Norway’s Court of Appeal upholds validity of new tariffs for the transport of gas

The Court of Appeal in Norway has now published its highly anticipated ruling on the ‘Gassled’ appeal, following an unsuccessful challenge to the validity of tariffs for the transport of gas in the District Court in Oslo.

As detailed in our earlier Law-Now, the Norwegian Ministry of Petroleum and Energy (“MPE”) introduced regulations in 2013 setting new tariffs for the transportation of gas (the “Amendment Regulations”). Four companies with an interest in Gassled, the owner of the Norwegian gas pipeline system (the “Claimants”), brought an action against the Norwegian state challenging the legal basis for the Amendment Regulations. The new, lower tariffs will substantially reduce Gassled’s income. In late 2015, however, the District Court in Oslo rejected the Claimants’ challenge and upheld the validity of the Amendment Regulations. As might be expected (the Claimants estimated that their losses will be NOK 15 billion), the Claimants appealed this decision to the Court of Appeal.

The Court of Appeal has now upheld the decision of the District Court and, in so doing, has affirmed the precedence of the Norwegian government’s power to regulate over the interests of other stakeholders in the oil and gas industry.

Gassled’s Appeal

The Claimants sought to re-argue all but one of their arguments previously rejected by the District Court, summarised as follows:

1. The establishment of Gassled in 2002 was negotiated as a “package” with several elements, including that the tariffs applied for the transport of gas should continue unchanged for the entirety of their license period up to and including 2028. In rejecting this argument at first instance, the District Court had stated that “to be an observer and monitor of process is something other than being a real legally bound party to the Gassled agreement.” The Claimants argued in the Court of Appeal, however, that although MPE was not a party to the agreement establishing Gassled, it had effectively endorsed the whole “package” and had limited its ability to alter it by that endorsement.

2. MPE lacked statutory authority to adjust the tariffs. The decision to change the tariffs was taken in breach of the Act of 29 November 1996 No. 72 relating to petroleum activities (the “Petroleum Act”). The correct legal basis for any change of tariffs was Section 4-8, second paragraph, which gives the MPE the right to change tariffs for gas transport if it is necessary “to ensure that implementation of projects is carried out”, but only to the extent that the owners are guaranteed reasonable profits. The Claimants argued that the change in tariff was not necessary for this purpose.

3. The tariff change was contrary to Article 1 of the first Protocol to the European Convention on Human Rights (“A1P1”). This Article provides that every natural or legal person is entitled to the peaceful enjoyment of their possessions, which may only be restricted “in the public interest and subject to the conditions provided for by law”. The Claimants argued that the restriction of their A1P1 right (to receive payment for the transportation of gas through their pipelines) was disproportionate to any public interest benefit, and there was no clear legal authority for the restriction.

4. In the alternative to the first three claims (to set aside the new tariffs), the Claimants sought compensation. This claim was based on the argument that MPE had not provided sufficient guidance in respect of the tariff regime (including the possibility of a potential change) to sellers and purchasers of the participating interests in Gassled, in breach of the relevant provision of the Norwegian administrative law.

Decision

The Court of Appeal rejected each of the Claimants’ arguments and upheld the decision of the District Court in full.

The Court held that there was no agreement between the companies involved in the establishment of Gassled that the tariffs applicable to the pipeline system should remain unchanged during the license period. In any event, there was no evidence that MPE had agreed to this. Whatever the “package” agreed when establishing Gassled, it did not provide any restriction on the ability of MPE to change the tariff by way of the Amendment Regulation.

In respect of the Claimants’ second argument, the Court found that there had been no breach of the Petroleum Act. In setting the new tariffs, MPE had thoroughly considered the criteria set by the Petrolum Act, namely promotion of the “best possible resource management” and whether the “owner can expect a reasonable return on invested capital”. That was all that was required. Accordingly, there was no basis on which to challenge the government’s exercise of its discretion in changing the tariffs. The decision to change the tariffs was a general regulatory decision affecting a variety of actors; there could be no legal requirement to assess the consequences for specific individual stakeholders (such as the Claimants).

With regard to A1P1, the Claimants’ argument fell at the first hurdle. The Court found that there was no legitimate expectation on the part of the Claimants that the tariffs would remain unchanged until 2028, and therefore no proprietary right afforded protection by A1P1.

The Claimants also fared worse in the Court of Appeal with regard to their alternative case for compensation. The District Court had been critical of the information provided by MPE at the time the Claimants’ purchased their interests in Gassled, although found that MPE had not been negligent. The Court of Appeal, meanwhile, found that the Claimants were professional parties in commercial negotiations. Had MPE volunteered an indication of the possibility of a future tariff change, this could have been perceived as interference in those negotiations. MPE was correct not to provide the information.

The Court’s wholesale rejection of the Claimants’ arguments also had an impact on the costs awarded. Whereas the District Court had found that each of the parties should bear their own costs due to its criticisms of MPE, the Appeal Court has ordered that the Claimants pay the majority of the state’s legal costs.

Comment

The Court of Appeal’s decision further confirms the discretion afforded to the Norwegian state to regulate in order to maximise resources and revenue from oil fields, even where this affects the interests of other stakeholders.

The decision in respect of the Claimants’ claim of negligence on the part of MPE also highlights the importance of a full and detailed risk assessment when negotiating purchase of oil and gas interests, including with regard to the relevant regulatory framework. In the absence of a clear commitment to the contrary, professional parties (with professional advisors) are expected to understand that the regulatory landscape may well change.

The Claimants do have a final opportunity to appeal to the Supreme Court. They must do so by 16 September, but any application to appeal will require ‘leave’ of the Supreme Court.