The UK's upstream oil and gas regulator, the Oil and Gas Authority (OGA), is consulting on changes to the MER UK Strategy (see text box below for details of the MER UK Strategy). The consultation runs until 29 July 2020.
What is the MER Strategy?
The MER UK Strategy, which has been in force since March 2016, is legally binding on the Secretary of State; the OGA; holders of offshore petroleum licences; operators appointed under those licences; owners of upstream petroleum infrastructure and installations; and persons planning and carrying out the commissioning of upstream petroleum infrastructure. Significantly, the OGA has the power to enforce compliance with the Strategy. The Strategy includes a "central obligation", which currently is to "take the steps necessary to secure that the maximum value of economically recoverable petroleum is recovered from the strata beneath relevant UK waters". This central obligation is supported by a number of "supporting obligations" and "required actions and behaviours".
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Background to the consultation
The Petroleum Act 1998 (as amended) places an obligation on the OGA to review the current Strategy at least every four years and requires a consultation to take place in relation to any proposed changes. There have been some significant changes to the UK's energy policy in recent years, and the changes being proposed to the Strategy reflect that. In particular, in 2019 the UK Government set a new net zero carbon by 2050 target (Net Zero Target) for the UK, and there has been growing recognition that, in order to achieve this objective, carbon reduction policies must be adopted across all industry sectors. As discussed in an earlier briefing (see our briefing of January 2020 here), the UK oil and gas industry has already been galvanised to embrace the energy transition, but the OGA has signalled that much more must be done and that a failure to take concrete action to address climate change could result in the industry's "social licence to operate" being under "serious threat".
Changes to the Strategy being proposed
A key issue considered by the OGA in its review of the Strategy is the new Net Zero Target, as well as the UK Government's policy of complying with the Paris Agreement. In addition, the review also:
- reflects stewardship and other changes in the United Kingdom Continental Shelf (UKCS) basin's operating environment; and
- clarifies a number of legal and technical matters identified since the Strategy was first put in place.
Embracing the energy transition
Rejecting the "what's in a name" maxim, the OGA has proposed that the Strategy be renamed as the "OGA Strategy", dropping "MER UK" from the title on the basis that "MER UK" – maximising economic recovery of oil and gas in the UKCS – should no longer be "considered in isolation" from matters such as the Net Zero Target. In fact, the consultation states that "maximising economic recovery of oil and gas should be carried out in a way which is fully compatible with the transition to net zero". Therefore, the OGA has proposed that the central obligation be amended to include an obligation on industry to:
- "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"; and
- "consider their social licence to operate, and develop and maintain good environmental, social and governance practices in their plans and daily operations".
The requirement to implement measures to reduce carbon emissions is echoed in changes proposed to the supporting obligations in the Strategy. In particular, the section dealing with the deployment of new technologies has been amended to state that new and existing technologies must be deployed with a view to "where appropriate" enabling carbon capture and storage projects, and projects relating to hydrogen supply, to be planned for and developed. The other supporting obligations have likewise been amended to incorporate references to actions aimed at reducing carbon emissions. Notably, while the section dealing with decommissioning currently already requires licensees to consider whether infrastructure can be used for carbon capture and storage (rather than being decommissioned), the new proposed drafting has strengthened this obligation by requiring licensees to "be able to demonstrate" that such options have been explored.
Other changes
The consultation proposes various other changes to the Strategy, some of which are substantive while others are more structural, including the following:
- a new corporate governance supporting obligation, which is intended to underline the importance for licensees to have "good and proper governance arrangements in place";
- moving the section dealing with the requirement for collaboration to the supporting obligations section of the document, thereby underlining its importance;
significantly, amending "cost reduction", as an objective, to "cost efficiency" – a change which, according to the consultation, "brings in net zero considerations"; and
- recategorizing a section of the Strategy as "required actions" which are to be adhered to in demonstrating compliance with the central obligation and the supporting obligations, including a new express reference to the need to have regard to certain stewardship expectations published by the OGA when considering how to act in accordance with the Strategy.
Comment
The various initiatives launched by industry body Oil and Gas UK, such as the "Roadmap to 2035: A Blueprint for net-zero", as well as actions being implemented by individual oil and gas companies, indicate that there is already a shift towards the energy transition at industry level. Therefore, it is likely that much of the industry has no objection in principle to the changes being proposed to the Strategy.
However, it is arguably an irrefutable fact that right now the industry faces some major obstacles to fully take forward the energy transition as envisaged by the Strategy. While the introduction to the consultation does acknowledge that there are "major issues facing the oil and gas industry in 2020", in the form of the oil price slump and the COVID-19 pandemic, it seems likely that the economic impact of the current situation will prevail beyond 2020. Therefore, it is important for the Government and the OGA to acknowledge the fact that the oil and gas industry will require support to move forward and continue to make a contribution to the UK's economy and energy security, as well as taking forward the energy transition, which could very well be an important component of the UK's economic recovery.
Moreover, leaving aside the recent macroeconomic factors, the oil and gas industry has repeatedly called for the Government to set a clear policy and regulatory pathway for the deployment of carbon capture and storage, and hydrogen. The Energy White Paper, which has been expected to provide a policy steer on various issues, looks set to be further delayed, but it is hoped that it will provide more clarity in due course.
