I INTRODUCTION

The United Kingdom has a long history of oil and gas production, having onshore production since the 1930s and much more significantly, large-scale offshore oil and gas production from the 1970s to the present, with the first commercial offshore oilfield, Argyll, commencing production in 1975.

According to industry body Oil & Gas UK (OGUK), more than 43 billion barrels of oil equivalent (boe) have been extracted from the UK Continental Shelf (UKCS). Production from the UKCS peaked in 1999 and there has been a general decline since. In 2005, the United Kingdom became a net importer of crude oil for the first time since the early 1990s. The OGUK’s Activity Survey 2016 states that, although production on the UKCS rose by 9.7 per cent in 2015 to 1.64 million barrels of oil equivalent per day, the revenues fell to the lowest rate since 1998, lying at £18.1 billion for 2015. The price of oil in 2015 averaged US$52 per barrel (bbl) compared with an average of US$38bbl in 2016. To adapt to lower price environment the industry committed to substantial cost-cutting, with operating costs falling 28 per cent from $29.30/boe to $20.95/boe. But the impact of the reduced oil price has had further ramifications entailing widespread redundancies in the workforce and a huge loss of taxation income for the UK government. With global oversupply, the industry faces uncertainty going into 2017 and will be largely determined by Iran re-entering the market, oil consumption and demand growth (in particular China’s ability to halt its economic slowdown), and the cooperation of OPEC and non-OPEC producers (such as Russia) to influence the oil price in the face of stiff competition from the US shale producers.

In its history, the UK offshore oil and gas industry has faced many challenges and developments in its regulatory framework. Regulation of the industry is currently in a state of flux, with more recent developments revolving around the new regulator – the Oil and Gas Authority (OGA) – and its powers under the Energy Act 2016, changes to the tax regime and the UK’s decision to leave the European Union. We deal with each below.

II LEGAL AND REGULATORY FRAMEWORK

Challenges met over the years have forced the industry to sculpt a comprehensive and recognisable legal framework, both at domestic and international level.

i Domestic oil and gas legislation and regulation

The Petroleum Act 1998 vests ownership of petroleum in the UKCS in the Crown, and has historically granted regulation responsibility to the Secretary of State for the Department of Energy and Climate Change (DECC). DECC has most recently been the body responsible for the regulation of the oil and gas industry. However, a number of changes have been introduced following the specially commissioned review headed by Sir Ian Wood (the Wood Review), most significantly the creation of a new regulator – the OGA. The OGA has been established as an independent regulator by the Energy Act 2016. The OGA has inherited the licensing powers from DECC and will be the body responsible for the licensing rounds, issuing licences and granting licence assignment consents going forward. The Secretary of State’s powers have been reduced to cover offshore environmental regulation, decommissioning and overall energy policy. HM Treasury retains control of fiscal matters, and HM Revenue & Customs retains responsibility for tax retrieval. Pursuing a more collaborative approach to industry regulation in line with the Wood Review’s recommendations, the OGA will adopt all other roles, having four times the personnel of DECC’s licensing division, a higher budget and extended powers to resolve disputes, attend operating committee meetings, access and publish data, and impose heavy sanctions. The OGA’s regulatory and sanctions powers are discussed further in Section IX, infra.

The OGA now has the sole authority to grant licences for the exclusive right to search, bore for and extract petroleum in the territorial waters of the United Kingdom and on the UKCS, but the method of obtaining a licence remains largely the same (see licensing section below). Licences may also be acquired through asset transfers between companies, and the OGA consent is required prior to any licence assignment. The terms and conditions of a licence (known as model clauses) from the Petroleum Licensing (Production) (Seaward Areas) Regulations 2008 are now fully incorporated into offshore production licences. The model clauses set out in detail the conditions for the licence including term, licence surrender, record-keeping, working obligations, appointment of an operator, measurements and pollution. In awarding licences, the OGA must also comply with the Hydrocarbons Licensing Directive Regulations 1995 which set out additional anti-discrimination rules that EU Member States must follow when issuing petroleum licences.

