A revised MER UK Strategy: Implications for UK Oil & Gas Participants

Last month, the Oil and Gas Authority (the “OGA”) released a consultation paper (the “OGA Consultation”) setting out its proposals to revise the Maximising Economic Recovery Strategy for the UK (the “MER UK Strategy”).^[1]  The OGA’s proposed revisions are potentially far-reaching and are aimed at positioning the UK’s oil and gas industry as a solution, rather than an impediment, to achieving the Government’s carbon neutrality targets.

In this briefing we review five key changes proposed in the OGA’s consultation document, and consider their impact on participants in the oil and gas industry.

Introduction

The MER UK Strategy will be familiar to all participants in the industry.  Since March 2016, the MER UK Strategy has had as its core obligation a requirement to “take the steps necessary to secure that the maximum value of economically recoverable petroleum is recovered from the strata beneath relevant UK waters”.

The OGA Consultation, released on 6 May 2020, has been issued in the wake of the UK government’s introduction of legislation in June 2019 to achieve carbon neutrality by 2050 (the “Net Zero Target”). The wide-ranging changes proposed in the OGA Consultation – considered in detail below – reflect this, with new obligations put forward including the proposed introduction of new low carbon obligations requiring industry participants to reduce flaring and emissions, explore and implement carbon reduction measures such as platform electrification and imposing new good faith obligations in respect of carbon capture and storage (“CCS”), amongst others.

Change to the Central Obligation

The OGA MER’s Central Obligation is to "secure that the maximum value of economically recoverable petroleum is recovered from the strata beneath relevant UK waters". This core principal objective of “maximising the economic recovery of UK petroleum” is enshrined in Section 9A(1) of the Petroleum Act 1998.

The OGA Consultation envisages adding a second branch to this Central Obligation, by requiring participants 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 carbon capture and storage projects”.

Relevant persons, in this Consultation, are understood to be those persons listed in section 9A(1)(b) of the Petroleum Act 1998 – namely holders of and operators under petroleum licences, owners of upstream petroleum infrastructure, persons planning and carrying out the commissioning of upstream petroleum infrastructure and owners of relevant offshore installations.

The effect of this proposed change is to directly integrate the government’s Net Zero Target into the Central Obligation. Indeed, changes to the introduction of the MER UK Strategy and its supporting obligations indicate the clear intention of the OGA to support and empower industry participants to identify and take steps to reduce their greenhouse gas emissions (“GGEs”) and, in maximising economic recovery, to consider their social licence to operate and develop and maintain good environmental, social and governance practices in their plans and daily operations.

New Carbon Capture and Storage Obligations

At the crux of the MER UK Strategy was the requirement that relevant persons plan, commission and construct infrastructure in a way that enables the maximisation of the value of economically recoverable petroleum from the area where the infrastructure is located. The OGA Consultation proposes the introduction of a new requirement that relevant persons also take into account whether, and how, the relevant infrastructure can also be used to (i) help meet the Net Zero Target, including by reducing GGEs, and (ii) provide for or support the development and use of facilities for any CCS projects.

The OGA Consultation also proposes the introduction of an obligation requiring relevant persons to have regard to CCS projects when complying with the strategy, including whether there are possibilities for collaboration with persons planning or carrying out CCS project, negotiating access to infrastructure for CCS projects “in timely fashion and in good faith”, and permitting access to the relevant infrastructure to be used for CCS project “on fair, reasonable and non-discriminatory terms”. As further set out below, the lack of clarity as to the scope of this new obligation, and how it will be applied in practice, inevitably carries with it a risk of disputes. However, for companies with offshore CCS credentials, this new obligation will help ensure greater access to infrastructure for them. Should the OGA’s proposed amendments be implemented, we expect to see a flow of investment towards these companies to follow suit.

Introduction of New Governance Obligations

The OGA Consultation also envisages the introduction of new governance obligations requiring licensees to “apply good and proper governance at all time”, including complying with principles and practices which the OGA may direct. No clear governance standards are referred to in this document, so it is unclear at this stage against which principles compliance will be benchmarked. The OGA Consultation has however already indicated its intention to “bring a company’s track record and appetite for actively pursuing energy transition matters into discussions under the licence”. It is unclear at this stage whether this new requirement would apply to existing licences or would be limited to licences to be granted.

Third Party Access and Collaboration Obligations

The OGA Consultation envisages the replacement of the previous collaboration obligation which required participants in the market, amongst other things, to consider whether collaboration or cooperation with other persons could reduce the costs or increase the recovery of economically recoverable petroleum amongst other things. The new obligation proposed would instead require the collaboration and cooperation of participants not just with other relevant persons but also with other participants throughout the supply chain - including persons seeking to acquire an interest or invest in offshore licences or infrastructure in the region, and persons providing goods or services relating to relevant activities in order to support the delivery of such activities on time and on budget. This new obligation would bring with it a change in the way procurement happens in the UK oil and gas exploration market – operators will be looking not only to the actions they can take to help achieve the Net Zero Target, but also what measures suppliers down the chain have in place to also meet this target.

Similarly, where relevant persons are not able or decide not to ensure the recovery of the maximum value of economically recoverable petroleum from their licenses or infrastructure, the OGA Consultation proposes that they be subject to a new obligation to “provide access to all relevant data and other information, including to allow bona fide persons to establish technical and financial competence”.

