Politics

Legal challenge to Third Energy sale gets go-ahead as emails reveal ministers intervened in deal

fracking KM Eddie Thornton

Fracking equipment at Third Energy’s gas site at Kirby Misperton in North Yorkshire in Autumn 2017. Photo: Eddie Thornton

A government department “worked with” Barclays on the “orderly disposal” of the troubled fracking company, Third Energy, ministerial correspondence has revealed.

Senior ministers “closely monitored” the sale of the firm and “emphasised its importance”.

The transfer of North Yorkshire-based Third Energy to an affiliate of a US company is now the subject of a legal challenge.

Anti-fracking campaigner, Eddie Thornton, has been granted a hearing at the High Court for a judicial review of the deal, which was approved by the Oil & Gas Authority (OGA).

The case will decide whether the regulator properly considered the risk to the taxpayer that clean-up costs would not be met by the new owners. It will also argue that the OGA failed to follow the rules on the change of control of oil and gas licences.

Ministerial phone call to Barclays executive

181212 extract from notes

Extract from meeting notes

The go-ahead for the legal action came as emails, seen by DrillOrDrop, show that the former energy minister, Claire Perry, had a phone call in December 2018 with a senior Barclays executive about the sale of Third Energy. Leading civil servants were also on the call.

The emails, released in response to a freedom of information (FOI) request, suggests there had also been previous meetings.

Barclays had faced protests since 2015 about its 97% stake in Third Energy. It had told shareholders in 2017 it intended to sell the company “at some point”.

Third Energy had failed to frack a gas well in the North Yorkshire village of Kirby Misperton as planned in the winter of 2017/2018 because of government concerns about its finances.

In January 2018, the then energy secretary, Greg Clark, delayed the final decision on Third Energy’s fracks until the company filed its overdue accounts and passed financial resilience tests.

The December 2018 phone call came less than two months after the accounts were finally published. They showed that Third Energy’s liabilities had risen to £63.9m and turnover had plunged. The accounts said the company was up for sale and there was “significant doubt” about its ability to continue as a going concern.

The phone call notes said:

“The call began with the Minister outlining the importance of managing onshore oil and gas in a sustainable way and thanking Barclays for working with BEIS [Department of Business, Energy and Industrial Strategy] on the orderly disposal of Third Energy.

“CP [Claire Perry] also emphasised the importance of this and that it was closely monitored by both her and SoS [secretary of state, then Mr Clark].”

Claire Perry 180521

Former energy minister, Claire Perry. Photo: Parliament TV, 21 May 2018

The notes show that Jon Whitehouse, head of government relations at Barclays, took part in the conversation.

Joanna Whittington, then recently appointed director general, energy and security at BEIS, and Emily Bourne, a BEIS director, were also on the call.

Six paragraphs were redacted in the FOI release.

The notes concluded:

“CP Reassured JW [Jon Whitehouse] that BEIS is committed to a workable solution and appreciated all Barclays work to pulling this forward.

“JW – Said he will talk to his team about further options.”

Another email from BEIS, sent on the morning of the phone call, said:

“Hi [redacted] – I am sure things are going to be quite busy today … but also conscious that we had not had a chance to catch up since the previous round of meetings and just wondered if you might have a chance for a quick call today?”

After the phone call, an email from Barclays said:

“We had a good call earlier. Jon and I were on it and discussed afterwards with [redacted] and [redacted]. We’ll be discussing internally tomorrow and will revert accordingly.”

Redacted internal BEIS memo

Redacted external BEIS email

Link to government transparency register which described the subject discussed as “energy investments”

£80m+ loan written off with sale

Barclays sold Third Energy’s onshore business in April 2019, four months after the phone call. The deal was finalised in July 2019.

The gas sites in the Vale of Pickering, a pipeline network and the gas-fired power station at Knapton were sold to York Energy (UK) Holdings Ltd, an affiliate of the American company, Alpha Energy, with no history of operating in the UK.

Accounts published in January 2020 show that, as part of the deal, Third Energy was released from a £80m+ loan. It also received £12m to “meet its known liabilities and provide it working capital”.

The loan had been held by Third Energy’s parent company, the Cayman Islands-based Third Energy Holdings Limited. It had been taken out with Northwharf Investments Limited, a subsidiary of Barclays Bank plc. Before the sale, Barclays plc was the ultimate parent company of Third Energy Holdings Limited.

Legal challenge over risk of clean-up costs falling on taxpayer

191023 Eddie Thornton Helen Chuntso

Campaigner Eddie Thornton speaking to reporters outside Third Energy’s gas site at Kirby Misperton, 23 October 2019. Photo: Helen Chuntso

Anti-fracking campaigner, Eddie Thornton, who is bringing the legal challenge against the OGA, said today:

“There is a significant risk that the new owners will use the funds on a risky bid to strike new oil or gas, leaving the company with nothing in the bank if they fail.

