Cox and others versus the oil and gas authority

On 18 January 2022, the English High Court handed down its judgment in Cox & Ors, R (On the Application Of) v The Oil And Gas Authority & Ors [2022] EWHC 75 (Admin).

The judgment considered the UK's statutory objective of "maximising the economic recovery of UK petroleum" and whether the strategy adopted by the Oil and Gas Authority (OGA) to achieve this was unlawful, or irrational due to inconsistency with the UK Government's net zero target.

In the UK, so-called "climate ESG litigation" (court cases inspired by climate change) has to date tended to take place in the public/administrative law space, often involving judicial review. A prominent example of this was the 2020 Heathrow Airport third runway challenge. This new ruling follows this trend.

Summary

The OGA regulates the exploration and development of the UK's offshore and onshore oil and gas resources. The OGA was established as a result of the recommendations of the Wood Review of 2013/13.

To implement a further recommendation of the Wood Review, the Petroleum Act 1998 was amended to provide for the development and implementation of a strategy for maximising economic recovery from the UK Continental Shelf (the "MER UK Strategy"). The MER UK Strategy, produced by the Secretary of State in consultation with industry, came into force on 18 March 2016. Significantly, under the Petroleum Act 1998 the Strategy is binding on the Secretary of State; the OGA; various industry players, including holders of offshore petroleum licences; operators; and owners of relevant offshore installations. The OGA also has the power to enforce compliance with the Strategy. In 2020, the MER UK Strategy was reviewed and amended to reflect the Government's net zero target, with the new version – now titled "the OGA Strategy" – coming into force on 11 February 2021.

On 23 July 2021, three climate campaigners obtained permission to judicially review the OGA and the Secretary of State for Business, Energy and Industrial Strategy over the OGA's new Strategy.

Following a two-day substantive hearing, which included expert evidence on the tax regime applicable to petroleum exploration and production activities, Mrs Justice Cockerill rejected arguments from climate campaigners that the OGA's Strategy was unlawful as it failed to factor in the tax treatment afforded to the oil and gas industry.

'Maximising Economic Recovery'

Maximising economy recovery (MER) as a concept has a long history. By the mid-1980s, the UK Government was already describing its policy in respect of the UK Continental Shelf as one of "maximum economic recovery of petroleum". By the early 1990s a pre-tax approach to assessing whether recovery was "economic" or not had developed with contemporary documents noting that assessment should take place "irrespective of the actual division of realised value between licensees and the Exchequer".

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".

As mentioned above, in 2020, the OGA consulted on a new Strategy to replace the 2016 Strategy. The key proposed amendments were changes relating to minimising emissions from recovery activities to assist the Secretary of State in meeting the net zero target consistently with MER. Under the Climate Change Act 2008, the Secretary of State has a legally binding commitment to reduce the country's emissions to net zero by 2050, in line with the Paris Agreement.

The OGAStrategy was laid before parliament in December 2020 and came into force in February 2021. It gives the OGA a dual mandate to "secure that the maximum value of economically recoverable petroleum is recovered from the strata beneath relevant UK waters” and, in doing so, "to take appropriate steps to assist the Secretary of State in meeting the net zero target." The Strategy sets out plans to support ongoing efforts to exploit North Sea oil and gas reserves.

The arguments

Ground 1

The claimants argued that the OGA's definition of "economically recoverable" in its Strategy was inconsistent with the statutory term "maximising the economic recovery of UK petroleum" contained in the Petroleum Act 1998. Under the OGA's definition, the MER assessment takes place on a pre-tax basis, which the claimants claimed was inappropriate for the purposes of determining whether recovery was "economic" or not as it failed to take into account the favourable tax treatment the claimants alleged was afforded to the oil and gas industry. The claimants referred to figures showing overall negative taxation flows (i.e. to oil and gas companies) in 2015-16 and 2016-17 to substantiate this.

The defendants disputed the claimants' position and argued that the OGA, as an expert sectoral regulator, was entitled to adopt a working definition of MER which it considered appropriate, subject only to public law constraints of rationality and reasonableness.

Ruling on Ground 1, Mrs Justice Cockerill ruled in favour of the defendants. She considered that while it was not always improper for a court to substitute its own judgment for that of an expert regulator on matters of economic assessment, it was right to afford the regulator's expertise considerable deference. However, if she had concluded that it was for the court to determine how "economically recoverable" should be defined, she would have found no error of law in the Strategy concerning the MER assessment being made on a pre-tax basis and noted that the claimants' taxation flow figures failed to take into account overall revenue flows.

Ground 2

The claimants' second argument was that the OGA's Strategy was irrational and inconsistent with the UK Government's Net Zero target because it would lead to more oil and gas being extracted than would otherwise be the case.

The defendants argued that the OGA has had proper regard to UK domestic action on climate change and its balancing of the objectives of economic recovery and climate change mitigation was a matter for the OGA to determine.

Ruling on this, Mrs Justice Cockerill again found in favour of the defendants, noting that the revised definition of "economically recoverable" would not necessarily result in increased emissions. In circumstances where she had already concluded that the OGA has the discretion to define what MER means and that it has not adopted an incorrect construction of the term, the claimants failed to demonstrate that the OGA had acted irrationally under public administrative law (which is an onerous test to meet).

In addition, she noted that the claimants' arguments had strayed away from an irrationality challenge and into a misdirection argument. Namely, that the OGA had misdirected itself when considering that it had no remit or powers to take into account 'scope 3 emissions' that are indirectly created up and down a value chain when determining whether recovery was economic or not. In the case of the oil and gas industry this will include emissions from the use of oil and gas required in transport and heating. Citing a recent case brought by Greenpeace in Scotland in relation to oil production (Greenpeace Limited v the Advocate General et ors [2021] CSIH 53), Mrs Justice Cockerill dismissed the claimants' argument and noted that there is authority to suggest that the OGA has no duty to take into account the ultimate consumption of the refined product.

Analysis

Across Europe there have been a number of ground-breaking judgments against governments, including the Dutch Supreme Court's landmark decision in the Urgenda litigation that the government of the Netherlands had a duty to prevent climate change, and must take steps to cut greenhouse gas emissions by at least 25 per cent, compared to 1990 levels.

Despite this, to date, judicial review challenges brought by climate activists in UK courts have largely failed. By their very nature, judicial reviews tend to focus on the process by which public decisions are taken, rather than their correctness. This does not present the most favourable circumstances for a case such as the OGA litigation, where the claimant's claims essentially went to the heart of whether oil and gas policy is consistent with a country's net zero ambitions. Here, the point used as the basis for the challenge was a narrow and technical one. The court afforded a high degree of deference to the regulator in making its expert assessment.

This ruling is unlikely to dissuade campaigners from identifying alternative grounds for legal challenge against UK Government policy and/or major infrastructure projects. Climate-focused judicial reviews look set to continue during 2022, with ClientEarth and Friends of the Earth bringing claims focused more squarely on the UK Government's proposals for achieving its net zero strategy.

The fact that the questions raised in the OGA case were given a full hearing at court, reflects a wider trend. Namely, the willingness of the courts to give permission for substantive consideration of claims against the Government, or government bodies, relating to steps to combat climate change.

In addition, litigation success is not the only objective when activist groups commence judicial review proceedings. Proceedings typically draw attention to issues raised by claimants, irrespective of the result. In this instance, the challenge brought the claimants' position on the tax treatment received by North Sea oil and gas companies to the public's attention.

Authors: Tom Cummins, Partner, Andrew Sims, Solicitor