The decommissioning of offshore oil and gas installations has become a key issue for the United Kingdom Continental Shelf (UKCS) and is likely to acquire further prominence in the years ahead, as society transitions away from reliance on fossil fuels. In legal and economic terms, liability for decommissioning is a particularly significant matter. The UK Government is keen to ensure that those involved in the extraction and management of oil and gas resources in particular fields should bear liability for decommissioning costs, rather than the state. Meeting this objective, however, depends upon relevant parties being able to fulfil their obligations and avoiding defaulting on their liabilities. Failure by one party in meeting its decommissioning costs is also a concern for other parties with shared liability, given that this can increase their own liability which may already be substantial.
Disputes involving decommissioning liability are becoming more common before the courts and also outside the context of litigation.[1] As regards the latter, it has recently been reported that Fujairah Oil and Gas (“Fujairah”) has defaulted on its share of decommissioning liability in relation to the Brae oilfield, following a share sale transaction.[2] This blog article briefly deals with the background and legal issues connected to the story and identifies some unanswered questions.
TAQA Bratani Ltd v RockRose UKCS8 LLC
The case of TAQA Bratani Ltd v RockRose UKCS8 LLC,[3] which was decided in January 2020, is a useful source of information and background regarding recent issues connected to Brae. It involved 5 oil and gas field blocks (known collectively as the Brae Fields)[4] and considered whether joint operating agreements gave the claimants an absolute right to terminate RockRose’s appointment as operator, following a majority vote and the provision of notice. The court held that such a right did exist and it was not subject to implied terms qualifying the exercise of the right. TAQA thereby replaced RockRose as operator. It was suggested by Judge Pelling QC that the primary value for TAQA in taking over as operator may have been to enable it to reduce costs (if it was also operator of other fields) and “particularly the cost of decommissioning operations as the fields became economically exhausted”.[5] The judge noted that one of the fields was already in decommissioning, with others to follow in 2022 and 2027 and the total decommissioning costs for the Brae Fields were estimated at around $1.8 billion.[6]
RockRose UKCS8 LLC was formerly known as Marathon Oil UK LLC (until July 2019) and was owned by Marathon Oil Corporation. In July 2019, RockRose Energy Plc (now RockRose Energy Ltd) purchased 100% of the share capital in Marathon Oil UK LLC and renamed it.[7] Apparently, TAQA had also made a bid to acquire Marathon Oil UK, but its offer was rejected.[8] The judge in the TAQA Bratani Ltd case indicated that the “very substantial costs” relating to decommissioning were an important aspect in the disposal of Marathon Oil UK and the way in which TAQA’s offer for it was framed.[9] For the same reasons, JX Nippon Exploration’s interest was considered to be “negative” and “unsellable”.[10] (Interestingly, there was also internal correspondence within TAQA whereby it was suggested that s 29 notices (involving abandonment programmes) had not been served on Marathon Oil Corporation and it was recommended that this should be done to protect the joint venture and the regulator.)[11]
Share Sale to Fujairah
RockRose Energy Ltd, mentioned above, is owned by Viaro Energy Ltd, which in turn is owned by Viaro Investment Ltd. The most recent company group accounts (made up to 31 December 2020) disclose that “in order to optimise its portfolio of assets” on 24 December 2020 the group sold its entire stake in RockRose UKCS8 LLC as well as its subsidiaries for $1 (75p) to Fujairah International Oil and Gas Corporation, a company owned by the emirate of Fujairah in the UAE.[12] The effective date of the transaction was 31 December 2020. The name of the company was changed from RockRose UKCS8 LLC to Fujairah Oil and Gas UK LLC in March 2021. The company is an overseas company based in Delaware, USA.
For sales of businesses, including oil and gas businesses, a distinction needs to be drawn between share sales (as was the case with the sale to Fujairah) and asset sales.[13] There are a number of differences between them. Most fundamentally, where there is a share sale the ownership position of the company changes (due to shares being sold to another party (or parties)) but the assets are still owned by the company, while with an asset sale the company’s assets are sold to another party yet the ownership position of the company does not change. Some of the most important assets in the context of oil and gas are licences and various related rights. If a licence is to be transferred as part of an asset sale, it will need to be transferred to a new owner by an assignment.
