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. I hope Mr Justice Robin Knowles will be Willing or forced to pick up the tab should this energy company fail . It’s clear the costs to decommission these Wells May fall to the tax payers . The financial stability is non proven so they are a Costly risk the Community has not asked for ? This does not look like justice to me .

  2. Well done, Eddie. Thank you for being willing to speak out. Let us hope that the victory for the OGA does indeed turn out to be Pyrrhic.

  3. Well, that’s the equivalent of the cost of one nurse, thrown away on a hopeless gesture.

    Lawyers stuffing their pockets, a few egos satisfied, and case LOST.

    The usual anti pattern.

    • Martin; maybe you might think that way but the final outcome of Cuadrilla’s test fracking was the closure of the fracking industry due to one of the predicted major hazards that were cited in our ultimately unsuccessful Legal Actions.
      Obviously the Judicial System was proven incorrect on their pronouncements and there is no reason to believe that won’t happen again.

      • Major hazards?

        Well, the same Judicial System failed to predict similar in Milton Keynes. Shocking really. LOL.

        If a car factory goes bust, who pays for the site to be decommissioned? Or, a steel works, or most heavy industry?

    • KatT

      The landowners will be feeling fine i suspect, as they are in Notts

      It all goes pear shaped, the tax payer will end up with the bill, as its the tax payer who has got the benefit over the years (income for the government, income for the local council etc).

      While we wait and see, examples of landowners who have had to pay for the decommissioning of English onshore oil and gas wells would be good (in the last 30 years say)

      • Hewes62, Apologies but I don’t understand your point regarding the landowner’s all being in Notts?

        I do not agree with your comment regarding the tax payer footing the bill. The public should not have to pay the clean up costs of a private company. All private companies are subject to tax and business rates. Oil ad. gas producers are no different. As consumers of a product we pay a company for the commodity they produce, which is sold at a profit to the company. Nor is the public party to any land transaction between a company and landowner. So again, why should the public pick up the cost of any clean up cost of privately owned land? And the landowner will have no doubt received a relative pittance for rent compared to the profits a company will have made. A company should not operate if it cannot pay the clean up costs that it contractually signs up to at the start of operations. The remediation required after oil and gas extraction is known in advance, it is not some unforeseen, emergency event, therefore there is no excuse for a company not paying to clean up their own mess. Whether this means less profit, less dividends being paid and a far more realistic bond being paid upfront or bond payments continuing during operations, then so be it. It cannot be right that oil and gas companies, many making huge profits, leave their clean up costs with the tax payer. Nor should they be allowed to reduce the extent and quality of remediation to cut corners. The way companies are structured can allow them far too easily to walk away from their obligations, with no proper legal redress.

        • Kat T

          Thanks

          I should have referred to Notts and Lincs landowners. There are many wells around here in a similar situation to those of TE, and the landowners are not worrying ( as per past comments on this issue on DoD my me). ie the TE issue is not a one off.

          The comment about examples of where a landowner has had to pay would be good. Perhaps there are some to see (Paul / Ruth?) but I have not come across any yet, despite having plenty of wells.

          Re the taxpayer. I do not argue right or wrong, just that in my opinion, the taxpayer will pick up the tab, no matter what the politicians think. The government licenses companies to get oil and gas out of the ground, and takes a cut in taxes and so forth. The concept covers the while of the UK, so that the odd one fails should be balanced by those that succeed.

          Going forwards, this may be different and I note the arguments that, as oil is cheap and we prefer it is not burned, no profit will ever be made from the wells, and therefore the cost of decommissioning needs to be deposited up front (although would you trust giving it to any government?)

          Certainly you would expect this where the government (and the tax payer) do not own the resource, such as polyhalite for example or, for those that follow the Alba share price, welsh gold.

          But my opinion is, there is no argument at present about ‘heritage’ oil and gas wells. The tax payer, having trousered the cash in the past, is on the hook. For new wells – some cash up front would be good I guess.

