OGA launches its MER UK Strategy review consultation

United Kingdom

The Oil and Gas Authority (“the OGA”) has launched a consultation into its proposed updated Maximising Economic Recovery Strategy (“the Strategy”), which it has revisited in line with the obligation to review the Strategy every four years[1].

The Strategy is binding on “relevant persons”, including offshore licence holders and operators of offshore infrastructure, and sets out key obligations and requirements in relation to each stage of the ‘life cycle’ of the oil & gas industry, from exploration through to decommissioning. The Strategy as originally adopted imposed on the industry (for the first time) a legal obligation to maximise the economic recovery of the remaining oil and gas reserves on the UKCS.

This Strategy review takes place against a very different and even more challenging backdrop than the original Strategy. There has been an evident shift in scientific, public and industry opinion surrounding climate change, and the OGA has recognised that increased emphasis must be placed upon the industry’s “social licence to operate”. As of November 2016, the UK Government is not only party to the Paris Agreement, which imparts a binding obligation to limit global warming to below 2 degrees but is further subject to a target under the Climate Change Act 2008 to reduce greenhouse gas emissions to “Net Zero” by 2050. It is recognised in the Strategy consultation that it is still “vital” to manage the UKCS’s declining production and to maximise its value to meet energy demands in order to minimise reliance on imports, but at the same time, that a reduction in the associated carbon footprint is equally vital. This increased consideration of, and accountability towards achieving, environmental targets and binding obligations is clearly reflected in the revised Strategy – the key question being how, whilst properly and effectively complying with environmental considerations, can the UKCS’ remaining ageing resources be sustainably exploited?

The Central Obligation

The Central Obligation as originally stated required all relevant persons to “secure that the maximum value of economically recoverable petroleum is recovered from the strata beneath relevant UK waters”. That was the very clear focus of the work undertaken following the Wood Review, with an intention to provide an economically successful industry for the mature UKCS basin.

The consultation proposes an additional limb to the Central Obligation, which would create a far broader obligation taking into account not only economic and commercial considerations but also the environmental effects of commercial petroleum recovery.

The proposed new second limb takes account of a considerable move in public and government focus over the last few years. It is proposed that relevant persons must now also “take appropriate steps to assist the Secretary of State in meeting the net zero target, including by reducing as far as reasonable in the circumstances greenhouse gas emissions from sources such as flaring and venting and power generation, and supporting carbon capture and storage projects”. This additional obligation would impose an express obligation on industry participants to ensure their petroleum exploration, development and production activities are carried out in such a way as to work towards meeting these binding environmental targets but with a clear focus on “Scope 1” emissions i.e. those from a relevant person’s own activities although the reference to power generation could bring in “Scope 2” emissions from purchased energy. The Consultation Paper refers specifically to consideration of options for electrification of platforms, the rigorous application of good oilfield practice and “practices of equivalent standing from other industrial sectors”.

The proposed drafting only requires that effort “as far as is reasonable in the circumstances” is taken – that caveat takes account of the fact that the obligation needs to be applied to real situations, and a ‘one size fits all’ approach is unlikely to be workable. What is “reasonable” is likely to vary depending on the particular infrastructure and project being undertaken.

Supporting Obligations – updated for ‘Net Zero’

The Supporting Obligations in relation to Exploration, Development, Asset Stewardship, Technology, Decommissioning and Cost Efficiency have all been updated to incorporate environmental obligations and actions at every level in the new Strategy. For example:

  • the reframed Development Supporting Obligation will require industry participants to consider, when developing infrastructure, whether or not any proposed or already existing infrastructure could “contribute to meeting the net zero target” or support any future Carbon Capture and Storage (CCS) Projects. This reflects the Strategy’s renewed focus on environmental sustainability and longevity, and the increasing emphasis on making use of existing infrastructures and taking a long term future approach to re-purposing installations and infrastructure;
  • the Asset Stewardship Supporting Obligation will require owners and operators of infrastructure to maintain infrastructure in a manner so as to optimise “energy efficiency” and to undertake to reduce, again subject to the “so far as is reasonable in the circumstances” caveat, emissions from activities such as venting and flaring. There is also an obligation to achieve optimum potential for the re-use or re-purpose of infrastructure and to negotiate in a timely fashion and in good faith, non-discriminatory access to it on FRAND[2] terms;
  • the Technology Supporting Obligation in the new Strategy specifically identifies an obligation to enable CCS technologies and hydrogen technologies to be planned for and developed, and to deploy technologies to reduce as far as possible emissions from flaring, venting and power generation.
  • The Decommissioning Supporting Obligation highlights the need for parties to demonstrate before commencing the planning of decommissioning or partial decommissioning that they have explored all viable options for re-purposing and re-using infrastructure wherever possible, including for CCS.

The importance of CCS technologies is expressly recognised in a new specific Carbon Capture and Storage Projects Supporting Obligation, which states that relevant persons “must have regard to [CCS] projects” and must collaborate, negotiate and allow access on FRAND2 terms to infrastructure in furtherance of this obligation.

Governance

Related to the focus on Net Zero is a new focus on social licence to operate. A new Supporting Obligation has been inserted relating to Governance which requires the licensee of an offshore licence to “apply good and proper governance at all times, including complying with any principles and practices as the OGA may from time to time direct”. The high-level principles which are aids to the interpretation of the Strategy refer to relevant persons developing and maintaining “good environmental, social and governance practices in their plans and daily operations” and the Consultation Paper refers to the OGA encouraging Boards to have the “skills and diversity to manage their operations appropriately” and “bring a company’s track record and appetite for actively pursuing energy transition matters into discussions under the licence”.

