Life after Brexit – Implications for the upstream oil and gas sector

Now that the decorations are packed away and the Christmas cake crumbs swept up, we are turning our attention to the outcome of the last minute agreement of the Trade and Co-operation Agreement (TCA) signed on 30 December between the UK and the EU and its implications for the oil and gas sector.

Trade in Goods

The most immediate and obvious implication of Brexit is the impact at UK ports where the changes in customs procedures have added significant stresses to a transport system already suffering from the impact of the pandemic.

The changes result from the fact that goods are no long moving within a single market but are crossing a customs border. The TCA provided some good news in that it prohibits tariffs on goods moving between the UK and the EU: however, customs forms are required (even for goods moving to the EU for repair and return) and these must be checked. Mistakes in completing unfamiliar paperwork, and inexperienced border officials, mean checking takes longer than it should. Phytosanitary checks, intellectual property checks and verification of origin may add to the delays. Even if a shipment for an oil and gas customer has all the right paperwork, it may share a freight vehicle with a shipment which does not or be in a queue behind a vehicle which lacks the appropriate documents.

Over time, it is to be hoped that these teething problems will be worked out, but in the meantime, many operators have taken self-help measures such as increasing stocks of business critical spares, and finding alternative sources of supply within the UK or outside the EU (although the latter may still be affected by backlogs at ports). Where the shipments are business critical, force majeure provisions will be scrutinised to see if these provide relief to the supplier for delays in delivery.

Even when systems are working more smoothly the requirement for additional paperwork will add time and delay to contracts, which will need to be checked to determine whether these changes are at the expense of the customer or supplier.

Fortunately, HMRC have confirmed to Oil & Gas UK that there will be no change to the current processes for UK-UKCS movement of goods for the time being. Furthermore, no changes will be made without consulting industry through the UKCS Work Group.

Movement of persons

The second significant change is the impact on free movement of persons, and this has been somewhat improved by the TCA. EU workers in the UK prior to the end of the transition period may now or in the future qualify for the UK settled workers scheme, which will entitle them to residence rights. In future, EU workers wishing to come and work in the UK will need a visa under the new points-based immigration system (as will those from outside the EU) and the employer will need a sponsor licence. Equally, those wishing to travel from the UK to the EU for business purposes may require a visa. It will therefore potentially be harder for employers to move staff between the UK and European offices. However, the TCA does provide that each party must allow certain movements of business people from the other party – these are:

• the entry and temporary stay, and employment in its territory of intra-corporate transferees (although there are strict definitions on who qualifies as an intra-corporate transferee in terms of experience and length of employment);
• the entry and temporary stay (up to 90 days in any 6 month period) of business visitors for certain purposes without requiring a work permit or similar approval; and
• the entry and temporary stay of contractual service suppliers and independent professionals (again subject to detailed definitions and conditions).

All of these rules are going to require more planning and forethought from employers.

Energy Regulation

The TCA contains a chapter on energy but this is largely focused on downstream gas and electricity trading and on electricity and gas interconnectors, also addressing security of supply and support for renewable energy.[1] Only two provisions are directly aimed at the upstream sector – Articles ENER.24 and 29.

Article ENER.24 (Offshore risk and safety) states that the Parties shall cooperate and exchange information with the aim of maintaining high levels of safety and environmental protection for all offshore oil and gas operations and shall take appropriate measures to prevent major accidents from offshore oil and gas operations and to limit the consequences of such accidents. It also requires the Parties to promote the exchange of best practices among their authorities that are competent for the safety and environmental protection of offshore oil and gas operations and to separate HSE regulation from any functions relating to licensing of offshore oil and gas operations.

Article ENER.29 (Authorisation for exploration and production of hydrocarbons and generation of electricity) states that if a Party requires an authorisation for exploration or production of hydrocarbons or generation of electricity, that Party shall grant such authorisations on the basis of objective and non-discriminatory criteria which are drawn up and published before the start of the period for submission of applications in accordance with the general conditions and procedures set out in the Services and investment section of the TCA, that reasons are given and that rights of appeal are available. Financial contributions or contributions in kind required from entities to which an authorisation is granted shall not interfere with the management and decision-making process of such entities.

