North Sea Transition Authority New Governance Guidance

Among the changes introduced in the North Sea Transition Authority (“NSTA”) Strategy[1] (which came into force on 11 February 2021) was a new “Corporate Governance” Supporting Obligation. This requires that offshore licensees “apply good and proper governance at all times, including complying with any governance principles and practices as the OGA may from time to time direct” and that they must comply with “a direction made by the OGA” under paragraph 3.

Following an 8-week consultation period during which views of stakeholders were sought, the NSTA has now published Governance Guidance (the “Guidance”). The Guidance details the circumstances when the NSTA will consider the adequacy of a licensee’s governance framework and the factors which will be considered during this process.

Background

Concerns were raised during the consultation process for the NSTA Strategy that a Corporate Governance Supporting Obligation was unnecessary, since the UK already has a robust corporate governance and regulatory regime, and that in any event, the NSTA was not best placed to regulate that aspect of the industry. The NSTA, however, took the view that the NSTA’s involvement in corporate governance would assist in limiting any risks to investment in the UKCS that may arise if (for example) individual poor examples of corporate governance had the effect of damaging the reputation of the basin thus impacting investor confidence and continued investment in the region. But it indicated that it would propose a ‘light touch’ approach to avoid unnecessarily increasing regulatory burden, recognising that the UK has a robust corporate governance and regulatory regime.

The NSTA also recognised that further explanation would be required as to what the NSTA considered would be “good and proper” governance, and the Governance Guidance has now been introduced to provide general principles with which licensees can then determine how they should comply.

Responsibility for Governance

The Guidance makes clear that, for its purposes, the Board of Directors of a licensee (or equivalent body which exercises effective control), which is referred to in the Guidance as the “Relevant Board”, has responsibility for the governance of a licensee. The NSTA expectation is that all licensees will adhere to an appropriate and recognised corporate governance code, such as the UK Corporate Code 2018, the Wates Principles of Corporate Governance 2019 or the QCA Corporate Governance Code 2018, although the NSTA will also consider other UK codes that a licensee may point to as appropriate in its individual case.

However, the variety of different licensees operating on the UK Continental Shelf (“UKCS”) means that a ‘one size fits all’ approach to corporate governance is not appropriate and the NSTA will normally accept adherence to other recognised UK or overseas corporate governance codes (for example, where the Relevant Board is located overseas and observes an appropriate code from that country). The NSTA will operate a ‘comply or explain’ approach where it expects a Relevant Board to be able to explain how a licensee complies with the Guidance or identify the areas of, and reasons for, any non-compliance.

NSTA Strategy: Specific Governance Principles

In addition to the observation of recognised corporate governance principles, the NSTA expects that all licensees will observe the specific governance requirements detailed in the Guidance. This covers five key areas:

1. Purpose and Leadership, Board Composition and Director Responsibilities: in addition to satisfying all statutory directors’ duties, Relevant Boards are expected to have appropriate senior level knowledge and experience of: (i) offshore upstream operations, (ii) the specific requirements and challenges of the UKCS and (iii) all aspects of the NSTA Strategy (including the net zero target). Relevant Boards must also ensure compliance with NSTA requirement in relation to the fitness of persons who exercise control over a licensee and include an experienced Consultative Committee of Accountancy Bodies (or equivalent) qualified officer who has responsibility for the internal control, risk management and integrity of financial statements. Details of the NSTA’s general approach to assessing the ‘fitness’ of licensees, Directors of licensees, and individuals involved in the management of licensees, and of those who control licensees were published in December 2021 and can be found here.
2. Delivery of Licence Commitments and the NSTA Strategy: the NSTA expects the Relevant Board to promote the long-term success of the licensee in the UKCS by identifying opportunities for the creation and preservation of value and the establishment of systems of oversight to identify and mitigate risks. While this might be considered a normal requirement of all boards and encompassed by most corporate codes, the NSTA goes on to state that consideration should be given to the indirect financial risks to third parties (including joint venture partners, investors, users of shared infrastructure and suppliers) when taking decisions in relation to the allocation of financial resources and the acquisition or disposal of licences. This may be viewed as a reaction to recent events in the UKCS involving default by recent entrants which has caused considerable work for, and inconvenience to, affected third parties. Relevant Boards should also adopt a prudent approach to dividends or other capital distributions taking into account the highly cyclical nature of the industry.
3. Audit, Risk, Internal Control and Reporting: the Relevant Board must ensure compliance with all applicable financial accounting principles as set out by the International Financial Reporting Standards (“IFRS”) and the International Accounting Standards Board (“IASB”). This includes compliance with regard to the disclosure of contingent assets, liabilities and provisions. The Relevant Board should have a clear understanding of a licensee’s internal controls, accountability and responsibilities. Again, similar principles would be found in most corporate codes. A number of licensees will already be complying with the principals of the IFRS and IASB.
4. Environmental Governance Principles: the NSTA Strategy places an obligation on licensees to assist the Secretary of State in meeting the net zero target by 2050 and requires them to develop and maintain good Environmental, Social and Governance (“ESG”) practices in their operations. Relevant Boards should therefore establish and embed a culture of greenhouse gas reductions in the operations of licensees. In this regard, the licensee’s performance should be measured, reported and tracked against UK Government targets and industry standards.
5. Corporate Social Responsibility: the Relevant Board must give due consideration to its social responsibilities in the performance of its operations and interactions with stakeholders. While not imposing a binding obligation, the NSTA expects Relevant Boards to ensure that licensees take account of the principles of diversity and inclusion while considering the provisions of the North Sea Transition Deal, the NSTA’s Supply Chain Expectation, OGUK’s Supply Chain Principles and the Department of Business, Energy and Industrial Strategy Prompt Payment Code.

Delivering on the Guidance

The Guidance does not impose new compliance reporting obligations on licensees nor will the NSTA systemically track compliance. However, the NSTA will be alert for actions or behaviours which suggest non-compliance, for example in the context of its Stewardship Review process and discussions with industry, investors and other regulators. A licensee’s governance may also be reviewed by the NSTA during its authorisation and review processes, particularly if an application for consent would result in a material change to the size and characteristics of a licensee.

During any NSTA review, a licensee may be required to justify the corporate governance code which it has been following and demonstrate compliance with the specific principles contained within the NSTA Strategy. Areas of non-compliance will need to be identified and explained. Where governance is deemed to be inadequate, the NSTA will ask the licensee to propose remedial measures and if these are deemed insufficient, the NSTA may direct the licensee to comply with specific governance principles and practices. Ultimately if the NSTA considers that a failure of governance amounts to a failure to comply with the NSTA Strategy, it may investigate the failure to comply under its Sanctions Procedure[2] which could lead to a sanction such as a fine, enforcement notice or (in extreme cases) operator removal or licence revocation.

Licensees are expected to have incorporated the Guidance into their corporate governance frameworks by 18 July 2022. That does not provide licensees with very long for the necessary due diligence to ensure the principles set out in the Guidance are being met. For companies which have already incorporated relevant UK or overseas codes into their practices and procedures, this requirement should pose little additional burden. However, that may not be true in all cases. It will be interesting to see to what extent the NSTA begins to incorporate express consideration of corporate governance issues in their annual Stewardship Review process and how specific they may be in circumstances where they consider that the standard of a licensee’s governance is inadequate.

The proposed Guidance is available here and our previous publication can be read here.

The authors wish to acknowledge the assistance of Natalie Haefner (Associate, CMS) and Beth Wheat (Trainee, CMS) in preparing this article.

[1] With effect from 21 March 2022, the Oil and Gas Authority changed its name to the North Sea Transition Authority to reflect its evolving role in the energy transition. This article reflects that name change, although the Governance Guidance has not (yet) been updated to reflect the new terminology.

[2] oga_sanctions_procedure-may-2019.pdf (ogauthority.co.uk)