Legal

Judge dismisses challenge on decommissioning costs of Third Energy wells

An anti-fracking campaigner who argued that the cost of decommissioning Third Energy’s gas wells in North Yorkshire could fall on the taxpayer has lost his legal case.

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

Eddie Thornton told the high court in July that the industry regulator, the Oil & Gas Authority (OGA,) had failed to take account of the risks that Third Energy could not afford to pay for the work.

But in a written ruling issued today, all four of Mr Thornton’s grounds for a judicial review were dismissed.

Mr Justice Robin Knowles said:

“In my judgment Mr Thornton’s proposed Grounds are not made out. In the present case I consider the appropriate course is to refuse permission to bring a judicial review.”

Third Energy sale

The case centred on whether the OGA followed its own regulations when a Barclays’ subsidiary sold Third Energy to York Energy in summer 2019.

As a condition of the sale, the new owners asked for confirmation from the OGA, through a letter of comfort, that it would not revoke the Third Energy exploration licences.

The court heard that the OGA accepted there were risks in allowing the takeover by York Energy, a new company with share capital at the time of just £10.

But the regulator issued the letter of comfort, concluding that, though “finely balanced”, the risks were greater if the sale did not go ahead.

It concluded:

“On balance, it is believed that the Transaction has a reasonable chance of allowing Third Energy to operate as a viable entity under York [Energy UK] where it will pay for its obligations and commitments under the [L]icence.”

“Breach of statutory duty”

Mr Thornton’s case alleged that OGA had failed to assess whether Third Energy had the financial capacity to discharge its decommissioning obligations. He also argued that the OGA did not assess whether there was any risk the work would have to be carried out at public expense.

This meant, he said, the OGA had failed to comply with its statutory duty to “minimise public expenditure”.

The court had heard that the OGA carried out an internal review of whether it should issue the letter of comfort. This included risks of the sale to York Energy and advantages.

The risks included that York Energy was a newly-funded company with no external financial backing and no track record in UK oil and gas. The business was currently loss-making and could fail at an early stage if initial developments were “not particularly successful”. The share value of Third Energy was unlikely to cover the full cost of decommissioning if it went out of business, the OGA added. It also said Barclays would be “off the hook” for decommissioning.

But the regulator’s review also said Barclays was injecting £9m into the company and wiping out £70m of debt. This would make Third Energy one of the UK’s “best capitalised onshore oil and gas companies”.

York Energy also intended to produce gas from the Ryedale fields, the OGA said, and the production projections were plausible. A stress test of York’s finances showed it had the ability to fund liabilities and obligations, the OGA added.

At the hearing, the OGA said it also wrote to its parent department, the Department of Business, Energy and Industrial Strategy (BEIS), about the risks and advantages of the sale.

OGA “fully aware” of risks

The judge’s ruling concluded that the OGA was “fully aware” of the risks that York Energy may not be able to meet its commitments. Mr Justice Knowles said:

“The ‘foreseeable risk’ that, after the Transaction, Third Energy Gas would ‘be unable to pay for decommissioning activity when it falls due’ was considered by the OGA. It reported the risk to the Minister.

He said the letter to BEIS was “obviously appropriate step in these circumstances”. He said there was nothing in the internal review that amounted to a “failure to fulfil the duty” on minimizing public expenditure.

The OGA had told the court the liability for decommissioning “falls to landowners in the first instance” and “our duty to have regard to impacts on the public is not directly engaged”.

On this issue, Mr Justice Knowles said:

“It is fair to observe that is not ideal language”.

But he added: “the language is to be construed with some latitude”. Taking account of the whole OGA review, the judge said “it is sufficiently clear” that the OGA did not fail to have regard to the need to minimise public expenditure.

The judge also dismissed Mr Thornton’s argument that the OGA had misinterpreted two sets of regulations (Model Clauses 40 and 41) on dealing with the control of licences.

