The Oil and Gas Authority Becomes an Independent Regulator

01 Jan 2018

As of 1 October 2016, the Oil and Gas Authority (OGA) became the independent regulator for offshore and onshore oil and gas operations in the United Kingdom. The Cornerstone Hydrocarbon Group considers the OGA’s functions and powers and comments on this development.

Core Functions of the OGA
The Energy Act 2016 (EA 2016) transfers to the OGA the regulatory functions previously exercised by the Secretary of State pursuant to the Energy Act 1976, the Petroleum Act 1998, the Energy Act 2004, the Energy Act 2008 and the Energy Act 2011 in relation to oil and gas licensing, exploration and production, fields and wells, infrastructure and carbon storage licensing.

In the exercise of those functions, the OGA is statutorily obliged to have regard to various matters (s. 8 EA 2016), including:

  • minimising public expenditure;
  • the need for energy security;
  • the development and use of facilities for the storage of carbon dioxide (particularly in the context of the target in section 1 of the Climate Change Act 2008);
  • the need for collaborative working;
  • innovation in technology and working practices; and
  • the need to maintain a stable and predictable system of regulation which encourages investment.

The Secretary of State will, however, continue to exercise a measure of control over the OGA, retaining the power to direct the OGA to exercise its functions in a particular way if “necessary in the interests of national security” (s.9(1)(a) EA 2016) or, if “the circumstances are exceptional”, in the “public interest” (s.9(1)(b) and (2) EA 2016). Such directions must be laid before Parliament unless the publication of any material within them would be contrary to the interests of national security, or otherwise not be in the public interest.

The Secretary of State also has power to require the OGA to notify the Secretary of State of specified “cases, matters or circumstances” when they arise or are likely to arise (s.10 EA 2016) and to require the OGA to provide information or samples held by it (s.11 EA 2016).

The OGA has the power to charge application fees (s.12 EA 2016). Provision is also made to enable the Secretary to charge a “licensing levy” to cover the costs incurred by the OGA in exercising its functions and those incurred by the Lord Chancellor in connection with the provision of Tribunals to consider appeals against decisions of the OGA (ss.13 and 14 EA 2016), although the OGA may also continue to receive funding from the Secretary of State (s.15 EA 2016).

OGA’s powers to resolve disputes relating to licence terms or that impact on maximising economic recovery (MER)
The OGA has two dispute resolution functions. The first, which it takes over from DECC, is to resolve disputes over third party access to upstream oil and gas infrastructure (s.82 Energy Act 2011.

The second is to resolve “qualifying disputes” (s.19 EA 2016) which relate to the following “qualifying issues”:

  • issues which are relevant to the fulfilment of the objective of maximising the economic recovery of UK petroleum (this is the “principal objective”: s.9A(1) of the Petroleum Act 1998,as amended by the Infrastructure Act 2015); or
  • relate to activities carried out under an offshore licence.

Therefore not all disputes will be referable to the OGA for resolution under the Energy Act 2016. The government has been careful to limit the scope of the OGA’s dispute resolution powers to those which support its primary role of promoting MER (maximising economic recovery); the limitation means that OGA’s resources should only be spent on those disputes which will be of most benefit to industry and the UK as a whole.

A “qualifying dispute” may be referred to the OGA by any “relevant party” to the dispute (s.19 EA 2016): holders of petroleum licences; 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 OGA may also consider the dispute of its own initiative (s.23 EA 2016).

Not all disputes referred to the OGA will necessarily be resolved by it:

  • The OGA has a discretion to refuse to consider a dispute on prescribed grounds (ss.21(1)(a) and (4) EA 2016). Grounds for refusal include: there are more appropriate means available for resolving the dispute; the dispute is not sufficiently material to the fulfilment of MER; and the OGA considers it unlikely, in the circumstances, it would be able to make a satisfactory recommendation in respect of the dispute. The legislation offers little guidance as to what a “satisfactory recommendation” might be; however, we can expect the OGA to define its understanding of that phrase in the guidance which it is required to issue under s.21(2) EA 2016.
  • The OGA may also adjourn the reference (ss.21(1)(b) and (5) EA 2016) to enable further negotiations between the parties to the dispute. The government has made clear that the OGA’s dispute resolution powers ought to be relied on by parties to a dispute only as a last resort. The OGA supervises the progress of the negotiations and the parties are required to report back to the OGA. The OGA has power to sanction parties who do not comply with directions for negotiations set by the OGA (s.21(6) EA 2016).

