The Oil and Gas Authority (“the OGA”) has submitted its revised Strategy for laying in the UK Parliament, following its first four yearly review and associated consultation earlier this year. The re-named “OGA Strategy” largely reflects the consultation draft and, once the parliamentary process is complete, will embed a range of new net zero obligations on the industry reflecting the ongoing global energy transition. The updated Strategy seeks to ensure that the recovery of oil and gas reserves in the UKCS is managed consistently with the UK’s global climate change targets. It also introduces new requirements on corporate governance which may impact oil and gas companies at board level and requires collaboration and cooperation with potential entrants to the industry as well as existing oil & gas industry companies and the industry’s supply chain.
Part 1A of the Petroleum Act 1998 requires the OGA to produce a Strategy that enables the principal objective of maximising the economic recovery of UK petroleum to be met, and to then review it on a four yearly cycle. The Strategy is binding on “relevant persons”, which includes offshore licence holders, operators and owners of offshore infrastructure, as well as the OGA itself. The Strategy was first introduced in 2016 and so this year has seen the first four yearly review. A consultation was held on the proposed revisions between May and June earlier this year. Please see our earlier note on the consultation here. Having considered around 50 responses from industry and interested bodies, the OGA has proceeded with the consultation draft with a few modifications.
Since the first Strategy came into effect, there has been an evident shift in opinion surrounding climate change and a new focus has been placed on the industry’s “social licence to operate” and its role in achieving net zero. That is clearly reflected in the change of emphasis in the new Strategy. It will likely take some time for the full impact of the changes to be understood – the OGA itself has confirmed it has not been able to carry out a full Impact Assessment, partly because it cannot forecast accurately the extent to which the new OGA Strategy will lead to a different outcome to that which would be arrived at under the original MER UK Strategy.
The OGA Strategy and Consultation Response
The structure remains similar to that of the MER UK Strategy, setting out a Central Obligation and Supporting Obligations, together with a number of Required Actions. Most (but not all) of the changes are intended to incorporate specific net zero related requirements; the OGA has also taken the opportunity to clarify a few points that it felt were not sufficiently clear in the MER UK Strategy.
The Central Obligation
The Central Obligation has been expanded beyond its original requirement to “secure that the maximum value of economically recoverable petroleum is recovered from the strata beneath relevant UK waters”. It now includes a second limb requiring relevant persons to “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”. The net zero obligation requires relevant persons to ensure that their own activities work towards these binding environmental targets. This additional limb was included in the draft which was consulted on earlier this year and the OGA’s response to the consultation notes that most respondents were generally supportive of integrating the net zero target into the OGA Strategy. The OGA considers that the net zero target is now an integral part of MER UK.
This new second limb requires only that effort “as far as is reasonable in the circumstances” is taken. This takes account of the fact that the obligation needs to be applied to real situations. What is “reasonable” will vary and the OGA has noted that it considers is not appropriate to define what this means.
Separately, a general concern was voiced in some consultation responses that there was a risk of significant regulatory overlap as a result of the incorporation of the net zero obligation. In response, the OGA has included a new introductory principle (which is not itself part of the Strategy but intended to guide the interpretation of the Strategy) which confirms that the revisions to the Strategy are not intended to create any regulatory overlap. The OGA has also produced in its consultation response document a helpful table explaining its understanding of the roles of the various regulators who have a part to play in relation to oil & gas industry activities.
The Supporting Obligations
The Supporting Obligations relate to: Governance, Exploration, Development, Carbon Capture and Storage Projects, Asset Stewardship, Technology, Decommissioning, OGA Plans and Collaboration. These have been updated to incorporate the new net zero focus:
Governance: as part of the new focus on the social licence to operate, this new Supporting Obligation has been inserted requiring the licensee 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”. Twenty-four of the respondents raised concerns with this new obligation, querying its value and purpose. The concerns were generally that this would allow the OGA to interfere in the day to day affairs of companies and that corporate governance is already well regulated. The OGA has stated that it recognises that a number of codes, such as the 2018 UK Stewardship Code, 2020 UK Stewardship Code and the Wates corporate governance principles already exist and it will likely reiterate these existing requirements but will include “Strategy based specific requirements where relevant”. This may include requiring licensees to show that they have knowledge of the UKCS and the Strategy, and to consider the appointment of a non-executive director in the role of “UKCS Champion”.
Development: A new limb has been added to this obligation, requiring relevant persons to consider when developing infrastructure whether any proposed or existing infrastructure could “contribute to meeting the net zero target” or support any future Carbon Capture and Storage (“CCS”) Projects.
Carbon Capture and Storage Projects: This is a new Supporting Obligation and states that relevant persons “must have regard to [CCS] projects”. The wording of this obligation was updated as a result of the consultation to clarify that CCS considerations in the strategy apply only “where there is a reasonable prospect of any such project being developed”.
Asset Stewardship: this will require owners and operators of infrastructure to maintain the infrastructure in such a manner as to optimise “energy efficiency” and to undertake to reduce “so far as is reasonable in the circumstances” 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, access to it on fair, reasonable and non-discriminatory terms. The updates to this obligation remain unchanged following the consultation.
Technology: this contains an obligation to enable CCS 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.
Decommissioning: this obligation highlights the need to demonstrate before commencing the planning of decommissioning that all viable options for re-purposing and re-using infrastructure have been explored. This has been amended slightly from the version consulted on to remove the same requirement before the commencement of partial decommissioning.
Collaboration: This is a new Supporting Obligation which imposes an absolute obligation on the industry to collaborate and co-operate with other relevant persons, potential entrants to the industry and the supply chain. By contrast, the equivalent MER UK Strategy requirement was to “consider whether” collaboration would advance MER UK. A number of concerns were raised in relation to this change during the consultation process. A key concern was that collaboration was becoming “delinked from the Central Obligation” and “an end rather than a means to an end”. It was suggested that the lack of detail around what it might mean to collaborate in particular circumstances could lead to more rather than fewer disputes. The obligation has been amended from the version consulted on to clarify that it applies when “undertaking relevant activities”. The OGA stated in its responses to the consultation that the intention was not to delink this from the Central Obligation and that collaboration among relevant persons is part of how MER UK is to be achieved. The new text has been added to try to clarify the link to the Central Obligation and address these concerns. The revised Strategy also clarifies that there must be collaboration with the supply chain. The OGA has stated that it intends to introduce a new Stewardship Expectation which recognises the role that “relevant persons” play in developing and supporting the supply chain.
The definition of “economically recoverable” has been amended to make it clear that carbon emissions and carbon costs assumptions should be included within economic assessments of project or option appraisals. The OGA has stated that the full societal costs of greenhouse gas emissions should be included when undertaking economic assessments.
Other minor changes have been made to the Strategy for clarity or to reflect learnings from the last few years.
The Strategy is available here. The OGA’s response to the consultation is available here.