Commercial Court considers Secretary of State’s powers to impose decommissioning liability under Petroleum Act 1998

Apache UK Investment Limited v. Esso Exploration and production UK Limited [2021] EWHC 1283 (Comm)

The Commercial Court has recently provided a significant judgment regarding decommissioning liability for wells drilled in the North Sea in a rare decision interpreting provisions of the Petroleum Act 1998 (the “Act”).

On May 17 2021, Charles Hollander QC, sitting as judge at the High Court, decided the matter between the Claimant, Apache UK Investment Limited (“Apache”) and the Defendant, Esso Exploration and Production UK Limited (“Esso”). The full judgment can be found here.In summary, the Court:

• found that Esso was successful on the first of two issues, which was a matter of construction relating to the contractual arrangements between the parties; and
• having interpreted the applicable provisions of the Petroleum Act, agreed with Apache that it was not required to provide security for the cost of decommissioning certain wells drilled after Esso sold its interests to Apache

Dispute

The parties entered into several Bilateral Decommissioning Security Agreements (“BDSAs”) as part of Esso’s sale to Apache of a subsidiary which held licenses in several oil fields in the North Sea, including the Buckland and Nevis Fields. The BDSAs provided security for Apache’s obligation under the sale and purchase agreement to indemnify Esso for any decommissioning obligations that Esso could be held liable for. The dispute concerned the amount of security to be provided by Apache in respect of those decommissioning obligations.

There were two issues before the court for determination:

1. The first issue focussed on contractual provisions of the sale documentation executed by the parties on Apache’s purchase of Esso’s subsidiary. (Issue 1)
2.  The second (and more interesting) issue focussed on interpretation of provisions of the Petroleum Act 1998. The issue was whether Esso could face decommissioning liability under the Act for wells (“the Additional Wells”) which were installed several years after Esso sold its interest in the fields under s34 of the Act. If it could, Apache was obliged by the terms of the BDSAs to provide security to Esso for the Additional Wells. (Issue 2)

Judgment

In summary, the Court found in favour of Esso on issue 1, and in favour of Apache on issue 2.

On issue 1, the Court found that Esso was successful on the basis of interpretation of the relevant contractual provisions, applying the usual rules of construction.

On issue 2, Apache claimed that Esso could not be liable for decommissioning the Additional Wells as they constituted ‘offshore installations’ and were drilled after Esso had sold its interests to Apache. Esso was concerned that:

• notwithstanding that the Additional Wells had been installed post sale, the Secretary of State may pursuant to its powers under s34 of the Act impose decommissioning liability on it as, at the time certain s29 notices for the relevant Fields were issued to the subsidiary sold to Apache, Esso was a body corporate associated with the subsidiary as per s30(1)(e) of the Act. S34 of the Act provides, in summary, that the Secretary of State may propose that a person who, whilst not named on a s29 notice, may nonetheless be liable for decommissioning that installation if it has at some time fallen with s30(1) since the giving of the first s29 notice for that installation;
• the meaning of ‘offshore installation’ in the Act was not clear and, on the basis of the drafting of the relevant s29 notices, could include the whole of the Buckland or Nevis field or the relevant platform (e.g. Beryl A).

Esso sought to engage with OPRED, the regulatory of offshore decommissioning before trial. Whilst it did not give a formal opinion on the scope of the relevant provisions of the Act or formally participate at the trial, it attended trial and heard the parties’ arguments, together with the court’s judgment.

The Court found that Apache was not obliged to provide security in respect of the Additional Wells on the following basis:

• The question of whether existing s.29 notices applied to the Additional Wells depended on whether the meaning of the phrase “offshore installation” at s44 (1) of the Act was wide enough to cover the Additional Wells.
• Esso argued that the language used in the s.29 notices was wide enough to cover all installations on the relevant fields, including the Additional Wells. Apache argued that it was not wide enough to do so on the basis that at the time the s29 notices were issued the wells were not “maintained or. intended to be established”.
• S44(1) provides: ““Offshore installation” means any installation which is or has been maintained, or is intended to be established, for the carrying on of any activity to which subsection (2) applies”.
• The Court found that this provision limits the power of the Secretary of State to issue notices only in respect of an installation which is or has been maintained or is intended to be established at the time the notice is issued.
• Accordingly, as the Additional Wells were not constructed for several years after the sale of the company by Esso to Apache, there was no reason to think that the Additional Wells were “intended to be established” at the time of the s.29 notices. Consequently, Esso could not be liable for the decommissioning of the Additional Wells under the Act, and Apache was therefore not obliged to provide security for the Additional Wells under the terms of the BDSAs.

Comment

The case provides welcome clarity on the scope of certain provisions of the Petroleum Act which govern the decommissioning regime in the UK North Sea. In particular, oil and gas companies selling out of assets can take comfort from the judge’s interpretation of s.44 (1) that if the Secretary of State issues a s.34 notice in relation to an offshore installation which was not constructed or intended to be constructed at the date of a historic s.29 notice, it will be acting ultra vires and the s.34 notice will not be effective. Whilst this finding is not binding on the regulator, it does provide an insight into the Court’s view on this matter. It also gives guidance on what constitutes an “offshore installation” with the court finding that each of the Additional Wells constituted an “offshore installation”, notwithstanding that the relevant s29 notices were drafted in far more generic terms. In light of this parties may start seeking more specificity from OPRED in s29 notices in order to avoid disputes arising as to their scope.

With thanks to London trainee Hafsah Waheed for her contribution to this article.