“This will leave taxpayers on the hook for the clean-up costs of the company’s drilling sites in its licence areas, potentially running to tens of millions of pounds.”

Mr Justice Supperstone has granted a rolled up hearing for the judicial review application.

This means the High Court will consider the grounds of the challenge and whether the OGA’s decision to allow the sale was lawful. The hearing is due to last 1-2 days. Judge Supperstone said the case was not suitable to be heard by a deputy judge.

York Energy’s most recent accounts show it had a share value of just £10. The company was incorporated in February 2019, two months before the announcement of the Third Energy sale.

Mr Thornton said:

“Given that existing legislation places the burden for decommissioning onshore assets onto the taxpayer if the licence holder goes bust, Barclays have dropped this like a hot potato, even giving away money to get rid of Third Energy.

“The government regulator is completely ignoring its duty of care towards our community.

“My legal team believes the Oil and Gas Authority failed to follow the law when it neglected to carry out the requisite thorough financial assessments before waving through this takeover.

“The public could now face a huge bill for decommissioning all the old wells and pipelines across the entire suite of licences in North Yorkshire if this new company goes bust.”

Mr Thonton’s case argues the OGA:

  • Misinterpreted the legislation that governs the change of control of petroleum licences
  • Failed to assess financial capability of the companies in the sale of Third Energy
  • Failed to undertake all aspects of the proper financial capability assessment
  • Failed to take into account the serious risk that change of control would lead to Third Energy Gas being unable to pay for decommissioning activity when it falls due

He is fundraising for the costs to bring the case. He is represented by Marc Willers QC, Garden Court Chambers, and Estelle Dehon, Cornerstone Barristers, with instructing solicitor, Matthew McFeeley, Richard Buxton Environmental and Public Law.

Ms Dehon told DrillOrDrop:

“The sale of Third Energy shows how vital it is for there to be proper financial regulation of fracking companies.

“The fracking boom has been built on low interest rates feeding capital into high risk ventures with shaky cash-flows and questionable economics.

“Mr Thornton’s claim has uncovered that, despite the OGA identifying a “foreseeable risk” that, after the transaction, Third Energy “will be unable to pay for decommissioning activity when it falls due”, and despite informing DBEIS that “[t]here are… risks associated with allowing the Transaction… and the OGA cannot provide any assurance that [Third Energy] will ultimately be able to meet its licence commitments, including decommissioning”, the OGA supported the sale.

“This is not robust regulation. Nor was it lawful, given the OGA’s legal duty to assess whether fracking companies have financial capacity to discharge their decommissioning obligations.”

14 replies »

  1. Mr Thornton concerns are not frack related, being the proper financial regulation of onshore oil and gas companies, not specifically those who frack.
    Ms Dehon speaks of nothing else it seems.
    Maybe she is not up to speed with her brief?

    • I fail to see how you can state that Mr Thornton’s concerns are not frack related. his concerns are based on the previous operating policies of fracking companies around the world who literally drill till they drop then abandon all responsibility for the environmental damage and maintenance costs of their failures before moving on and re-establishing themselves with a new name to do the same again elsewhere. Best case scenario is that the taxpayer will be forced to pick up the costs as all to often no responsibility is taken for the abandoned wells. This is only one well and we could end up 100’s maybe 1000’s of them across the country should we allow this travesty to continue as each well will eventually become financially unviable and abandoned.

      • Billy Hammett

        As noted in the above report, and others here on DoD, the case refers to the Clean up costs of all wells and infrastructure owned by TE ( as noted in Mr Thorntons comment ). It is not specific to The one, unfracked well in the company portfolio.

        While Mr Thontpn may be concerned about fracking personally, his case does not hinge on whether any fracking has been carried out by onshore oil and gas companies.

        The wells and infrastructure support a conventional operation, not a shale gas fracked operation.

        The case also refers to the legal duties of the OGA, and the ownership of abandoned wells, all under UK regulation.

        Hence my opinion that Me Dehon is wide of the mark by using the term fracking where Mr Thornton does not. If Me Dehon had used the term ‘oil and gas’ rather than fracking she would be closer to the issues of the case ( and not talk of an onshore fracking, or conventional oil and gas boom, of which there has been neither in the UK ).

        What happens abroad under foreign legislation and enforcement is immaterial to the case. Indeed there are multiple onshore oil and gas sites in the UK under varying states of abandonment that could be referred to by either side in the case.

        • I expect Mr Thornton will have a word with his Barristers to make sure they get this right in Court.

          Paying for decommisioning of onshore wells has been an issue for UKOOG for a long time. A decommisioning bond requirement was being proposed but I don’t think this got anywhere.

