United Kingdom: Energy – Oil & Gas

The United Kingdom is a country with an established upstream oil and gas sector, as further described in this document.

Oil and gas currently accounts for around 73% of the UK’s total energy needs. In 2020, commercial production from the UK Continental Shelf (UKCS) accounted for 70% of the UK’s oil and gas demand, clearly indicating the industry focus on offshore activities.

Generally, the UK production has been in decline since the turn of this century. Between 2014 and 2019, the UKCS oil and gas production increased by 20% though, driven by major developments in existing fields and almost 40 new fields opening, but has fallen since.

Total production from the UKCS was just over 587 million barrels of oil equivalent (boe) in 2020, which is an average of 1.6 million boe per day. This level of production was 5% lower than in 2019 and will likely continue to decrease in 2021 and 2022, reflecting lower levels of brownfield and greenfield investments and the anticipated impact of increased planned maintenance outages deferred from 2020.

The UK’s independent regulator, the Oil and Gas Authority (OGA), estimates that proven and probable UK reserves is 4.4 billion boe (as at end 2020), which is 0.8 billion boe lower than a year before. This decrease is due to the production not being offset by additions to the reserves base as part of the Field Development Plan. When assessing the current production projections, these remaining reserves could sustain production from the UKCS to 2030.

The Petroleum Act 1998 (Petroleum Act) consolidated the regulatory regime applying to the exploration and production of petroleum in the UK. All offshore and onshore licensing – except onshore licensing in Scotland, Wales and Northern Ireland, which are subject to separate regimes / authorities – is governed by the Petroleum Act.

The rights to petroleum resources, which include exploration and production, lie with the Crown. On behalf of the Crown, the Department for Business, Energy and Industrial Strategy (BEIS) exercises regulatory responsibility. On the back of the Framework Agreement governing the relationship between BEIS and the OGA, much of BEIS authority is actually performed by the OGA.

The OGA is responsible for petroleum licensing (both onshore and offshore), the regulation of upstream petroleum sector, and administering the third-party access regime for upstream oil and gas infrastructure.

A company looking to participate in the UK upstream oil and gas sector may either bid for a licence or acquire an interest in existing assets (with any acquisition being subject to regulatory consents).

The OGA considers each application on a case-by-case basis and requires demonstration of financial worthiness and, with respect to the operator, technical capability, previous experience and environmental awareness.

The OGA grants licences through competitive licensing rounds organised for offshore, respectively onshore licences. The latest (the 32nd) offshore licensing round was held in July 2019 (licence awards made in September 2020) and the latest (the 14th) onshore licensing round was held in 2014 (licence awards made in December 2015). There are also awards of licences outside licensing rounds, but this is not that common.

The 33rd offshore licensing round was due to start in late 2020. However, in March 2020, the OGA announced that would be delayed until at least 2021. In September 2020, the OGA confirmed there would be no further licensing rounds in 2020 or 2021.

Separately, in September 2020, the government carried out a review of the policy on licensing for North Sea oil and gas to ensure it was compatible with climate change objectives. In March 2021, BEIS confirmed it would be introducing a Climate Compatibility Checkpoint for future licensing rounds. The Climate Compatibility Checkpoint will use the latest evidence, looking at domestic demand for oil and gas, the sector’s projected production levels, the increasing prevalence of clean technologies (such as offshore wind and carbon capture) and the sector’s continued progress against its emissions reduction targets. This will ensure that licences are compatible with climate objectives. The design of a Climate Compatibility Checkpoint is expected to be completed at the end of 2021.

The Offshore Petroleum Regulator for Environment and Decommissioning (OPRED) is also conducting an Offshore Energy Strategic Environmental Assessment. Upon completion of this assessment, the OGA will run another licensing round.

The right to explore for, develop and produce oil and natural gas is granted by way of a licence.

Irrespectively whether there is a single or several companies involved, there can be only one licensee. Where there are several companies, all of them have joint and several liability under the license. It is then up to the companies to regulate their mutual relationship contractually (usually via a joint operating agreement that splits liability between the parties in proportion to their beneficial interest in the licence).

Only an entity approved by the OGA may act as an operator.

