High Court decision raises significant issues over the interpretation of the Petroleum Act 1998

United Kingdom

The recent decision in Apache UK Investment Limited v Esso Exploration and Production UK Limited [2021] EWHC 1283 (Comm) shows how difficulties can arise when complex standard agreements are amended for particular circumstances. It also raises significant potential issues regarding the scope of the Petroleum Act 1998’s provisions for decommissioning as the court found that a section 29 notice applied only to infrastructure which either existed or was intended to be constructed at the time the notice was served. This appears to conflict with the approach of BEIS in its guidance and in practice.


The case concerned disputes as to the amount of security to be provided under decommissioning security agreements. It arose out of  the purchase in 2011 by Apache UK Investment Limited ("Apache") from Esso Exploration and Production UK Limited ("Esso") of Mobil North Sea LLC ("MNSL"), which held licences in the Beryl, Buckland, Ness, Nevis, Skene and Maclure fields (the "Fields").

Apache and Esso entered into six Bilateral Decommissioning Security Agreements (the "BDSAs") in respect of the Fields, providing security in respect of Apache's obligation under the sale and purchase agreement (“SPA”) to indemnify Esso for all decommissioning related expenditures which Esso was or might become liable to incur. The obligation to indemnify was further supported by a parent company guarantee provided by Apache Corporation, the ultimate parent company of Apache.

On 26 March 2020, Apache Corporation ceased to be a "Qualifying Surety" under the BDSAs. Consequently, pursuant to the terms of the BDSAs, Apache was required to provide further security in the form of Letters of Credit. As the sums involved were substantial, the judge commented that “Not surprisingly, Apache wish to provide as little security as is possible in accordance with their obligations, and Esso are by contrast concerned that they might end up under secured.” Equally unsurprisingly, a dispute ensued regarding two matters:

  • Whether on a proper construction of the BDSA the required security was to be assessed in accordance with a Proposed Plan which Apache put forward for 2021 or whether it should be assessed in accordance with a Proposed Plan for 2020;

  • Whether the Petroleum Act 1998 made Esso potentially liable for the decommissioning of certain wells and therefore those wells should form part of the property in respect of which security was due.

Security under the BDSAs.

The BDSAs appear to have been based on the industry standard decommissioning security agreement (“DSA”) with some modifications to reflect the fact that the security agreement was a bilateral arrangement for the particular circumstances of the SPA rather than the field-wide arrangement for which the standard DSA is intended. In particular, under Clause 4.2 of the BDSA Apache was obliged:

  • to promptly notify Esso if the provider of the Affiliate Guarantee ceased to be a Qualifying Surety

  • to provide Esso with a Letter of Credit by way of security in the amount set out in Clause 5 of the BDSA within 10 days of that event, namely by 5 April 2020.

On 26 March 2020, Apache Corporation ceased to be a "Qualifying Surety" under the BDSAs. On 27 March 2020, Apache notified Esso of this, and indicated that it was currently arranging for the required letters of credit to be issued to Esso.

Clause 5 stipulated a Provision Amount for 2011 and 2012. Apart from this, Clause 5 was largely consistent with the industry standard DSA. The Provision Amount was to be determined in accordance with the Decommissioning Plan for the Relevant Year. However, under Clause 3 of the BDSA, there was no obligation on Apache to annually update that Plan unless and until Apache Corporation ceased to be a Qualifying Surety. In that event Apache should within three (3) months submit to Esso a proposed Decommissioning Plan which should provide among other things an estimate of the highest Net Cost during the immediately following Year (such immediately following Year being the "Relevant Year").  Therefore, when Apache Corporation ceased to be a Qualifying Surety in 2020 there was at that point no agreed Decommissioning Plan setting out a Provision Amount for 2020 nor was there a Provision Amount for 2019.

Clause 5.3 provided that if there was no Provision Amount for the Relevant Year, then the Provision Amount should be equal to the Initial Amount and that this would be an Interim Amount until the figures could be updated. Apache duly issued to Esso letters of credit in this amount which was approximately £550 million (the "Letters of Credit").

Clause 5.3 went on to provide that “In the event that the Provision Amount for the Relevant Year for which the Interim Amount applies is subsequently approved, deemed approved or determined by the Expert pursuant to clause 10 at a time in which Apache Corporation is not a Qualifying Surety, then Apache shall (subject to Clause 4.4) be obliged to provide a substitute Letter of Credit in the amount of the Provision Amount so approved, deemed approved or determined and Esso shall be obliged to return to Apache for cancellation the Letter of Credit in the amount of the Interim Amount promptly upon Esso's receipt of the new substituted Letter of Credit.”

