The Oil and Gas Law Review: United Kingdom


The oil and gas industry in the UK is in a period of transition. While continuing to address the realities of the UK continental shelf (UKCS) as a mature and complex basin and the operational and financial challenges resulting from the covid-19 pandemic, the industry continues to adapt and play a pivotal role in helping to deliver a net zero future through energy transition initiatives such as emission reduction targets, carbon capture, usage and storage (CCUS) and hydrogen.2 These factors have shaped trends in the UK oil and gas industry's transactional and operating landscapes in recent times, as well as informing a number of recent legislative developments – in particular relating to innovation and 'decarbonisation' initiatives.

The revised Oil & Gas Authority (OGA) Strategy came into force on 11 February 2021, which amended the 'maximising economic recovery' (MER UK) strategy (described in more detail below) to ensure that energy demand is met while ensuring an orderly energy transition and reducing reliance on imports.3 The UKCS still remains fiscally competitive with material new discoveries.4 In 2020, production from the UKCS accounted for 70 per cent of the UK's oil and gas demand5 and it is estimated that there are potentially 5.2 billion barrels oil equivalents (boe) yet to be discovered in the UKCS as at the end of 2019.6

Deal activity slowed down in 2020, with total mergers and acquisitions (M&A) spend decreasing from approximately US$5.6 billion in 2019 to approximately US$4.2 billion in 2020.7 However, there are some encouraging signs emerging in 2021, with over £3 billion of new acquisitions announced in the first half of 2021, showing that investors are still being attracted to opportunities in the UKCS despite the challenges faced by the industry.8 A variety of transactions have occurred across all stages of the upstream oil and gas life cycle, including exploration prospects, pre-development opportunities, producing fields and late-life assets. Recent transactions have resulted in a more diverse ownership landscape on the UKCS and a significant trend that has developed is the increasing proportion of assets, production and investment opportunities that have been acquired by private equity-backed companies. Infrastructure investors have increased their exposure to the midstream across various asset classes including pipelines, storage and liquefied natural gas (LNG).

The UKCS retains significant resources and a continued focus on exploration and development of new fields. Many exciting prospects continue to be developed and four new Field Development Plans were approved by the OGA in 2020.9

Total production from the UKCS was just over 587 million boe in 2020, or 1.6 million boe per day, which was 5 per cent lower than in 2019.10 Oil and Gas UK (OGUK) estimates that production will decline further between 5 and 7 per cent per year in 2021 and 2022, reflecting lower levels of recent brownfield and greenfield investments and the anticipated impact of increased planned maintenance outages deferred from 2020.11 The UKCS still retains over 10 to 20 billion boe yet to be produced,12 which could sustain production from the UKCS for another 20 years or more.13

Legal and regulatory framework

i Domestic oil and gas legislation

The principal legislation governing exploration and production of crude oil, gas and shale gas in the UK is the Petroleum Act 1998 (as amended) (the Petroleum Act). The Petroleum Act governs all oil and gas exploration and production in the UK (other than onshore in Northern Ireland), and underpins a regime whereby licences are granted, by the OGA (and by the Welsh Ministers, for onshore oil and gas in Wales, and the Scottish Ministers, for onshore oil and gas in Scotland), to persons to 'search and bore for and get' petroleum. Licence holders are granted the right to explore and develop a specified geographical area. Ownership of petroleum vests in the Crown, and petroleum produced within the licence area transfers from the Crown to the licence holder at the well head.

The Petroleum Act is supplemented by the Energy Act 2016, the Infrastructure Act 2015 and various environmental and health and safety legislation.

ii Regulation

The Department for Business Energy and Industrial Strategy (BEIS) is responsible for setting energy and climate change mitigation policies and establishing the framework for achieving the policy goals in those areas.

From 1 October 2016, the OGA was formally established as a fully independent regulator and a government-owned company, with the Secretary of State for Business, Energy and Industrial Strategy (the Secretary of State) as the sole shareholder. The Secretary of State is ultimately responsible to Parliament for the OGA.