It is not clear how this obligation will be implemented in practice. The consultation paper refers to the fact that there are a number of existing codes in this area such as the 2018 UK Corporate Governance Code, the 2020 UK Stewardship Code and the Wates Principles. However, it is not clear whether the OGA would simply require compliance with such codes or go further – the consultation papers states “In connection with our licensing powers, the OGA requires the flexibility to be able to update and adapt what is considered good and proper governance based on current events and learning. Therefore, the OGA has proposed an ability to make a direction on such matters.” The consultation paper states that prior to making any direction, the OGA would consult on what is proposed and consider any responses made. Given that the Strategy is of binding effect and the breadth of what is proposed, it is to be hoped that clarity will be added to these provisions in the final version. For example, the provision purports to bind “the joint ventures in which they engage” but these are rarely legal persons and rarely involve any party other than the licensees so the intent of this reference is unclear.

Supporting Obligations – industry behaviour

There are two other potentially significant proposed changes in approach in the new Strategy.

An obligation to collaborate

Firstly, the obligations around collaboration have been reworked, to create an absolute obligation on the industry. The Strategy as originally adopted required relevant persons merely to consider (among other things) whether collaboration would advance MER UK. The new draft contains a new “Collaboration” Supporting Obligation within the revised Strategy, which requires that relevant persons “must” collaborate and co-operate with other relevant participants, for example joint venture partners, other licensees and contractors. However, unlike the original collaboration “behaviour” the purpose of such collaboration is no longer specified in the Strategy.

It will be interesting to see what comments on this proposal are received through the consultation process. Although this approach is doubtless intended to recognise that the balancing of maximising economic recovery with environmental concerns is not an isolated task for individual relevant persons, but that commercial collaborative behaviour will be of benefit to the industry, there are potentially many different interpretations of what it might mean to ‘collaborate’ in particular circumstances. An un-caveated obligation to ‘collaborate’ perhaps risks being interpreted as a requirement to agree with or consent to the demands of any counterparty, irrespective of what those may comprise, and it may prove difficult to balance such a stark obligation with the reality that there may be a genuine and reasonable difference of opinion in particular circumstances. If an absolute approach is taken, then there may be a risk of an increase in disputes amongst relevant persons based on compliance with that obligation. It is also interesting that it is proposed to extend that obligation to contractors – notwithstanding that the industry supply chain is itself not bound by the Strategy and so would itself be under no equivalent obligation.

Cost Reduction becomes Cost Efficiency

Secondly, the Cost Reduction Supporting Obligation has been modified to be a “Cost Efficiency” obligation. That is necessary because many of the new environmentally focussed requirements, particularly in respect of re-purposing offshore facilities and developing CCS projects, whilst not being prima facie the lowest cost option, may be the most cost-efficient projects over a period of time. This re-purposing of the Cost Efficiency Obligation appears to highlight the OGA’s focus on ensuring the longevity and sustainability of the UKCS.

This is also relevant in the context of decommissioning which must be conducted in the most cost-effective way that does not prejudice either MER or re-use or repurposing options – this might entail, for example, taking steps to decommission pipelines in a way which would preserve them for later use, such as using removable capping options and biocides.

Other changes

Other minor changes have been made to the Strategy for clarity or to reflect learnings from the last few years of activity – these include:

  • Clarifying that exploration activities include the acquisition and use of data, not just seismic activity;
  • A new obligation to inform the OGA promptly if a licensee becomes aware that a work programme will not produce a satisfactory expected commercial return (presumably so there is time to agree an alternative before the licence expires);
  • The introduction of an obligation to permit access to infrastructure on non-discriminatory terms in addition to fair and reasonable terms – this obligation was already in the Infrastructure Code of Practice;
  • Clarity that the obligations to deploy existing, new and emerging technologies apply whether or not the OGA has a technology plan in place;
  • The OGA may adopt industry plans as OGA plans. Where a relevant person does not intend to comply with an OGA plan, that person must now not merely consult with the OGA but demonstrate that their alternative plan meets the obligations of the Strategy;
  • Clarity that nothing in the Strategy requires a breach of licence obligations;
  • A new obligation to provide access to data to parties when looking to divest in circumstances where a relevant person is not able to ensure MER UK.

Comment

The Consultation Paper states that “Maximising economic recovery of oil and gas does not need to be in conflict with the transition to net zero. They can and should be fully integrated.” This is true – we cannot simply switch off our society’s reliance on fossil fuels not just for power but for transport, heating, industrial uses and petrochemicals. According to the report of the Committee on Climate Change (CCC) on ‘Net Zero’, oil and gas will remain an important and critical part of our energy mix for the foreseeable future, as we transition to net zero. If we are using fossil fuels then for reasons of security of supply, national economic benefit and so as not to simply export our emissions, it makes sense to maximise domestic production. However, when doing so, we must seek to ensure that the emissions associated with that production are minimised. Industry also has a role, because of its infrastructure and skills, in the development of both CCS and “blue” hydrogen.

However, for many the concept of maximising the recovery of oil and gas reserves in the UKCS in tandem with complying with global climate change targets appears a fraught one. The updated OGA Strategy attempts to allow the two to coexist by providing specific obligations and actions for relevant persons to undertake.

The Consultation Paper and a tracked change version of the Strategy are both available here. The consultation is open until 29 July 2020.



[1] Petroleum Act 1998, Part 1A

[2] Fair, reasonable and non-discriminatory