Each licence takes the form of a deed, which binds the licensee to adhere to the licence conditions regardless of whether it is using the licence at any given moment. Licensees have to comply with generally applicable law as well.

There various exploration and production licences:

• offshore – seaward exploration licences and seaward production licences; and
• onshore – landward exploration licences and landward production licences (formerly known as petroleum exploration and development licences (PEDL)).

As the name suggests, offshore exploration licences focus on exploration only. They are non-exclusive and cover the UK´s entire offshore area (save for the areas in relation to which production licences have been issued). Offshore exploration licences are usually used to carry out seismic surveys and to drill wells for core-sampling. As such, they are regularly used by those wishing to gather data to sell, rather than exploit the petroleum themselves. The licensee has to pay an annual fee, but such is significantly lower than the one payable for an offshore production licence.

Offshore production licences, on the other hand, give exclusive rights to exploration and production within certain licence area(s). They are usually issued for three successive terms. The initial term is associated with exploration, the second with development, and the third with production. Generally, production licences expire automatically at the end of the term unless the relevant work programme has been sufficiently advanced to proceed to the next term. There are also certain additional requirements, such as, for example, relinquishment of usually 50% of the initial licence area licence prior to the end of the initial term and payment of an annual fee (rental).

Onshore production licences generally follow the framework applicable to offshore production licences. The licensee must complete the agreed exploratory work programme in the initial term before advancing to the second term. A development plan must then be approved during the second term before progressing to the third, production term.

Licences are both contractual and regulatory in nature – contractually, being executed as a deed and providing for the contractual transfer of rights from the Crown to the licensee, and regulatory, because the “model clauses” (set in statutory regulations) apply to it.

Even though there have been some shale gas discoveries, shale gas is not being exploited in the UK.

Any activity involving shale gas would require not only usual consents required for onshore developments, but also a hydraulic fracturing consent (HFC) issued, upon satisfaction of relevant requirements, by the Secretary of State for BEIS.

However, since late 2019, there is de facto moratorium on issuance of HFCs (and thus on fracking) in England. Prior to it, only two HFCs were issued. The Scottish government also confirmed in October 2019 its absence of support for unconventional oil and gas. In September 2018, the petrochemical company INEOS lost a legal challenge against the Scottish government’s position on fracking, arguing that the government was exceeding its powers and lacked the legal competence to impose an effective ban. In December 2018, the Welsh government also confirmed that fracking would not be supported in Wales.

The OGA is a fully independent regulator and a government-owned company whose powers were granted under the Energy Act 2016. The OGA is responsible for licensing exploration and regulating development of the UK’s oil and gas resources.

BEIS, on the other hand, retains with regulatory control over the industry by being responsible for the overall policy and legislative framework. The Secretary of State for BEIS is ultimately responsible to Parliament for the OGA and is its sole shareholder. BEIS also has responsibilities relating to the application of environmental legislation. This is carried out through OPRED, which is principally responsible for enforcing the environmental regime applicable to offshore oil and gas activities and decommissioning in the UK.

In addition, there are other important regulators. The role of environmental regulation is handled by the Environmental Agency (EA) in England, Natural Resources Wales (NRW) and the Scottish Environment Protection Agency (SEPA) in Scotland. The Health and Safety Executive (HSE) is responsible for enforcing health and safety legislation, notably in the offshore oil and gas industry on the UKCS. Since the UK left the European Union, the Offshore Major Accident Regulator (OMAR) replaced the Offshore Safety Directive Regulator (OSDR), a partnership between HSE and OPRED, as the authority responsible for the safety of offshore oil and gas operations.

The government does not have the right to participate and be carried in a licence. The government´s involvement is limited to collection of rental fees and other tax revenues. There is no government-owned oil and gas company in the UK.

A licence applicant has to have a place of business within the UK. This requirement is satisfied if the company (1) has a staffed presence in the UK; (2) is registered at Companies House as a UK company; or (3) has a UK branch of a foreign company registered at Companies House.

