The Oil and Gas Authority (OGA) has enthusiastically adopted the "net zero" agenda in the changes that it is proposing to make to the strategy that governs much of its regulatory activity (see our earlier articles here, here and here). However, some have questioned whether aspects of the OGA's proposals stray beyond its statutory remit, possibly to the extent of not being well founded in law. In this article, by way of contribution to the ongoing debate rather than as legal advice, we set out some arguments that seem to us to support the view that the OGA's proposals are in fact within its powers.

Source of OGA powers

The OGA's powers in respect of the strategy derive from section 9A of the Petroleum Act 1998, which was inserted by the Infrastructure Act 2015. This provides for:

• the "principal objective" ("the objective of maximising the economic recovery of UK petroleum (MER UK), in particular through" development, construction, deployment and use of petroleum industry equipment and cooperation between licence holders, infrastructure owners and other specified industry participants); and
• the "one or more strategies" that the OGA "must produce…for enabling the principal objective to be met". These "may relate to matters other than those mentioned in" the definition of the principal objective.

The proposed changes to the strategy have at their heart an amendment to the Central Obligation in paragraph 2 of the strategy. To the existing obligation on "relevant persons" (i.e. specified classes of industry participants) to "in the exercise of their relevant functions, 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 would add an obligation to "in doing so…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". (The drafting takes this form because "getting to net zero" is an obligation imposed on the Secretary of State by the Climate Change Act 2008, as amended in 2019 to include a net zero rather than 80% reduction target against the 1990 baseline.) Among the other more striking changes is the addition of a subsidiary obligation to have regard to CCS projects in paragraph 22.

There are perhaps three broad ways in which the OGA can be said to have the power to introduce these kinds of new obligations:

• the "pure MER UK" argument would be that, taking the Petroleum Act regime by itself, the new obligations are simply a way to enable the principal (MER UK) objective to be met;
• the "wider MER UK" argument would be that the new obligations are a logical way to reflect the impact on how the principal objective is to be met, given the broader context within which they sit, which includes:
  • the Secretary of State's duty to ensure that the UK meets its 2050 greenhouse gas emissions reduction target as laid down in section 1 of the Climate Change Act 2008 and the generally close relationship between the Secretary of State and the OGA;
  • the specific obligation on the OGA to have regard (amongst other things) to the development of CCS projects "and how that may assist" the Secretary of State to meet the section 1 2008 Act target, set out in section 8 of the Energy Act 2016;
• a third possibility would be that the new obligations are at least in part independently based on section 9A(3) of the 1998 Act, which states that a strategy may relate to matters other than the development, construction, deployment and use of equipment used in the petroleum industry, and collaboration among industry participants.

Background

Section 9A was inserted into the Infrastructure Bill as an amendment during its Lords Committee stage. This was before the OGA had been incorporated or legislated for: the powers relating to the strategy were given to the Secretary of State in the first instance and transferred to the OGA by the Energy Act 2016. One of the talking points during the Parliamentary debates on section 9A was whether the new provisions gave sufficient prominence to climate change objectives in general and to CCS in particular, but government ministers were not pressed particularly hard on these points.

When the Bill that became the Energy Act 2016 went through the House of Lords a little over a year later, the pressure on ministers to make explicit reference to CCS was greater, and the government made a concession by introducing as an amendment at Report stage the words about having regard to CCS and assisting the Secretary of State in relation to the 2050 target that we are now familiar with in section 8. However, at the same time, opposition peers succeeded in inserting a new clause that would have amended the principal objective in section 9A of the 1998 Act (for "recovery of UK petroleum" substitute "return of UK petroleum, while retaining oversight of the decommissioning of oil and gas infrastructure, and securing its re-use for transportation and storage of greenhouse gases"). The government said it was concerned that this would confuse matters, diluting the focus of the OGA and potentially resulting in premature decommissioning, and succeeded in voting the new clause down in Commons Committee.

The Parliamentary debates on the legislation are unlikely to be considered determinative of its interpretation and, even if they were, the signals that they give are not particularly clear. However, they serve as a useful reminder that the legislation governing the OGA is not the product of a single, perfectly thought-through piece of policy-making, but was a slightly messy process spread over two Bills, at least one of which was first introduced in somewhat under-cooked form. They also remind us that, in one form or another, the concerns that have been aired in the debate over the OGA's current consultation are not new, but go back to the creation of the OGA regime. Ultimately, however, the legislation has to be read in a way that is coherent when it is considered as a whole, and against the circumstances that the OGA and the industry find themselves in now, rather than by reference to how Parliamentarians perceived market conditions in 2015/2016, or thought that Sir Ian Wood (had he been writing his review then, rather than a couple of years earlier) would have perceived them. 

CCS and other net zero technologies as enablers of MER UK

CCS has intrinsic appeal to the upstream oil and gas industry for two main reasons. It offers the prospect of increasing the extent to which hydrocarbons can continue to be used by a world that is moving towards net zero; and it can provide new uses and revenue streams for old upstream assets. 