The OGA is the entity responsible for petroleum licensing and regulation of the upstream oil and gas sector, including:

  1. oil and gas licensing;
  2. oil and gas exploration and production;
  3. oil and gas fields and wells;
  4. oil and gas infrastructure; and
  5. carbon storage licensing.

In response to the decline in production from the UKCS, the UK government commissioned a review of the UK offshore oil and gas recovery and regulation led by Sir Ian Wood. The concluding recommendations of this review included the establishment of a new regulator (the OGA). The key principle of the recommendations, and the stated policy of the UK government, is to maximise the cost-effective recovery of UK resources. The Infrastructure Act 2015 amended the Petroleum Act, to implement an official MER UK strategy, which was produced by the Secretary of State and came into force in March 2016. In February 2021, the OGA Strategy came into force to ensure that net zero is a part of the MER UK (described in more detail below). The OGA Strategy is binding on the OGA, various industry participants, the Secretary of State and licence holders, operators and owners of offshore installations. The OGA has enforcement powers in respect of compliance with the OGA Strategy, and it is required to act in accordance with its OGA Strategy when:

  1. exercising its functions under the Petroleum Act or Part 2 of the Energy Act 2016;
  2. exercising functions or powers under a petroleum licence; and
  3. using its ancillary powers; for example, to assist or advise the government.

iii Treaties

The UK is a signatory to treaties including the Energy Charter Treaty, which regulates energy-specific matters, and the Geneva Convention on the Continent Shelf 1958 and the UN Convention on the Law of the Sea, which sets the limits of the state's territorial sea and access to the continental shelf and beyond. Regionally, the UK is a signatory to the Convention for the Protection of the Marine Environment of the North-East Atlantic, the mechanism which started in 1972 and by which 15 governments and the European Union (EU) cooperate to protect the marine environment of the north-east Atlantic.14

Additionally, the UK is a party to conventions governing the recognition and enforcement of foreign arbitral awards including the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the Geneva Convention on the Execution of Foreign Arbitral Awards 1972 and the UN Convention on the Settlement of Investment Disputes between States and Nationals of Other States.

In respect of tax, the UK has an extensive network of double tax treaties with other jurisdictions that are broadly designed to prevent a taxpayer from having to pay tax in more than one jurisdiction on the same income, profits or gains. The extent to which any UK taxing rights may be restricted under a particular treaty depends on the nature of the income, profits or gains in question and the terms of the relevant treaty.


The Petroleum Act vests all rights to petroleum in the Crown but permits the OGA to grant licences to 'search and bore for and get' petroleum to persons deemed fit. Under the Petroleum Act, exploration for and production of petroleum in the UK and on the UKCS can only be undertaken under the terms of these licences. A company wishing to participate in the UK upstream oil and gas sector must bid for a licence or acquire an interest in existing assets, with any acquisition being subject to regulatory consents.

The OGA is responsible for issuing licences through competitive licensing rounds that generally take place every year, and the OGA Strategy is applied by the OGA in each licensing round. Separate rounds are held for seaward (offshore) licences and landward (onshore) licences. In exceptional circumstances, where there are compelling reasons provided by a company, the OGA may issue a licence outside of a licensing round.

Licences take the form of a deed, pursuant to which the licensee is bound to observe the conditions of the licence. These detailed terms and conditions are prescribed in a series of 'model clauses', which are set out in secondary legislation under the Petroleum Act. The model clauses applicable to a particular licence are those that are in force at the time the licence was granted and are not affected by subsequent sets of model clauses, except through specifically retrospective measures.

UK licences are both contractual and regulatory in nature – contractually, being executed as a deed and providing for the contractual transfer of rights from the Crown to the licensee, and regulatory, because the model clauses are encompassed in statutory regulations, and Parliament may unilaterally amend the terms upon which a licence is granted. Legally, only one licence exists, although a licence may be granted to one or more licensees, who will be held jointly and severally liable in respect of obligations arising under the licence.

