Judicial review of Oil and Gas Authority’s Strategy dismissed

United Kingdom

Throughout 2021, the Oil and Gas Authority (“OGA”) faced a number of legal challenges from environmental campaigners. Perhaps the most significant example was the judicial review challenge to the OGA Strategy which was given leave in July and proceeded to a full hearing in December 2021.  

On 18 January 2022, Mrs Justice Cockerill handed down her judgment in R (on the application of Cox and others) v Oil and Gas Authority and another [2022] EWHC 75 (Admin), which dismissed the application on all grounds.

Background

The regulatory regime for the UK offshore oil & gas industry, established in 2016, is based on a requirement known as the “principal objective”, which is defined in the Petroleum Act 1998 section 9A as “the objective of maximising the economic recovery of UK petroleum…” known as “MER”.  The OGA is also required to publish one or more strategies for the purpose of enabling the principal objective to be met.  

The original MER Strategy was implemented shortly after the establishment of the OGA in 2016.  On 11 February 2021, a revised strategy, the “OGA Strategy”, took effect. To enable the principal objective to be met, this imposes on industry a “Central Obligation” in two parts:

  1. Like its predecessor, the Central Obligation glosses the principal objective by requiring regulated companies to take the steps necessary to “secure that the maximum value of economically recoverable petroleum is recovered from the strata beneath relevant UK waters”;

  2. In addition (and for the first time) there is a second limb to the Central Obligation, so that regulated companies are required, in seeking to comply with the first limb, 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.”

Key to the precise scope of the Central Obligation is what is meant by “economically recoverable petroleum”.  The OGA Strategy defines the term “economically recoverable” in relation to petroleum as

“those resources which could be recovered at an expected (pre-tax) market value greater than the expected (pre-tax) resource cost of their extraction, where costs include both capital and operating costs (including carbon costs) but exclude sunk costs and costs (such as interest charges) which do not reflect current use of resources. In bringing costs and revenues to a common point for comparative purposes a 10% real discount rate will be used. Where relevant, UK Government carbon appraisal values for all greenhouse gas emissions will be used combined with the associated real terms social discount rate”.

Application for judicial review

The Claimants’ challenge to the OGA Strategy asserted that the definition of “economically recoverable” was unlawful and/or frustrated the statutory purpose of the Act because:

  1. it wrongly provides for a pre-tax approach when determining economic value, which is not provided for in the Petroleum Act’s definition of the “principal objective”; and

  2. it fails to account for the financial support the industry receives, including tax breaks, meaning that activities uneconomic for the UK as a whole could be pursued as a result.

Separately, the Claimants challenged the Strategy on the grounds of irrationality, arguing that the Strategy’s definition of “economically recoverable” is irrational as it will result in increased levels of oil and gas production and thus increased greenhouse gas emissions and so conflicts with the purpose of the Climate Change Act 2008 and the government’s Net Zero Target.

The Claimants brought expert evidence on the UK tax regime. The judge was unimpressed with this evidence, considering that it failed to meet the standards set by the Civil Procedure Rules for such evidence, in that it failed to state the substance of all material instructions, whether written or oral and failed to distinguish clearly between matters of fact and opinion. However, in the event, this evidence was not particularly relevant to the arguments at hand.

Consideration and judgment

Ground 1 – Unlawfulness

There were two aspects to this claim.

The role of the Court

First, the Claimants argued that the meaning of a statutory provision is a question of law for the court, that there can be only one permissible interpretation of a statutory provision and that the OGA cannot choose its own definition.

Mrs Justice Cockerill rejected this argument comprehensively.

First, on the role of the Court, the judge acknowledged that there are cases where what is in issue is simple statutory construction and where an answer may be determined by the Court to be right or wrong. However, she noted that the authorities also acknowledged that there are cases where statutory wording is inherently imprecise or "open-textured" and considered this was such a case. “Here we have a provision which is effectively instructions to a specialist authority; which is couched in imprecise terms – certainly broad enough not simply to call of the exercise of judgment, but in all the circumstances hallmarking the exercise as one to be done by reference to the authority's specialist understanding and judgment. It is, to my mind, a very considerable distance from the kind of case where an exercise of statutory construction could determine a single right answer.”

Statutory interpretation

Having determined that interpretation of the term “economic recovery of UK petroleum” was a matter for the OGA, the question of whether it was incorrect in that interpretation did not fall to be determined, but Mrs Justice Cockerill went on to consider it in case she was incorrect on the first point.

The Claimants argued that the term “economic recovery of UK petroleum” meant recovery of UK petroleum that is economic to the “UK as a whole” including when it comes to the public purse and therefore has to take account of the fact that oil companies in certain circumstances receive repayments of tax from the Treasury. The OGA’s decision to assess the question of economic recovery pre-tax was therefore inconsistent with the statutory definition, proceeds on the basis of an error of law and has frustrated the statutory purpose behind section 9A of the Act. 

As Mrs Justice Cockerill summarised the Claimants’ position “The essence of the case is that, by ignoring the effect of government-backed financial support, the Strategy has stretched the definition of “economically recoverable” too wide, such that activities that are not truly “economic” for the UK are nonetheless still sought to be maximised through the Strategy.”

The judge noted several issues which led to the conclusion that the Claimants were wrong:

  • that interpretation began with looking at the words in question but also required a review of the background, which in this case included the Explanatory Notes to the Bill and the Wood Review. From the background (such as the Explanatory Notes to the Bill and the Wood Review) it was clear that Parliament must have been aware of the fiscal aspects of oil and gas regulation but there was no evidence that it intended the OGA to depart from the traditional approach of economic assessment on a pre-tax basis. Parliament could have used plain, specific language if it intended to require the OGA to take a different approach. It did not do so.

