The regulator of the oil and gas industry has no power to secure decommissioning of onshore sites, the High Court heard today.
The Oil & Gas Authority (OGA) said there was detailed legislation for the clean-up of the offshore industry. But there was no equivalent for onshore wells.
The OGA was defending a legal challenge which alleged its handling of the sale of Third Energy last year increased the risk that the taxpayer would have to pay to decommission well sites in North Yorkshire.
The case, brought by anti-fracking campaigner Eddie Thornton, accused the OGA of failing to comply with legislation and its own guidelines. He wants the OGA to consider whether to revoke Third Energy’s gas production licence.
Third Energy, previously owned by a subsidiary of Barclays Bank, was taken over by York Energy, a company incorporated just five months before the deal was completed. York Energy had no experience in the UK onshore oil and gas industry and had share capital of just £10.
“Flex statutory muscles”
Marc Willers QC, for Mr Thornton, said the OGA should have “flexed its statutory muscles” and ensured that York Energy set money aside to meet its decommissioning commitments.
He said this would have demonstrated that the OGA had complied with its duty under the Energy Act to “have regard to minimising future public expenditure”.
But Kate Gallefant QC, for the OGA, replied:
“The OGA is not responsible for securing oil and gas decommissioning onshore.
“We have no function in relation to site restoration – that is for the mineral planning authority.
“The OGA does not have the power to require the setting aside of money for decommissioning.”
Mr Willers said securing decommissioning was within the OGA’s remit because of its duty under the Energy Act.
Ms Gallefant described this as “a very bold submission”. She said:
“Section 8 of the Energy Act cannot effect an obligation to secure decommissioning.”
There was no legislation for the onshore oil and gas industry which gave responsibility for clean-ups to the OGA, she said.
“Liability will trickle down”
Ms Gallefant said the OGA had considered the risk that Third Energy would not be able to meet its obligations and concluded there may be “some impact on the public purse”.
But she said Tom Wheeler, the OGA’s director of regulation, had correctly decided that the Energy Act duty on minimising public expenditure was “not directly engaged”.
She said he had explained to the Department of Business, Energy and Industrial Strategy (BEIS) that liability for decommissioning would begin with Third Energy Gas, the holder of the gas production licence.
If the company went out of business, liability would “trickle down” and the costs would fall on the landowner. Only if the landowner also became insolvent would the liability reach the government and the public purse, she said.
“All that is fairly and squarely put before BEIS so that they understand there could be a call on public expenditure at the end of the day.”
The court heard that the takeover had been brokered at discussions “at ministerial level”.
For the deal to go through, York Energy insisted on support from the OGA through a letter of comfort.
Mr Willers argued that the OGA could have refused this.
But Ms Gallefant said OGA officials had concluded that if the takeover did not go ahead the Third Energy group was likely to become insolvent imminently. She said:
“The OGA was looking for the least-worst solution”.
“The choice was allowing the transaction to go ahead or not – neither were very appetising.
“One was more appetising than the other and hoped to avoid insolvency of the Third Energy group.”
The court heard that Barclays had agreed to write off £80m of Third Energy’s debt and add £9m to company’s balance sheet for developing its North Yorkshire gas fields.
Mr Willers said the OGA should have balanced whether Third Energy was more likely to meet its commitments under Barclays or York Energy.
Ms Gallefant said Barclays was under no obligation to Third Energy so the balance was “irrelevant”. She said:
“We did what the claimant argued we should have done. We considered whether the transaction would put the licensee in a worse position.
“We refute the suggestion that we failed to take into account a mandatory material consideration. We applied our policy and considered the question they said we failed to consider.
“Mr Wheeler considered there was an increased prospect of Third Energy meeting some of its commitments if the transaction went ahead.”
“No red flags”
OGA financial guidance on newly-incorporated companies, like York Energy, says assessments should consider in detail the track record of directors and the firm’s financial capacity.
Mr Willers said the information provided on York Energy directors was “little more than a company profile”.
Ms Gallefant replied:
“The information provided did not raise any red flags.
“There is no evidence that the OGA failed to consider the financial capacity.”
The two sides also disagreed over whether York Energy should have sought advanced written permission from the OGA for the takeover.
Ms Gallefant said this requirement applied to assignments of licences, not change of control.
Mr Willers said the OGA had misinterpreted its licensing rules and should have insisted on giving written permission. He said there should be an order declaring that the OGA’s written consent should have been obtained before the sale went ahead.
Mr Willers also asked the court to declare the OGA’s financial analysis had failed to take account of material considerations.
The judge Robin Knowles reserved his ruling to a future date.