Thus while the UK’s licensing regime will no longer be required to comply with the detailed provisions of the Hydrocarbons Licensing Directive, it will need to maintain the transparent and objective approach to licence award and the separation of powers between the health, safety and environmental remit of BEIS, OPRED and the Health and Safety Executive, and the licensing powers of OGA. However, this is very much in tune with the UK’s preferred approach to management of its hydrocarbon resources and there has been no discussion of any change to this. Other regulation such as the MER UK regime, and taxation of oil and gas production, is domestically derived and is not affected by Brexit.

As a consequence, the TCA will have little direct impact on the exploration and production sector and the impact of Brexit following the TCA remains very similar to the impact expected from a no deal (other than the removal of any threat of tariffs on equipment and materials, as oil and gas was always expected to be zero rated).

Health and Safety

In the health and safety context, much regulation is EU derived but remains in place as a result of the incorporation of EU law into UK law for the time being. However, there is potential over time for regulatory divergence between the UK and the EU. For instance, some may argue that the UK should tackle so-called “gold-plating” in EU rules. However, Article ENER.24 referred to above requires the UK to take appropriate measures to prevent major accidents from offshore oil and gas operations and to limit the consequences of such accidents and the general level playing field provisions of the TCA will also limit the extent to which the UK can weaken health and safety standards. Indeed, much of the regime put in place under the Offshore Safety Directive was inspired by UK regulation and s is likely to endure for at least the short to medium term.

Moreover, it is likely that at least some of the EU regulations have improved a lot of the British workforce and lead to greater safety in the workplace and greater protection for the environment. Any attempt to abolish these rules would result in campaigns by trade union leaders, charities and lobbying groups to retain them.

While such changes could potentially reduce costs incurred as a result of having to comply with EU regulations, divergence would add to administrative costs for companies operating across both the UK and EU which will in future potentially have to deal with two regimes rather than one. Our view is that we do not anticipate significant change in the short to medium term.

Environment

In terms of environmental law, the substance will remain largely the same but there will be two significant changes – the UK is developing its own replacement systems for regulating emissions trading and for the many and varied chemical regulation regimes.

In December, the UK Government confirmed that that it would establish a UK ETS which will largely mirror EU ETS although for the time being there is no agreement for any formal link to the EU ETS. In the meantime, UK participants in the EU ETS must continue to comply with EU ETS obligations for 2021, submitting verified annual emissions reports for 2020 by 31 March 2021 and the equivalent emissions allowances by 30 April 2021.

From 1 January 2021, the REACH regime, which regulates the movement of chemicals, has been replaced in the UK with a UK REACH regime. Manufacturers in the UK and importers into the UK are now required to register afresh with the Health and Safety Executive, the new body taking on powers under REACH previously held at EU level by the European Chemicals Agency (ECHA).

There will inevitably be teething problems with this regime as parties race to obtain the appropriate registrations and in some cases to deal with unfamiliar paperwork. For instance, roles previously undertaken by companies within EU REACH may have changed significantly under UK REACH, which will involve different registration requirements.

In addition to new registration is needed, roles in the supply chain will have also changed following Brexit. Previously, UK downstream users could have relied on an EU REACH registration held further up the supply chain. However under the new regime, importers into the UK must ensure that the substances they import are covered by a UK REACH registration. This will mean, that parties familiar with bringing chemicals into the UK in the capacity of distributor within EU REACH will face additional and more stringent compliance obligations as importers for the purposes of UK REACH. The same principle will apply for supply into the EU from the UK, which will render the first distributor as the importer and again will take on further duties accordingly.

There will also be changes to the rules for the movement of waste between the UK and the EU. From 1 January 2021, movements of waste between the UK and EU are subject to EU customs guidelines as well as the EU Waste Shipment Regulations including waste notification and waste movement forms for notifiable waste.

Contracts/Disputes

There has been much discussion in the run up to Brexit of the possible impact on existing contracts. For example:

• whether changes in the regulatory regime applicable from 1 January 2021 trigger a change in law provision – this will be a matter of contractual interpretation based on the express words of the contract and depending on the wording may also be affected by the knowledge of the parties of potential changes at the time the contract was entered into;
• change of law provisions generally allow one party to the contract to claim additional time or money to deal with those changes but where the change in regulation prevents a contractual provision from being performed or causes significant delay there may be a role for clauses addressing force majeure, or in very rare cases for the English law concept of frustration – again these are very fact and wording dependent, but mere increase in the cost of performance will not usually result in relief, even if performance becomes uneconomic – however, contracts containing material adverse change clauses will undoubtedly be carefully perused in such cases;
• disputes may arise as to how to interpret references to EU laws and EU institutions in existing contracts – while the Interpretation Act 1978 applied together with the EU (Withdrawal Agreement) Act 2020 will mean that in most cases references will be construed, where applicable, as referring to UK equivalents from 1 January 2021, references to concepts such as “the EU” or “Member States” may be harder to interpret; and
• provisions of the contract referring to EU regulatory regimes which have now fractured into parallel EU and UK systems such as those referred to in this note for employment, data protection, chemicals regulation or others such as intellectual property, competition law and financial regulation may give rise to disputes, particularly as those regimes diverge.