In addition to regulatory requirements, there are several voluntary industry-based codes of practice to which UKCS licensees are expected to adhere. For example, the Infrastructure Code of Practice is intended to facilitate access by a third party to oil infrastructure in the UKCS such that the parties involved can agree fair and reasonable terms. The fallow acreage initiative places pressure on licensees to deliver activity on old licences where companies have not been active for some time, or to relinquish licences in order for the acreage to be offered to other companies. With respect to transfers of licences, the Commercial Code of Practice establishes an agreed framework to minimise resources spent on negotiations and promote positive commercial behaviour.

ii Treaties

The United Kingdom is a signatory to a number of international treaties and multinational agreements that have an impact on UK oil and gas regulation. Among the most important are the 1958 Geneva Convention on the Continental Shelf and the 1982 United Nations Convention on the Law of the Sea, which together set the limits for a state’s territorial sea and continue to govern the UK’s access to its Continental Shelf and beyond. Also significant to the oil industry is the Energy Charter Treaty, which regulates between Member States a number of energy-specific areas such as competition, transit of energy goods, trade, investment and dispute resolution. Other notable multinational agreements include the 1998 Convention for the Protection of the Marine Environment of North East Atlantic (OSPAR), which has had a significant impact on the United Kingdom’s decommissioning regulations.

III LICENSING

The OGA is the relevant licensing authority for offshore acreage. Regulation is by a licensing regime rather than a production sharing arrangement.

During a formal licensing round (usually annual), the OGA invites applications for specific acreage known as blocks or part-blocks pursuant to the Hydrocarbons Licensing Directive Regulations 1995. Licensing rounds are advertised online and in the European Journal. All applications are made in a prescribed form and companies applying for a licence must be registered in the United Kingdom, either as a company or as a branch of a foreign company. The timing for the application will vary depending on the size of the licensing round. In the simplest case (out-of-round with no environmental complications) it can take less than three months from the application. However, in a large licensing round with many licences and applicants it can take up to two years.

A company will make (either by itself or as part of a joint venture) an application for a specific licensed area. Applications will be considered individually and awarded by the OGA using a published assessment matrix. Licences are not awarded to the highest bidder. The primary focus of the OGA is on the extent of proposed work programmes and applicants must demonstrate financial and technical capability to complete such work programmes. The OGA will then publish a summary of successful bidders’ marks and work obligations. Once a licence has been granted, progression through the licence phases is dependent on obtaining OGA consent, which is also required for carrying out drilling, development and cessation of production activities.

There are currently two types of offshore licence awarded by the OGA: the exploration licence and the production licence. Under a seaward petroleum exploration licence, seismic surveys and shallow drilling can be performed in certain acreage. Other parties may hold an exploration licence over the same area, and it is, therefore, a non-exclusive licence. Under a seaward petroleum production licence, the licensee is granted the exclusive right to search, bore for and extract hydrocarbons from the UKCS in the area prescribed under the terms of the licence for the full life of the field from the exploration phase and development to decommissioning.

Three subcategories of production licence exist. The most common of these is the traditional licence. Potential applicants must be able to demonstrate financial, technical and environmental capability in order to be successful. The promote licence (introduced in 2002) is designed to award smaller companies production rights and allow a two-year period in which to obtain the requisite financial and technical capabilities prior to development. The frontier licence (introduced in 2003) recognises the difficulties in sourcing oil in remote areas of the UKCS (such as the deep waters west of Shetland) and permits screening over a large area to look for a wide range of prospects.

A licence will expire automatically at the end of each term, unless certain conditions allowing the licensee to advance to the next term have been fulfilled.

The duration of a traditional production licence is presently split into successive terms of four, four and 18 years. To progress from the initial to the second term, the licensee must have completed a work programme as approved by the OGA and relinquished a minimum of 50 per cent of the acreage under the licence. If, during the second term, the OGA has approved the development plan and all of the acreage outside that development has been relinquished, the licence may continue into the third term. The OGA may exercise its discretion to extend the third term beyond the prescribed 18-year period if production is ongoing.