  4. Unfortunately we have got an extrremely corrupt government – they are literally throwing massive quantities of taxpayers money away to give to their pals, refusing to publish the paperwork on procurement of contracts which is against the law (eg those for buying PPE from companies who dont make PPE etc). I am told they are going to give the top job in the NHS to Di Harding who used to be a jockey and is just a business woman who does not know about healthcare. It would be good if poeple woke up to what is being done with their taxes.

    They are also planning to allow a new coal mine in Cumbria – quite how that fits with a green future plan that they are trumpeting has not been explaned.

    • CJR

      Corruption accusations are floating around, although I always look at the global register to see where we are.

      There was a lot about the gov throwing money to its pals to make ventilators (primarily on Linked in is where I saw it)

      But – hey ho, they were not needed and it seems the chap did not bill the government.

      https://www.theguardian.com/world/2020/apr/24/dyson-will-not-supply-ventilators-to-nhs-to-treat-covid-19

      Other contacts feel that the most corrupt gov in the UK is the SNP, but they are better at PR than the Conservative Government.

      https://www.effiedeans.com/2020/09/the-smell-of-corruption.html

      Then I think on DoD there was some comments a while ago that Russian Stooges were being placed in positions of power. Not much since on that.

      So lets keep an eye on the Di Harding story. She is a member of the Jockey Club it seems, but (dear interested reader as they say) you do not have to have been a jockey to be a member. So maybe the jockey bit was an attempt at fake news by persons unknown?

      https://en.wikipedia.org/wiki/Dido_Harding

      Maybe someone in the top job of the NHS needs to be able to grasp contract management et al, rather than being very good at brain surgery or similar?

  5. Well, CJR, perhaps you could identify a “non corrupt” UK Government where the top job of Health Minister has been given to a healthcare professional!!??

    I am awake. I like my taxes being managed by someone who knows about managing finance in business. If you believe the NHS is good at managing money, or any other resource, you live in a strange world or have not had the need to utilise the NHS a great deal. Best of both world’s is where the health professionals concentrate upon health, and those with management, administration and financial skills concentrate upon that.

    I watched Baroness Harding being “grilled” by the Select Committee. She knew what she was talking about, the poseurs on the Committee didn’t have a clue, and were repeatedly asking for information she had supplied just a few minutes earlier-and I only noticed she rolled her eyes once!

    • I have spent a lot more time on this than you have. Its all about cash and influence for Boris Johnsoin’s chums rather than having people in charge who know the field they are supposed to be managing. There are good reasons why this government is failing against the opposition, Cummings’s excess use of AI – pretending computers are better at making decisions that human beings, people given contracts where the money is squirrelled offshore and no paperwork is shown, which is against the law. As before, I know a lot more about this than you do. One of hte reasons we had so many covid cases is because of a superspreader event, – Hancock and Harding wanted the Cheltenham races to go ahead…. still lets not digress, this should be focusing on oil and gas. Whether politicians are reliable and speak the truth has always been part of this subject…..Johnson now wishes to emulate left wing policies but does not stand behind them; it was widely known that johnson was a proven liar way before he became PM.

  6. Before proceeding with its acquisition of Third Energy, the newly formed York Energy sought a letter of comfort from the OGA that it would not revoke the License to explore and extract hydrocarbons in the North Yorkshire basin.

    The OGA was of the opinion that there was a “reasonable chance of allowing Third Energy to operate as a viable entity under York Energy Holdings where it will pay for its obligations……under the License.”

    The newly expressed ambition of Third Energy Gas UK to concentrate on Geo Thermal projects would suggest that it will now fail the ongoing obligation of a License Holder to maximise recovery of petroleum products – paraphrased as Drill or Drop.

    This surely places the OGA under a duty to revoke the Licenses held by Third Energy which has openly declared its intention not to search for hydrocarbons.

    Eddie may have failed to secure a Judicial Review of the process that concluded with the issuance of a “letter of comfort” by the OGA but it has undeniably exposed the shifting sands and corporate uncertainties of the world in which petroleum exploration is undertaken and which the OGA is pretending to regulate.

    We await the revocation of five PEDLs held by Third Energy.

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