The strategy is, by definition, a strategy "for enabling the principal objective [of MER UK] to be met" (section 9A(2)). If an upstream operator is involved in a CCS project because it sees an opportunity to extend the life of a field through enhanced oil recovery techniques, for example, then there is clearly a MER UK purpose in play. In such a case, there would, as such, be nothing special about the OGA taking steps to ensure that other operators behaved in a collaborative manner with that operator. It could rely on the existing strategy without the addition of the proposed new wording. 

Variations of the same argument could be used in respect of at least some, and perhaps all, of the other technologies promoted by the proposed new wording, such as hydrogen projects and gas-to-wire. Does it matter that these are not specifically referenced as things that the OGA should have regard to (in the way that CCS is mentioned in section 8 of the 2016 Act)? No, because they are all technologies that can alleviate the carbon footprint of the industry or enhance its returns, thereby in one way or another making it more likely that it can continue to operate profitably in a carbon-constrained world. 

When one moves beyond looking at MER UK in isolation to take account of the wider context, the foundation for the proposed new wording becomes stronger.

• The continuation of substantial upstream oil and gas activity in a net zero world depends on (i) eliminating or substantially reducing the carbon footprint of the oil and gas value chain; and/or (ii) developing "negative emissions" technology. CCS is central to both (i) and (ii).
• Dealing with the upstream/midstream parts of the value chain is essential: even if every unit of hydrocarbons extracted from the UKCS and of UK-refined products were consumed outside the UK (and so did not contribute to "UK emissions" under the 2008 Act), it would scarcely be compatible with UK net zero objectives (underpinned as they are not only by the 2008 Act, but by the UK's international obligations under the Paris Agreement) not to seek to use the UKCS regulatory framework to reduce/eliminate, for example, the emissions from flaring and fossil-fuel power turbines highlighted in the recent OGUK Pathway to a Net-Zero Basin document.
• It is true that CCS is probably not the answer to eliminating polluting forms of generation on upstream platforms, and pushing upstream operators towards sourcing their power from renewables instead may increase their costs at least in the short term (so perhaps conflicting with MER UK in the narrower sense). However, there are the safeguard provisions in the strategy (including the satisfactory expected commercial return (SECR) principle) to mitigate this and, in the longer term, it is hard to see how you achieve net zero without a significantly higher carbon price – and the higher the carbon price, the greater the incentive to adopt any and all means to reduce the oil and gas value chain carbon footprint.
• Ultimately, MER UK rests on the fact that there is a finite hydrocarbon resource in the UKCS, and under almost any conceivable economic conditions (even if there were no such thing as anthropogenic climate change) only a certain portion of that resource will ever be economically recoverable. Carbon prices and other net zero policies, if they are to be effective, inevitably diminish the economically recoverable portion to some extent. They increase the costs of producing and consuming fossil fuels. However, prudent investment in technologies that reduce the upstream and midstream footprints should be able to ensure that that reduction in the economically recoverable portion is as small as possible.
• While section 8 of the 2016 Act refers to CCS but not to other net zero technologies, there was, as we have seen, a particular political reason for that reference, and the duty to have regard to CCS does not prevent the OGA having regard to other technologies that may be relevant to MER UK in the broader context.
• It is often argued that if governments and regulators do not take sensible action now to reduce greenhouse gas emissions, there is an increased risk that they will end up taking more drastic action later, potentially with more disruptive results for the oil and gas industry. On this basis, it may well be that early promotion of net zero goals through the upstream regulatory framework will actually maximise absolute levels of recovery – at whatever price.
• The OGA's approach, then, is perfectly consistent with the principal objective provisions of the 1998 Act, read in the broader context not only of section 8 of the 2016 Act, but also of UK climate change policy generally as embodied in the 2008 Act. Although the OGA presents itself as – and is – an independent regulator, it will surely not have put forward its proposals to change its strategy without the knowledge and (presumably) approval of the Secretary of State. (As the OGA's sole shareholder, the Secretary of State can, by special resolution, direct its directors to take or refrain from taking any otherwise lawful action. The Secretary of State also has to review a draft strategy before it can be laid before Parliament and take effect, and can reject the draft on the basis that it does not enable the principal objective to be met.)
• It is perhaps ironic that OGA is running slightly ahead of government: for example, imposing obligations to facilitate CCS projects before the government has finalised its current CCS policy. But in doing so, it is merely manifesting once more the greater vigour and focus that comes with being a single-purpose regulator, which is what it was created to bring to the regulation of the UKCS. Five years ago, ensuring the continued flourishing of the basin meant cutting production costs, and the OGA proved more successful in achieving that than the Secretary of State had. Now, it means grasping the net zero agenda as well – and it would be odd for any authority accountable to the Secretary of State – let alone one that is responsible for hydrocarbon extraction – not to have regard to that agenda. 
• If the MER UK regime had been legislated for, but responsibility for the strategy had been left entirely in the hands of the Secretary of State, and the Secretary of State had proposed the same changes to the strategy, nobody would think that they lacked a legal basis – indeed, one can imagine NGOs seeking to challenge the Secretary of State's alleged failure to comply with section 1 of the 2008 Act if such changes were not made. It would be very strange if the effect of transferring the Secretary of State's responsibilities to the OGA was to prevent the regulation of the UKCS to be carried on with the same degree of focus on that section 1 duty.
• Arguably, the only discordant note is the fact that the proposed changes to the strategy puts the OGA ahead of the game compared with some other areas that could be said to endanger achievement of net zero targets, and for which BEIS is responsible. The government's failure to update the 2011-vintage National Policy Statements for Energy Infrastructure, in particular those relating to fossil-fuelled generation (currently the subject of incipient judicial review proceedings), is a case in point.