The OGA also has powers to revoke any licence at an earlier stage than the expiry of its term. Such powers can be invoked in a number of circumstances such as insolvency of the licensee, breach or non-observance of the licence terms or if a licence assignment is carried out without prior approval from the OGA.

IV PRODUCTION RESTRICTIONS

The Energy Charter Treaty (ECT) requires the United Kingdom to take measures to facilitate oil transit across its national boundaries in a non-discriminatory manner and according to the principles of freedom of transit, namely, without distinction as to the origin, destination or ownership of the oil and on the basis of non-discriminatory pricing.

Offshore pipelines require the approval of the OGA, and in granting approval the OGA will have regard to the interests of other users of the sea for the transport of oil as well as the impact on the environment. Transportation of oil by road and rail is regulated by the Carriage of Dangerous Goods and Use of Transportable Pressure Equipment Regulations 2009, and is monitored by the Health and Safety Executive. Transportation of oil by sea is regulated by the Merchant Shipping (Prevention of Oil Pollution) Regulations 1996 and the Merchant Shipping (Dangerous Goods and Marine Pollutant) Regulations 1990. The International Maritime Dangerous Goods Code contains internationally agreed guidelines on the transport of dangerous goods.

Crude oil and crude oil products in the United Kingdom are not subject to a mandatory price-setting regime. The United Kingdom adopts a free-market approach, and oil and oil products are therefore priced and valued accordingly. There is no legal requirement to sell to domestic markets.

V ASSIGNMENTS OF INTERESTS

Government consent is required for assignments of a licence. A licensee may not, except with the consent of the OGA and in accordance with the conditions (if any) of the consent, do anything whatsoever whereby any right granted by the licence becomes exercisable by or for the benefit of another person. The OGA operates an e-licence administration system (the Petroleum E-Licensing Assignments and Relinquishments System (PEARS)) for the submission of licence assignment applications for offshore production licences. The timing for consent depends on such factors as the complexity of the assignment, the quality of information initially provided by the licensee via PEARS and the number of other applications being processed. In addition, as part of a general drive towards improvement of the quality of records, each application will be checked for consistency between its starting point and the records of the licence’s current position. The first time each licence is subject to a PEARS application, the user will have to confirm such consistency. If confirmation cannot be given, the relevant licensee must notify the OGA via the system about any discrepancies, upload supporting documentation for the OGA to consider, and, if appropriate, implement a correction, which can also affect timing. A straightforward assignment will normally be processed in 10 working days, although this cannot be guaranteed. Production operatorship and financial checks in particular can take longer than this; the overall processing time will increase to 25 to 30 days where (straightforward) financial checks are involved. A small fee is required to be paid up-front for applications through PEARS.

With regard to transfers of shares in a company, the model clauses provide that the Secretary of State may ultimately revoke the licence on a change of control of the licensee, so parties often apply for reassurance that it is not the Secretary’s intention to do so. When considering an application for a change of control the OGA’s policy requirement is that the licensee must demonstrate that the change will not prejudice its ability to meet its licence commitments, liabilities and obligations. Where a licensee is dependent upon the financial support of its current corporate parent to enable it to meet its licence obligations and will become reliant upon the financial support of its new corporate parent, the OGA will require a parent company guarantee from the new corporate parent to replace any existing parent company guarantee that may have been issued. The OGA is generally willing to consider such requests. There are no pre-emptive rights reserved to the government.

VI TAX

The United Kingdom does not itself participate in the petroleum sector, other than in its capacity as regulator, but does benefit from the industry through its tax regime.