          I believe offshore is different and more secure.

  2. Perhaps the solution would be to make it easier and quicker and less expensive for the production companies to produce gas or oil, and thus pay more in taxation that could then be utilised for decommissioning in the event of a future financial issue?

    • It is certainly true that Cuadrilla would have stopped work much earlier if the antis had not protested and delayed operations at PNR. Cuadrilla was shut down by the OGA due to seismicity exceeding the traffic light limits. Nothing to do with protestors.

      This would have happened anyway and it could have been a lot earlier saving a lot of protest time and residents stress. But there are some protestors who protest against everything as a career so the longer operations go on the better…..

  3. So in summary, Third Energy gets permission to frack for gas, cracks on to frack ASAP, then fails to get the go ahead due to it’s dire financial situation and incompetence – but only after the govt is backed into a corner on actually confirming that situation. The parent company Barclay’s drop TE ASAP with a massive debt write off and a golden goodbye, the only plausible reason being to remove the risk of having to pay out massive restoration costs. The govt then get directly involved in negotiations between private companies to ‘ease the path’ to sell off TE to a company with £10 worth of assets and no ability to pay any future massive restoration costs. The OGA sanction the lot, apparently without batting an eyelid and presumably aided and abetted by Claire Perry/O’Neil, thus knowingly placing the risk of any such cost falling directly onto the taxpayer.
    Outraged at this lack of due diligence and risk to the public purse, the usual pro frackers complain about a solicitor referring to TE as a fracking company, poised and tooled up to frack a well. Also suggesting to make it easier to crack on without due diligence, on the off chance that enough of any prospective profits wouldn’t disappear offshore or be quickly written off by creative accountancy.
    ‘Fracking will be perfectly safe is it’s well regulated’ we’ve been repeatedly told. Doesn’t that need sound regulation, properly created, administered and policed?

    • Mike Potter

      The restoration cost concern relates to the existing conventional infrastructure.

      TE planned to frack an existing well. Hence costs of decommissioning that well and it’s associated production infrastructure are part of that larger picture.

      Indeed, as all the frack equipment has gone, one could argue that the site has been restored to it’s pre frack condition and therefore there is no case to answer ( were the case just relating to fracked wells).

      The case in hand could apply to all future oil and gas wells in the UK, fracked or not. Hence the issues you note above ( due diligence and the various shenanigans etc ) are not specific to fracking. Indeed, I expect that many in the Weald will be following the matter with interest should the OGA and or the regulations prove to be faulty.

      This point seemed to have been missed by Ms Dehon, but not by Mr Thornton, who is bringing the case.

      If the case rests only on the restoration costs from fracked wells, regulations specific to fracked wells and their related infrastructure then, in the case of TE, there is no case to answer.

      So, my point is that Ms Dehon seems to have got the wrong end of the stick and thinks it is all about fracking, when it is much broader.

      That TE were tooled up and ready to frack a well is immaterial to the case in hand. The case is that TE were sold on and the new company may not have enough money to restore the existing well sites and production infrastructure which has been in place for many years.

      No doubt Ms Mahons words were balm to the OGA. However I expect that Mr Thornton has a clearer grasp of the matters in hand and, as Paul Tresco notes, will ensure the legal team are focussing on the correct issues.

  4. Hewes 62

    Most of the four tier Corporate Structure that is Third Energy still exists. What has changed is the ownership of the Ultimate Parent Group. Instead of it being Barclays PLC, it is now Alpha Energy. Alpha Energy ,based in America, has been in existence for less than two years . Twelve months ago, it set up an intermediary company ( York Energy) to be the interface between Third Energy and Alpha Energy.

    The Oil and Gas Authority was created by the Energy Act 2016 to regulate upstream petroleum activity and has had two attempts to issue Financial Guidance to help it with its task. When Third Energy was ” refinanced” during the transfer of assets to Alpha Energy , the OGA was asleep at the switch and either couldn’t or wouldn’t properly assess the financial resilience of the new boy who was effectively taking over its Licenses.

    It is this failure by the OGA which is at the heart of Mr Thornton’s action. There is a strict protocol to be observed when PEDLs are awarded and the same level of financial assessment must be done if Licenses are to be transferred to another operator. These are the OGA’s own rules.

    One of the reasons for the assessment is to “minimise future public expenditure” . Alpha Energy is now responsible for all or any of the decommissioning costs arising from Third Energy’s existing activity as well as being responsible for all “legacy ” issues arising from future activity. It is highly unlikely that the OGA understood even a fraction of the financial instruments used by Alpha Energy to carry off its acquisition. I doubt whether it even had access to those parts of the business that were registered in the Cayman Islands. And I doubt whether much of the original source of finance is still in place. Many of the instruments and bonds use in this industry change ownership on a minute by minute basis.