The Petroleum Licensing (Applications) Regulations 2015 contain the application process for licences. All applications must be made in the prescribed form and for a specific area. The OGA will only grant a licence to an entity that has the appropriate technical and financial capacity to contribute to the OGA Strategy. The OGA considers all applications on an individual basis, and companies must meet certain criteria, including technical competence, financial capacity and tax considerations (the OGA routinely corresponds with Her Majesty's Revenue and Customs for information on any tax issues).

The different types of licences currently being issued are:

  1. seaward production licences: these are the main offshore production licence, which run for three successive periods or terms. The initial term is associated with exploration, the second with development and the third with production. However, the licence requires fulfilment of the relevant work programme, agreed with the OGA, before it can proceed from one term to the next – but a licensee who fulfils the required obligations and obtains the relevant consents quickly during the initial terms will not be prevented from commencing production under the licence prior to the third term. Production licences expire automatically at the end of the term unless the licensee has advanced the work programme sufficiently to commence the next term. The licence will expire at the end of its initial term unless varied by agreement, or the licensee has completed the work programme, all sums have been paid, and the licensee has relinquished 50 per cent of the initial licence area. Each production licence also requires payment of an annual fee (known as rental), charged on an escalating basis for each square kilometre covered by the licence at that date and for licensees to relinquish areas that are not being exploited;
  2. landward production licences: the onshore equivalent of seaward production licences as described above (formerly referred to as petroleum exploration and development licences);
  3. offshore innovate licences: the innovate licence offers greater flexibility during the initial and second term as the applicant can propose the durations of the initial and second terms. The 'offshore innovate licence' replaced the traditional, promote and frontier versions of the seaward production licence, described below (which still remain relevant for many existing offshore production licences); and
  4. exploration licences: an exploration licence is non-exclusive and covers the UK's entire offshore area apart from those areas covered by any production licences that are in force at the time. These are commonly used by seismic contractors who gather data to sell rather than exploiting the resources themselves, or by holders of a production licence who wish to explore outside the areas where they hold or require exclusive rights. The OGA grants both seaward and landward exploration licences. The annual payment is significantly lower than that of production licences and covers exploration relating to hydrocarbon production, gas storage, carbon capture and sequestration or any combination. An exploration licence grants rights to explore for petroleum, but not to extract it, and enables licence holders to carry out seismic surveys and to drill wells for core-sampling to a maximum depth of 350 metres below the seabed.

The 'traditional, promote and frontier licences' are no longer issued, but many remain in existence:

  1. traditional licence: this was the most common type of offshore production licence. They were granted with licence term lengths of four years for the initial term to complete the initial work programme, following which the licensee was required to relinquish 50 per cent of its acreage to move to the next phase. The second term was for another four years, and finally reaching a production phase for an 18-year third term (other than in relation to the 27th and 28th licensing rounds where greater flexibility was introduced for certain licences);
  2. promote licence: aimed at small and start-up companies, applicants did not need to prove technical or environmental competence or financial capability before the award of the licence, but they were required to do so within two years of the start date of the licence. Otherwise, the terms of the various phases and relinquishment obligations were the same as a traditional licence; and
  3. frontier licence: this licence had an exploration phase of six years to allow companies to evaluate larger areas and look for a wider range of prospects, but the terms varied based on the terrain (two more years for standard frontier licences and five additional years for the more challenging West of Shetland frontier licences). Licensees were required to relinquish 75 per cent of the acreage at the end of the third year of the initial exploration phase, and a further 50 per cent at the end of the initial exploration phase.

Since September 2020, the UK government has been carrying out a review of policy on the future licensing of domestic offshore oil and gas exploration and production, to ensure that it continues to be compatible with the UK's climate change ambitions.15 The Energy White Paper published by BEIS in December 2020 indicated that BEIS is considering various options to ensure the licensing regime is consistent with the government's aims regarding the energy transition and emission reductions, and the impact on the supply chain and jobs.16 As part of this, the UK government will introduce a new Climate Compatibility Checkpoint (the design is to be completed by the end of 2021) to ensure that future oil and gas licensing rounds are compatible with climate objectives (including net zero). The Climate Compatibility Checkpoint will look at the UK's demand for oil and gas, the sector's projected production levels, the increasing prevalence of clean technologies such as offshore wind and carbon capture, and the sector's continued progress against its ambitious emissions reduction targets.17