In addition, there have been recent legislative changes which are relevant in the context of foreign participation. The National Security and Investment Act 2021 (NISA) will come into force on 4 January 2022; however, some provisions of the NISA apply retrospectively from 12 November 2020. The NISA is the UK’s first stand-alone national security and foreign direct investment regime. It allows the government to scrutinise and intervene in certain acquisitions that could harm the UK’s national security. It will be unlawful to complete a transaction (including direct and indirect acquisitions) that must be notifiable within the energy sector without prior approval from the Secretary of State.

There are no restrictions on the movement of capital or access to foreign exchange and no local content or local hiring requirements applicable to oil and gas operations in the UK.

The UK has rather stringent environmental and health and safety regime applicable to upstream petroleum activities.

OPRED implements offshore environmental legislation, whilst onshore this is done by EA in England, NRW in Wales and SEPA in Scotland.

As mentioned, the HSE is the national regulator for workplace health and safety. HSE’s energy division is responsible for the implementation of legislation in the petroleum sector. OPRED and HSE partner in OMAR and otherwise cooperate. The health and safety regime is based on the system of detection, control and mitigation of risks (through, among others, risk assessments, appropriate training, adequate insurance and others).

Revenue is derived through the application of various taxes. Since 1 January 2003, royalties are no longer payable under a licence. Also, there is no production sharing.

The taxes are:

• Ring Fence Corporation Tax (RFCT) at 30% – it is a standard corporate tax applicable to companies undertaking petroleum activities in the UK (subject to some modifications, e.g. relating to capital allowances) with the addition of a “ring fence”. The ring fence prevents taxable profits from oil and gas extraction in the UK and the UKCS being reduced by losses from other activities or by excessive interest payments. Thus, only losses relating to oil and gas activities can be set off against the profits from those activities. Various deductions are permitted, including for capital expenditures, R&D and decommissioning. There may also be various other “field allowances” available as a form of tax incentive.
• Supplementary Charge at 10% – this is not strictly a corporation tax, but it is charged as if it were an amount of corporation tax on ring fence profits to which financing costs are added back (and is subject to an allowance regime designed to encourage investment).
• Petroleum Revenue Tax (PRT) at 0% – it is an additional level of tax on the profits derived from individual fields. It was permanently zero-rated from 1 January 2016, but not abolished, so losses can be carried back against past PRT payments.

There are also annual rental fees payable. They vary depending whether there is onshore or offshore development and are calculated on an increasing scale of rates per square kilometre, thereby promoting early relinquishment of the licensed areas not being explored or developed.

As mentioned, there are no such current restrictions or obligations generally. The restrictions may only apply in case of severe threat to energy supplies, when the government has emergency powers. Here, it is worth noting that there have been recent legislative proposals that are relevant for the mid- and downstream oil industry. The Downstream Oil Resilience Draft Bill 2021 sets out how the government intends to address threats to the security of fuel supply by providing powers to ensure resilience in the downstream oil sector. This could expand government’s powers in monitoring market security, supply risks and providing protection against risk of disruption beyond emergency or crisis situations.

The Petroleum Act regulates decommissioning of offshore installations and pipelines. OPRED is the responsible regulator. A wide range of persons can be made jointly and severally liable for decommissioning.

The government may require provision of financial security for decommissioning obligations. The amount of security provided by the licensees is recalculated each year and is based on an estimate of the decommissioning costs. The usual form of security is a letter of credit.

The industry has developed decommissioning security agreements (DSAs), whereby each participant agrees to deposit cash or another type of security (e.g. letters of credit) into a trust. That trust operates to pay the costs of decommissioning when the time comes.

Tax relief is available in respect of the incurred decommissioning costs. The government has also made available decommissioning relief deeds (DRDs) to industry participants as a way of providing certainty with respect to the future availability such tax relief.

Regulatory approvals are required ahead of undertaking decommissioning activities.

Under the Petroleum Act, the construction of a pipeline is conditional upon the OGA´s issuance of a pipeline works authorisation typically granted to the appointed operator.

The regulation (including on permitting) of onshore pipelines is different and more complex. The matter is governed by the Pipe-lines Act 1962 (Pipe-lines Act). There is a need for consultation with the local authorities, landowners and land occupiers that will be affected. In addition, either a construction authorisation (under the Pipe-lines Act) or, less frequently, a development consent (under the Planning Act 2008) is required.