There are three elements of taxation to which companies in the oil industry may be subject: petroleum revenue tax (PRT) (now effectively abolished, see below), ring-fence corporation tax (RFCT) and a supplementary charge (SC). HM Revenue & Customs Large Business Service – Oil and Gas Sector (formerly the Oil Taxation Office) administers the taxation regime.

i PRT

PRT was a field-based tax charged on the profits arising to each participant from the production of oil under a licence. The PRT rate was permanently set to zero per cent in 2016 Budget, but it has not been abolished to allow for losses (e.g., suffered in the course of decommissioning of PRT-paying fields) to be carried back against past PRT payments.

ii RFCT

Oil companies are subject to corporation tax, but there are a number of variations to the usual rules, including the ‘ring-fence’ mechanism. The ring-fence rules are designed to prevent losses from other activities being set off against profits from oil and gas extraction by treating ring-fenced activities as a separate trade. However, it is possible to carry forward or back ring-fence losses against other activities. The applicable rates of tax are currently 20 per cent for non-ring-fenced profits and 30 per cent for ring-fence profits.

Despite the continuing cut in the main rate of corporation tax (from 26 per cent in 2011 to 20 per cent in 2015 announced in the 2013 Budget), the rate will remain at 30 per cent for profits from oil extraction in the United Kingdom.

iii SC

Introduced in April 2002, the SC constitutes an additional charge on ring-fenced profits (calculated in the same way as RFCT) without any deduction for financing costs. Costs that have been deducted for the purpose of paying corporation tax must be re-added before computing the SC liability. The SC is paid and administered at the same time as corporation tax. The current SC rate of 10 per cent (previously 20 per cent) has been introduced in the 2016 Budget as part of a major overhaul of the North Sea tax regime in response to the financial strain facing the sector.

Legislation was introduced in the Finance Act 2012 that effectively provides for a cap on the tax relief available for SC purposes for decommissioning costs. This restricts the use of SC losses arising as a result of expenditure incurred in connection with decommissioning to 20 per cent for decommissioning carried out on or after 21 March 2012.

VII ENVIRONMENTAL IMPACT AND DECOMMISSIONING

The implications of environmental incidents and drilling or production-related emissions have seen an increase in environmental regulation in the United Kingdom in recent years, particularly since the Gulf of Mexico oil spill in 2010.

i Offshore Safety Directive

The United Kingdom has recently seen a change to environmental regulation following the European Offshore Safety Directive (OSD), which came into force in July 2013. As a result, the offshore environmental, health and safety regime in the United Kingdom is in a state of transition, with new implementing legislation introduced in July 2015. UKCS operators are affected by a number of changes as a result, particularly in relation to oil pollution emergency plans (OPEPs) and environmental permitting.

An OPEP is an emergency response document that will facilitate the implementation of a robust and effective response to an oil pollution incident and minimise the impact on the marine environment. The Merchant Shipping (Oil Pollution Preparedness, Response and Co-operation Convention) Regulations 1998 require that all operations carried out on or in relation to an offshore installation or pipeline (including decommissioning) which may present a risk of marine pollution by oil must be the subject of an approved OPEP. However, following the amending regulations in 2015, the category of ‘responsible persons’ tasked with owning, maintaining and implementing an OPEP has been extended to include ‘installation operators’, ‘well operators’, ‘pipeline operators’ and owners of non-production installations (such as drilling rigs). Other regulatory approval and consent will be withheld until the OPEP is approved.

The matter of who will now be responsible for holding environmental permits offshore is also a significant change and affects the dynamic of offshore environmental liability. While previously the Secretary of State had the power to take action against a third-party duty-holder (such as a contractor operating a facility on behalf of the licensee) for pollution incidents, the reality was that environmental permits were typically held by the operator/licensee, and it would be the primary target. However, recent statements made by the OGA now indicate that they expect the permit holder to be the owner of the safety case, as ‘the person in control of day to day operations’, rather than the licensee (if different). The default position is now expected to be that, as the permit holder, the health and safety duty-holder will now be the primary target for enforcement action. As such, while liability for environmental and economic damage and financial security requirements will remain with licensees, criminal liability under environmental regulations for breaches (typically discharges in breach of the terms of a permit) will rest primarily (but not entirely) with permit holders, e.g., installation and well operators, and including drilling contractors and non-licensee duty-holders.

