Power of OGA to give sanctions notices

Energy Bill [Lords] – in a Public Bill Committee at 12:00 pm 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 discuss the following:

Clauses 44 to 61 stand part.

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

I want to pick the Minister’s brains, particularly on clauses 43, 45 and 46, which relate to sanctions, enforcement and financial penalty. As the Minister has already guided us, this is the area where the OGA gets heavy with people who have not resolved their disputes properly or not done what had been decided.

This part of the Bill lays out a number of ways in which that circumstance can be approached, including through sanctions on companies—although I am unclear how exactly those would be enforced—and enforcement notices. I assume that sanctions lead to enforcement in a linear process, but the connection is not completely clear.

I want to refer briefly to the financial penalty. I presume the process has been followed of worrying about what has gone wrong, a possible resolution, a sanction notice, failure to comply with that and an enforcement notice that is also not complied with. A financial penalty notice finally arrives to underpin that process. That is my understanding of how this part of the Bill works.

Then we have the amount of that financial penalty. Clause 46 states:

“The financial penalty payable under a financial penalty notice in respect of a failure to comply with a petroleum-related requirement…must not exceed £1 million.”

That appears to give a clear ceiling on the penalties. I presume the companies concerned in the exploitation of the North sea will read the clause closely and decide that is what could happen to them, were they to go through the whole process, and that is the financial penalty that might come their way. That is not a particularly high financial penalty, compared with some of the fines imposed by Ofgem, for example, relating to practices in the energy market; we have seen fines ranging from a few million to tens of millions related to the practices of energy companies.

At the end of this part, an interesting caveat is placed on the regime and the penalty limit of £1 million. The caveat is in clause 46(7), which states:

“The Secretary of State may by regulations amend subsection (1) to change the amount specified to an amount not exceeding £5 million.”

That appears to put into the Bill considerable uncertainty. Is the amount £5 million? Is it £1 million? Is it that if too many companies do too many bad things over the period, the Secretary of State will decide that the penalty is not high enough and will then, by regulations, introduce an additional penalty—the general tariff maximum? Or is it that the Secretary of State has a reserve power—there is a threat—over the period to ensure that companies toe the line on sanctions and enforcement notices?

To return to what I might do were I a company involved in the North sea and I looked at this provision, I am not sure how I would react. Would I say, “That’s okay, because the worst that can happen to me is a £1 million fine,” or would I say, “Hang on a minute. The Secretary of State might actually levy a £5 million fine”? Presumably, by the time the Secretary of State has levied the £5 million fine—because that requires the provision to be amended by regulations—I will have finished with my £1 million fine. A company or companies might be undertaking fairly flagrant abuses in the system that are advantageous to them to an extent well in excess of £1 million, but provided that they can take on board the £1 million fine, they can presumably get on with undertaking those abuses. I think that there are extreme powers in the Bill to force disinvestment by companies that are completely in breach of conditions.

The Secretary of State’s power to up the fine limit would be applied only once the horse and cart were well down the road and the stable door was wide open. The Secretary of State would then, under the processes of the House, have to work out how to undertake regulations to put the fine limit up and make the regime different. It might be wiser simply to place in the Bill an upper limit that may be varied downwards, rather than having in the Bill a limit that appears to be not the limit, which would be another limit entirely. Is the Minister amenable to looking again at the provision to see whether a better formulation could be brought about in relation to fines? Alternatively, is there a deeper explanation, which I have not understood, as to why the relationship between £1 million fines and £5 million fines is in the Bill in the way that we see it?

Photo of Phil Boswell Phil Boswell Scottish National Party, Coatbridge, Chryston and Bellshill

I was going to speak on the same subject— clause 46 and the amount and nature of the financial penalty in relation to the numbers that we are dealing with in terms of daily production—but I will not labour the point, because the issue has been more than adequately covered by the hon. Member for Southampton, Test.

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

Thank you—short and sweet.

These clauses provide the OGA with powers to regulate compliance with new and existing duties imposed by the Bill, the Petroleum Act 1998 and offshore licences by imposing civil sanctions on persons who are in breach of those duties. In the Bill, the duties are referred to as petroleum-related requirements. A key recommendation of the Wood review was for the new regulator to acquire new sanctions to guard against behaviours that are known to have obstructed the objective of maximising economic recovery of UK petroleum. We have therefore worked to develop a framework of sanctions that is fit for purpose and that provides a transparent and independent means of appeal.

