Following on from the first in our series of briefings on the passing of the Energy Act 2023 (the Act) which focused on the impact of the Act on the offshore wind sector (see Environmental commitments for offshore wind), this latest update considers the impact of the Act on the offshore oil and gas sector.
The Act, a wide ranging and innovative piece of primary energy legislation, became law on 26 October 2023. The Act affects the regulatory landscape of the energy industry across several thematic areas from offshore oil and gas activities and offshore wind to CCUS and hydrogen production.
In this briefing, our energy experts at Norton Rose Fulbright look at the implications of the Act for regulation of the UK’s long standing offshore oil and gas sector and considers how it needs to evolve for the future.
Decommissioning cost recovery
On 13 January 2023, the UK government published a series of policy statements relating to the then-proposed Energy Security Bill (latterly known as the Energy Bill, now passed as the Act). Two of these related to the offshore oil and gas industry. The first policy concerned decommissioning cost recovery for the offshore oil and gas and carbon storage sectors, and the principles it set out are now established within the Act. A new fee charging scheme has been introduced to cover costs incurred by the Secretary of State (SoS) in carrying out its regulatory functions under Part 4 of the Petroleum Act 1998 (PA98), namely in respect of decommissioning of offshore oil and gas and carbon storage infrastructure.
The details of the new scheme, including how, when and by whom such charge(s) will be payable will be laid out in secondary legislation in due course, whilst the Act also makes necessary consequential amendments to the PA98 itself. However, the expectation is that infrastructure owners and operators will pay the charge only after the date of approval of a decommissioning programme. This is a change to the existing regime, under which a fee is payable at the time of submitting a decommissioning programme request and/or upon submission of a request for revision of a decommissioning programme (in each case, payable by the person submitting such request).
The premise behind these changes is to align the fee charging regime with that applicable under domestic environmental law, namely the so called ‘polluter pays’ principle.
Further details and the anticipated timeline for the introduction of this new regime have yet to be decided; however, the removal of financial burden from the public purse will no doubt be high on the list of priorities. For those in industry who will see their financial liabilities increase because of these regulatory changes, it will become even more critical to prepare sufficiently robust decommissioning programmes (and have adequate ring-fenced funds in place, including potentially a review and amendment of any existing decommissioning security arrangements) to ensure that they can meet their decommissioning responsibilities. The renewed focus on “value for money” may also see more heavily negotiated terms around decommissioning liabilities when players enter into farm-in farm-out arrangements, or exit a licence altogether.
Environmental regimes for offshore oil and gas
The second of the policy statements mentioned above, published at the beginning of 2023, focussed on environmental protection in the context of offshore oil and gas exploration and production. The policy objectives are stated to be focussed on ensuring the high standards of the offshore oil and gas environmental regime remain during the industry’s net zero transition and the addition of new technologies.
The Act looks to achieve this by empowering the SoS, by way of new (and yet to be published) secondary legislation, to amend emergency oil pollution planning and response policy requirements. Changes are anticipated to be made to existing regulations, such as the Offshore Petroleum Activities (Conservation of Habitats) Regulations 2001 and the Merchant Shipping (Oil Pollution Preparedness, Response and Co-operation Convention) Regulations 1998, which underpin the sector’s environmental regime.
Obligations under such regulations may now be imposed on those responsible not only for offshore installations or wells, but, amongst other infrastructure types, offshore gas storage facilities, connected infrastructure (including pipelines) and onshore handling and storage facilities. In each case, any such policies can also expressly encompass assets that are being, or have been, decommissioned or abandoned.
A fundamental change of note is the Act’s clarification that references to ‘gas’ in this section refer not only to ‘gas’ (as defined in the Energy Act 2008), but also to carbon dioxide and hydrogen. This small addition ensures that the SoS’s powers in relation to environmental protection are purposefully extended to encompass new technologies such as carbon capture and storage (CCS) and hydrogen production, transportation and storage. This ensures that the UK’s offshore oil and gas environmental regime is fit for the future.
In addition, the Act confirms that offshore oil and gas activities and the offshore production and storage of gas is subject to habitats assessment procedures. Consequently, any impact of such activities on relevant protected sites and/or species must be assessed and, where required, mitigated.
In a similar manner to those provisions relating to the offshore wind sector, the Act also contains detailed procedural provisions managing the interaction between the central UK government and the devolved authorities when it comes to the exercise of the SoS’s powers pertaining to environmental protection regimes in the offshore oil and gas sector.
NSTA change of control powers
Lastly, the Act amends the model clauses of both existing and future exploration and production licences to give the North Sea Transition Authority (NSTA) the power to prevent an undesirable ‘change of control’ by a licensee before it occurs.
Prior to the Act, the model clauses provided the NSTA with the power to consider any such change of control only after the event. This left the NSTA with a theoretical (but difficult to exercise) power to revoke a licence unless a further change of control took place within a three-month period. This also caused uncertainty for potential acquirers of companies holding petroleum licences – where they usually sought and, in most cases, received a non-binding “letter of comfort” from the NSTA that it is not minded to revoke a licence following a change of control.
In practice this has been hugely problematic, and the NSTA only exercised this power once in May 2023, when it revoked three offshore petroleum licences insofar as they related to a specific licensee following a change of control, as the relevant entity did not meet regulatory requirements.
The Act’s new pre-emptive approach provides enhanced certainty for investment on the UKCS and strengthens the ability of the NSTA to ensure UK energy security of supply going forwards by ensuring only properly vetted and suitable entities can acquire a license interest. In addition, resulting regulatory certainty that a corporate transaction won’t run the risk of being unwound after the event will likely be well received by sector stakeholders.