Disputes will inevitably arise under contracts with counterparties based in the EU, which raises the question of how Brexit will impact legal proceedings. The TCA does not address civil justice cooperation, save in the context of certain specialist proceedings (such as proceedings to enforce IP rights). This is another area where the position remains largely as it was expected to be in the case of a no-deal departure from the EU and is briefly summarised below.

On governing law:

• The Rome I and Rome II Regulations oblige EU courts to recognise choice of law clauses, regardless of whether the law chosen is that of an EU member state or a non-member state. Choice of law clauses in favour of English law will therefore continue to be recognised by EU courts going forward.
• With effect from the end of the transition period, Rome I and Rome II have now been incorporated into domestic law. This means that English courts will continue to recognise foreign governing law clauses in the same way as before.
• Non-EU courts, including EFTA courts, apply their own domestic conflicts of laws rules or bilateral treaties to decide whether or not to recognise choice of law clauses. This is unaffected by Brexit.

On jurisdiction clauses:

• As a result of the end of the transition period, the Brussels and Lugano regimes (applicable to the EU and EEA countries respectively) have ceased to apply to the UK. The UK has applied to re-accede to the Lugano regime, but this requires the consent of the existing members. A decision on this is not expected until April 2021 at the earliest.
• Meanwhile, as between the UK, Gibraltar, the EU, Mexico, Montenegro and Singapore, the Hague Convention on Choice of Court Agreements will apply. This provides a more basic regime that only recognises exclusive jurisdiction clauses. Including an exclusive jurisdiction clause in any new contract will minimise post-Brexit problems related to jurisdiction and enforcement when dealing with EU counterparts.
• During the transition period, there was a difference in position between the UK Government and the European Commission as to whether or not the Hague Convention will apply to contracts entered into between 1 October 2015 (when the Convention entered into force for all EU members, including the UK) and 31 December 2020 (when the Convention entered into force for the UK as a party in its own right). In the UK, a statutory instrument requires courts to apply the Convention to such contracts. In the EU, it is possible that courts may follow the Commission’s view, expressed during the transition period, that it does not apply (unless the Commission adopts a more flexible view in light of the TCA that has now been reached). Courts that take this view will apply their own conflicts of laws rules. While it will often be the case that those rules will recognise exclusive jurisdiction clauses, and enforce any resulting judgments, this may not apply in all circumstances and jurisdictions.
• No EFTA country has yet ratified the Hague Convention. Pending a decision on the UK’s reaccession to the Lugano regime, you may wish to consider arbitration rather than litigation when dealing with EFTA counterparts. If court litigation is preferred to arbitration, an exclusive jurisdiction clause is likely to offer the widest scope for enforcement, but you should take specific local advice.
• Arbitration agreements and awards are widely enforced under the New York Convention, which is independent of the EU and unaffected by Brexit. The UK and all EU and EFTA countries are parties to the New York Convention.
• The non-application of the Brussels and Lugano regime to the UK could result in English courts being willing to grant anti-suit injunctions in relation to claims brought in EU Member State courts in breach of arbitration agreements. In order to benefit from this, the arbitration agreement will need to provide for a seat in England.

On service of proceedings:

• Arrangements for service of proceedings are important largely because of timing and because of issues of control. With the end of the transition period, the methods available for service of UK proceedings on EU defendants will change.
• In particular, some EU countries require a claimant in proceedings outside the EU to serve via a central authority, embassy or consulate. In relation to counterparties in these countries – currently Austria, Bulgaria, Croatia, Czech Republic, Greece, Hungary, Malta and Slovakia - it would be sensible to negotiate the appointment of a UK agent for service of process, in order to minimise any delays. The agent should be located in the same constituent country of the UK whose courts are named in the jurisdiction clause (e.g. an English agent for English proceedings).

