The new Energy Act 2008 - impact on the oil and gas industry

On 26 November 2008 the UK Energy Bill received Royal Assent. The new Energy Act (the “Act”) implements the UK energy policy that emerged out of the Energy Review 2006 and the Energy White Paper 2007, namely to tackle climate change, reduce carbon dioxide emissions and ensure secure, clean and affordable energy.

The Act introduces new legislative measures that will affect all areas of energy investment in the UK from Oil and Gas to Nuclear to Renewable Energy. This article summarises the impact of the Act on the oil and gas industry (see our related LawNows for summaries of the Nuclear and Renewables elements of the Act).

The provisions relating to oil and gas in the Act cover the following areas:

• a new regulatory framework for offshore gas storage and unloading projects;
• changes to the current offshore oil and gas decommissioning regime;
• certain amendments in respect of petroleum licences; and
• extension of the existing regimes relating to third party access to upstream petroleum infrastructure.

The provisions will therefore be relevant to companies active in the UKCS, whether acting as operators, owners or developers.

Gas Importation and Storage

Prior to the new Act, the UK’s legislative regime offshore was primarily intended for licensing oil and gas production. It did not cater for the types of gas supply projects that the market is looking to develop as indigenous UK production of natural gas declines. Companies investing in new gas storage and import infrastructure in the UK have sought a clear regulatory framework to minimise the uncertainty, delays and costs arising from the UK’s consents procedure.

The Act implements a new regulatory framework specifically intended for offshore gas storage and unloading projects. The regime is designed to simplify the consents process, ease the administrative burden on developers and establish certainty regarding the legal operation and construction of new facilities. The Government’s aim is to encourage private investment in offshore gas supply infrastructure and to contribute to long term security of supply.

The Act enables the Crown to claim sovereign rights for the storage of gas within its exclusive economic zone, thus extending its ability to grant leases from the existing 12 nautical mile limit of the UK's territorial waters, to a maximum of 188 nautical miles within the UK's continental shelf. This is to be known as a "Gas Importation and Storage Zone".

Under the Act, a licence will be required for carrying out one of the following activities within the territorial sea or Gas Importation and Storage Zone:

• the unloading of gas to an installation or pipeline;
• the storage of gas;
• the conversion of a natural feature for the purpose of storing gas;
• the recovery of gas;
• related exploration activities; and
• the establishment or maintenance of an installation for any of these purposes.

The Secretary of State for Business, Enterprise and Regulatory Reform (“SoS”) is empowered to grant licences for such purposes under certain terms and conditions. In order to make use of the sea, the seabed or spaces under the seabed for the purpose of these activities, an operator would also have to obtain a lease or (outside the 12 nautical miles limit of the territorial sea) authorisation from The Crown Estate. The terms of any licence (for example, commencement and duration) may be linked with such lease or authorisation.

Failure to obtain a licence before carrying out any of the specified activities, or failure to comply with certain terms of the licence, would be a criminal offence with the penalty of a fine. The SoS will also be able to direct the licence holder to take steps to remedy a breach of the licence or engage a third party to take necessary action to remedy the breach at the licence holder’s expense.

Decommissioning of Oil and Gas Installations

The Act has implemented certain changes to the existing offshore oil and gas decommissioning regime contained in the Petroleum Act 1998 (the “Petroleum Act”). The changes in the Act seek to ensure that liability for decommissioning installations and pipelines falls on the appropriate persons rather than the taxpayer, even in the case of insolvency of the current owners of the field. The Act:

• widens the range of persons who may be made liable for decommissioning to include: a licensee who has transferred an interest in a licence to another party without the SoS's prior consent; anda limited liability partnership where it is an associated party;
• prevents the SoS from serving a decommissioning obligation on licensees and parties to joint operating (or similar) agreements if they have never been entitled to derive any financial or other benefit from a particular installation within a sub-area of the licensed area;
• allows for owners of installations to be made liable for decommissioning even if the operator and licensees are able to provide adequate security, thus enabling, for example, the owner of an FPSO to be made liable for decommissioning in addition to the operator and licensees;
• allows the SoS to obtain financial information from parties at an earlier stage than was previously the case - such information may now be requested in advance of the SoS giving notice for the parties to submit a decommissioning programme;
• allows the SoS to require decommissioning security to be provided potentially well in advance of approval of any decommissioning programme;
• disapplies insolvency legislation so that, in the event of insolvency, any funds that have been placed in trust by the licensees to provide for the costs of decommissioning will not be available to the general body of creditors; and
• extends decommissioning liability to abandoned wells which were drilled pursuant to a petroleum/gas storage and unloading licence.

Petroleum Licences

The Act makes certain amendments to the Petroleum Act which give the SoS new powers relating to the transfer of rights under petroleum licences without the SoS's consent. The SoS can, by giving notice not more than three months after learning of the unconsented transfer, direct that the rights in the relevant licence revert to the transferor.

Amendments have also been made to various Model Clauses of petroleum licences including:

• a power for the SoS to partially revoke a licence in relation to one of the parties in the event of specific insolvency events or a change of control in respect of that party; and
• a power to instruct a licensee to plug and abandon a well which has been suspended for at least one month.

Third Party Access to Infrastructure

The Government believes that access to infrastructure on fair and reasonable terms is essential in order to maximise the economic recovery of the UK's oil and gas. The Act extends the previous regimes (embodied in the Pipelines Act 1962, the Gas Act 1995 and the Petroleum Act) relating to third party access to upstream oil and gas infrastructure.

The revised regulatory framework is designed to address previous gaps in the coverage of the SoS’s dispute resolution powers to determine third party access to upstream petroleum infrastructure, such as in relation to access to oil processing facilities, certain gas processing facilities and services associated with the operation of pipelines. The provisions also enable the SoS, on the application of a person other than the owner, to order an increase in pipeline capacity by modifying the apparatus and works associated with the pipeline, or by installing a connection to another pipeline.