The Oil and Gas Authority (“OGA”) has used its non-binding dispute resolution powers for the first time and has published a number of recommendations following an investigation into a capacity dispute between two operators.
The OGA’s first non-binding dispute resolution recommendations are interesting for a number of reasons:
- This is the OGA’s first use of those powers – its approach and recommendations will provide some indication to the industry as to what to expect if that route is followed. For example, the investigation was opened on 25 June 2019 and recommendations issued on 30 August 2019. The OGA therefore seems to have come close to meeting the potentially challenging timetable of reaching a decision within 60 days that it has set for itself in its dispute resolution guidance.
- The OGA called in the dispute – it did not wait for parties to self-refer but instead looked to use these powers to intervene in circumstances where OGA had concluded that negotiations were ‘stuck’. OGA has indicated many times that it prefers to use its powers to facilitate progress rather than sanction a failure to progress, and so this approach to the use of its non-binding dispute resolution powers may prove to be a template for its future work.
- The OGA has published details of the dispute and its recommendations - the OGA issued five recommendations to the parties. A non-confidential summary can be found on the OGA website (available here). This continues the OGA’s preferred ‘transparent’ approach to its use of its powers, which it hopes will assist industry to understand better OGA’s approach to difficult issues arising under MER UK.
- The OGA’s recommendations comprise a series of actions and steps and require frequent update reporting to the OGA – the OGA has not just provided a set of answers for the parties to implement but appears to have instead recommended a ‘road map’, presumably intended to assist the parties in reaching their final decision against a backdrop of close monitoring and encouragement from the OGA.
The OGA’s powers
The OGA’s non-binding dispute resolution powers are set out in Part II, Chapter 2 of the Energy Act 2016 (“the 2016 Act”) and allow a relevant party to refer a qualifying dispute to the OGA for non-binding resolution. The OGA may also choose to ‘call in’ a qualifying dispute on its own initiative. A qualifying dispute is one which is a matter under a licence, or which relates to the principal objective of maximising the economic recovery of UK petroleum under the MER UK Strategy. The 2016 Act states that the OGA is not bound to accept a dispute, but once the OGA has agreed to consider a dispute, it must do so properly and issue recommendations for resolution.
When considering a dispute, the OGA must balance the need to fulfil the principal objective with the need to achieve an economically viable position for the parties to the dispute. In May 2019, the OGA published updated Dispute Resolution Guidance (“the Guidance”) (available here) in accordance with section 21(2) of the 2016 Act. The Guidance lays out the procedures to be followed in order for the OGA to decide as to whether to accept or reject a dispute for its consideration. The OGA will not normally accept a dispute “without evidence of the failure of meaningful commercial negotiations” which highlights that the OGA views its involvement not to be the first step for parties. The Guidance also states that a dispute should be sufficiently material to the fulfilment of the principal objective.
The dispute was in relation to non-binding heads of terms agreed between the owners of the Cygnus platform and the owners of the Pegasus field in respect of a potential tie back to Cygnus for the export of Pegasus gas. The heads of terms agreed in 2017 anticipated that the Pegasus field owners would obtain access to the Cygnus facilities between October 2021 and December 2023. However, as engineering work progressed, and the performance of the Cygnus field was better than expected, the Cygnus operator, Neptune, considered that there would be insufficient capacity in the infrastructure to accept the Pegasus production without impacting Cygnus’s own plans and it would be inconsistent with the MER UK Strategy to continue with the heads of terms as agreed. Spirit, which was both a partner in the Cygnus field and operator of the Pegasus field disagreed and was of the view that there had been no material changes since the heads of terms were agreed and therefore both parties should honour the heads of terms. As the parties could have taken a considerable time to resolve the dispute by themselves, the OGA decided to consider the dispute and engage its dispute resolution procedure. The OGA issued a draft recommendation to the parties on 30 July 2019 and both parties provided the OGA with representations to assist the OGA with its final recommendation.
The OGA’s non-binding recommendations
On 30 August 2019, following a review of the parties’ representations, the OGA issued five recommendations to the parties. The recommendations were based on a number of factors, namely:
- The OGA’s findings that there had been various breakdowns of communication between the parties.
- Although parties should generally negotiate heads of terms between them, and insofar as it is possible, take into account potential outcomes prior to commencing negotiations, there may be certain situations where supporting facts change and renegotiation between the parties is necessary. The OGA stated that the information provided by the parties during this investigation showed that this was in fact a situation where renegotiation was necessary.
The OGA’s final recommendations to the parties comprised of the following:
- The Cygnus owners should issue a hub strategy, inclusive of both equity and third-party gas opportunities for the next five years, with an updated and revised strategy issued by the end of March 2020.
- The Cygnus JV should improve its knowledge of the subsurface and progress its infield opportunities in a timely manner.
- Should all of the parties deem it appropriate for Pegasus to be delivered over Cygnus, the parties should return to the heads of terms and work collaboratively on any required changes to enable an agreement to be concluded. In order for the parties to deliver an outcome which is consistent with the MER UK Strategy, the parties should ensure that revised, binding fully termed agreements are finalised and signed as soon as reasonably practicable, to give Pegasus the certainty to move forward either on Cygnus or elsewhere.
- The parties should provide the OGA with monthly reports on progress of the discussions.
- The Pegasus owners should continue work to evaluate alternative export options in light of continued uncertainty.
Both parties stated that they welcomed the OGA’s involvement and its recommendations. The OGA said the parties should carry out significant work on improving collaborative behaviours and ensure they are operating in accordance with the provisions contained in their Joint Operating Agreement. The parties have responded to this by stating that they will continue to collaborate in support of the objectives of the MER UK Strategy.
Although a recommendation is not binding and therefore not appealable, it is not clear how readily a party could disregard a recommendation made by the OGA. Unless the recommendation or a similarly MER UK compliant alternative is implemented in a time frame acceptable to the OGA, the OGA may also decide that there has been a breach of the MER UK Strategy, which is sanctionable under the OGA’s powers listed in Part II, Chapter 5 of the 2016 Act.