Can the strategy go beyond MER UK?

As noted above, section 9A(3) of the 1998 Act allows the strategy to "relate to matters other than" the development, construction, deployment and use of equipment used in the petroleum industry, and collaboration among industry participants. Note how it does this.

(1) In this Part the “principal objective” is the objective of maximising the economic recovery of UK petroleum, in particular through—

(a) development, construction, deployment and use of equipment used in the petroleum industry (including upstream petroleum infrastructure), and

(b) collaboration among the following persons—

(i) holders of petroleum licences;

(ii) operators under petroleum licences;

(iii) owners of upstream petroleum infrastructure;

(iv) persons planning and carrying out the commissioning of upstream petroleum infrastructure.

(2) The Secretary of State must produce one or more strategies for enabling the principal objective to be met.

(3) A strategy may relate to matters other than those mentioned in subsection (1)(a) and (b).

Subsection (3) refers to the matters "mentioned in subsection (1)(a) and (b)". Arguably, this implies that the broadening of scope in subsection (3) goes beyond the particular examples of "development, construction etc." mentioned in subsection (1)(a) and collaboration among the industry participants specified in subsection 1(b), but not that it goes beyond the generality of MER UK that sits in the first line of subsection (1). If the latter meaning were intended, the scope of the strategy would be incredibly broad: it could be about more or less anything, and then surely subsection (3) would have said that the strategy "may relate to matters other than those mentioned in subsection (1) [as a whole]", rather than specifically referring to "subsection (1)(a) and (b)"?

The counter-argument to this is that if subsection (3) only permits the strategy to go beyond what is listed in subsection (1)(a) and (b), but not beyond MER UK generally, it is essentially redundant drafting, because the section would have the same meaning without it. The words that introduce subsection (1)(a) and (b), "in particular through", would normally be read as introducing a non-exhaustive list of examples. Indeed, even without getting into net zero policy, it is not hard to think of things that fall outside (1)(a) and (b), but which are clearly part of the MER UK agenda. In a sense, it is as if the things mentioned in (1)(a) and (b) have been chosen precisely because they would not necessarily be among the most obvious examples of MER UK – at least if one were reading the legislation in the abstract without the background of the Wood Report behind it.

It is hard to reach a firm conclusion on the extent to which subsection (3) supports the OGA's approach in the strategy consultation in a way that is independent of the arguments based on interpretation of MER UK. Redundant statutory drafting is not unknown, and subsection (3), although technically unnecessary, could nevertheless have been included for emphasis. Alternatively, it may be that somebody saw subsection (3) as an unobtrusive way of giving the Secretary of State/OGA a bit of additional leeway that might be useful at a later date. Or maybe they thought that, if MER UK is labelled the "principal objective", it does not necessarily imply that there cannot be other, related objectives.

Enforcement

An additional reason for not wanting to rely on subsection (3) as the sole basis for legitimising the proposed changes to the strategy is apparent when one considers enforcement.

Section 9C of the 1998 Act obliges licence holders and others to act in accordance with the strategy when carrying out their licensed activities etc. This obligation is supported by Chapter 5 of Part 2 of the Energy Act 2016, which gives the OGA powers to enforce compliance with it through the issuing of enforcement or penalty notices, and ultimately stripping a licence holder of its licence.

As noted above, the strategy in its current form expresses the principal objective as its "Central Obligation", and the proposed changes modify the Central Obligation by adding a new limb (b) that refers to taking appropriate steps to assist the Secretary of State in relation to net zero. Notwithstanding what we have said above, net zero is not part of the statutory remit of OGA or Petroleum Act 1998 licence holders as such.

However, although the enforcement apparatus of Part 5 of the 2016 Act is triggered by a failure to act in accordance with the strategy, the exercise of some of OGA's other regulatory powers turns on the fulfilment or otherwise of the principal objective, rather than compliance with the strategy. In particular, this applies to the OGA's powers to attend/get minutes of JV partners' meetings, and to intervene in disputes. At present, that makes little difference, but if the changes proposed in the consultation were to mean that compliance with the strategy is materially broader than fulfilling the principal objective (which we have argued above is not the case), then the enforcement provisions would not operate in a uniform way. It would be open to industry participants to argue that those powers triggered by a failure to fulfil the principal objective do not bite where, for example, a dispute relates to facilitation of a CCS, hydrogen or gas-to-wire project.

If, on the other hand, one takes the view that the new obligations are simply a further manifestation of the MER UK principle in the current economic, political and legislative context, the unity of the enforcement provisions is not disturbed by the proposed revision of the strategy.