Oil & Gas: Scope of legitimate reasons to withhold consent

In Apache North Sea Ltd v INEOS FPS Ltd [2020] EWHC 2081 (Comm) the Commercial Court decided it was not legitimate to pre-condition the giving of a consent upon renegotiation of commercial terms where the outcome would have been to enhance the consenting party’s contractual benefit. However, it did identify that setting conditions to consent would sometimes be legitimate. As issues concerning the giving of consent regularly arise in oil and gas transactions and operations, the approach of the Commercial Court gives useful guidance to those operating consent rights.

Facts

INEOS FPS Limited (“INEOS”) owns and operates the Forties Pipeline System (the “FPS”). Apache North Sea Limited (“Apache”) owns interests in the Forties Field in the North Sea.

In 2003, BP sold its interests in the Forties Field to Apache. The fact that, going forward, these interests and the FPS would be in different ownership necessitated the conclusion of a transportation and processing agreement (“TPA”) between Apache and a BP entity (“BPEOC”) to regulate the terms on which hydrocarbons produced by Apache from the transferred interests would be brought ashore through BPEOC’s pipeline.

Apache subsequently acquired interests in two further fields from BP – the Maule Field and the Tonto Field. It entered into TPAs for those fields on 16 June 2012 and 23 April 2013 respectively, and on 23 April 2013, Apache and BPEOC entered into an Umbrella Agreement for all three fields by which they were all made subject to the same terms as the TPA applicable to the Forties Field. INEOS purchased FPS from BPEOC in 2017, and therefore became a party to these TPAs and the Umbrella Agreement with Apache.

Apache’s estimated production profile from the relevant fields is set out in Attachment F to the TPA, which sets out an estimated production profile on a quarterly basis up to the end of 2020. Clause 5.05(a) of the TPA provides that if Apache “requires to … amend Attachment F” then subject to there being Uncommitted Capacity, INEOS “shall not unreasonably withhold its consent to such increase”.

Apache wished to revise Attachment F, to set out its estimated production profile for the period from January 2021 to December 2040. INEOS stated that it was only willing to consent to the amendment sought if Apache agreed to revise the tariff payable under the TPAs for the transportation and processing of hydrocarbons.

Decision

Consent

There are a number of Court decisions addressing consent provisions generally, many of them landlord and tenant disputes where the landlord’s consent is required to an assignment or sub-letting of the lease or an application by the tenant to apply to change the permitted use of the demised premises. The principles set out in these decisions have been applied to consent provisions in other types of contract (Portson Capital Technology Funds v 3M UK Holdings Ltd [2011] EWHC 2895 (Comm) and Crowther v Arbuthnot Latham & Co Ltd [2018] EWHC 504 (Comm)).

As Lord Briggs JSC noted in Sequent Nominees Ltd v Hautford Ltd [2020] AC 28 “the correct approach is to construe [the consent provision] so as to discover what, upon its express terms, it permits the landlord to do”, an exercise not limited to looking at the terms of the consent provision in isolation, but also at the other terms of the contract of which it forms part. And just as it is important for the court not to trespass on issues which are properly part of the evaluative exercise for the consent-provider under the guise of construing the contract, it is legitimate for the court to consider to what extent the parties can have intended that one party would be subject to the risk of an adverse decision by its counterparty on a particular matter “with the protection only of a requirement of good faith and rationality” (as Hildyard J put it in Lehman's Waterfall. Re Lehman Brothers International (Europe) (In Administration) [2017] Bus LR 1475).

In the landlord and tenant context, it has been held that “it will not normally be reasonable for a landlord to seek to impose a condition which is designed to increase or enhance the rights that he enjoys under the lease” (Phillips LJ in Mount Eden Land Limited v Straudley Investments Limited (1996) 74 P&CR 306, 310-311) .

However, the mere fact that through the imposition of a condition, the consent-provider may acquire an entitlement to something it did not previously have does not automatically render the condition illegitimate. In particular, a condition may have this effect but will otherwise be legitimate where it provides a mechanism for addressing a legitimate concern on the part of the consent-provider in relation to the consequences of providing consent, with the result that the benefit obtained is compensatory or mitigatory in nature.

Application to Facts

Apache’s obligation to transport Shipper’s Pipeline Liquids did not cease at the end of 2020 merely because the existing Attachment F did not address the period from the end of 2021 onwards. If Apache carried on producing Shipper’s Pipeline Liquids, it remained obliged to transport them through the FPS.

In addition, Apache was not entitled to condition any request for an amendment to Attachment F to provide for production after the end of 2020 on INEOS’ agreement to vary the TPA, e.g. by reducing the contractual tariff, amending the ‘Send or Pay’ provisions to Apache’s advantage or by enlarging Apache’s entitlement to make alternative transport arrangements. There is nothing in the language of Clause 5.05(a) which provides a basis for Apache conditioning its request in this way.

Clause 7.01 sets out a base tariff for “the Services” which is to be escalated over time using a formula in Clause 7.02, as is standard in TPAs. Clause 7.02 provided for escalation without limit as to time. The tariff remained payable unless and until INEOS exercised its right under Clause 7.05 to change to a costs-share charging basis.

Given the above, INEOS could not require an increase in the tariff as a condition of agreeing to the amendment of Attachment F. On the proper construction of the TPA:

• Apache is entitled and obliged to tender Shipper's Pipeline Liquids for transportation on the FPS at the contractual tariff for the duration of the TPA, which continues until it is terminated on one of the six bases the TPA provides.

• The terms of Attachment F do not limit that entitlement and obligation to the period up to 2020.

• In those circumstances, it would be inconsistent with the terms and scheme of the TPA if INEOS was entitled to make its consent to the amendment of Attachment F conditional on Apache agreeing to a fundamental revision of the parties' bargain in the form of a new tariff.

Comment

Although this dispute related to a transportation and processing agreement, issues of withholding consent seem to be on the rise across the North Sea. This doubtless arises from the more marginal nature of assets and the change in ownership structures. Many industry participants are looking closely at their existing agreements and counterparties and assessing whether consent rights might be used as a trigger to either renegotiate contractual terms or block an undesirable transaction.

As in this case some of these consent rights require consent to be ‘not unreasonably withheld’. Other forms of agreement might entitle the consenting party to ‘reasonable assurances’ from the party to receive consent (see Apache Beryl Ltd v Marathon Oil UK Ltd [2017] EWHC 2462 (Comm) – see page 50, CMS Annual Review of developments in English oil and gas law (2018 Edition)).

Where consent must not be unreasonably withheld, the decision of the Commercial Court in this case clarifies that:

• It will not normally be reasonable to seek to impose a condition which is designed to increase or enhance the rights that the consenting party enjoys under the contract in question.

• However, a condition may be legitimate where it provides a mechanism for addressing a legitimate concern on the part of the consent-provider in relation to the consequences of providing consent, with the result that the benefit obtained is compensatory or mitigatory in nature.