Article 4 of the OSD also requires Member States to ensure that decisions on granting or transferring licences take into account the capability of a licensee to meet the financial and technical requirements of the OSD. This provision was transposed into UK national law by the Offshore Petroleum Licensing (Offshore Safety Directive) Regulations 2015, which requires licensees, for the duration of offshore petroleum operations, (1) to make adequate provision to cover liabilities that potentially derive from those operations (2) to maintain sufficient capacity to meet all the financial obligations that may result from any liability for offshore petroleum operations carried out by operators appointed by or in respect of it.

ii Other relevant regulations

Permits may also be required under a range of other regulations. The Offshore Chemicals Regulations 2002 (as amended in 2011) and the Offshore Petroleum Activities (Oil Pollution Prevention and Control) Regulations 2005 (as amended in 2011) set out the regulatory framework for use and discharge of offshore chemicals and for the prevention and control of oil pollution, including permitted discharges in accordance with the conditions of the relevant permits. These regimes were extended in 2010 to installations used for the offshore storage of natural gas, offshore unloading of liquefied natural gas and the offshore storage of carbon dioxide for the purpose of its permanent disposal.

The Offshore Petroleum Activities (Conservation of Habitats) Regulations 2001 (as amended in 2007), apply to oil and gas activities carried out wholly or partly in the UKCS. Together with the Offshore Marine Conservation (Natural Habitats &c.) Regulations 2007 (as amended in 2012), the regulations implement the Habitats Directive (92/43/EEC) and the Wild Birds Directive 2009/147/EEC. These Regulations apply in the offshore area (beyond 12 nautical miles from the UK coast) and offer protection to marine life by creating a number of offences that aim to prevent environmentally damaging activities. The Conservation (Natural Habitats &c.) Regulations 1994 and the Wildlife and Countryside Act 1981 may also have relevance to offshore activities in territorial waters.

There is also a framework of regulations governing offshore atmospheric emissions that relate to the flaring of gas, diesel engines, gas turbines and other ‘combustion plant’. The Offshore Combustion Installations (Prevention and Control of Pollution) Regulations 2013 came into force on 19 May 2013 in order to implement the Industrial Emissions Directive (Directive 2010/75/EU) and superseded the equivalent 2001 Regulations, subject to transitional provisions. The regulations require permits to be put in place and complied with for offshore combustion installations with a thermal input of 50MW. As regards waste, waste disposal licences and a waste management plan must also be put in place.

The Fluorinated Greenhouse Gases Regulations 2015 similarly provide for regulations relating to plant and equipment with potential for the emission of F-gases on an offshore installation. Flaring and venting consents are required under the Petroleum Act 1998 and will be granted by the OGA. Waste disposal licences and a waste management plan must also be put in place. The United Kingdom is also part of the EU Emissions Trading Scheme and a Greenhouse Gas Permit must be held in order to operate. These regulations require annual reporting to the regulator on greenhouse gas emissions from the installation.

iii Onshore regulation

Environmental regulation onshore is a dynamic area. Environmental permits are required under the Environmental Permitting (England and Wales) Regulations 2010. In Scotland, the Pollution Prevention and Control (Scotland) Regulations 2012 implement a similar permitting regime. Permit conditions cover emissions to land, air and water and require operators to use best available techniques to prevent and minimise emissions. Emissions from onshore large combustion plants are also regulated under these Regulations. Separate consents or registrations may be required depending on the nature of the activity for matters such as use and disposal of radioactive substances and the disposal or carriage of waste.