  • in the tri-partite system established following the Wood Review, issues of taxation remained the remit of the Treasury. It would make no sense to impose on the OGA – which does not control taxation decisions – a responsibility which involves meeting an objective which (if it were to be considered other than on a pre-tax basis) is in part dependent upon an input which it cannot ever control.

  • it was significant that the Claimants had no clear alternative interpretation of the statutory provision in question.The Claimants contended that the assessment of what is “economic” needs to be carried out by reference to the UK as a whole. However, the reference to “the UK as a whole” did not appear in the statute. Moreover, the Claimants were focused on only one aspect of those benefits (tax revenues) while the Wood Review stressed the need for consideration of the wider benefits of MER which flow for the UK as a whole including reduced imports, enhanced security of supply of primary fuels and employment.

  • the Claimants arguments around the impact of decommissioning tax relief were misconceived. They focused on the fact that in certain years the Treasury might pay out more in tax relief to oil and gas companies than it received from those companies in oil and gas taxation but this was to ignore the wider picture, which meant that a company would never receive more by way of rebate than has been paid by way of tax, even where an asset has changed hands and the repayment may go to a different company to the one that paid the tax:

  • The complaint is essentially this: that I should conclude that the approach to the Strategy is wrong because it is possible there may in individual cases be net payments to particular companies in particular years because of the way in which the taking over of particular concessions is organised. So, while the tax position over the life of the concession is at worst neutral, because A may be the incumbent in years 1-18 with net positive tax position but B is the incumbent in years 19-20 with net negative tax position, the whole strategy needs to be changed. This is, frankly, a strained and nonsensical approach.

  • the concern regarding payments to foreign companies was misconceived because a company that wishes to join a licence and take an interest in a producing field must be either a UK company or have a fixed place of business in the UK, and any licence holder will be taxed in the UK on its production activity and any distribution of profits, whether to UK resident or non-UK resident shareholders, will be made from post-tax profits.

Ground 2 – Irrationality

The Claimants made an alternative argument that (even if they were wrong and the OGA had discretion to determine the meaning of “economic recovery of UK petroleum) the OGA’s exercise of that discretion was irrational since maximising economic recovery would increase the amount of petroleum recovered and thus increase the amount of greenhouse gases (GHGs). This was inconsistent with the Net Zero Target and with the OGA’s own duty under section 8(1) of the Energy Act 2016 to have regard when exercising its functions, so far as relevant to, inter alia, the development and use of facilities for the storage of carbon dioxide, and how that may assist the Secretary of State to meet the Net Zero Target.

Mrs Justice Cockerill was not persuaded.  The “have regard” duty under s.8 of the Energy Act 2016 which is the foundation of the Claimants’ irrationality argument was a process duty. The question of how to balance various objectives is a matter for the regulator, not the Court. The OGA, in consulting on and adopting the Strategy, manifestly had regard to UK domestic action on climate change, so the requirement was met.

In any event, it was not clear that the consequence of the definition would be extra emissions. The Claimants’ argument oversimplified the Strategy and the OGA’s economic assessment to the point of misunderstanding it. The assessment to be performed does not necessarily result in maximised extraction since “relevant persons are obliged to maximise the expected net value of economically recoverable petroleum not the volume expected to be produced.”

The Claimants’ approach also entirely failed to take account of the fact that carbon costs have now been brought within the assessment of economic recovery – with reference particularly to carbon appraisal values for greenhouse gas emissions and the associated social discount rate.

A further argument arose orally as to whether the OGA was required to have regard to the downstream oil and gas scope 3 emissions from any increased production. Scope 3 emissions are commonly understood to mean those not directly produced by an economic activity, but from its value chain, both upstream in the supply chain and downstream from the use of the product. So, in the case of oil and gas production, upstream scope 3 emissions may include for example emissions from helicopters or shipping of material.  Downstream scope 3 emissions in the case of oil and gas include the emission from the use of oil and gas required in, for example, transport, electricity generation and heating.

The judge agreed with the OGA that these emissions are not an area which can be regulated in a Strategy for offshore production. Further, there is authority to suggest that there would be no duty on the OGA to take into account the ultimate consumption of the refined product: Greenpeace Limited v the Advocate General et ors [2021] CSIH 53 at [64-65]:

“The question is whether the consumption of oil and gas by the end user … are “direct or indirect significant effects of the relevant project”. The answer is that it is not … The ultimate use of a finished product is not a direct or indirect significant effect of the project … It is the effect of the project, and its operation, that is to be considered and not that of the consumption of any retailed product ultimately emerging as a result of a refinement of the raw material.”

The only argument left to the Claimants was, in effect, to say that the OGA is legally required to take steps, through its Strategy, to “undermine (or limit) the maximisation of “economically recoverable” petroleum”. “The essential problem with this argument is that it finds no basis in the statute – and indeed contradicts the whole concept of MER, and not merely the iteration of MER which the Claimants are seeking to challenge. Were the Claimants' argument in this respect right it would effectively override s.9A of the Act. That cannot be right – not least when the principal objective of MER was put on a statutory footing seven years after the CCA 2008 was enacted.”

Ultimately, Mrs Justice Cockerill found that the Claimants’ claim failed, and the claim was dismissed.

The full judgment can be read here.

Comments

The OGA unsurprisingly welcomed the judgment and stated its intention to continue to regulate and influence the industry in a manner which both secures energy supply and supports the transition to net zero.

The option remains for the Claimants to appeal the decision and it will be interesting to see whether they choose to do so.

Regardless, it seems likely that environmental campaigners will continue to utilise judicial review as a mechanism for challenging the government and regulatory bodies within the oil and gas industry. Indeed, several such applications have been made since permission was granted in this case.