Under the “model clauses”,[14] assignments of oil and gas licences are prohibited unless the prior written consent of the OGA has been obtained.[15] A failure to obtain this will be considered a breach of the model clauses accompanying the licence and will provide the basis for its immediate revocation or reversal of the assignment (under the Petroleum Act 1998, s 5A, as inserted by the Energy Act 2008, s 76). As specified in s 4 of the 1998 Act, the model clauses are incorporated into licences, unless the authority modifies or excludes them. The OGA provides details regarding the assignment consent procedure on its website.[16]
There is no equivalent requirement to obtain the consent of the OGA where there has been a share sale, and so such consent was not required for the share sale to Fujairah. However, the OGA does have the power to revoke a licence if there is a change of control of a licensee and the OGA serves written notice requiring a further change in control and that further change does not take place within 3 months.[17] In addition, the OGA may revoke approval for a party to exercise any function of organising or supervising all or any of the operation of searching or boring for or getting petroleum in pursuance of a licence, where an approved person “is no longer competent to exercise that function”.[18] When this will be the case is not particularly clear (but see the discussion relating to the OGA below).
It is possible that agreements between parties involved in a joint venture could require permission from the other parties before there is a sale. But this will generally be limited to asset sales. For instance, a standard joint operating agreement (JOA) produced by Oil and Gas UK provides that:
“[n]o transfer [of any interest under a licence] shall be effective or binding upon the Participants unless the remaining, non-transferring Participants shall each have consented to such transfer in writing (which consent may only be withheld on grounds that the financial responsibility and technical capability of the proposed transferee to discharge the obligations under this Agreement as they relate to the interest to be transferred has not been adequately demonstrated).”[19]
There is no equivalent provision for share sales. One of the reasons for this is that asset sales are likely to be more disruptive, due to a change of party involved and the consequences arising from this. There is also often a reluctance to place restrictions on the transfer of a party’s shares by virtue of a JOA.[20] By contrast, JOAs and other related agreements often have pre-emption clauses, giving the other parties to the agreement the ability to veto an asset transfer or to obtain a share of the interest being transferred.
As well as the differences stated above, share sales are frequently more attractive than asset sales due to them being more straightforward, in part because they only require the transfer of the shares, rather than potentially the transfer of a variety of different assets. A disadvantage of a share sale is that all of the assets and liabilities of the entity remain, and there is not the same opportunity for selecting only the most favourable or productive assets to be transferred.[21]
Default on Decommissioning Liability?
As already noted, it has been reported that Fujairah has defaulted on its share of decommissioning liability. While the position is not wholly clear, in the most recent sets of accounts for TAQA, JX Nippon Exploration and Production (UK) Ltd, and Spirit Energy Resources Ltd, partners in the joint venture for Brae Fields (along with Fujairah), it is stated that there has been default by one of the partners and the non-defaulting partners are seeking to obtain the defaulting party’s equity interest in the field.[22] This is expected to lead to increased decommissioning liability for the non-defaulting partners but it seems as if negotiations between the parties are still ongoing. Clause 17 of the model JOA may give some insight into the rules that apply in the event of default involving these partners.[23] However, we cannot be sure if the JOA for Brae Fields contains the same provisions.
There are a number of unanswered questions regarding the default. If Fujairah has defaulted, why have they done so? What steps have been taken by the other partners to recover the outstanding sums from them? What is the value in obtaining Fujairah’s interest for each of the non-defaulting parties? Are the other parties continuing to pursue sums from Fujairah? In addition, what type(s) of instrument is being used for the purposes of covering decommissioning liability? Answers to at least some of these questions will emerge over time. The next sets of accounts for Fujairah and the other parties involved will probably disclose some details and it is possible that there could be further litigation between the parties. For now, Fujairah seems to remain registered against the Brae Fields on the OGA website.
Share Sales, Default and the OGA
From the perspective of the regulator, the inability of one party to contribute its share of decommissioning liability may be of little concern if others are able to cover the full amount. Joint and several liability will be of relevance here. However, participants in the oil and gas industry may fear that they will also be subject to increased decommissioning costs if their joint venture partners default in future. If parties are unable to afford an increased level of liability this may lead to a shortfall in the overall decommissioning amount available to cover liabilities. While the issues here need to be weighed against the advantages of a largely unfettered ability to utilise share sales, there is the possibility of dealing more restrictively with changes of control in the terms of the model JOA or in the model clauses accompanying licences. Of greater assistance to those already engaged in joint venture activities, the OGA could be more interventionist where there are share sales, in order to ensure that parties comply with their ongoing liabilities.
