UK Government to introduce downstream oil resilience requirements

On 17 October 2017 the Department for Business, Energy and Industrial Strategy (BEIS) published for consultation proposals to strengthen the resilience of oil-based fuel supply to UK consumers.  The move is particularly noteworthy given that, up to now, the UK Government has steered away from any significant level of regulation of the downstream oil sector, outside the areas of environmental and health and safety regulation, in contrast to the heavily regulated downstream gas market.

What you need to know

• The UK Government is proposing a suite of new regulatory resilience measures, including new reporting requirements, designed to protect against fuel supply disruptions.
• Subject to some minimum thresholds, the new measures are intended to apply to the whole downstream oil and oil product industry.
• The new measures are likely to be in place by April 2019.

Scope and background

As noted in the consultation, fuel supply resilience is defined as the ability of the downstream oil sector to protect against, react to, and recover from any fuel supply disruptions, in order to ensure the reliable and continuous supply of fuel across the UK. The downstream oil sector encompasses any person involved in any part of the import, supply, storage, distribution and/or retail of petroleum and/or petroleum products into or within the UK.

Petroleum-based fuels continue to play an important part in the UK's energy mix, particularly in the transport sector. Various events, such as the Coryton refinery insolvency, as well as the earlier Buncefield oil storage depot explosion, have played a role in leading the Government to review downstream oil resilience.

The proposed measures form part of a wider package of reforms to the Government's approach to the protection of critical infrastructure. The Government's National Cyber Security Strategy, implementation of the EU Network and Information Systems Directive (see our earlier briefing Providers of "essential services" to tackle cybercrime - UK implementation of the NIS Directive) and the "Building our Industrial Strategy" Green Paper all address issues relating to essential infrastructure and services resilience. Most recently, on the same day as publishing this consultation, the Government also published a Green Paper on possible future controls on foreign investment in certain key industries, including the oil and gas industry (see our briefing UK Government consults on measures to protect national security in context of foreign investment).

These developments mark a turning point in the Government's approach, with greater regulatory oversight of the ownership and operation of key public services that are in private ownership. However, the consultation paper notes that the Government favours "light-touch" measures and has expressly rejected a regulation model that would involve a licensing regime (such as that applying to the downstream gas market) or a new regulator to enforce that regime.

The Government's existing powers

The Government's existing powers to monitor and control fuel supply are limited. Most notably, the Government has a wide power under the Energy Act 1976 to regulate the production and supply of petroleum products if there is an "actual or threatened emergency" affecting fuel supplies, but this power would only be invoked in rare circumstances. The Government also has some limited powers to intervene in mergers, on grounds of national security, under the Enterprise Act 2002.

The proposed measures

The measures proposed by BEIS fall into three distinct areas, as outlined below.

Measures to "monitor"

The proposed regime will allow BEIS to collect information from the downstream oil sector for the purposes of monitoring fuel supply resilience and identifying risks to fuel supply. This would have two elements:

• regular reporting of technical data; and
• event-based reporting of incidents or risks of disruption to fuel supplies.

Some reporting requirements, such as the requirement to report events which may have a "significant impact" on continuity of supply, will apply to the whole downstream oil sector. However, other reporting requirements will apply only to companies that meet certain thresholds – for example, the requirement to provide monthly reports of production, supply and disposal figures, will apply to UK refiners, importers, wholesalers and resellers supplying at least 50,000 tonnes of any petroleum product to the UK market on an annual basis.

Measures to "protect"

BEIS is proposing:

• an ownership test to enable the Government to intervene for the protection of fuel supply, where operators or owners of critical downstream oil infrastructure do not meet satisfactory levels of financial soundness or operator competence; and
• a Government "spending power" to enable the Government to support supply resilience improvements and schemes.

The ownership test

The ownership test will have three components:

• an obligation on industry to report change of ownership or control, where this amounts to a "qualifying transaction";
• a power for the Government to request information in relation to a qualifying transaction; and
• a power for the Government to intervene in qualifying transactions.

Similarly to some of the reporting requirements, a minimum threshold will apply: the test will apply only to companies that handle more than 500,000 tonnes per year of petroleum or petroleum products. A transaction that involves companies that meet this threshold will be a "qualifying transaction" if it involves:

• the acquisition (directly or indirectly) of a significant proportion (25 per cent or more) of the shares or voting rights; or
• any other transaction that gives (directly or indirectly) control, significant influence over, or significant access to, that company or over its assets.

It is proposed that the Secretary of State's powers to intervene will mirror the powers available under the Enterprise Act 2002 in relation to the public interest regime – that is, the Secretary of State will have the power to block a transaction or impose conditions on it. BEIS will publish a separate consultation that will deal with the reporting of qualifying transactions in more detail.

The "spending power"

It is intended that the Government will have the power to offer financial support to maintain resilience, but the consultation does not provide any detail of the circumstances when such a power would be exercised.

Measures to "insure"

BEIS is also proposing:

• powers to enable industry-wide measures to be put in place, owned and managed by the fuel supply industry, to maintain fuel supply during a disruption – that is, measures that might act as "insurance policies" in case of disruption ; and

• a resilience direction power to ensure members of the downstream oil sector take appropriate action to maintain and improve fuel supply resilience.

Industry-wide measures

It is intended that the Government will facilitate the development of industry-wide measures, such as a reserve road tanker fleet, by enacting secondary legislation that sets out the detail of such collaborative schemes. BEIS has said that it will carry out a further consultation on possible options for achieving different schemes.

It is envisaged that any such scheme would be organised and managed by an industry body which is funded and controlled by industry members.

Resilience direction power

It is proposed that the Government will have a power to give directions to the industry where necessary for resilience purposes. The consultation states that the power would be used only "as a back-stop or last resort". Notably, the power could be used to compel industry-wide participation in one of the resilience schemes being contemplated (such as the reserve tanker fleet, mentioned above).

Sanctions

It is intended that there will be a power to enforce the new measures through sanctions for non-compliance, although the consultation notes that "BEIS would only pursue sanctions as a last resort following engagement with the relevant person". The regime may also include other enforcement measures, including criminal prosecution in relation to matters such as knowingly providing fraudulent or misleading information.

Next steps

The consultation closes on 12 December 2017. The impact assessment published with the consultation contemplates that the proposed measures will be in force by April 2019.