Simultaneously, the Offshore Petroleum Regulator for Environment and Decommissioning (OPRED) is conducting a new Offshore Energy Strategic Environmental Assessment for future licensing rounds, and the OGA plans to run the next licensing round following the completion of that assessment.18

Production restrictions

There is no national oil company in the UK that is directly involved in oil and gas exploration and production activities in the UKCS. Oil and gas exploration and production are regulated by restrictions on the award and transfer of licences, and requirements relating to approval of work programmes and how that work is performed. There are no special regulatory requirements that apply to the exports of oil or oil products, other than the payment of applicable duties or taxes, and compliance with International Energy Agency's oil stocking obligations. Additionally, in the event of an actual or threatened emergency in the UK that will affect fuel supplies, the Secretary of State may use emergency powers under the Energy Act 2016 to regulate or prohibit the production, supply, acquisition or use of substances used as fuel.

Assignments of interests

The OGA's consent is required for a licence to be sold, transferred, assigned or otherwise dealt. Any transaction that results in a company joining a licence, or withdrawing from a licence, is deemed to be a licence assignment. The OGA will consider any assignment made without prior consent, a very serious breach of the model clauses and grounds for immediate revocation of the licence or to reverse the assignment. There are a number of issues that the OGA considers when deciding whether to give approval, including: (1) compliance with the EU 2013 Offshore Safety Directive (as implemented in the UK under domestic legislation); (2) the technical and financial capacity of the assignee; (3) decommissioning costs; (4) effect on operatorship arrangements; and (5) fragmentation of licence interests (i.e., creation of less than 5 per cent interests).

The company selling its licence interest (the transferor) must apply to the OGA for its consent. The transferor will need to obtain much of the information the OGA needs from the acquiring company (the transferee). Consent will not be granted unless the OGA has all required information. The OGA reviews and considers the form of the deed of assignment used by the parties and provides for approved draft deeds of assignment. Licence assignment applications are processed online through the UK Energy Portal, and the OGA aims to process applications within 10 working days. If the assignment results in a change of operatorship, this may extend the process to up to 30 working days. Assignment consents are valid for 90 days after the completion date specified in the application form.

The OGA's consent to proceed with a change of control of a licensee is not expressly required; however, the OGA does have the power to require either a further change of control or revocation of the licence, upon a change of control. As a result, best practice is to apply to the OGA in advance of a change of control and seek comfort that the OGA will not exercise its powers. The application should demonstrate that the proposed change of control would not impact the ability of the licence holder to meet its obligations under the licence. The OGA may require a parent company guarantee from the new corporate parent to replace any existing parent company guarantee that may have been issued before the change in control.

The creation of a charge on a licence also requires the consent of the OGA. To facilitate ordinary course transaction financing, and to eliminate the cumbersome need for prior consent, 'open permission', which is a form of automatic consent, applies to any fixed or floating charge or debenture. The licensee must give notice to the OGA within 10 days of creation of the charge, providing certain information about the charge. If the holder of a charge intends to enforce the security interest, it will be caught as a licence assignment, and the procedures described above in respect of licence assignments will apply.


The tax system applicable to oil- and gas-related activities in the UK (and the UKCS) consists of a special fiscal regime, comprising three principal elements:

  1. ring fence corporation tax (RFCT): the normal corporation tax regime is modified in its application to companies producing oil in the UK and UKCS: a 'ring fence' applies to prevent taxable profits from oil and gas extraction from being reduced by losses from other activities. The rate of RFCT is currently 30 per cent;
  2. supplementary charge (SC): the rate of SC is currently 10 per cent. This is not strictly corporation tax, but it is charged as if it were an amount of corporation tax on ring fence profits to which financing costs are added back (and is subject to an allowance regime designed to encourage investment); and
  3. petroleum revenue tax (PRT): this is an additional level of tax on the profits derived from particular fields. The rate of PRT was reduced to zero with respect to chargeable periods ending after 31 December 2015 but it has not been abolished so losses can be carried back against past PRT payments.