Separately, the contaminated land regime under the Environmental Protection Act 1990 and subsidiary regulations is an administrative regime requiring the polluter (or, in its absence, the owner or occupier of land) to pay for remediation. The Environmental Damage (Prevention and Remediation) (England) Regulations 2015 in England and equivalent regulations in Wales and Scotland implement the EU Environmental Liability Directive (2004/35/EC) (Environmental Liability Directive) onshore, requiring the responsible operator to remediate damage to the environment or where this is impossible, to make compensatory payments.

iv Environmental liability and OPOL

In the event of a significant oil spill the operator must implement its emergency response centre to take appropriate actions to prevent further pollution and implement a response strategy. In the event of an oil leak in UK waters, the licensees will have unlimited liability for all costs of remediation under the Environmental Liability Directive, and, if negligence can be proven, will also have unlimited liability to those affected by their actions. There is also an element of strict liability for remediation costs and direct damage under the rules of the Offshore Pollution Liability Association Limited (OPOL). This is a voluntary scheme but in practice all operators are required by the OGA to be members of OPOL. This requires operators to have financial assurance, usually in the form of insurance, against pollution liabilities. They are required to compensate public authorities and third parties affected by pollution on a strict liability basis up to the limits of liability under the OPOL scheme (currently US$250 million per incident). If any member defaults, ultimately the other members are required to make good the default, up to the same limits of liability.

Breach of any environmental and health and safety regulations is a criminal offence. Recent sentencing guidelines for England and Wales for specified environmental offences, requiring sentences to reflect the level of harm, level of culpability and turnover of the offender, facilitate a dramatic increase in fines in many circumstances. The Court of Appeal has commented that for large organisations fines could be millions of pounds. For other offences not covered, owing to changes in sentencing powers for the lower courts, sentences are also expected to increase. No equivalent guidelines exist in Scotland, but a sentencing council that would issue such guidelines is under consideration.

v Competent authorities

The enforcing authorities for environmental matters in the United Kingdom are DBEIS, the newly established Offshore Safety Directive Regulator (OSDR), the Environment Agency (EA) and the Scottish Environmental Protection Agency. The Maritime and Coastguard Agency (MCA) is the competent UK authority in terms of counter-pollution measures and response at sea, and the Joint Nature Conservation Committee (JNCC) and Marine Scotland provide advice on environmental sensitivities that may be affected as a result of any oil spill. Both the MCA and JNCC are consulted as part of the OPEP review and regulatory approval process.

vi Decommissioning

With respect to decommissioning, domestic UK legislation has adopted a number of international and regional treaties, including UNCLOS (Law of the Sea Convention) Article 60(3), IMO Guidelines and Standards 1989 and 1992 OSPAR Convention (Recommendation 2006/05 was adopted by the 2006 OSPAR Commission, which introduced a management regime for offshore drill cuttings piles).

Under Section 29 of the Petroleum Act 1998, the Secretary of State is empowered to serve notice on a wide range of persons indicating that those persons are jointly and severally liable to carry out an approved decommissioning programme. In the first instance this would include parties to joint operating agreements for installations and owners for pipelines. The notice will either specify the date by which a decommissioning programme for each installation or pipeline is to be submitted or, as is more usual, provide for it to be submitted on or before such date as the Secretary of State may direct. Primary liability rests on the parties to the asset at the time of decommissioning. The Secretary of State may withdraw a Section 29 notice, for example, on the sale of an asset. This right used to be automatic, but is now less so. However, the Secretary holds a significant ‘clawback’ power under Section 34, whereby the liability net can be expanded to include anyone on whom a Section 29 notice could have been served at any time after the first Section 29 notice is served (i.e., former owners – even those who have previously had the Section 29 notice withdrawn – and affiliates of such owners).

Typically, parties contractually agree to provide security for their share of decommissioning liabilities as part of a sale and purchase, or as part of a field agreement with co-venturers, or, on rare occasions, as part of an agreement with the government. The amount of security, which is recalculated each year, is based on an estimate of the decommissioning cost net of the remaining value in the field. The usual form of security is a parent guarantee or letter of credit. The proceeds are paid to a trustee if the licensee defaults or is insolvent or does not renew the credit, meaning that a fund will be available to meet decommissioning costs.

