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UK Petroleum Licence Judicial Review: Landmark judgment in the High Court

  • United Kingdom
  • Energy and infrastructure - Exploration and production

17-08-2017

The background

On 15 December 2016, the UK High Court granted permission to Friends of the Earth to proceed for a judicial review of the lawful authority of the Secretary of State for Business, Energy and Industrial Strategy (the “Secretary”) to vary the terms of an existing UK Petroleum Licence (“Licence”) granted pursuant to the Petroleum Act 1998 (the “1998 Act”). A full judgment on this matter was handed down on Monday 14 August by the Hon. Mr Justice Holgate in the Queen’s Bench Division of the High Court.

Under review was the established practice of the Secretary to agree with Licensees changes to the terms of their individual Licences. Typically, such changes are to extend the final term of a Licence (for example where a field remains in production and capable of yielding further tax revenues past the originally envisaged Licence end date), or to extend the initial term of a Licence (but without extending the overall term) to give a Licensee more time to appraise its acreage. This practice has been commonplace in recent years, both onshore and offshore. It was noted that in 2016 alone 178 variations were agreed to onshore and offshore Licences, including 49 variations to the length of the initial term.

In the current case, the Secretary and the Licensee - Dart Energy – had agreed to extend the period of the initial term of Licence PEDL 189, but without extending the overall length of the Licence. The Claimant, a resident within the Licence area, sought permission to judicially review the Secretary’s legal authority to agree to the extension.

The substantive issues

The substantive issues upon which the judicial review was decided:

1. Whether a UK Petroleum Licence is contractual or regulatory in character

If the Licence was contractual, as counsel on behalf of the Secretary and Dart argued, then the Secretary and the Licensee could vary the Licence as they saw fit. If the Licence was regulatory, as was argued by counsel for the Claimant, relying heavily on the cases of IRC v Mobil North Sea [1987] 1 W.L.R. 1065 and Data Broadcasting International v Ofcom [2010] EWHC 1243 (Admin), then it was argued that the Secretary must rely on express statutory powers arising under the Petroleum Act 1998 and related regulations or the express terms of the Licence in order to grant a variation. This would lead to a situation where the Secretary could only vary a Licence if, at the time it was granted, it included express provisions allowing for future variation.

The judge agreed with the analysis of the Secretary and Dart, that a Licence was contractual in nature. In reaching his conclusion, the judge stated that a Licence granted exclusive property rights in relation to the licensed area and was capable of being varied by agreement between the parties after the grant. The judge considered that neither the Mobil nor Ofcom judgments demonstrated that a Licence was statutory or regulatory in nature.

2. Whether the 1998 Act and accompanying regulations established a complete statutory code governing the operation of Licences that could not be departed from

In reaching his conclusion on the true nature of a Licence, the judge had to consider the argument put forward by the Claimant that the 1998 Act and accompanying regulations set out a complete and comprehensive statutory code that could not be departed from. Counsel for both parties had already accepted that the Secretary has an express power to modify or exclude the application of the published model clauses on the grant of any particular Licence. The difference between counsel for the Claimant and the Secretary was whether the absence of an express right within the statutory regime to vary Licences after grant prevented the Secretary from agreeing any variation to the Licence which is not specifically contemplated in the Licence terms.

The judgment is quite clear in its conclusion that there is nothing in the 1998 Act to indicate that a Licence may not be varied subsequently by agreement. The argument that the model clauses form part of a complete statutory code which exclude variations of any kind was described as misconceived and the argument that varying a Licence after its grant would be incompatible with EU directive 94/22/EC was also firmly rejected.

It is also worth noting that the court found that the introduction in the 14th Onshore Round Licences of an express right for the Secretary to extend the first period of the terms of those Licences after they had been granted was not an admission that no such power had existed previously, but was a change introduced for administrative convenience in order to enable Licence variations to be documented by simple agreements, rather than requiring deeds of variation.

Limitations?

It should be noted that the ability to vary the Licence is not without limits. It was expressly stated that where in the legislation there is an express prohibition on a particular variation then there would be no power to make such variation by agreement with the Licensee.

Implications and next steps

Whilst for the academic lawyer the judgment gives some valuable judicial guidance on the contractual nature of a Licence, the case is of broader interest to the UK oil industry. The judgement gives support to the practices of the OGA (and its predecessors) with regards to its administration of Licences. Crucially the decision puts to rest the possibility of re-opening of large numbers of previous variations to Licence terms in both the onshore and offshore space, and will hopefully give comfort to those within the industry who prior to the decision were in the process of amending, or were considering an approach to the OGA for an amendment of, their Licence terms.

Recurring themes within the judgment, going beyond the strictly legal, give some valuable insight into the views of the court. Although the judgment states it is not a ruling on the “merits or demerits” of the fracking process or the environmental concerns of objectors it does give some clear indication of the direction of future travel:

  • it repeats in a number of places the need to maximise economic recovery from areas under Licence
  • it stresses the need for the OGA and Licensee to be able to react flexibly to changes in Licence conditions, interestingly making reference to both above and below ground conditions, in order to agree changes to the Licence timetable
  • it notes the established practice of the OGA (and its predecessors) in varying Licences and the commercial expectations that such practice has engendered in the context of the need for continued investment in the UK by the upstream oil and gas industry
  • the contractual right bestowed by the Licence repeatedly draws comparisons with the grant of a property right, rather than a purely contractual right, suggesting a right that will be strongly defended by the current administration.

Perhaps most importantly it marks a set-back to the on-going efforts of pressure groups to restrict the development of the UK unconventional oil and gas industry and offers some welcome respite to the upstream industry both onshore and offshore in the UK.