Following the effective abolition of PRT, RFCT and SC together result in an effective marginal tax rate of 40 per cent for all oil and gas fields in the North Sea.

Investment in the UKCS is encouraged by tax relief being provided for expenditure on research, exploration, appraisal and production through capital allowances (broadly, the UK's form of allowable 'tax' depreciation) and, once production has commenced, through tax deductions for expenses incurred wholly and exclusively for the purposes of an eligible trade. The government has also signed decommissioning relief deeds with oil and gas companies to provide certainty on the tax relief they will receive when decommissioning assets, as further described below.

In the context of UKCS transactions, decommissioning issues, and particularly the question of with whom the economic burden of decommissioning liabilities should lie, have frequently been a significant challenge to transactions involving the transfer of UKCS licence interests. The traditional position has been that buyers would provide sellers with an indemnity for all decommissioning liabilities whether they arise on or before the agreed economic date or date of the agreement.

There has been, however, an increasing trend toward sellers of licence interests retaining a proportion of the decommissioning liability (as, historically, it was likely that the new owners would not be able to get effective tax relief for decommissioning costs, because of having paid insufficient amounts of corporation tax and SC by the time the decommissioning of those assets occurred). This has been particularly relevant in the context of late-life assets where a seller is likely to have significantly greater tax capacity than a buyer. However, in the context of 'right assets, right hands' and the OGA Strategy, following an announcement in the Autumn 2017 Budget, the Finance Act 2019 introduced transferable tax histories (TTHs) for oil and gas companies, which provide companies buying North Sea oil and gas fields with certainty that they will get tax relief for the decommissioning of the asset as, on purchasing the asset, they are able to make a joint election for the buyer to acquire some of the previous owner's tax history (namely, historical profits on which ring-fenced corporation tax and supplementary charge have been paid). The buyer is then able to set the costs of decommissioning the fields at the end of their lives against the TTH.

The recent amendments enacted are beneficial for a number of UKCS participants including:

  1. taxpayers selling licence interests who may be able to dispose of UKCS assets and thereby unlock capital to be employed in further exploration and development activity (whether in the UK or elsewhere) if a transaction can be structured such that the seller's TTH is transferred to the buyer; and
  2. buyers of such assets who may have greater certainty that tax relief will be obtained for the cost of decommissioning activity.

Environmental impact and decommissioning

i Environmental impact and safety

While oil and gas activities are primarily regulated by the licence and the Petroleum Act, various other statutory provisions apply in respect of environmental and safety issues. The model clauses also generally require licensees to avoid harmful methods of working, by, for example, operating in accordance with 'good oilfield practice' and to take all steps practicable to prevent the escape of petroleum, including into any waters in or near the vicinity of the licensed area.

The principal regulators for health and safety in the UKCS are BEIS, the Health and Safety Executive, and a partnership between the two – the Offshore Safety Directive Regulator (OSDR), established in 2014 following the Deepwater Horizon disaster in 2010.

Following the Piper Alpha offshore platform explosion in 1988, and the subsequent Cullen Inquiry, in 1992 the UK developed the safety case regime as the central plank of offshore health and safety law. The current Offshore Installations (Offshore Safety Directive) (Safety Case etc.) Regulations 2015 (SCR 2015) impose obligations on the relevant dutyholder (being the relevant operator for production installations or owner for non-production installations) to prepare safety cases and submit them to be approved by the OSDR for all offshore installations. The Pipelines Safety Regulations 1996 impose separate duties on operators of pipelines.

More generally, the majority of the Health and Safety at Work etc. Act 1974 (HSWA) is applied offshore via the Health and Safety at Work etc. Act 1974 (Application outside Great Britain) Order 2013. The effect of this is that employers remain under the HSWA's core duties, including to ensure the health and safety of employees and others who may be affected by a business's activities.

The OGA has the power to issue financial penalty notices carrying fines of up to £1 million under the Energy Act 2016, in respect of: (1) a failure to comply with a duty to act in accordance with the OGA Strategy; (2) a breach of a term or condition of an offshore licence; or (3) other breaches of the Energy Act 2016 that are sanctionable thereunder. It may also issue an enforcement notice, order the removal of the operator of a licence and ultimately revoke a licence for one or all of the licence holders in the event of non-compliance with applicable requirements.