Tax relief is available for decommissioning costs when they are incurred and under the Finance Act 2013 the UK government guarantees the present rates of tax relief to individual companies investing in the North Sea by entering into Decommissioning Relief Deeds. Under these contracts, if the tax relief regime is changed, the government will make a compensatory payment to the affected companies.

VIII FOREIGN INVESTMENT CONSIDERATIONS

i Establishment

Companies may only perform exploration and production activities in the United Kingdom under a petroleum licence. All companies applying for a licence must be registered in the United Kingdom, either as a company or as a branch of a foreign company (in order to effectively have a taxable UK presence). The OGA will consider each application on a case-by-case basis and will require a company to demonstrate its financial worthiness (i.e., that it is able to finance its share of the relevant work programme for the licence in question) and technical capability.

Companies wishing to be appointed as operator are considered against additional criteria including previous experience, technical expertise and environmental awareness.

While there is no specific limitation to foreign companies, the Secretary of State has the power to make a public interest assessment of the impact of a foreign company on the market. Furthermore, the Secretary requires that to be a licensee, a company must have a place of business within the United Kingdom. In assessing the suitability of a candidate to act as an operator, the Secretary has stated that the location of the company’s operations may be a factor in assessing its ability to run operations effectively.

A branch presence or company incorporation can be set up relatively quickly and cheaply (within a day if required).

ii Capital, labour and content restrictions

From a European perspective, as a member of the EU, EEA nationals are permitted to live and work in the United Kingdom without being discriminated against on the basis of nationality (although there are special rules for Croatian nationals for visa purposes). All non-EEA nationals must obtain permission to work in the United Kingdom. Those working purely offshore are exempted from this requirement. In order to sponsor an employee to work in the United Kingdom, an employer must be licensed to do so by UK Visas and Immigration. Penalties for non-compliance include civil penalties of £20,000 per illegal worker or unlimited fines or imprisonment for knowing non-compliance.

Once it has been ascertained that an individual has the right to work in the United Kingdom, they also have the benefit of the Equality Act 2010, which provides that employers are prohibited from discriminating against them on various grounds including race (where race includes colour, nationality and ethnic or national origins). The scope of this protection is wide, and includes the management of recruitment, terms of employment or engagement, access to job opportunities and benefits, and termination. If an employer is found guilty of discrimination under this Act, it could be liable for unlimited compensation arising from the discrimination, including an award for injury to feelings. An employment tribunal’s powers to make recommendations regarding the operations of the employer (e.g., training on equal opportunities) and increase compensation for subsequent non-compliance have been removed with effect from 1 October 2015.

iii Anti-corruption

The Bribery Act 2010 came into force on 1 July 2011, introducing significant changes to the anti-corruption law in the UK. Section 7 of the 2010 Act provides for a new strict liability corporate offence, committed when a commercial organisation fails to prevent bribery by a person associated with it. For a commercial organisation to be guilty of an offence under Section 7 it does not matter if the associated person is convicted of an offence. The prosecution need only prove beyond reasonable doubt that an offence has been committed and that the bribe was made to benefit the commercial organisation. If this is not proved, there is no offence pursuant to Section 7. If this is proved, the commercial organisation must demonstrate that adequate anti-bribery procedures were in place on a balance of probabilities. It also does not matter whether the organisation is aware of the corrupt conduct or not. The intention of the associated person offering the bribe is, however, important. A Section 7 offence will only be committed if the associated person had an intention to obtain, retain or advantage the business of the commercial organisation.

A commercial organisation can be fined an unlimited amount if a Section 7 offence is committed. The sentencing guidelines in respect of bribery offences provide that the court should determine a level of fine that reflects the seriousness of the offence while taking into account the financial circumstances of the offender. The level of fine may then be adjusted in light of other relevant factors that merit such adjustment. The guidelines provide that court’s aim should be to achieve (1) removal of all gain by the organisation committing the offence; (2) appropriate additional punishment; and (3) deterrence.