The OGA plays an inquisitorial role in considering and resolving disputes. It has power (s.24 EA 2016) to require parties to a dispute to provide it with information, and while s.24(3) makes an exception for items subject to legal privilege, it makes no exception for commercially sensitive information. Parties must comply with a request for information made under s.24; a failure to comply could lead to a sanction.

Once the OGA has considered the dispute, it must make a recommendation. The recommendation “must be one which it considers will enable the dispute to be resolved in a way which best contributes to the fulfilment of [MER] whilst having regard to the need to achieve an economically viable position for the parties to the dispute” (s.23(4) EA 2016). The recommendation may be published in whole or in part. However, before the OGA makes any decision whether or not to publish its recommendation, it must give each party to the dispute “an opportunity to be heard” (s.23(7) EA 2016), which may provide the parties both with an opportunity to persuade the OGA as to the terms of its recommendation, but also to keep commercially sensitive information out of the public domain.

A recommendation of the OGA is simply that; it does not bid the parties. There is no right of appeal from a recommendation of the OGA (unlike a decision to impose a sanction). However, the expectation is that parties will comply with recommendations of the OGA, where they relate to the MER. Given the OGA’s primary role of promoting the MER, it would be open to the OGA to use its sanctions powers on the basis that that party is not acting in accordance with the MER strategy.

Sanctions for failure to comply with a petroleum related requirement
The OGA has the power to impose sanction notices in circumstances where a person has failed to comply with a “petroleum related requirement” (s.42(1)A EA 2016). The OGA is required to issue a statement of the procedure it proposes to follow for such enforcement decisions (s.59 EA 2016).

“Sanction notice” is an umbrella term for:

  • An enforcement notice (s.43 EA 2016), which sets out the breach of the requirement and the steps to be taken to comply;
  • A financial penalty notice (ss.44-46 EA 2016), which sets out the breach together with details of penalty to OGA (not exceeding £1m) paid into the consolidation fund – having regard to guidance issued following being laid before House of Commons;
  • A revocation notice (s.47 EA 2016), which sets out the breach and informs the person that petroleum license is revoked – not less than 28 days after the notice;
  • An operator removal notice (s.48 EA 2016), which sets out the breach of the requirement and informs the operator that the licensee under whose license the operator operates is required to be removed.

A number of sanction notices can be issued together, but, once issued, the OGA’s power to issue further sanction notices is limited (s.54 EA 2016). The OGA has an express power to withdraw a notice (s.55 EA 2016).

The OGA also has power to obtain information for the purposes of the investigation (s.57 EA 2016). The exercise of this power is subject to an appeal to the Tribunal (s.58 EA 2016).

Prior to imposing any sanctions, the OGA must serve upon the person it intends to serve with a sanction notice, or the licensee as appropriate, a sanction warning notice (s.49 EA 2016). The notice should set out the breach and an opportunity to give representations. There is an express prohibition on imposing a sanction notice prior to the end of the period afforded to the person to make representations. The OGA must have regard to the representations prior to deciding whether to impose the sanction notice in the terms it has warned, in different terms or not to serve a sanction notice.

An appeal may be made to the Tribunal either on the basis that the breach did not occur (s.51 EA 2016). The Tribunal has a power to either confirm or cancel the notice. Alternatively, an appeal may be made against the sanction on the basis it was unreasonable or not within the powers of the OGA, on judicial review-type grounds (s.52 EA 2016). The Tribunal’s powers are either to confirm, quash or vary the sanction. The Tribunal must have regard to OGA guidance. The sanction notice is of no effect until the decision of the Tribunal.

The OGA may keep a public register of sanctions, but it must not include anything which is “commercially sensitive”, not in the “public interest” or otherwise “not appropriate for publication. If the OGA does publish a sanction and the notice is cancelled or varied it must publish that cancellation or variation.

The framing of the OGA’s role by the government is instructive. In announcing the independent establishment of the OGA, the government described the new powers as being conferred so that the OGA “can act with greater speed and flexibility to drive investment, support jobs and further the UK’s competitive edge in the oil and gas industry to ensure the UK remains an attractive destination for investment.” While speed and flexibility are welcome, the task of a genuinely independent regulator cannot simply be to promote investment; it must also be to ensure compliance with best practice. Furthermore, the first matter to which the OGA must have regard in exercising its functions is minimising public expenditure – it will be interesting to see how this sits with the requirements of regulating a complex and fast-changing industry. Finally, it is notable that the government retains surprisingly open-ended control over the OGA, with the power to direct the OGA to exercise its powers in a particular way if it is in the public interest to do so, with the only check on this control being the requirement to lay the direction before Parliament in some circumstances.

So, while the establishment of an independent regulator is welcome, the extent to which the OGA will truly embrace that role remains to be seen.