OPRED, an agency of BEIS, is principally responsible for enforcing the environmental regime applicable to offshore oil and gas activities (and also decommissioning) in the UK. The offshore environmental legal regime covers a broad range of topics; the principal environmental matters covered are:

  1. oil pollution and emergency pollution control;
  2. discharges of hydrocarbons and chemicals to water;
  3. waste management;
  4. emissions to air (e.g., from combustion activities);
  5. marine licensing (e.g., depositing objects on the seabed or dredging);
  6. emissions trading, fluorinated gases, ozone depleting substances and energy auditing; and
  7. environmental impact assessment and habitat protection.

While the majority of environmental offences are criminal in nature, the Offshore Environmental Civil Sanctions Regulations 2018 (the OECS Regulations) give OPRED powers to impose civil sanctions in respect of breaches of some existing offshore oil and gas environmental regulations. The civil sanctions available to OPRED are fixed and variable monetary penalties; previously, the breaches could only be sanctioned through criminal prosecution. OPRED will, in each case, consider whether the imposition of a civil sanction is appropriate. This will include consideration of a number of factors, including whether a civil sanction is proportionate given the seriousness of the breach and the compliance history of the offender. OPRED can only impose a civil sanction where it is satisfied that a breach has been proven beyond reasonable doubt (the criminal burden of proof).

Following the Deepwater Horizon explosion and spill, the Offshore Safety Directive 2013 (2013/30/EU) extended liability for environmental damage under the EU Environmental Liability Directive (2004/35/EC) to offshore oil and gas operations. In particular, the Offshore Petroleum Licensing (Offshore Safety Directive) Regulations 2015 (2015 Regulations) provide that the licensee will be responsible for the prevention and remediation of damage incurred during operations carried out for or on behalf of the licensee or operator. Further, under the 2015 Regulations, licensees are required to make adequate financial provision to cover liabilities for the duration of operations.

In addition to statutory obligations, liabilities may arise under common law torts such as nuisance and negligence, or under contract. Parties suffering harm or damage caused by operations of an offshore installation may claim under a voluntary oil pollution compensation agreement to which all offshore operators active in the UKCS are party. Membership of the offshore pollution liability agreement (OPOL) is a condition of the OGA granting a licence and so all operators will in practice be party. OPOL generally subjects operators to strict liability for pollution damage, and the cost of remedial measures up to a maximum of US$250 million per incident. Above the US$250 million cap, recovery by third parties will be dealt with as a matter of civil law.

ii Decommissioning

Oil and gas operators in the UK are increasingly decommissioning their assets as they are reaching the end of their useful economic lives. Operators' expenditure on decommissioning is rising and there is expected to be a gradual increase in expenditure over the next three years, reaching about £1.5 billion in 2024–26.19

The Petroleum Act imposes an obligation on licensees to pay for the decommissioning and proper removal of offshore installations from the seabed, other than in exceptional circumstances. Decommissioning of these installations (including pipelines) is regulated by BEIS, through OPRED. The OGA, pursuant to the OGA Strategy and the Energy Act 2016, is required to assess decommissioning programmes to ensure they meet the OGA Strategy's principal objectives on the basis of cost savings, future alternative use and collaboration.

The Secretary of State, under Section 29 of the Petroleum Act, has the power to serve a 'Section 29 Notice' to anyone owning an 'interest' in an installation 'otherwise than as security for a loan' and associated companies (broadly 50 per cent owned direct or indirect affiliates) of companies that are directly liable. The Section 29 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. At first instance, a Section 29 Notice would typically be issued to the operator of the field and each of the licensees, but the power of the Secretary of State to issue a Section 29 Notice to other relevant parties is broad and should be considered in transaction structures in an M&A context. It is expected that the OGA will send a Section 29 Notice to this wider class of parties if it finds the decommissioning arrangements proposed by the operator and licensees to be unsatisfactory.

