DTI guidance on disputes over 3rd party access to upstream oil & gas infrastructure

Following on from the launch last year of the revised voluntary Code on Infrastructure Access (click here to view Law-Now), the DTI has recently published its revised guidance on how it will settle disputes brought to it under its statutory powers. These powers, under the Petroleum Act 1998 and other legislation, to impose terms on infrastructure owners, have not been used in the past, and given the revised Code with its far more effective processes, seem unlikely to be used much more in the future. Most of the changes to the old guidance are minor presentational changes which perhaps explains the relatively low-key introduction of this revised guidance, which was not even issued in draft for consultation.

It is notable that the Code is not referred to expressly at all and indeed the one reference to it in the old guidance has been deleted. The few substantive changes are:

• It is made clear (presumably because of the enhanced role of the DTI under the voluntary Code) that applications to the DTI under its statutory powers are expected to be the exception not the rule, and therefore DTI officials are available to "play an informal role" as mediators/facilitators in disputes.
• It recognises the conflict between the efficient use of resources (use ullage in existing pipelines) and the wish for greater competition (build new pipelines) – regulatory action may be necessary to prevent the exploitation of local monopoly positions.
• It expands its explanation of UK competition law, but gives a strong hint that the preferred approach to resolving disputes about access is the use of the sectoral remedies rather than competition law:

"Although the OFT has not issued specific guidance on the application of the Act to upstream oil and gas infrastructure…it considers that infrastructure owners are unlikely to have breached the Chapter II prohibition on abuse of a dominant position where they have had due regard to the Secretary of State's principles for setting terms… in arriving at the terms that they offer to, and agree with, third parties. … If the applicant considers that there may have been abuse of a dominant position, he may make a complaint to the OFT. However, the OFT may conduct a formal investigation only if it has reasonable grounds to suspect an infringement; simply receiving a complaint does not automatically trigger an investigation. Even then, investigation is at the OFT's discretion and would be subject to resource constraints and priorities. Recourse to the sector specific legislation therefore provides a more certain process and is likely to give a speedier outcome."

• There is a significant shift in relation to the assurances given in the House of Lords in 1975 when these powers were first introduced. At that time, the Government stated that there were no circumstances in which, where the Secretary of State was called on to intervene, the owner of a pipeline would be financially worse off through the admission of a third party. While the DTI acknowledges that this was seen as a fundamental, basic safeguard, it now takes the view that "this should not prevent determinations from including an apportionment of overall risk to the owner in return for an appropriate level of reward." The concern seems to have been that this provision might be interpreted as requiring third parties for instance to take the risk of personal injury, damage to the infrastructure or consequential loss arising out of the third party's use of the infrastructure, risks which would in most North Sea contracts be taken by the owner.
• It is recognised that there is a tension between setting terms which reward past investment and attract future investment and ensuring that terms set are attractive enough to encourage development of new fields. This difficult balance is further reflected in some small changes to the description of likely scenarios – when looking at infrastructure built as part of an integrated field development, the DTI will no longer look at whether its capital costs have been recovered but rather whether provision has already been made for them to be recovered (for instance, perhaps over the life of the original field). In some places the conflict is quite evident – for instance, in respect of infrastructure built or oversized with a view to third party business the terms set would normally be at a level just sufficient, taking into account the risk involved, to earn the owner a reasonable return on costs incurred in the anticipation of third party use if the tariff were applied to the third party throughput expected at the time of the decision to invest – the DTI comments that this may well be higher than the level that the owner would offer if prospective users have alternative export options available, although only a few lines later the guidance states that in most cases the terms that would be determined by the Secretary of State are likely to be in line with those that would be offered by infrastructure owners were they to face effective competition.

Please click here to find the full text of the Guidance.