Energy Act 2016: a further milestone for UKCS reform

On 12 May 2016 the Energy Act 2016 (Energy Act) received Royal Assent. This is a significant milestone for further implementation of the recommendations of the Wood Review and the Maximising Economic Recovery from offshore UK petroleum (MER UK) strategy flowing from it. In this briefing we summarise the key provisions of the Energy Act and their impact.

WHAT YOU NEED TO KNOW

• The Energy Act 2016 has received Royal Assent.
• Once the relevant provisions come to force (under commencement regulations to be made by the Secretary of State) this will pave the way for a new independent Oil and Gas Authority, with new powers, including the power to impose financial sanctions.

An independent Oil and Gas Authority

Since 1 April 2015, the new oil and gas regulator, the Oil and Gas Authority (OGA), has functioned as an Executive Agency of the Department of Energy and Climate Change. The Energy Act establishes the OGA as a fully independent regulator. Part 1 of the Energy Act deals with the establishment of this new entity, in the form of a State-owned company, and the transfer of various functions to the new entity. Significantly, Schedule 1 of the Energy Act provides for various statutory provisions, including some provisions of the Petroleum Act 1998, to be amended, so that various powers previously held by the Secretary of State are vested in the OGA.

Matters to which the OGA has to have regard

Section 8 of the Energy Act provides that in exercising its functions, the OGA must have regard to the following matters:

• the need to minimise future public expenditure arising from relevant activities. This, no doubt, is targeted at ensuring oil and gas companies take responsibility for decommissioning and environmental costs;
• security of energy supply for the UK;
• the development of facilities for the storage of carbon dioxide;
• collaboration between the OGA, Government and industry;
• the need to encourage innovation; and
• the need to maintain a stable system of regulation to encourage investment.

Funding of the OGA

The costs of the OGA carrying out its functions are to be fully funded by the oil and gas industry. The Infrastructure Act 2015 gave the Secretary of State the power to impose a levy on licensees, to fund those costs. That power has now been substituted by a new power to impose such a levy under the Energy Act. For the current charging period (from 1 April 2016 to 31 March 2017), the levy payable, as set out in the Oil and Gas Authority (Levy) Regulations 2016, is as follows:

The Energy Act also provides that the OGA may charge fees for exercising various functions. Any such fees will be set out in regulations made by the Secretary of State.

New powers for the OGA

For the oil and gas industry, one of the most significant aspects of the Energy Act is the grant of various new powers to the OGA, which were not previously available to the Secretary of State. These powers are as follows:

• a power to consider disputes between industry participants. This power may be exercised when a party refers a dispute to the OGA, or the OGA may on its own initiative decide to consider a dispute. Once the OGA considers a dispute, it will make a recommendation for resolving it. To allow the OGA to consider disputes, the Energy Act gives the OGA various powers to facilitate this process, including powers to require parties to provide it with relevant information, and to attend meetings. It is important to note that while the OGA has powers to compel parties to participate in the process for consideration of disputes, ultimately, the OGA's recommendations are not legally binding;
• a power to acquire information and samples from industry participants;
• a power to attend meetings, and in particular, meetings relating to activities carried out under offshore licences, such as operational committee meetings. To allow the OGA to exercise this power, licensees are required to give the OGA notice of such meetings; and
• a power to impose sanctions on parties who fail to comply with petroleum-related requirements, such as licence conditions or the MER UK strategy. Sanctions can take the form of enforcement notices, financial penalties, licence revocation or operator removal. The Energy Act provides that the OGA must issue guidance as to the matters to which it will have regard when determining the amount of any financial penalty to be imposed.

Disclosure of information by the OGA

Chapter 6 of the Energy Act imposes a general prohibition on the OGA disclosing any information or samples obtained by the OGA in the exercise of its powers under the Energy Act. The prohibition recognises the confidentiality and sensitive nature of the information provided to the OGA by industry participants. However, the Energy Act also provides various exceptions to the general prohibition on disclosure. For instance, the OGA may disclose information to Government Ministers and certain regulatory bodies, such as the Competition and Markets Authority, where such disclosure is for the purposes of facilitating the carrying out of that Minister's or body's functions.

Rights to use upstream petroleum infrastructure

The Energy Act amends various provisions under the Energy Act 2011 dealing with applications for access to upstream petroleum infrastructure. The amendments recognise that such applications will now be made to the OGA rather than the Secretary of State. They also make specific provision for the transfer of an application, or the transfer of the ownership of the relevant infrastructure, from one party to another – in particular, it is now expressly provided that any obligations imposed or rights conferred under the Energy Act 2011 on a transferor in connection with the transferor's ownership of the pipeline or facility are treated after the transfer as imposed or conferred on the transferee.

Decommissioning provisions

Schedule 2 of the Energy Act makes some amendments to the provisions dealing with decommissioning under the Petroleum Act 1998. The main purpose of the amendments is to ensure that options for reducing the cost of decommissioning or re-using the facilities for some other purposes (instead of decommissioning) are considered before decommissioning goes ahead. In particular, a new section 28A provides that decommissioning cannot commence unless there is a decommissioning programme in place which has been approved by the Secretary of State. In addition, while responsibility for matters relating to decommissioning is retained by the Secretary of State, licensees will now have to consult the OGA before submitting the decommissioning programme to the Secretary of State.

Next steps

The relevant provisions of the Energy Act will come into force when the Secretary of State makes commencement regulations under the Energy Act. This is expected to take place shortly.