On 23 June 2020, Apache wrote to Esso enclosing a Proposed Plan in respect of each of the BDSAs for the years 2020 and 2021 (the "2020 Proposed Plan" and the "2021 Proposed Plan"). On the basis of the Proposed Plan for the year 2020, the relevant Provision Amount for that year was £412 million. Since this sum was lower than the amounts of the Letters of Credit, Apache indicated that it would require Esso to return the Letters of Credit to Apache upon receipt of substitute letters of credit in the lower amount.

Esso objected that Apache had no obligation or right to submit the 2020 Proposed Plan under the terms of the BDSAs, and that it had therefore disregarded that document. Esso also raised various objections to the detail of the 2021 Proposed Plan.


Proposed Plan for 2020 or 2021

The first question to be considered by the court was whether Clause 3 required Apache to present a Proposed Plan for 2020 or 2021.

The court agreed with Esso that the BDSA required preparation of a Plan for 2021 and not 2020. The court noted that Clause 3.1 required Apache to provide a Proposed Plan within 3 months for consideration by Esso which would update the historic figure initially provided in accordance with Clause 5. There was then a mechanism for objections to made, with possible referral to Expert, all of which might take many months to complete. Clause 3.1.2 required the estimate of the cost to be for the "immediately following Year (such immediately following Year being the Relevant Year)". The court found that “At any given date in 2020, the immediately following calendar year is 2021.  Any other construction would be very surprising.”

It was clear that the amendments made to the industry standard to address the particular circumstances of the acquisition created some ambiguity. The court agreed that there was a significant difficulty in interpreting Clause 4.2 which provided that the obligation to provide Esso with a Letter of Credit was "in the amount equal to the Provision Amount stated in or calculated for the Relevant Year under Clause 5."  The court commented that it was difficult to make sense of the addition of the words "for the Relevant Year" which were otiose at best and arguably misleading. It was also fair to say that the draftsman had not always used the expression Relevant Year in a way entirely consistent with his definition: for example in Clause 5.1 there was reference to the "2011 Relevant Year and 2012 Relevant Year" which does not square particularly well with the definition "immediately following Year".

However, there were, in the court’s view, more difficulties with Apache's construction. For example, if Apache Corporation had ceased to be a Qualifying Security in December 2020, on Apache's case, the process of submitting a Proposed Plan would focus not on the security required for the coming year 2021 but the past year 2020, and the Proposed Plan would not be submitted until early 2021 and probably agreed in mid-2021. Given Apache's submission that commercial common sense required these provisions to be construed so that accurate and up to date security could be provided, commercial common sense seemed very much on the side of Esso's construction. Further, it had led in the present case to Apache submitting two plans for consecutive calendar years at the same time. Nothing in the BDSAs suggested that was contemplated.

The Additional Wells

The second dispute between the parties was concerned with the extent of the potential decommissioning obligations of Esso under the Petroleum Act 1998 ("the Act").

The Act provides in section 29 that the Secretary of State may by written notice require the person(s) to whom the notice is given to submit to the Secretary of State an abandonment programme in relation to an offshore installation.

Section 30 sets out the persons to whom notices under section 29 may be given. Inter alia, section 30 permits notices to be served on persons who have the right to exploit or explore mineral resources in any area (in other words, licensees under the Act in respect of the area) where the exploitation or exploration of mineral resources in the exercise of the right either is carried on from, by means of or on the installation, or the person intends to carry on such activity from, by means of or on the installation. Notices may also be served on companies associated with the licensees (essentially affiliates and 50:50 joint ventures).

Under section 34 of the Act, at the time a decommissioning programme is approved, if the Secretary of State has concerns regarding the financial resources of the companies then liable to carry it out, additional companies can be made liable if at any point previously they could have been served with a section 29 notice, even if they were not so served.

Esso objected when it received the Proposed Plans from Apache that Apache had failed to include in the 2021 Plan ten subsea wells relevant to the BDSAs, which it suggested could add approximately £100 million to the gross cost estimate. Following further correspondence between the parties, Esso refined this objection to only four additional wells located in the Nevis and Buckland Fields (the "Additional Wells").

The Additional Wells were drilled after Esso disposed of MNSL to Apache. The BDSA required security to be given in relation to the decommissioning of Field Property. This was defined to exclude new field facilities “unless Esso or its Affiliates can be required to submit or carry out an abandonment programme in relation to such new field facilities under the terms of the Petroleum Act 1998”.

