Qualifying disputes and relevant parties

Energy Bill [Lords] – in a Public Bill Committee at 11:30 am on 28 January 2016.

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Question proposed, That the clause stand part of the Bill.

With this, it will be convenient to take clauses 21 to 27 stand part.

Photo of Alan Whitehead Alan Whitehead Shadow Minister (Energy and Climate Change) 11:45, 28 January 2016

I want to raise a rather more general issue relating to the clause: what the status of disputes might look like as far as the Oil and Gas Authority is concerned and how the disputes arrangements set out in the clauses relate to what disputes might look like in practice. The wording of the clauses strongly suggests that, essentially, the OGA will oversee and adjudicate disputes between two other parties, and that the tribunals machinery towards the end of the clause will operate to resolve disputes between the OGA and third or fourth parties.

However, it seems to me that in practice, particularly in terms of what is set out in the strategy document “Maximising Economic Recovery of Offshore UK Petroleum” and the powers and definitions envisaged for the OGA that will apply to the MER process, many of the disputes may well be between a third party and the OGA. That is underlined by some of the definitions and directions suggested in the MER UK strategy.

For example, the OGA has powers relating to the making of what the strategy calls a “satisfactory expected commercial return”. The OGA is not just in the business of ensuring that come what may, every company in the North sea runs at maximum possible speed to secure extraction; it must clearly consider, on the basis of those activities, what might constitute a reasonable and satisfactory expected commercial return, which the strategy itself says is a wide concept.

The strategy also suggests that what is economically recoverable is also a fairly wide concept. Is there an obligation on a petroleum company faced with the prospect of recovering petroleum that that company considers not economically recoverable in general terms? Economic recoverability is a fairly variable term, depending on the current price of oil, all sorts of other factors relating to extractability and, as we have discussed in this Committee, factors relating to the size of the field, its connection to infrastructure and various other matters.

The question of what is economically recoverable and what a satisfactory expected commercial return is puts two layers of uncertainty on to the process of potential disputes involving North sea companies and the OGA. There is an interesting overall question of commercial return in the strategy, at the end of the definitions. The strategy expressly acknowledges, in the context of commercial return, that

“although there is a legal obligation to pursue economic petroleum, commercial operators cannot be expected to take on risks for a very marginal return. However, this concept of commercial is limited by what is ‘a reasonable return’ in all of the circumstances. To that extent, projects which are low-risk are likely to justify only a more modest return on investment whereas more complicated projects may reasonably justify a higher return”.

Clearly, the strategy already envisages a wide range of uncertainties about what the theoretical concept of maximising economic return will mean in the context of real business in the North sea—who is there, what they are doing and the circumstances in which they are attempting to extract. I emphasise that point because once this strategy and the dispute provisions are in operation, although I would not say that it is likely to be a lawyer’s paradise, it has the potential to develop a number of grey areas of dispute between those companies and the OGA about exactly what is meant by these various terms as far as the processes are concerned. We should bear it in mind that that is what we are starting with in the new process of the OGA, rather than something that develops as the OGA progresses. If someone has a dispute, who is it with? The OGA. Who decides how that dispute should be determined? The OGA. Who provides penalties and sanctions if the dispute is not resolved? The OGA. There is at least a whiff in this clause that the OGA might be judge, jury and executioner in those dispute processes.

Under those circumstances, I can imagine an energy company in the North sea with a dispute thinking, “Well, I think I can predict how this dispute is going to turn out if I go to the OGA and decide that there is a problem here.” I may have misunderstood this clause, but there does not appear to be a mechanism that provides, at the very least, the necessary Chinese walls within the organisational process to maintain confidence that, when disputes arise, external parties have a reasonable certainty that the dispute will be considered as it should be, in the light of resolving those grey areas properly and perhaps changing elements of the decision by taking representations on those grey areas and on how the OGA reacts to their being re-examined.

Unless it can be shown that I have entirely missed a clause or two in this chapter, the main clauses, other than a subsequent reference to a tribunal at the end of the chapter, do not give great comfort that the original process will be as good as it might be. Does the Minister consider that the arrangements, as currently structured, provide that reasonable certainty and equity in the resolution of disputes? Or does she consider that, at a future date, additional safeguards may need to be built in to ensure that the process can be operated fairly, and observably fairly, for all the partners in the North sea?

Photo of Andrea Leadsom Andrea Leadsom The Minister of State, Department of Energy and Climate Change

The hon. Gentleman is quite right to raise this interesting and important area. The clause sets out the scope of the OGA’s new dispute resolution process. It requires that at least one party to a dispute is a relevant party—a person listed under section 9A(1)(b) of the Petroleum Act 1998—and that the dispute must be about issues that are either relevant to the fulfilment of the OGA’s principal objective or relate to activities under an offshore petroleum licence. The OGA is restricted from considering any dispute that is already the subject of an application for third-party access to upstream petroleum infrastructure under the Energy Act 2011 or any issues that are not qualifying issues.