The Gas Act of 1986 (Gas Act) sets the framework for LNG import and onshore LNG regasification, supplemented by, notably, the Gas (Third Party Access) Regulations 2004 (TPA Regulations). New onshore LNG developments require development consent.

There is regulated third-party access based on published terms and non-discriminatory prices. An exemption from this requirement is available under certain conditions.

The UK has three LNG terminals for import of LNG into the country. These are the Isle of Grain terminal (near Rochester) and the Dragon and South Hook terminals (in Milford Haven). Each of them is exempt from the TPA Regulations. There is no export of LNG from the UK.

The framework applying to offshore LNG infrastructure is set by the Energy Act 2008. The activities of a new offshore LNG terminal are dependent on obtaining of a licence to unload gas as well as a lease of the seabed from the Crown Estate.

The environmental and health and safety requirements generally applicable to oil and gas installations also apply to LNG (onshore and offshore) facilities. These compliance requirements apply during construction and operation.

Development of offshore gas storage facilities necessitates obtaining a licence from the OGA. Statutorily imposed model clauses applicable to such licences are outlined in regulations issued under the Energy Act 2008. In addition, there is a need to obtain relevant rights from the Crown Estate.

The Gas Act principally regulates onshore gas storage. It is supplemented by other legislation such as the Planning Act 2008. Development of onshore gas storage facilities necessitates appropriate rights to the relevant land having been obtained. Negotiated third party access rights are provided for under the Gas Act. An exemption from it is available under certain conditions.

The UK gas storage facilities are relatively limited and generally third party access exempt. The largest gas storage facility is the Stublach facility, followed by Hornsea (Atwick), Humbly Grove, Holford, Aldbrough, Hatfiled Moor and Hill Top Farm.

Similarly as in case of the LNG facilities, generally applicable environmental and health and safety law also apply to gas storage facilities.

There is a network of high pressure gas pipelines in the country. It is known as the national transmission system (NTS). It is owned by National Grid. Distribution, on the other hand, is mostly effected through lower pressure gas distribution networks of regional reach. They are owned by a limited number of companies. There also small networks that distribute gas to industrial parks or housing developments. Their owners are known as independent gas transporters.

The gas transmission and distribution infrastructure is regulated by the Office of Gas and Electricity Markets (Ofgem). Ofgem operates under the authority of the Gas and Electricity Markets Authority (GEMA). GEMA members are appointed by the Secretary of State at BEIS. GEMA’s powers and duties are largely statutorily regulated.

The third party access regime exists and is highly regulated.

The gas transmission and distribution system of Northern Ireland is regulated separately.

The retail gas market has been privatised and competitive for more than 20 years. Consumers can choose their gas supplier from various market participants. Gas suppliers buy gas from the wholesale market or directly from gas producers and deliver it to end users. Suppliers set their prices independently. There are certain price caps.

The wholesale gas market is characterised by a gas spot price commonly referenced as the UK National Balancing Point (NBP). Gas anywhere in the NTS counts as NBP gas, meaning that there is a singular price for gas. Furthermore, gas transporters and gas shippers have to adhere to the industry governed Uniform Network Code, various applicable legislation and regulation as well as conditions of the licences.

The retail gas market in Great Britain is regulated by Ofgem under the authority of GEMA. As mentioned in reply to the question 15 above, GEMA members are appointed by the Secretary of State at BEIS. GEMA’s powers and duties are largely statutorily regulated.

Ofgem’s priority is to protect customers’ interests. One way of achieving this end is by promoting well-functioning competitive markets.

In May 2020, the OGA launched a consultation process in relation to potential amendments to its March 2016 strategy. The consultation acknowledged the shift in public and industry opinion in relation to climate change and proposed a change to its central obligation in order to require licensees to assist in meeting a net zero target, including by reducing emissions as far as possible and supporting carbon capture and storage projects.

The revised OGA strategy came into force on 11 February 2021, which amended the principal objective of “maximising economic recovery” to ensure that energy demand is met while ensuring an orderly energy transition and reducing reliance on imports.

Generally, OGA position is, although the UK will be transitioning to net zero, for the foreseeable future, oil and gas will remain a crucial part of the UK´s energy mix.