The Secretary of State had served on MNSL prior to the sale and purchase a number of section 29 notices relating to Subsea Installations for the Nevis Field and Buckland Fields. Although MNSL had been sold to Apache, Esso remained potentially liable for the decommissioning of those Subsea Installations under section 34 of the Act as an associated company of MNSL at the time of issue of the notice. The question is whether these notices covered the Additional Wells

Esso’s concern was that the Secretary of State would contend that, on a proper construction of the Act, the existing notices were wide enough to require decommissioning of the Additional Wells, and therefore unless provision was made for security under the 2021 Plan, Esso could be significantly unsecured.

OPRED Guidance issued in 2018 states: "In circumstances where a section 29 notice is not withdrawn from a party that has disposed of its interest (see below) they would not be liable for any new installations or pipelines emplaced in the field. In these cases OPRED will prepare a separate section 29 notice referencing the new installations and the relevant parties. However, the exiting party would be liable for any new equipment added to an installation already covered by their existing notice."[our emphasis]

Esso sought to engage with OPRED (the division of BEIS responsible for offshore decommissioning) , on the basis that if OPRED was prepared to accept that the section 29 notices issued before Esso sold MNSL to Apache did not apply to the Additional Wells, Esso would accept that Apache did not need to provide security for their decommissioning. However, OPRED indicated to Esso that it was of the view that Esso could be liable under section 34 for the Additional Wells. The court considered that “ultimately this is a question of construction of the Act and OPRED's views would not be determinative”.

The matter appeared to turn on whether the Additional Wells fell within the definition of offshore installation under the Act. "Offshore installation" is defined by section 44(1) as "any installation which is or has been maintained or is intended to be established for the carrying on of any activity" falling within section 44(2) and (3). Those activities are by section 44(3) the exploitation or the exploration with a view to exploitation, of mineral resources in or under the shore or bed of relevant waters. By section 44(2) that activity must be carried on from, by means of or on an installation which is maintained in the water, or on the foreshore or other land intermittently covered with water, and not connected with dry land by a permanent structure providing access at all times and for all purposes. By section 44(5) "installation" includes any floating structure or device maintained on a station by whatever means.

The court focused on the fact that section 44(1) limits the powers in relation to offshore installations to an installation which is or has been maintained or is intended to be established: “Thus the Secretary of State would only have power to apply one of the section 29 notices to the Additional Wells if at the time of the relevant notice those wells were being maintained or were "intended to be established".” No one has ever suggested that there was an intention at the time of the notices to construct any of the Additional Wells, which were only built many years thereafter. I take the view that there is no possible reason to think that the Additional Wells could fall within the section 29 notices on the basis that they fell within "intended to be established."

The court therefore concluded that the security did not require to include provision in relation to the Additional Wells.


The commercial purpose of the BDSAs was to provide for security in respect of Apache's obligation under the SPA to indemnify Esso for all decommissioning related expenditures which Esso was or might become liable to incur. Those liabilities could arise in the event the Secretary of State required Esso to carry out decommissioning, notwithstanding it had disposed of the assets, by virtue of a section 29 notice issued under the Act or through section 34. The scope of Esso’s liability under a section 29 notice was therefore key to understanding the extent of the security needed to cover the scope of the indemnity in the SPA.

It is arguable that the analysis of the court jumped from the requirement for the installation to have been established or intended to be established to a requirement for the well to have been established or intended to be established. The alternative approach (which was briefly considered but rejected) is whether the well formed a later addition to an installation which had been established/intended at the time of the notice. This decision, if correct, has some interesting implications for industry.

  • First, it is notable that the judge appears to have been proceeding on the basis that a well was itself capable of being an installation, which is inconsistent with the approach taken to date by BEIS, which has treated “installation” as referring only to a platform or subsea manifold structure.  However, although installation is commonly understood in the industry to be so limited, it is not immediately apparent that there is anything in the definition of installation which would prevent the court’s interpretation. Although in practice, production and injection wells are included (and indeed expected by OPRED to be included) within decommissioning plans this approach would potentially extend Part IV of the Act to exploration and appraisal wells which has never previously been considered to be the case.

  • Second, the court’s interpretation of the section 29 notice as applying only to infrastructure in place or intended to be in place at the time of the service of the notice creates issues for BEIS in determining what constitutes an addition to such an installation and what constitutes a new installation requiring a new notice.  It may require BEIS to regularly update section 29 notices and/or issue many more notices, particularly where there have been amendments to the Field Development Plan, in order to capture such additions within the new section 29 notice rather than assuming that a single notice would capture later additions to an installation. That in turn raises questions as to the scope of liability of those caught by the earlier notice who are no longer owners by the time of the later notice.

In simple terms, either:

  • The court’s decision is wrong, which means Esso will not be receiving adequate security under the BDSAs as a result of this decision; or

  • BEIS has been acting on a mistaken belief on the scope of existing section 29 notices and may now need to take action to seek to remedy the position.