Energy Bill 2022 - Key proposals for the offshore oil & gas industry

The Energy Bill 2022 (the “Bill”) was introduced on 6 July 2022. The Bill covers carbon capture and storage, hydrogen production, regulatory reform, and emerging low carbon technologies – the details of which will be covered by us in due course here. Please see here for our review of details of the carbon capture and hydrogen revenue models set out in the Bill.

Here we cover the proposals contained in Part 11 (Oil and Gas) of the Bill seeking to extend the powers of the oil and gas industry’s regulator, the North Sea Transition Authority (“NSTA”) in relation to a proposed change in control of a licensee and the establishment of a new charging scheme on connection with regulation of offshore decommissioning activities.

1. New requirements for advance NSTA approval of change in control

Current position

Under the current regulatory regime, the NSTA has no authority to prevent the transfer of control of an offshore licensee company in advance of that change of control – it can only take steps to seek to remedy any undesirable changes after the change has taken place. This long acknowledged ‘gap’ in the regulator’s sphere of control has become increasingly significant and the NSTA has previously expressed concerns regarding the governance risks arising in the maturing UKCS basin with an increasingly diverse range of licensees and considerable M&A activity. Various steps have been taken recently to address those risks, including the introduction of a governance obligation in the OGA Strategy when it came into effect last year and, on a wider energy security basis, the notification regime introduced by the National Security and Investment Act 2021 (see our Law-Now here for further details of that Act).

What is proposed?

The Bill goes a step further, by setting out powers which (if enacted as proposed) will permit the NSTA to intervene at a much earlier stage in any proposed transfer of the ownership of an offshore licensee company, by requiring a three month notification period for any proposed changes of control and NSTA consent before the transfer of ownership can complete. The inclusion of this announcement in the Bill suggests that the NSTA considers that it needs additional powers to prevent investors entering the industry where they are not prepared to properly resource that involvement.

How will this be achieved?

Section 228 of the Bill proposes amendments to the model clauses incorporated into all existing and future offshore (and onshore) production licences, by:

• Amending the model clauses that are contained in the Petroleum Licensing (Production) (Seaward Areas) Regulations 2008 (S.I. 2008/225) (“the 2008 Regulations”) and the Petroleum Licensing (Exploration and Production) (Landward Areas) Regulations 2014 (S.I. 2014/1686) (“the 2014 Regulations”); and
• Inserting equivalent new model clauses into licences that were granted under the Petroleum (Production) Act 1934 or the Petroleum Act 1998.

Although it is intended that the new power will apply to all existing and future production licences (but not exploration licences), irrespective of when granted, that amendment will not permit the NSTA to take action using these new powers in relation to previous changes of control; where a change of control has taken place (or takes place prior to enactment of the proposed new power), the NSTA has existing powers that permit it to require a further change of control to be implemented. It is proposed that these existing powers will cease to apply from introduction of the new power.

What are the proposed changes to the Model Clauses?

Schedule 18 of the Bill outlines the specific amendments that it is proposed will be made to the model clauses. Companies contemplating a change of control will be required to apply for consent to the change of control to the NSTA in writing at least three months prior to the date on which the proposed change would occur. If prior approval is not obtained, the NSTA will be entitled to revoke the relevant licence(s) (or partially revoke, in relation to the relevant company’s interest where the licence is held by more than one company).

In this context, “control” of a company means that a person exercises, is able to exercise, or is entitled to acquire, direct or indirect control over a company’s affairs. In particular, a person is treated as having control of a company if he possesses or is entitled to acquire the following:

1. one-third or more of the share capital or issued share capital of the company;
2. one-third or more of the voting power in the company;
3. such part of the issued share capital of the company as would, if the whole of the income of the company were in fact distributed among the participators (without regard to any rights which he or any other person has as a loan creditor), entitle him to receive the greater part of the amount so distributed; or
4. such rights as would, in the event of the winding-up of the company or in any other circumstances, entitle him to receive the greater part of the assets of the company which would then be available for distribution among the participators.

On receipt of a request to consent to a change in control, the Bill provides the NSTA may consent unconditionally, apply conditions to consent or refuse consent. The kinds of conditions that are anticipated are very broad – for example, (a) conditions as to the arrangement for the change, such as the date by which it must be made; (b) conditions as to the performance of licence activities; or (c) financial conditions – and may be imposed on either or both the company and the person taking control of the company.

