What you need to know
- The Administrative Court has confirmed: (1) the contractual nature of petroleum licences issued under the Petroleum Act 1998; and (2) that such licences can be varied by a deed of variation.
- The court decision does not alter the currently accepted legal position, but it is a welcome judicial clarification of an issue that has been subject to some debate and potential uncertainty.
Background
In the UK, under the Petroleum Act 1998 all rights to UK petroleum sources belong to the Crown. The Oil and Gas Authority (OGA), and formerly the Secretary of State (before the newly established OGA took over licensing functions from the Secretary of State), has the exclusive right to grant licences to parties to "search and bore for and get" petroleum. It has long been accepted that such licences are both contractual and regulatory in nature: contractual, because they are in the form of a deed providing for the contractual transfer of rights from the Crown to the licensee to develop petroleum resources in return for a financial reward; and regulatory, because they stem from a statutory regime. However, until now there has been no court decision making an authoritative pronouncement on this issue.
In the recent case of R (Benjamin Dean) v the Secretary of State for Business, Energy and Industrial Strategy [2017] EWHC 1998 (Admin) the Administrative Court considered the legal nature of a licence in considerable detail.
Facts of the case
The case concerned an onshore Petroleum Exploration and Development Licence (PEDL) granted by the Secretary of State to a number of companies for the purposes of coal bed methane exploration and production. In brief, the licensees subsequently concluded that coal bed methane production would not be viable, and decided to pursue shale gas exploration. To allow the relevant work to be carried out, the licensees sought to extend the initial term of the PEDL. To implement this change to the PEDL, the Secretary of State entered into a deed of variation with the licensees.
The claimant in the case, Mr Benjamin Dean (a parish councillor in the local area), applied by judicial review for an order quashing the deed of variation, or a declaration that the deed of variation had no legal effect. The main arguments brought forward to support the application were: (1) that the Petroleum Act 1998 is a complete statutory code governing such licences; (2) that the nature of such licences is purely statutory; and (3) that the Act therefore does not confer on the Secretary of State any power to make a variation to the terms of a licence once it has been granted.
The court ruling
The court analysed the nature of a licence granted under the Petroleum Act 1998. The fact that it is executed as a deed by both the grantor and the licensee was noted by the court as an essential aspect of it. Unlike, say, a planning consent issued under planning legislation, the licence does not come into existence unless the applicant accepts the offer and enters into a deed with the grantor. Furthermore, the court noted that at least in the case of an onshore licence (as opposed to an offshore one) the execution of the deed creates an interest in land. Importantly, the court then went on to say that that the mere fact that a licence is granted under a statutory provision does not change the usual position that parties may agree to vary an agreement after it is entered into, and as such, the court held that "there is nothing in the [Petroleum Act 1998] to indicate that a licence…may not be varied subsequently by an agreement between the parties".
Significance of the case
This court decision is significant as it affirms the principle that licences issued under the Petroleum Act 1998 are contractual in nature (as well as having a regulatory aspect) and can be varied by agreement between the licensee and the grantor. It was noted in evidence given on behalf of the Government that the power to vary licences is essential to the operation of licences, as for many licences there is no other mechanism available to vary work programmes or the duration of the initial or second term. While in most cases such variations are not controversial, it will nonetheless be a comfort to licensees and their financiers to have the validity of such variations affirmed. This may be particularly important in circumstances where a party seeks to rely on a potential regulatory irregularity as a means to challenge the validity of a licence or its terms – this may be a co-licensee in dispute with its partners or a third party seeking to stop the exploration or production activities intended to be carried out pursuant to the licence.