    Maybe the OGA did the best that it could in trying to pick the bones out of a deliberately complicated corporate structure but frankly this is unacceptable when the Environment is at stake . I wish Mr Thornton all the best in bringing an action which would be unnecessary if the OGA admitted the inadequacy. of its Financial Guidance.

  5. Strange that there is less concern around the decommissioning of wind turbines that were erected without adequate measures in place to deal with them at the end of their lifespan.

    • It’s not strange at all on this site, as it’s all about the O&G industry and would therefore be a somewhat strange and pointless distraction to discuss it on a thread specifically about decommissioning O&G wells. That’s not to say that it isn’t an important issue and one that should be (and should have been in the past) addressed by govt energy policy and regulation. Isn’t it a little odd that you frequently talk about wanting a reduction in the regulation, policing and enforcement on the O&G industry, yet suddenly seem concerned that the renewables industry should have just the opposite? So, is it sensible regulation for all, just for renewables, or reckless lack of any whatsoever that you prefer?

  6. Philip Tate

    Thanks for that clarification for the basics of the case here for readers on DoD re the complexities of the handover.

    I do underststand what Mr Thornton is doing.

    I was mystified as to why Ms Dehon went off on an anti frack track when the issue is generic to all forms of onshore oil and gas exploration and production.

    We will probably never know.

    However, the resulting discussion here has shown that others were or are confused as to the intent and or scope of the legal action.

    We all wait to see how the issue progresses no doubt.

  7. Hewes64

    I think Ms Dehon is right to believe that companies which Frack are much more likely to leave “legacy” issues than those engaged in extraction of gas from conventional strata. Fracking is a brutal onslaught of pressure and pumps which has a dismal record in messing up the natural environment. Third Energy had every intention of being the first company to frack a well in the UK and it still has all the consents and permits to do so.

    What caused it to blow a fuse was the realisation by the BEIS that its model of finance was highly risky for the tax payer. Third Energy had loaded its Operator (Third Energy Gas UK) with a staggering amount of debt , made possible through the cleverness of leveraged lending. Private Equity is the worst type of corporate structure to be engaged in an activity that may have serious environmental consequences. BP was able to pay for the damage it caused off the coast of Mexico because it was a company which actually had real wealth and real income.

    Most of the companies which Frack are a revolving door of options and share out agreements, registered in shadowy corners of the globe, with no clear indication of who is actually responsible .Before its takeover, all of Third Energy’s lending was short term and had to be re-financed every twelve months. Not the sort of profile that should be engaged in anything other than selling ice cream. Goodness knows the financial strength of the new owners who have parachuted in an old chum to run the company. The new CEO was last responsible for a shrinking chain of hamburger joints. I’m serious.

    More power to Ms Dehon and Mr Thornton.

  8. Philip Tate

    The case in hand related to a company that has not fracked. Therefore Me Dehon is not correct to refer to fracking as she does in the context of the case in hand.

    This is the case in her first and third part of here statement.

    The central part is fine although whether the case has uncovered anything has yet to be tested in court I suspect.

    Fracking ( as noted here on DoD and in BOW legal opinion ) does not have a dismal record in relation to it’s impact on the environment in the UK. Many wells have been fracked without note.

    It may seem brutal but no more ( or a lot less ) than coal mining, although the machinery is hidden from view in a mine.

    There is a concern, based on examples of poor practice in the US that HPHV shale fracking here in the UK will result in similar issues and these would be magnified due to the scale of operations required. However there are no examples I know of, here in the UK,where fracking operations have or indeed will result in a more expensive clean up bill than conventional oil and gas production on a well by
    well basis.

    There are many examples of poor practice in the conventional oil and gas industry outwith the UK. I am not sure that just referring to issues which happen outwith UK regulations and regulation will carry any weight in the forthcoming case.

    Re TE trying to be the first company to frack a well in the UK.

    Third Energy came to the party after Cuadrilla, so they were not attempting to be the first company to frack a well with the intention of producing shale gas. That honour falls to Cuadrilla with their Preese Hall well.

    Indeed, TE planned to frack a section of an existing vertical well, drilled in 2013. They intended to frack 5 sections of the well. More a test frack than a purpose drilled shale gas well a la Preston Road.

    See frack plan in link below.

    https://consult.environment-agency.gov.uk/onshore-oil-and-gas/third-energy-kirby-misperton-information-page/

    I have no issue with Mr Thornton bringing the case and wish him luck. However TE was a company in trouble prior to and after it’s attempt to frack. To indicate that the case in hand is in some way related to fracking and any associated clean up costs from fracking is somewhat disingenuous in my opinion.

    Company shenanigans are not specific to the fracking industry as the case on hand would attest to.

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