Oil and Gas: Litigation in Norway over Tariffs for the Transport of Gas

The District Court in Oslo has ruled on the validity of new tariffs set in June 2013 for the transport of gas. This case has attracted considerable attention among oil and gas lawyers in Norway and the decision is expected to be appealed.

This case also brings into reality the competing interests faced by governments when trying to maximise resources and revenue from oil fields whilst balancing the interests of other stakeholders.

Background

In Norway, there is national control over the transport of gas to prevent monopolies taking over. Indeed, the basic principle has always been that profits made from Norwegian oil and gas should come from the oil fields rather than from the gas transport system.

The Act of 29 November 1996 No. 72 relating to petroleum activities (“Petroleum Act” or the “Act”) states that “The Norwegian State has the proprietary right to subsea petroleum deposits and the exclusive right to resource management.” (Section 1-1). Section 1-2 of the Act states:

“Resource management of petroleum resources shall be carried out in a long-term perspective for the benefit of the Norwegian society as a whole. In this regard the resource management shall provide revenues to the country and shall contribute to ensuring welfare, employment and an improved environment, as well as to the strengthening of Norwegian trade and industry and industrial development, and at the same time take due regard to regional and local policy considerations and other activities.”

To construct and/or operate oil and gas pipelines on the Norwegian continental shelf, in accordance with the Petroleum Act, a licence is required. Licensees are said to hold “participating interests” in the licences.

The implementation of the EU gas directive and the introduction of individual company based gas sales from the Norwegian Continental Shelf in 2001 resulted in a need to look at the organisation of upstream gas transportation. This led to the formation of Gassled (an unincorporated joint venture) in 2002 by the merging of all gas pipeline/transportation stakeholders in the Norwegian Sea into a single stakeholder, following extensive negotiations between the owners of the existing facilities for gas transport on the shelf.

Gassled owns the offshore gas pipeline infrastructure and operates pursuant to licences granted by the Norwegian state to transport gas. The Gassled pipeline system is operated by Gassco AS which is an independent, state-owned company.

In Norway, gas transport tariffs have been regulated by the government since the commencement of petroleum activities. The tariff model that has been used until recently was set by the Norwegian Ministry of Petroleum and Energy (“MPE”) in 2002 at the time of establishment of Gassled and was considered to give the owners in Gassled a reasonable profit in light of, amongst other things, the risk that they had assumed.

Facts

On 26 June 2013, the MPE set new tariffs for the use of Gassled’s pipe system (the regulation of 26 June 2013 on the change of regulation of 20 December 2002 No 1724 on the determination of tariffs, etc (“Amendment Regulation”)). This will substantially reduce Gassled’s income from 1 October 2016 to 2028 (the end of the licence period).

Four companies with ownership interests in Gassled (Njord Gas Infrastructure AS, Solveig Gas Norway AS, Silex Gas Norway AS and Infragas Norge AS) (“Claimants”) brought an action against the Norwegian State (represented by MPE). It was estimated by the Claimants that their losses caused by the Amendment Regulation represented NOK 34 billion.

The Claimants’ primary application was that the Amendment Regulation was invalid on four grounds, summarised as follows:

1. The parties who had established Gassled had entered into an agreement with the government in 2002 that the tariffs could not be changed during the entire licence period (in principle to 2028). This agreement involved restrictions in the state’s power of alteration. The decision to change the tariffs contravened the terms and conditions agreed between the original Gassled owners (which differed from the Claimants who had since acquired their respective interests from the initial participants) and the shippers of gas in Gassled during the licence period and was, therefore, invalid.
2. The government lacked statutory authority to adjust the tariffs. The decision to change the tariffs was taken in breach of the Act (Section 4-8 second paragraph), which gives the Ministry the right to change tariffs for gas transport if it is necessary in order to ensure that projects are implemented in the light of resource management considerations and only to the extent that the owners are guaranteed reasonable profits. There were no resource management considerations that could justify such a comprehensive and far-reaching tariff reduction relative to the already fixed tariffs. There was no evidence that the agreed tariff level had been a hindrance to good resource management.
3. The decision to change the tariff was a violation of a general prohibition set out in the Norwegian constitution against introducing rules with retroactive effect. The Claimants had no ability to adapt or avoid the negative consequences of the decision to change the tariffs. The state had not demonstrated any strong societal considerations to suggest that a retrospective effect in the present case was compatible with the Norwegian constitution (section 97). The measures had marginal resource management effects.
4. The decision was in breach of Article 1 of the first Protocol to the European Convention on Human Rights which provides that every natural or legal person is entitled to the peaceful enjoyment of their possessions (including the right to claim payment for the transport of gas through the facilities in Gassled).

The Claimants applied for damages for the loss they had sustained as a result of the Amendment Regulation.

In the alternative, the Claimants claimed compensation. This claim was based on the argument that MPE had not given the vendors and purchasers of the participating interests in Gassled relevant guidance on the new tariff regime.

The Norwegian administrative law § 11 provides:

“The administrative organs have within their scope of activity a general guidance duty. The purpose of the guidance should be to give parties and other stakeholders an opportunity to meet their specific interests in the best possible way. The scope of the guidance must also be adapted to the situation of the individual administrative organ and the capacity to undertake such activities.