The investigations under the 2010 Act are conducted by the Serious Fraud Office, an independent government department responsible for prosecuting serious and complex fraud, bribery and corruption. The first commercial organisation was convicted under Section 7 of the 2010 Act in February 2016 and ordered to pay a fine of £2.25 million.

Following the enactment of the 2010 Act, amendments were made to Clause 22 of the Oil & Gas UK Industry Model Form Joint Operating Agreement (JOA) to address the 2010 Act. The Clause has been adapted to include anti-bribery provisions warranting that the JOA participants have not, nor will, bribe in connection with the JOA, the licence or joint operations and to provide that participants and their affiliates must devise and maintain adequate internal controls and steps should be taken to ensure such controls are imposed on contractors.

IX CURRENT DEVELOPMENTS

i The OGA and MER UK

A new independent regulator – the OGA – has been established by the Energy Act 2016. On 1 October 2016, the OGA became a government company and all the regulatory powers envisaged by the Energy Act vested in the OGA. The OGA is responsible for effective stewardship, regulation and licensing of the UKCS and also for facilitating maximum industry collaboration in respect of exploration, development and production in order to achieve the principal objective of maximising economic recovery of petroleum from the UKCS (MER UK).

The Energy Act confers on the OGA a number of powers it will need in order to act as a robust regulator. Among the most important ones are the power to act on its own initiative to issue non-binding recommendations in relation to relevant disputes between the operators and to have such disputes referred to them; the power to attend meetings the content of which is relevant to MER UK; and the power to impose sanctions for breach of ‘petroleum related requirements’ (in effect, non-compliance with MER UK).

The new regulator will use additional powers to facilitate implementation of the MER UK strategy. However, such new powers are only intended to enable stronger and better stewardship rather than to introduce more bureaucracy. The Wood Review considers that the development of the UKCS must continue to be driven by operators but that the new regulator should have the requisite skills, experience and authority to influence and guide parties.

The new regulator should also develop and implement important sector strategies in respect of the following – exploration (including access to data), asset stewardship (including production efficiency and improved oil recovery), regional development (starting with the southern North Sea), infrastructure, technology (including enhanced oil recovery and carbon capture and storage) and decommissioning.

ii Brexit – the UK’s decision to leave the European Union

On 23 June 2016, the people of the United Kingdom voted in a referendum to leave the European Union, setting in motion the long and arduous process of disentangling the UK from the European laws, regulations and institutions. Some parts of the UK oil and gas framework discussed above flow directly from the UK’s membership in the EU and the common market. As the UK sets out on its own on the uncharted waters of post-Brexit life, it is not unthinkable that with time the relevant laws prescribed by the Union law (in the areas such as employment, environmental protection, and health and safety) may be amended.

However, there is no indication that Brexit will have an immediate impact on the North Sea industry in the short term. Much of the core regulation governing oil and gas operations (such as taxation and licensing) is of UK origin and there may be little, if any, political will to repeal laws based on EU legislation that have already been implemented into domestic law (although some saving legislation may require to be enacted to preserve the relevant provisions).

Charting possible outcomes and scenarios to follow Brexit involves an exercise of crystal ball gazing. Much depends on the outcome of UK–EU negotiations. On one hand there is a risk of reduced inward investment and flight of capital from the sector. Following the Norway-style model may not be possible without access to the common market. In the same vein as Norway, the UK may be required to comply with European climate change regulation to preserve diplomatic ties, but without being able to influence it. On the other hand, Brexit could support inward investment as a result of a weakening pound. The government may also be incentivised to increase its support for the industry to allay sector’s instability fears that ensued following the vote.

Whatever the future brings, it is too early to draw conclusions at this juncture, and the post-Brexit developments and their impact on the UK oil and gas industry remain a key area to watch in the coming years.

Footnotes

1 Penelope Warne is senior partner and Norman Wisely is a partner at CMS. The authors would like to thank Konrad Rawicz, lawyer at CMS, for his assistance in drafting this chapter.