Other obligations

Other obligations are proposed in the OGA Consultation, including the introduction of:

1. New asset stewardship obligations on owners and operators to “reduce as part as reasonable in the circumstances greenhouse gas emissions resulting from sources such as flaring and venting and power generation”, and to achieve optimum potential for the re-use or re-purpose of infrastructure. The obligations also refer to owners and operators undertaking “relevant and measurable metering and measurement activities” to ensure these are met;
2. A new decommissioning requirement that, prior to the planning of or partial decommissioning of any infrastructure, relevant persons ensure and be able to demonstrate that options for that infrastructure’s continued use, including the re-use of re-purposing for CCS projects, has been suitably explored. Such a change would now require participants to integrate these considerations into their decommissioning plans; and
3. New requirements regarding the reductions of GGEs. While the focus of the new strategy is on CCS projects as a means of reducing GGEs, the OGA Consultation also envisages the introduction of new obligations concerning the adoption and deployment of emerging and existing technologies for the reduction of GGEs resulting from flaring, venting and power generation, and to enable projects relating to hydrogen supply to be planned for and developed. This is unsurprising, with the replacement of conventional hydrogen in industrial applications with low-carbon hydrogen, and the increasing demand for clean or zero-carbon hydrogen as a source of energy.

These additional obligations complement the overarching shift of the MER UK Strategy to reducing GGEs.

Commentary

The changes to the MER UK Strategy reflect the current mood in the oil and gas industry, including the perception that it needs to address the questions it is facing about its ‘social licence to operate’, and to remain attractive as a source of investment in the longer term. The OGA Consultation envisions addressing these concerns by positioning the UK oil and gas industry as the solution to achieving Net Zero, rather than the impediment it is more commonly perceived to be.

The changes also reflect the UK Government’s focus on implementing far-reaching changes to meet its Net Zero Target, as also demonstrated by the recent proposals for the implementation of UK Emissions Trading Systems after the UK’s EU Exit,^[2] and the upcoming consultation paper on the implementation of a carbon emissions tax as an alternative.

With climate change and reducing global GGEs now a priority item on the UK Government’s agenda, it is not surprising to see that the strategic changes proposed focus on the reduction of GGEs and on the adoption and implementation of good environmental, social and governance (“ESG”) principles. CCS technology, in particular, plays a central role in the new proposed strategy.  This is perhaps unsurprising given that the OGA is the carbon dioxide storage licensing authority, which approves and issues storage permits, and the recent findings made in the Committee on Climate Change’s May 2019 Net Zero Report that “plans for early deployment of CCS must be delivered with urgency - CCS is a necessity not an option for reaching net-zero GHG emissions”.^[3]

However, while the proposed amendments to the MER UK Strategy will undoubtedly be perceived by many as a welcome and much needed shift, the lack of detail or supporting explanation for how these new obligations will be implemented, monitored and sanctioned nonetheless leaves scope for confusion and, as a result, a risk of disputes arising,  including between the OGA and relevant persons, but also between relevant persons themselves, for example between operators who see these new obligations imposed on themselves and their joint venture partners, or between operators and companies down the supply chain.

As reminded in the introduction to the OGA Consultation, a failure to act in accordance with the current Strategy is sanctionable, with penalties including revocation of a licence or operatorship. We expect players in UK oil and gas market to seek further clarity on the scope of these new obligations.

From an ESG perspective, the OGA Consultation raises a number of questions:

• What governance standards should relevant persons be applying, and do the standards the OGA assesses relevant persons against go beyond the traditional financial and technical capabilities assessment conducted by the OGA when determining whether to grant licences?
• Similarly, what criteria will the OGA be taking into consideration in evaluating companies’ energy transition track record when determining whether to grant licenses? Will this disproportionately work against smaller oil and gas companies who have commonly been slower to announce carbon reduction targets? Will these obligations apply to the grant of new licences only or will they also apply to existing licences?

In parallel however, the proposed changes introduced by the OGA Consultation also highlight the very significant growth potential in the CCS market, with some of the changes looking to remove existing hurdles to market access for companies specialising in CCS projects. Many IOCs will have already turned their minds to the integration of CCS capabilities as part of their portfolio – the OGA Consultation will only serve to reinforce that trend. At the same time, we also expect to see some push back in this area. It remains to be seen how a new obligation requiring relevant persons to negotiate access to infrastructure for CCS projects “in timely fashion and in good faith”, and to permit access “on fair, reasonable and non-discriminatory terms” will be implemented, and whether decisions not to grant third parties access for CCS projects will lead to a fresh wave of disputes. For those interested in our analysis of the proposed changes to the Third Party Access Regime, and the implications for the upstream oil and gas industry, we will consider these issues in a separate post to follow.

^{[1] The OGA Consultation and the proposed changes to the OGA Strategy Review in track are available here.}

^{[2] See UK Government and Devolved Administrations’ Response on The future of UK carbon pricing, June 2020, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/889037/Government_Response_to_Consultation_on_Future_of_UK_Carbon_Pricing.pdf}  

^{[3] Committee on Climate Change, ‘Net Zero: The UK’s contribution to stopping global warming’, Chapter 6: Delivering a net-zero emissions target for the UK, May 2019 https://www.theccc.org.uk/wp-content/uploads/2019/05/Net-Zero-The-UKs-contribution-to-stopping-global-warming.pdf}