires that all installations have a Corporate Major Accident Prevention Policy and an Integrated Safety and Environmental Management System. Additionally, prior to drilling, an operator is obliged to give 21 days’ notice to the HSE, submit an application containing an OPEP to obtain consent from the OGA and obtain independent verification of the well design. As previously mentioned, all offshore operators involved in exploration and production must be party to OPOL.
The Department for Business, Energy and Industrial Strategy (BEIS) is the competent authority for decommissioning. The OGA works with BEIS to assess decommissioning programmes on the basis of cost, future alternative use and collaboration.
Part IV of the Petroleum Act 1998 provides the framework for implementing the UK’s international decommissioning obligations under the 1993 OSPAR Convention, the UNCLOS (Law of the Sea Convention) Article 60(3) and the IMO Guidelines and Standards 1989.
Section 29 of the Petroleum Act 1998 allows the Secretary of State to serve notice on licensees and certain others, eg contract operators. The Secretary of State also has residual powers to serve a Section 29 notice on a licensees, affiliates and historic owners (and their affiliates). Those served with a notice must submit a decommissioning programme for approval. Once approved, the notice holders are jointly and severally liable for the execution of the said programme.
The Secretary of State also has a rarely-used power to request that security for decommissioning costs be provided by the licensees. Instead, it has become standard for sellers to request that purchasers post security (either bilaterally or, increasingly, to the whole JV group) in order to cover the potential liability of the seller as the historic owner. Also, newer joint operating agreements (JOAs) commonly require that (i) the parties give each other parent company guarantees or other financial securities to secure their joint and several decommissioning liability and (ii) they enter into a decommissioning security agreement (DSA) to regulate the security arrangements.
The Climate Change Act 2008 (CCA) and the Infrastructure Act 2015 are the applicable laws relating to climate change in the UK.
The CCA (recently amended) sets out the UK’s goal of reducing its carbon account by 100% compared to 1990. The Committee on Climate Change (CCC) advises the government on achieving this target. The CCC has recently released a report suggesting that the UK can be net-zero in terms of carbon emissions by 2050 and, given the fall in the cost of zero-carbon technologies, this falls within the cost projections made by the government at the time of the CCA.
Onshore oil and gas developments will be subject to planning permission from local authorities.
The same regulatory regime applies to the development of conventional and unconventional oil and gas resources. However, the Infrastructure Act 2015 introduced certain extra requirements for wells that are to be fracked, including certain extra consents, well integrity rules and certain restrictions on drilling depths. A recent government consultation on planning laws and some high-profile planning applications by fracking operators has ensured that this divisive topic remains in the press.
There is no special scheme relating to the development of LNG projects in the UK.
The UKCS is often categorised as a mature basin with declining importance, both to the global companies who operate here and to the country as a whole. Interestingly, the industry’s main trade body, Oil & Gas UK, has recently launched a new collaboration project, “Vision 2035”, which seeks to ensure that the oil and gas industry in the UK will continue to provide security of supply for UK consumers while transitioning energy companies to a low carbon future. This campaign demonstrates the huge value still created by the industry both in the production and the supply chain. It also highlights the opportunities available both to new investors and to a new generation of industry employees.
The potential withdrawal of the UK from the European Union is not expected to have a substantial impact on upstream oil and gas regulation in the UK. The UK’s regime, especially that of the HSE, has largely evolved independently of EU legislation (while always being constrained by it). Other areas, such as decommissioning, are largely governed by international, rather than European, conventions.
However, the impact may be greater in the downstream industry, given that the gas industry relies heavily on the single European gas market. The outcome of ongoing negotiations in this area is being watched closely by the industry.
Also, the licensing regime for carbon capture and storage (CCS) partly relies on EU ETS legislation. This regime will become inoperable in the event of a “no-deal” Brexit. The government is planning to restore this power in areas where the Oil and Gas Authority (OGA) is the licensing authority, but in Scotland and Northern Ireland the devolved administrations would need to modify their licensing regulations.
Certain technical amendments to UK law have already been made by statutory instrument (SI 2018/1325) to ensure onshore and offshore oil and gas licensing, offshore oil and gas developments (including pipelines), onshore pipelines, major offshore and onshore electricity works developments (generation stations and overhead lines) and the stockholding of oil will continue to be operable after exit day.