The Secretary of State has the power to withdraw Section 29 Notices – for example, in respect of withdrawing licensees – but it would be unusual for this to occur without a replacement notice being served on an incoming licensee. Additionally, BEIS has the power to reissue any Section 29 Notice (under Section 34 of the Petroleum Act) but the risk of a licensee (or other interested party or related person as set out above) reincurring liability is always present, and they may be potentially liable for the decommissioning of that field until decommissioning is complete.

The Section 29 Notice requires the recipient to submit a decommissioning programme (setting out the methods and measures to decommission disused installations or pipelines, or both). Once the decommissioning programme is approved, following the OGA's review of the details including the cost estimates, the notice holders are legally obliged to carry it out on a joint and several liability basis. If a programme is not carried out or its conditions are not complied with, the Secretary of State may, by written notice, require remedial action to be taken. Failure to comply with any such notice is an offence, and the Secretary of State can carry out the remedial action and recover the costs from the person to whom the notice was given.

The Secretary of State can require decommissioning security at any time, with the security being ring-fenced from creditors in an insolvency situation, if it believes that there is an unacceptable level of risk of decommissioning costs falling to government. The industry and the regulators have developed a Decommissioning Security Agreement, commonly entered into by all licensees, providing for security to be held on trust by an independent security trustee. This security may be provided by a standby letter of credit, performance bond or insurance product, parent company guarantee or cash.

OPRED monitors the financial health of operators to determine their financial position compared with their anticipated costs to decommission assets. For example, it assesses operators' ratio of assets to liabilities in their accounts and has access to data provided by a consultancy firm on operators' financial health.

In response to concern that a lack of certainty about decommissioning tax relief had led operators to set aside money for decommissioning on a pre-tax (rather than post-tax) basis, in 2013, HM Treasury introduced decommissioning relief deeds to give operators greater certainty about the tax relief they will receive for decommissioning. These deeds guarantee that tax relief for decommissioning will not be lower than under 2013 rules and provide certainty that operators will receive tax relief should they incur any additional decommissioning costs because of the default of another party. The rationale is that this will reduce the amount of security required (before security was given without taking account of tax relief, therefore, increasing the amount), which will free up funds for asset transactions and investments, and discourage early decommissioning.

With decommissioning expenditure in the UKCS forecast to be around £1.5 billion per year for the next 10 years, the UK government plans to support the development of the UK decommissioning sector and its major role to play in the energy transition. Oil and gas assets and their component parts are already being reused and repurposed for CCUS, hydrogen production and offshore wind.20

Foreign investment considerations

i Establishment

To be a licensee, a company must have a place of business in the UK, meaning that they have a staffed presence in the UK, they are registered as a UK company or they have a registered UK branch.

The National Security and Investment Act 2021 (NSIA) will come into force on 4 January 2022; however, some provisions of the NSIA apply retrospectively from 12 November 2020. The NSIA will significantly strengthen the UK government's powers to investigate and prohibit transactions on national security grounds. It will be unlawful to complete a transaction that is notifiable within the energy sector without prior approval from the Secretary of State and civil and criminal penalties may be imposed.

ii Capital, labour and content restrictions

There are no restrictions on the movement of capital or access to foreign exchange and no local content or local hiring requirements applicable to oil and gas operations in the UK.

iii Anti-corruption

The UK Bribery Act 2010 establishes offences relating to giving bribes, taking bribes, bribing a foreign public official and failing to prevent bribery and applies to activities in the UK and can apply to activities overseas. A bribe is a financial or other advantage and is deliberately broad. A company guilty of an offence is liable to a fine.

Current developments

i The energy transition and the OGA Strategy update

Both government and industry are facing the changing circumstance of the 'energy transition' – driven by economic, geological, environmental and political realities. In April 2021, the UK government's Carbon Budget included a reduction of emissions by 78 per cent by 2035 compared with 1990 levels, which would bring the UK more than 75 per cent towards its target of net zero by 2050.21 It has been recognised that the UK's offshore oil and gas sector has the skills, technology and capital to contribute to the net zero target and it is becoming integrated with the wider energy sector and is already involved in CCUS, hydrogen and platform electrification projects.