Irrespective of whether the case is in progress, administrative organ is required within its scope to provide guidance […] to a person asking about his rights and obligations in a specific context that has current interest for him.”

It was claimed that MPE failed in their obligation to provide guidance either by (i) not informing them that it was an arbitrary system which meant that a comprehensive tariff regulation could take place at an unspecified point in time; or (ii) because the MPE did not give sufficient information on the system. It was argued that information in relation to future earnings was of crucial importance for share transfers in Gassled; the companies would not have bought participating interests in Gassled on the same terms had they known about the risk.

Decision

The court considered that the Claimants’ first argument was effectively: has the state by collaboration in the creation of Gassled committed itself in such a way that, for the licence period to 2028, it is subject to contractual limitations concerning the modification of tariffs?

The court highlighted that “the MPE in the years up to 2002 managed the return on investment in the transport systems by individual approvals of the transport agreements that also contained the tariffs. When the oil companies in 2002 negotiated on the establishment of Gassled, the state, as the owner of Petoro and Statoil and a major owner in Norwegian Hydro, was involved in the negotiations both in the capacity of owner of oil shares and as an oil company, but the state through MPE in the capacity of the tariff regulatory and tariff approval authority was in the Court's opinion not party to the negotiations, but monitored them as an observer and gave input as to what would be expected of its perceptions if final agreements should be approved and tariffs set.” [1]

The court stated that “to be an observer and monitor of process is something other than being a real legally bound party to the Gassled agreement.” In rejecting the Claimants’ first argument, the court stated that “the state or MPE gave no binding commitment – neither contractual nor administrative – that the tariffs that were set in December 2002 were supposed to be fixed right up to 2028.” [2] The court also noted that there was no documentary evidence or witness statements from the time of the establishment of Gassled that provided a basis to conclude that the state (MPE) had committed itself to accepting that the tariffs should be unchanged for the entire licence period. On the other hand, there was a wide range of evidence that it had not been envisaged by any of the participants that the binding tariffs would remain unchanged throughout the entire licence period.

The Claimants’ second argument was also rejected by the court on the basis that the Norwegian Petroleum Act gives the state a wide margin of discretion and the Amendment Regulation would provide the current owners of Gassled with a “reasonable future return”; that was all that was required by the Act.

As for the third argument, the court considered (amongst other factors) that there was no retrospective effect because the Amendment Regulation did not affect the agreements concluded up to the date on which the Amendment Regulation entered into force, nor does it affect agreements signed after the entry into force where the transport takes place before 1 October 2016. The court noted that the changes were justified “by strong societal considerations” and to facilitate good resource management.

For similar reasons to those given in response to the Claimants’ first, second and third arguments, the court rejected their fourth argument.

In relation to the alternative claim for compensation, the court considered a number of meetings that had taken place between MPE and the new owners of the participating interests in Gassled before the participating interests were purchased. The court held that MPE’s procedure, the guidance of the parties, the documentation and the public announcements were not of the qualitative level that they ought to have been and were therefore inadequate. MPE should have better advised the new owners of MPE’s power to change tariffs. The court considered that had this guidance been given, the new owners might still have proceeded with the purchase of shares in Gassled but would have paid less for the participating interests, thereby reflecting the risk of changes being made to the tariffs.

The court then considered whether this failure should result in an award of damages. In doing so, the court noted that MPE’s management, at the time of the change of ownership of Gassled, was not aware of MPE’s own scope with regards to changing tariffs. The court stated that it then had to consider whether MPE’s lack of awareness was so objectionable as to trigger liability, in other words, whether MPE’s lack of awareness was negligent. While the court held that MPE could be criticised for lack of awareness, MPE was not negligent and, therefore, the Norwegian government was not liable for damages.

However, with regards to the costs of the litigation, the Court held that each of the parties should bear their own costs as the MPE could be criticised for the occurrence of the proceedings in light of their failure to act in accordance with good administrative practice.

Comment

It is expected that the court’s decision may be appealed. The court was critical of the MPE’s lack of guidance and its poor administrative procedures. More curiously, however, was the fact it held that because MPE lacked awareness of the scope of its powers, this did not trigger any liability.

A dispute of this nature in Norway is rare. Norway is perceived as a safe option for investors. This case has attracted significant attention and the tariffs change has added an element of uncertainty in relation to infrastructure investments given that the Norwegian government’s decision has impacted the terms of agreements with investors.

Lower transportation tariffs will, according to the Norwegian government, "result in lower costs and contribute to recovering a larger part of the socio-economically profitable petroleum resources". It has said that “the trend on the Norwegian Shelf implies that tariffs in Gassled will have increasing importance for resource management, in part for discoveries in areas further north on the Shelf, and for discoveries close to existing infrastructure.”

This case brings into reality the competing interests faced by governments when trying to maximise resources and revenue from oil fields whilst balancing the interests of other stakeholders.

Parallels can be drawn with the UK’s strategy to maximise economic recovery from the UKCS (MER UK) where the commercial interests of infrastructure owners and licence holders in the UK may conflict with MER UK. In the UK, we have yet to see how this will play out in practice. For now, we can look to Norway to reflect on some of the tensions faced by the industry and the state in managing oil and gas resources.

CMS will monitor developments in this case and on MER UK generally.

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[1] Quoted from a translated version of the judgment.

[2] Ibid.