There is also a significant movement towards enhanced climate-related financial disclosures for companies to promote more informed business, risk and investment decisions as well as improving allocation of capital and supporting the transition to net zero. This will also affect the oil and gas sector. In its 2019 Green Finance Strategy, the government set out an expectation that all UK-listed companies and large asset owners would be required to report climate-related financial disclosures in line with the Task Force on Climate-Related Financial Disclosure´s recommendations by 2022. This would require disclosures in relation to governance, strategy, risk management and metrics and targets. In March 2021, BEIS also concluded a consultation on climate-related disclosure provisions in the Companies Act 2006 and a new reporting regime impacting both public and certain private companies is expected.

In March 2021, the North Sea Transition Deal was announced, setting out how the government and the industry will work together to meet the greenhouse gas emissions reduction targets by transform the sector for a net zero future. The Deal is to cut UK upstream oil and gas industry emissions of 10% in 2025, 25% in 2027 and 50% in 2020 (each set against a 2018 baseline) and the sector committed to working with the government to address the commercial and regulatory barriers to electrification of offshore platforms to realise these targets.

As mentioned in reply to question 2 above, the government will introduce a new Climate Compatibility Checkpoint by the end of 2021 to ensure that future licensing rounds are compatible with climate objectives (including net zero). Simultaneously, OPRED is conducting a new Offshore Energy Strategic Environmental Assessment for future licensing rounds, and the OGA plans to run the next licensing round following the completion of that assessment.

The recent changes in the government policy and other developments (outlined in reply to question 18) indicate the areas concern for the government lately.

As for Covid 19 , the oil and gas sector has been impacted by the pandemic alongside a number of other sectors. This has affected global supply/demand for petroleum. It has also impacted supply chains and physical operations, resulting in volatility of prices.

The government introduced legislation in 2019 committing to net zero greenhouse gas emissions by 2050. The government has now published its long-awaited net-zero strategy setting out how it plans to meet the country’s legally binding climate goals by 2050.

Generally, there has been an understanding that the 2050 target will be achieved by transitioning to renewable energy, but also by application of various other measures.

The OGA has been working with the government on the vital role that the oil and gas industry has to play in this transition process. Namely, governmental forecasts indicate that, although the UK will be transitioning to net zero, oil and gas will remain an important part of the energy mix for a while. During this period, it will be important to reduce reliance on petroleum imports as well as to manage properly declining North Sea production. In addition, the transition has to benefit from the oil and gas industry’s technology, human and other resources.

Building on commitments in the North Sea Transition Deal, as already mentioned in reply to question 18 above, the oil and gas industry will need to significantly reduce emissions, whilst scaling up production of low carbon alternatives (e.g. hydrogen, biofuels). As mentioned in reply to question 2 above, the government is introducing a Climate Compatibility Checkpoint on future licensing rounds for the UKCS so that the oil and gas sector can be regulated in a way that minimises greenhouse gases.

Carbon capture, utilisation and storage (CCUS) and hydrogen deployment will play a central role in the UK’s green industrial revolution and ensuring that UK’s businesses are competitive in a net zero future.

The central blueprint for the UK’s CCUS strategy is the 2018 CCUS Deployment Pathway Action Plan, which addresses innovative and economic support schemes available. The Plan for Growth strategy has set a goal to capture 10 million tons of carbon dioxide per year by 2030, almost doubling the global capture capacity operational as of 2021. This growing CCUS deployment target also ties into a goal set in the Ten Point Plan for a Green Industrial Revolution to establish two CCUS clusters by 2025 and another two by 2030.

The Industrial Decarbonisation and Hydrogen Review Support scheme has been set up to fund the new hydrogen and carbon capture business models.

There has been added emphasis on kickstarting the production of low carbon hydrogen and developing a robust UK hydrogen economy. Hydrogen production is expected to establish in the 2020s before a significant ramp up in the early 2030s, using a range of production methods to meet demand. Future opportunities will emerge through added focus on the UK Hydrogen Strategy and associated consultations on a hydrogen business model, the New Zero Hydrogen Fund and a low carbon hydrogen standard.