These clauses allow sanctions to be imposed for breaches of the duty to act in accordance with the strategy to enable the principle to be met. They allow sanctions to be imposed when holders of offshore petroleum licences are in breach of the conditions of those licences. They also allow sanctions to be imposed when relevant persons are in breach of other statutory duties imposed by part 2 of the Bill.

The persons to whom sanction notices can be given are determined by the relevant petroleum-related requirement. It is important to note that the sanctions that can be applied under this chapter comprise enforcement notices, which are civil sanctions, financial penalty notices and, importantly—the hon. Member for Southampton, Test did not mention this, but it is significant in this context—the potential to remove operator licences and operators. The clause allows for a subsequent sanction notice to be given in respect of a breach if it is not remedied within a period specified in either an enforcement notice or a financial penalty notice.

Taken together, this set of sanctions is quite serious. The hon. Gentleman asks why the cap is £1 million. Very deliberately, the maximum level of the fine has been set at a relatively modest level, as he pointed out, in relation to other regulators. Some can issue fines on the basis of a percentage of the company’s turnover, for example. The level of maximum fine at £1 million was set following discussion with industry and particularly feedback received during a call-for-evidence exercise in autumn 2014.

The response to the call for evidence highlighted that there is support for financial penalties in principle, but it very clearly called for a maximum cap at a level to deter breaches of relevant duties but not to deter investment in the UK continental shelf more broadly. The Government listened carefully to the industry’s views and we believe that £1 million is the right level to achieve this balance.

As the hon. Gentleman pointed out, we also want to ensure that there is scope for greater fines should circumstances change or the OGA’s powers prove not to be sufficient in all cases. I want to make it clear that under the power in the Bill to increase the maximum penalty to £5 million, any fine could be up to £5 million. That is significant scope to increase. It is important that hon. Members note that a fine is not the only sanction. If it is not sufficient, the OGA could consider termination of operatorship or revocation of licence.

Photo of Alan Whitehead Alan Whitehead Shadow Minister (Energy and Climate Change) 12:15, 28 January 2016

I thank the Minister for her response. I am interested that the matter has been discussed with the industry, although I guess it might be keen to have the fines at the lower end rather than the higher end as far as final sanctions are concerned. I accept that this will need to be tried out over a period to see whether fines work in conjunction with the other sanctions, such as enforcement and removal of licence options that the Minister referred to. I accept that this may be a reasonable starting point, but I hope the Minister will keep the process under review as the OGA gets under way with its work.

I have one final thought. What consideration has the Minister given to where the fines go? I assume they will go to the Consolidated Fund. Given the principles behind the Bill and how the OGA is funded to carry out its activities—we have discussed what people reasonably expect to pay into the OGA and what they expect to get in return, and the extent to which they understand that OGA running costs are effectively capped against contributions and that there will not be additional burdens on companies—one might think that the right route for fines would be for them to be tucked back into the process of developing and enhancing what is happening in the North sea, particularly through the operation of the OGA.

I appreciate that at that point one might say, “It’s the OGA that is levying the fine, and it might be the OGA that gets the benefit from it.” Clearly, that might not be entirely appropriate. Nevertheless, to fine capture and storage in the North sea might be an appropriate way to monitor the destination of those fines over a period. Has the Minister given any thought to that process? Although I appreciate that that would not provide anybody with a regular income, it might at the very least be seen to be an appropriate way to proceed as far as the companies operating in the North sea are concerned, in order to enhance the wellbeing of what they and the OGA are doing in the basin.

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

Fines would go to the Consolidated Fund, and they would not be available to be used to offset anything else or do other activities. It is a different funding stream from the levy, and the OGA will not keep the fines. The hon. Gentleman has made the point about the potential moral hazard of allowing such a regime.

Question put and agreed to.

Clause 43 accordingly ordered to stand part of the Bill.

Clauses 44 to 70 ordered to stand part of the Bill.

Clause 71