Oil and Gas exploration and production: compensation for trespass

In a recent decision, the Court of Appeal has confirmed that drilling and maintaining an oil pipeline under someone’s property, even at a depth of many hundreds of feet below ground, can amount to a trespass. This is so even where the oil company has been granted a licence by statute to exploit the petroleum resource. However, the compensation payable is likely in many situations - including the facts of the present case - to be a very small figure.

The case concerned three pipelines drilled into an oil and gas reservoir under property belonging to the claimant company (which was ultimately owned by Mohammed Al Fayed). The oil company had been granted a petroleum production licence under the statutory regime which applied at the time (the Petroleum (Production) Act 1934, now replaced by the Petroleum Act 1998 which is in materially identical terms). This allowed the oil company to drill down to the reservoir and extract the petroleum. The pipelines were drilled along a deviated path, which meant that they ran into and then under the ground at an angle. The pipelines crossed the boundary of the claimant company’s property at around 800 feet below the surface and terminated at between 2,300 and 2,800 feet under ground.

The Court of Appeal held:

1. the claimant company’s title extended at least to the strata at depths of around 2,800 below the surface of its estate. How much further did not need to be decided. It also had a right to possession of that strata even if it could not be said to have actual possession in any meaningful sense;

2. following commonly accepted principles, only the Crown, or someone licensed by the Crown, could bore for or extract petroleum within the UK. The petroleum was not “owned” by the claimant company even though they owned the land within which the reservoir was located;

3. although the oil company had been granted the necessary production licence, the statutory regime did not create a right to intrude onto (or under) the land of others. The regime required a licensee to acquire such “ancillary rights” as might be necessary to allow it to exercise its licence: by application to the court if not agreed between the parties. Compensation is payable for such ancillary right. If assessed by the court, the sum payable is calculated on the basis of what would be fair and reasonable between a willing grantor and a willing grantee, plus a 10% uplift to reflect the fact that the acquisition of the right is compulsory;

4. the intrusion into the ground under the claimant company’s estate was an interference in its possessory rights over that part of the land, and was therefore a trespass. This was held to be the case even though the claimant company’s use of the land had not been interfered with “one iota”;

5. as far as the words in the applicable statutes permit, compensation was normally to be determined by reference to the principles generally adopted for compulsory purchase compensation. On this basis the court would have ordered £82.50 be paid by the oil company to the claimant company;

6. however, compensation can also be determined by reference to amount the parties would have negotiated. According to the Court of Appeal the parties in this case would have negotiated a higher figure, estimated as £1,000, for the ancillary right. This was held to be the quantum of the claimant company’s loss.

The decision is significant. The conclusion on compensation will be a relief to oil companies. At first instance, the judge had quantified the compensation at 9% of the value of the oil extracted. This produced a figure of over £620,000. Reassuringly for oil companies, this figure was greatly reduced on appeal to £1,000. The decision means that oil companies drilling under land without having either the landowner’s agreement or court approval will risk being held liable in trespass. However, where the landowner’s right to possession has not - for all practical purposes - been interfered with, the compensation is likely to be small.

Further reading: Star Energy UK Onshore Ltd & Another v Bocardo S.A. [2009] EWCA Civ 579