In the event that the NSTA proposes to consent subject to conditions or to refuse consent, the company must be given an opportunity to make representations, and these must be considered by the NSTA. Although only the company is to be given notice of any proposed conditions or refusal, and to make representations on those, the OGA must give written notification of its decision and any conditions imposed on all interested parties – that comprises not just the company and the person that it is intended will take control of the company, but also any other companies that are licensees in respect of any relevant licence (i.e. not limited to coventurers with a beneficial interest in the same part of the licence area in respect of multi-block licences).

The base position is that the NSTA must reach a decision within three months of receipt of an application but that is not a strict deadline and the NSTA is required simply to notify the relevant parties in writing if it decides to delay its decision (and is not expressly required to provide reasons for doing so).

Additional NSTA powers to obtain information

The Bill also proposes that the NSTA should be granted extensive powers to obtain information in relation to a proposed change of control of a licensee. Section 229 of the Bill proposes a new section 5D to the Petroleum Act 1998 which will permit the NSTA by written notice to obtain any information that it considers it requires in connection with considering a potential change in control of a licensee (with the exception of information which is protected from disclosure on the grounds of legal professional privilege or, in Scotland, confidentiality of communications). The categories of persons on which it is proposed such a notice could be served is also broad: (a) the company; (b) the person who would take control of the company if NSTA approval is given; (c) any companies which are licensees in respect of the same licence(s); and (d) any other person (not in one of those categories) “…who appears to the OGA to have information that is required…”.

Comment

In practice, when this provision is enacted, M&A transactions involving a target company/subsidiary holding offshore production licences in the UKCS will require to include as a condition precedent to completion of the transaction similar to the CP that such transactions commonly seek in respect of obtaining a letter of comfort confirming that the NSTA is not minded to exercise its existing powers on change of control. Licensees will therefore be keen to be provided with further details of the formalities of the process – for example:

• will requests be submitted though the existing PEARS[1] portal used to make applications for consent in respect of asset transfers, or will a separate process be established by NSTA;
• what fees will apply;
• will it be possible to request an expedited approval process for internal corporate re-organisations.

In practice, the proposed change puts share transactions on a similar position as asset transfers where prior NSTA approval is already required. The NSTA wrote to industry in December 2021 setting out the NSTA’s process for taking decisions on whether to exercise its existing powers on change of control and (although no announcement has been made) it seems likely that it would apply similar considerations in respect of applications under these new provisions.

Clearly the process will need to be in place upon the provisions coming into force to ensure there is no unnecessary delay in companies seeking approval. This will be particularly relevant to any transactions which may have been entered into but not completed prior to the new powers coming into force, and the industry will be keen to ensure that existing transactions are not impacted by unforeseen delays.

2. New offshore infrastructure decommissioning charging scheme

The Bill was trailed as including provisions that would enable the government to more fully recover the costs associated with regulating offshore oil and gas decommissioning activities, with the government citing the current cost recovery mechanism as no longer being fit for purpose as a result of “the increasing scale of offshore decommissioning activities and the associated complexity and duration of the regulatory functions associated with them”. Certainly there has been a significant increase in decommissioning in recent years in light of the maturity if the UKCS basin. This can be illustrated by the fact that 76 programmes have been approved by the Offshore Petroleum Regulator for Environment and Decommissioning (“OPRED”) which sits within the Department for Business Energy and Industrial Strategy (“BEIS”), in the period from 2019-2022 with only 21 in the previous three year period. A template decommissioning programme has been made available to industry in order to seek consistency in the format in which the programmes are received by BEIS with the aim of increasing efficiency of BEIS exercising its function in relation to approval but the proposals introduced by the Bill and the commentary from the UK Government indicate that further change is required.

Section 227 of the Bill:

• deletes existing provisions of the Petroleum Act 1998 (sections 29(5) and 33(4)) which currently set out the basis on which BEIS may impose fees in connection with the approval and review of decommissioning programmes; and
• introduces a new section (38C) to the Petroleum Act 1998 which provides that “the Secretary of State may make a scheme providing for payment to the Secretary of State of charges for or in connection with the carrying out by the Secretary of State of the Secretary of State’s functions under this Part.”

The Bill does not propose to include any details of the proposed scheme itself – rather it provides BIES with powers to put such a scheme in place and provides that the scheme may specify when, how and by whom a charge is to be paid. Before making any scheme, the Secretary of State must consult organisations which are representative of those likely to be affected by the scheme. Industry will therefore be keen to hear details of the proposed scheme as soon as possible to understand potential impact and likely timing of introduction of any such scheme.

The Bill can be accessed here.

Explanatory Notes can be accessed here.

Factsheets can be accessed here.

[1]Petroleum e-business assignments and relinquishments system