Third Energy site at Pickering, 1 March 2017. Photo: KMTV

There was a real risk that Third Energy might not be able to decommission its gas wells in North Yorkshire under new owners, the High Court was told today.

But the industry regulator still supported the takeover last year by York Energy, a new company with share capital of just £10.

The details emerged during a legal challenge to the Oil & Gas Authority by anti-fracking campaigner Eddie Thornton.

Mr Thornton’s legal team told a virtual court hearing that the OGA failed to follow its own guidance on corporate takeovers when it dealt with the sale. It was also alleged that the OGA did not comply with a duty in the Energy Act.

The OGA rejects the case against it and most of its defence will be heard tomorrow.

“Sweeteners”

York Energy bought Third Energy’s onshore business in July 2019 from a subsidiary of Barclays Bank.

Part of the deal included what were described in court as “sweeteners” from Barclays.

The bank wrote off about £70m of Third Energy debt. It also provided £9m in working capital to fund two years of production enhancement techniques in the Third Energy gas fields and fulfil licence obligations including decommissioning.

York Energy described Third Energy as the best capitalised oil and gas company onshore in the UK.

But when the OGA was asked to support the takeover with a “letter of comfort”, it recognised there were risks from the deal, Marc Willers QC, for Mr Thornton, told the court.

In an email to the Department of Business, Energy and Industrial Strategy, the OGA’s director of regulation, Tom Wheeler, wrote:

“This is a finely balanced decision”.

Mr Willers said Mr Wheeler wrote:

“There is a very real possibility that the company will not be able to meet its commitments, including decommissioning wells.”

The email also noted that York Energy was a newly incorporated company with no experience of the UK onshore oil and gas industry and Third Energy was already making a loss. It also mentioned the risk of asset stripping.

But despite these concerns, the OGA issued the letter of comfort, allowing the sale to go ahead.

Third Energy’s Kirby Misperton fracking site, cleared of equipment in April 2018. Photo: Eddie Thornton

“No remit for decommissioning onshore wells”

The court heard that Mr Wheeler told BEIS it was not the OGA’s responsibility to ensure that licence obligations of oil and gas companies were discharged in all circumstances. The OGA did not consider the security of decommissioning onshore well bores “within its remit”.

Mr Wheeler was also reported to have written that if Third Energy could not pay to decommission its wells, the liability would first fall on the landowner. There were also other regulators, such as mineral planning authorities, who had responsibility for decommissioning. And the OGA’s duty, under section eight of the Energy Act, to have reference to minimising future public expenditure was “not directly engaged” in this case.

Mr Willers said:

“That was completely misplaced. We say that is entirely wrong.

“That duty was engaged. To say it was not led Tom Wheeler and the OGA to error. They concluded that the simple process of informing the minister at BEIS of the risks would be sufficient to satisfy the duty under the act.”

Third Energy had estimated decommissioning of the gas wells would cost £19.4m. Another estimate, by Haliburton for York Energy, estimated the cost at £5m.

Mr Willers said:

“There was no certainty that decommissioning costs would ultimately be met by the landowner in the event of a company walking away from its decommissioning obligations.

“The idea that the duty under section 8 of the Energy Act was not directly engaged because at first call the landowner would be responsible for the costs is flawed and in my view cavalier.

“The liability of landowners has not been tested in court and it is a contested point.

“We would say the OGA has not properly understood its duty under the Energy Act.”

Financial assessment “not good enough”

An expert witness for Mr Thornton’s team gave evidence that the OGA had not followed its own financial guidance on takeovers by newly-incorporated companies. This required the OGA to place more weight on the financial capacity of the company and the track record of directors and to look at this in detail.

The court heard that Alpha Energy, a US associate of York Energy, said the directors Tom Reed and Jason Senior, had “significant experience in the sector” in the former USSR.

But Mr Willers said:

“We do not see any review or assessment of this information.

“There is little more than the ‘say-so’ of Alpha Energy staff profiles.

“This is not good enough. There should have been some investigation about what was said by Alpha Energy about these directors.”

He said the OGA had also not carried out an assessment of York Energy’s parent, York Energy Cayman.

“There is no assessment of its standing, its financial capability or any reputation that might be at stake if it walked away from decommissioning costs.

“We do not accept there has been an appropriate financial assessment.”

Alarm bells

Mr Willers said the “sweeteners” offered by Barclays “should have set alarm bells ringing at the OGA”.

He suggested that Third Energy was “an albatross”, “a ticking time bomb” for Barclays.

“If Barclays was willing to write off £70m of debt and pay £9m to secure the deal they would not do that if they didn’t think there were risks to holding on to Third Energy.”

The bank would have suffered reputational damage if it walked away from decommissioning costs, Mr Willers told the court.

“The OGA should have asked whether it was far better to have Barclays on the hook – a company with such enormous assets and such as reputation that it might otherwise lose – as opposed to York Energy with no track record and no reputation it might worry about losing.”

He said the OGA financial assessment should have “weighed in the balance” the position of Third Energy before and after the sale.

“There is a failure on behalf of the OGA to take account of the serious risk of changing control would lead to Third Energy not being able to pay its decommissioning costs.”

Model clauses

The two sides in the case also disagreed on the interpretation of wording in model clauses which set the rules for how petroleum licences are operated.

Mr Willers argued that the OGA should have treated the takeover in the same way as assigning the licence to another party. This misinterpretation, he said, meant the OGA failed to require Third Energy to seek consent for the sale. Instead, Third Energy just had to seek the letter of comfort from the OGA.

The OGA said the case made by Mr Thornton’s legal team on the model clauses was “wrong and unarguable”.

The authority’s barrister, Kate Gallefant QC said:

“There is no proper legal argument offered.”

She said two of the disputed model clauses were separate provisions dealing with separate circumstances.

Ms Gallefant continues her defence of the OGA tomorrow at 10.30am.

DrillOrDrop report from day 2 of the case