As the hon. Gentleman will know, the dispute resolution process forms one of the major planks of the recommendations of Sir Ian Wood’s review. Also, he will be aware that the MER strategy is welcomed by industry, which sees it as very important. I absolutely agree with the hon. Gentleman that the area is complex. He mentioned the issue of what a “satisfactory expected commercial return” is. He is right to say that there is some subjectivity and that it is quite difficult and will require that industry and the regulator work closely together. However, there is good will and a desire from industry to see an asset steward who can help to support the ongoing success of the North sea.

Specifically in answer to the hon. Gentleman’s question about a satisfactory expected commercial return, our definition is:

“an expected post-tax return that is reasonable having regard to all the circumstances including the risk and nature of the investment (or other funding as the case may be) and the particular circumstances affecting the relevant person.”

We can all see that that is a deliberately flexible definition. It recognises that many factors must be weighed before deciding whether to invest in a project. For example, the risk associated with the project; the resources thought to be recoverable; how economically recoverable the project is; the future oil price; the current oil price; the cost of capital for the company; the complexity of the project; and shareholder expectations will all play a part. It is not realistic even to attempt to set a clear figure on what a satisfactory expected commercial return would be. However, the definition that we have included in this version of the strategy is intended to recognise all the factors set out above. It is important to note that we face a big job in the North sea, and the OGA and industry are very keen to work closely together on it.

The hon. Gentleman also raised the question of disputes with the OGA itself and how disputes will be brought to the fore. On the one hand, the OGA has the power to initiate the dispute process. I am sure the hon. Gentleman knows that, historically, industry has not necessarily progressed or resolved its own disputes efficiently. There are some that the parties may not refer to the OGA, but where resolution would be in the interests of delivering MER UK. In those circumstances, the OGA will have the power to initiate the dispute process itself to facilitate the resolution of the dispute. Equally, the OGA will take a view on whether there has been a breach of the strategy. If the OGA were to choose to move to a sanctions situation, as we will come to in later clauses, that may be appealed by the person who is under the sanction to the first-tier tribunal. I should mention that clauses 20 to 27 do not apply to disputes between the OGA and third parties.

Photo of Alan Whitehead Alan Whitehead Shadow Minister (Energy and Climate Change)

I am slightly taken aback by the point that clauses 22 to 24 do not apply. That is the part of the Bill in which I failed to find any leavening process between a straightforward dispute being referred to the OGA and no differentiation being placed within the structure of the OGA as to how that dispute might be referred to the OGA when the OGA is involved in the dispute. I presume that that does not apply in terms of sanctions and levies, but in terms of other disputes. The Minister underlined my concern about how grey those areas are. A problem remains in the clauses that relate to bringing forward disputes about the point at which, let us say, a company may decide that on balance it ought to bring forward a dispute because it thinks a grey area is a different shade of grey from the OGA. I do not think that we should take that analogy too far, but an issue remains about the assurances that such companies might seek.

While I accept that the strategy has been developed in the round, with close co-operation between companies operating in the North sea and the Department, nevertheless most of the arrangements need to be tested to destruction in the reality of the North sea. Companies might now be keen about having the OGA come forward, with the positive aspects that that provides for their activities in the North sea, but the question remains whether in practice, on a daily basis, they will have the confidence they need in the equity and veracity of the disputes process in the long term. I still do not see anything in the Bill that, if I were a company executive, would give me that full confidence. Will the Minister reflect on the clauses as they stand, particularly in relation to the beginning of the process and say whether such confidence can be guaranteed?

Photo of Andrea Leadsom Andrea Leadsom The Minister of State, Department of Energy and Climate Change 12:00, 28 January 2016

I confirm to the hon. Gentleman that clauses 20 to 27 apply only to disputes between two parties and not to those where the dispute is about or with the OGA. Those come later in the Bill.

I accept that this is a complex and new area. As we discussed on Tuesday, there will be regular reviews, the OGA will announce its annual business plan and it will be required to make statutory notices in all sorts of areas to signal its intentions. I therefore understand what the hon. Gentleman says, but I do not share his concerns.

Photo of Alan Whitehead Alan Whitehead Shadow Minister (Energy and Climate Change)

Can the Minister point me to where in the clauses it states that this measure does not refer to disputes between a third party and the OGA? I cannot find that, but perhaps it is there.

Photo of Andrea Leadsom Andrea Leadsom The Minister of State, Department of Energy and Climate Change

With the hon. Gentleman’s indulgence, I will have to write to him on that, because it may take me some time to find the actual place in the Bill. I hope that is agreeable to him.

Question put and agreed to.

Clause 20 accordingly ordered to stand part of the Bill.

Clauses 21 to 42 ordered to stand part of the Bill.

Clause 43