There is an indication that the OGA may seek to play a more active role in relation to share sales involving licensees. In a letter of 3 December 2021 to all licensees, it was acknowledged that recent years have witnessed a significant increase in share sales.[24] While generally supporting such transactions, the OGA stated it was “concerned that some such transactions may put at risk the delivery of a licensee’s licence commitments, liabilities and obligations… and that they therefore require close scrutiny”. As well as outlining the OGA’s change of control powers, the letter states that it will normally exercise its powers unless a licensee “demonstrates that the change of control has not prejudiced its ability to meet its Commitments”. In assessing this, the OGA will consider a number of matters, including: any change to the technical resources available to the licensee that may prejudice their ability to meet their licence commitments; any change to the financial resources available that may prejudice the licensee’s ability to meet their commitments; and the potential impact of a change of control on any other licensees in the same corporate group as the licensee, prior to the change of control. Where appropriate, the OGA will also assess the fitness of any incoming controlling company and its directors. It is strongly recommended that a letter of comfort is obtained from the OGA before completing a change of control transaction.
It will be interesting to see whether this warning shot from the OGA is followed by interventionist action in future and whether parties in the oil and gas sector are more cautious in their approaches to share sales. If so, this will likely go some way to assuaging concerns regarding defaulting on decommissioning liabilities when changes of control take place.
[1] See e.g. Apache UK Investment Ltd v Esso Exploration and Production UK Ltd [2021] EWHC 1283 (Comm). The case is discussed by Professor John Paterson, “Apache-Exxon decom case: Is the regulator left without options? Not necessarily” at https://www.energyvoice.com/opinion/324841/apache-exxon-decommissioning-john-paterson-aberdeen-uni/.
[2] See e.g. A Thomas, “Exclusive: Brae Area partner defaults on decommissioning costs after buying stake for 75 pence” (23/11/2021) at https://www.energyvoice.com/oilandgas/north-sea/decom/365631/fujairah-oil-gas-brae-decommissioning-taqa/.
[3] [2020] EWHC 58 (Comm).
[4] Blocks 16/3a, 16/3b, 16/3c, 16/7a and East Brae field – see para 7 of the judgment.
[5] Paras 73-74. And see the following paragraphs too.
[6] Para 74.
[7] See paras 4 ff. See also Companies House entry (https://find-and-update.company-information.service.gov.uk/company/FC009587) for Fujairah Oil and Gas UK LLC, Company number FC009587.
[8] Para 9.
[9] Para 74.
[10] Para 74.
[11] See para 83.
[12] The accounts are available from the Companies House pages for Viaro Investment Ltd and RockRose Energy Ltd. See page 3 of the accounts.
[13] See generally, in relation to oil and gas, N Wisely, “Acquisitions and Disposals of Upstream Oil and Gas Interests”, chapter II-9 in G Gordon, J Paterson and E Usenmez (eds), UK Oil and Gas Law: Current Practice and Emerging Trends, vol II (2018).
[14] The current model clauses are found in the Petroleum Licensing (Production) (Seaward Areas) Regulations 2008 (SI 2008/225).
[15] See model clauses, cl 40(1). There are equivalent provisions in earlier versions of the model clauses, e.g. Petroleum (Production) Regulations 1966 (SI 1966/898), Sch 4, cl 32; Petroleum and Submarine Pipe-lines Act 1975, Sch 2, cl 38; Petroleum (Production) Regulations 1976 (SI 1976/1129), Sch 5, cl 39; Petroleum (Production) Regulations 1982 (SI 1982/1000), Sch 5, cl 38; Petroleum (Production) (Seaward Areas) Regulations 1988 (SI 1988/1212), Sch 4, cl 41.
[16] https://www.ogauthority.co.uk/licensing-consents/licensing-system/licence-assignments/.
[17] Model clauses, cl 41(3), and there are equivalent provisions in earlier model clauses from the 1970s onwards, including those applicable when licences were granted for the Brae Fields.
[18] Model clauses, cl 24(2). Again, there are equivalent provisions in earlier model clauses from the 1970s onwards.
[19] Industry Model Form, January 2009 version, cl 23.2.
[20] N Wisely, “Acquisitions and Disposals of Upstream Oil and Gas Interests” at para II-9.11 states that the justification is that a JOA or similar agreement “should not prejudice a party’s shareholders’ ability to trade their shares.
[21] Ibid paras II-9.10 ff.
[22] These accounts are available from Companies House. Fujairah’s interest is apparently 40%.
[23] Industry Model Form, January 2009 version, cl 17. For discussion of JOAs generally, see S C Styles, “Joint Operating Agreements”, chapter II-2 in G Gordon, J Paterson and E Usenmez (eds), UK Oil and Gas Law: Current Practice and Emerging Trends, vol II (2018).
[24] Letter from Tom Wheeler, Director of Regulation, OGA, to Licensees, dated 3 December 2021 – fhttps://www.ogauthority.co.uk/media/7894/change-of-control-letter-3-december-webpage.pdf.