  • Since the court hearing, Third Energy has revealed that it plans to generate geothermal energy from some of its Ryedale wells and to pilot experimental plugging and abandonment techniques.

Reaction

After the ruling, Mr Thornton said:

“Whilst our claim was unfortunately unsuccessful, it shone a spotlight on the OGA’s secretive process and makes clear that the OGA must assess the risks to the public purse of a sale of a fracking company like Third Energy. 

“Despite OGA’s public statements to the contrary, the judgment makes it clear that the risk that cleanup costs fall to the taxpayer is real and needs to be considered when the OGA carries out its functions. 

“The Judge found that, in substance, the OGA had done enough in this instance, but specifically criticised statements the OGA had made that their duty to consider the risks to taxpayers were “not directly engaged,” categorically ruling that “the duty is always engaged”.  We are considering, with our legal team, whether to appeal.

“The judgement shows in black and white that the OGA admits Barclay’s is now ‘off the hook’ for the decommissioning costs. The regulator also explicitly acknowledged that York Energy is a newly-formed company with no external funding (and only £10 share capital. These are precisely the risks that we were concerned about when we brought the case. “

26 replies »

  1. Martin Collyer.

    Oil and Gas prices are certainly not fixed. I think this is fully recognised by the collapse in share price of most of the Companies that you have cheered over the last few years. From Occidental Petroleum all the way to UKOG and IGAS, there has been a destruction of shareholder value of at least 80%.

    My point about the License should be welcomed by you. Third Energy has expressed an intention not to chase hydrocarbons – a requirement of holding a PEDL. Surely you would want these Licenses to be held by a business that actually intended to explore for petroleum ?

    Or are you suggesting that Third Energy will abandon its windmills and geo-thermal the moment oil and gas prices head North ?

  2. I would suspect Third Energy can easily prioritise for themselves, pT.

    Maybe the clue is already there, that they have made it clear they still intend to generate electricity from gas. You seem to have missed that. Maybe it will only be imported gas? Maybe, if gas prices were rising, then UK on shore gas would start to look increasingly attractive?

    You seem to only see what you want to see, and ignore the rest. That is okay, but do not expect others to be equally blinkered.

    How’s the Tesla shareholder value doing? So, after Covid 19, shareholder value will look the same?

    Why would a company only look at one source of energy? No need to abandon one to develop another. Mr. Musk makes electric cars. He ALSO uses vast quantities of fuel to send rockets into space.

  3. No one seems to be remembering that when the Banks went bust in 2008, after greedy people with eyes bigger than their stomachs took our mortgages for huge houses they were never going to be able to repay back!
    The Tax payers always Pays, Decommissioning ship yards, steel works, factories, housing crisis, COVID! etc… it’s to the benefit of the country! Jeezuz, We were even liable for supporting Robert Maxwell and Sir Philip Green to prop up Pension Deficits from newspapers through to retail from tax-avoiders. Circle of Life!

    [Correction at poster’s request]

  4. Martyn Collyer

    The subject of this thread is about the OGA and the award of Licenses.

    If Third Energy wants to buy gas from the grid and generate electricity with a more modern plant – it does not need to hold a PEDL.

    The legal action was hoping to prove that the OGA had been negligent in transferring a License to a new Company with zero assets and no track record in gas exploration or recovery. A year later,the Company is saying that its revised programme does not require the benefits arising from the possession of a License. And to remind you, the License grants exclusive rights to an Operator to search for petroleum.

    If the OGA is to retain its credibility it should revoke the License and accept applications from other interested parties- if there are any in this new world which has a moratorium on Fracking.

  5. Seems to me that the Judge and the OGA together should agree to cover all and any decommissioning costs should the exploration and development companies fail to deliver.

    • Peter K R

      If that was the case, the judge could not be impartial I guess. But if he had ruled the other way – the result would still be the same I suspect. For such heritage wells, the tax payer will pick up the bill. Better concentrate on more recent ones.

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