On 11 February 2021, the OGA launched the revised OGA Strategy to support the UK's net zero target and to address climate change – proposing that the MER UK strategy should be carried out in a way that is fully compatible with the transition to net zero through the amendment of the central obligation of the MER UK strategy. This includes an obligation on the industry to take appropriate steps to assist the Secretary of State in meeting the net zero target, including by reducing as far as reasonable in the circumstances greenhouse gas emissions from sources such as flaring and venting and power generation and supporting CCUS projects.

In March 2021, the North Sea Transition Deal was announced setting out how the government and the industry will work together to meet the greenhouse gas emissions reduction targets by transforming the sector for a net zero future (the Deal).22 The Deal is aimed at delivering relevant commitments in the UK government's Energy White Paper and is closely aligned with the Prime Minister's Ten Point Plan.23 A key outcome of the Deal is to cut UK upstream oil and gas industry emissions by way of an absolute reduction in production emissions of 10 per cent in 2025, 25 per cent in 2027 and 50 per cent in 2030 (each set against a 2018 baseline), and the sector has committed to working with the UK government to address the commercial and regulatory barriers to electrification of offshore platforms to realise these targets.24 The CCUS commitment of the Deal entails developing an economic regulatory framework for CCUS transport and storage infrastructure, while the sector has committed to investing £2–3 billion to build such infrastructure for at least 10MT per year of carbon capture by 2030 and working with OPRED and the UK government to optimise oil and gas asset reuse for CCUS.25 The Prime Minister's Ten Point Plan included a commitment to deploy CCUS in two industrial clusters by the mid-2020s and a further two clusters by 2030 with an ambition to capture 10 MtCO2 per year by 2030.26 In May 2021, the UK government finalised the details of the Cluster Sequencing Process to allow organisations to enter the process by making a submission from which the UK government will identify at least two CCUS clusters for deployment in the mid-2020s (the Track-1 Clusters).27 Projects that are within the Track-1 Clusters will have the opportunity to receive support under the UK government's CCUS programme.28 The UK government is also considering CCUS business models to incentivise private sector investment and the business models are expected to be set out later in 2021.29 For the deployment of hydrogen, the Deal entails the UK government and the sector working together to deliver 5GW of low carbon hydrogen production capacity by 2030. In order to seize opportunities in offshore electrification, CCUS and hydrogen, both in the domestic market and internationally, the sector has also committed to developing a UK low carbon supply chain, with a target of 50 per cent UK content, and to help support up to 40,000 direct and indirect supply chain jobs in such industries. On 17 August 2021, the UK government published its hydrogen strategy to support the supply chain, create jobs and capitalise on innovation and expertise to facilitate private investment and increase export opportunities. A number of consultations in relation to the hydrogen business model, the hydrogen fund and the UK Low Carbon Hydrogen Standard are ongoing.

ii Climate reporting

There is a significant movement towards enhanced climate-related financial disclosures for both public and private companies to promote more informed business, risk and investment decisions as well as improving allocation of capital and supporting the transition to net zero. This will naturally affect the oil and gas sector. In its 2019 Green Finance Strategy, the UK government set out an expectation that all UK-listed companies and large asset owners would be required to report climate-related financial disclosures in line with the Task Force on Climate-Related Financial Discloure's recommendations by 2022. This would require disclosures in relation to governance, strategy, risk management and metrics and targets. Listed companies with a premium listing are already required to disclose whether they have complied with the climate-related financial disclosures and in June 2021, the Financial Conduct Authority launched a consultation, seeking to extend this reporting regime to issuers of standard listed equity shares. In March 2021, BEIS also conducted a consultation on climate-related disclosure provisions in the Companies Act 2006 and a new reporting regime impacting both public and certain private companies is expected.


1 Michael Burns is a partner and Naomi Nguyen is a senior associate at Ashurst.

7 (Mergermarket deal reporting).

8 ibid.

11 ibid.

18 ibid.

24 ibid.

25 ibid.

27 ibid.

28 ibid.

29 ibid.

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