Employment

The situation is similar when it comes to employment regulation. EU derived employment legislation will remain applicable in the UK unless or until changed by any subsequent domestic legislation (which in practice seems unlikely in at least the short term). There is the possibility that we may see de-regulation in the longer term, although currently this is purely speculative. We consider the most likely legislation targets for amendment could be:

• the Working Time Regulations 1998 (and rules around calculation of holiday pay);
• the Agency Workers Regulations 2010, which have faced criticism for imposing unnecessary burdens on businesses;
• TUPE, possibly to make it easier for employers to harmonise terms and conditions following a transfer of a business; and
• imposing a cap on discrimination compensation.

As employment is a highly litigated area, there is perhaps more of a risk of changes in judicial interpretation of that legislation. Under the Withdrawal Act, UK Courts will not be bound by new decisions of the Court of Justice of the EU (CJEU) made after the transition period ends but will still be bound to interpret retained EU law in line with existing decisions of the CJEU (retained EU case law). However, higher courts (the UK Supreme Court and the High Court of Justiciary in Scotland, the Court of Appeal and Inner House of Court of Session) will have scope to depart from retained EU case law if they consider it “right to do so.” This may cause uncertainty leading to re-litigation of established legal principles. We anticipate that, in particular, case law under TUPE (for example on changing terms and conditions) and under the Working Time Regulations (for example, holiday pay) may be vulnerable to challenge.

The Queen’s Speech last year set out proposals for a new Employment Bill, which will include new measures to protect workers’ rights including creation of a new, single enforcement body, offering greater protections for workers and to support business compliance, ensuring vulnerable workers are aware of and can exercise their rights. The precise wording of these will not be clear until the Employment Bill is published and this is still awaited with no timescales known at this stage.

Data Protection

The oil and gas sector, along with other sectors, will need to be aware of changes in relation to data protection. Again, the EU’s relatively recent GDPR regime is retained in UK law. UK GDPR will preserve the core EU standards such as data protection principles, rights of data subjects and obligations for controllers and processors. The big challenge relates to the transfer of personal data from the EU/EEA to the UK.

EU GDPR transfer rules apply to data entering ‘third countries’ outside the EEA. The UK became such a third country on 1 January 2021. Under these circumstances the transfer of personal data may lawfully occur to a third country where:

− a valid adequacy decision is in place (i.e. an adequate level of protection);

− one of a number of safeguards are in place; or

− certain derogations under the relevant GDPR regime apply.

The European Commission has not yet issued an adequacy decision in favour of the UK and companies which transfer data from EEA countries to the UK should therefore consider what GDPR safeguards can be put in place to ensure that data can continue to flow into the UK. Transfers in the opposite direction are permitted since the UK chose to unilaterally recognise the EU’s system as adequate for this purpose. The TCA did however create a bridging mechanism that allows the continued free flow of personal data from the EU/EEA to the UK for up to six months while the EU continues to consider whether to issue an adequacy decision.

Other Changes

There will also be changes affecting other areas including competition law and state aid, intellectual property and corporate taxation as well as considerable complexity around the rules for trade to and from Northern Ireland.

For more information on these areas, and more detail on any of the issues discussed above, please contact David Rutherford, Judith Aldersey – Williams or Andrew Shaw.

[1]In the downstream sector, the substance will remain largely the same, although downstream gas receives a focussed treatment, alongside electricity, in Chapter 2 of Title VIII: Energy of the TCA. In the main, Chapter 2 comprises a series of principles and steps required to ensure fair practices (many of which will be familiar). It also expressly includes certain aims on clean energy. As a broad summary:

• Fair practice: the production, generation, transmission, distribution or supply of gas must be non-discriminatory and reflect actual supply and demand. Market manipulation shall remain prohibited.
• Third party access: the Government must ensure the implementation of a system of third-party access to their transmission and distribution networks based on published tariffs that are applied objectively and in a non-discriminatory manner.
• Unbundling of transmission network operators: the Government shall implement arrangements for transmission system operators which are effective in removing any conflicts of interest arising as a result of the same person exercising control over a transmission system operator and a producer or supplier.
• Clean energy considerations: Chapter 2 applies equally to biogas and gas from biomass or other types of gas in so far as such gas can technically and safely be injected into, and transported through, the natural gas system. The Government must also assess the necessary actions to facilitate the integration of gas from renewable sources.