Well drilled

The oil and gas industry is home to a significant number of in-house lawyers, with many based in Aberdeen – Scotland’s energy capital. Having spent 14 years in the exploration and production sector I have aimed to provide a general insight into some of the major areas of focus for in-house oil and gas lawyers.

Licensing and joint ventures

For in-house oil and gas lawyers, a “licence” normally implies a petroleum licence. Whilst all rights to the UK’s offshore petroleum resources are vested in the Crown, the legal right for an oil company to explore for and produce offshore oil and gas is based on holding a seaward production licence. Such licences are granted by the Department for Business, Enterprise and Regulatory Reform (DEBERR, recent successor to the Department for Trade and Industry) on behalf of the government, the primary governing legislation being the Petroleum Act 1998. Seaward production licences cover specific geographic areas of the UK continental shelf, typically a few hundred square kilometres, and are generally awarded following a licensing round where oil companies either alone, or as a joint venture group, apply in a competitive tender situation.

Much of the work done by in-house oil and gas lawyers

centres on the joint ventures created by groups of oil companies. With one exploration well costing on average $10 million (Oil & Gas UK 2007 Economic Report; the US dollar is still the predominant currency of the industry), and often much higher, and with percentage chances of commercial success often being in single figures, spreading risk through holding participating interests in a number of joint ventures has been common practice.

These joint ventures are mostly unincorporated in nature, created and governed by a joint operating agreement (“JOA”) setting out, amongst other matters, the participating interests, the rules of governance, and the appointment and authorisation of the operator. The operator carries out the bulk of the work on behalf of the joint venture, normally requiring a sizeable resource base, and is generally the company with the largest participating interest.

Transportation and infrastructure

Oil and gas production has to be brought to market, and whilst some fields have been developed on the basis of offshore loading to oil tankers, the majority of oil and gas production is transported to shore by pipeline and associated infrastructure. Production and transportation assets are not always in common ownership, requiring producers to negotiate access to third party-owned infrastructure.

Access to third party infrastructure has not been left entirely in the hands of unregulated market forces. It is subject in particular to two non-statutory codes of practice, the Code of Practice on Access to Upstream Oil and Gas Infrastructure on the UK Continental Shelf (“ICOP”), and the industry-overarching UK Continental Shelf Oil and Gas Industry Licence-holder Commercial Code of Practice.

ICOP’s stated purpose is “to facilitate the utilisation of infrastructure for the development of remaining UKCS reserves through timely agreements for access on fair and reasonable terms, where risks taken are reflected by rewards”. To achieve this purpose, ICOP requires infrastructure owners to provide transparent and non-discriminatory access and requires parties to seek to agree fair and reasonable tariffs and other terms. Whilst negotiations for access to infrastructure can be intense and complex, ICOP sets a frame for these and is generally regarded as a successful example of a non-statutory code of practice.

Supply chain

There is a strong interdependency in the industry between the oil companies and the services companies that provide a wide variety of work and services across the exploration, development and production chain.

In common with the construction sector, the industry has developed model contract forms and guidance notes, created to attempt to streamline the tendering and contracting process and remove cost from this important component of the industry. These model contracts cover various activities including construction (of oil and gas production facilities), mobile drilling services and well services and can be found online at www.logic-oil.com.

A specific feature of contracts in the industry is the widespread adoption of a mutual “hold harmless” and indemnity regime whereby the parties will often grant wide indemnities to each other for various heads of loss or damage, particularly regarding property and personnel, irrespective of the negligence or breach of statutory or other duty of the indemnified party. This concept was partially based on the philosophy of allocating risk to the party best placed, or most likely, to insure against it and may be a factor in the relatively low incidence of litigation compared to other industry sectors.

For oil companies, most supply chain activities are subject to the Utilities Contracts (Scotland) Regulations 2006 (or the equivalent for England & Wales), implementing Directive 2004/17/EC. Although the sector is subject to a partial derogation, these regulations place obligations on oil companies regarding the tendering and placing of contracts above specified threshold values, with the aim of ensuring the application of competitive supply chain procedures.

Acquisition and divestment

Oil companies tend to hold interests in a portfolio of oil and gas assets, from undrilled exploration acreage to producing fields. For various reasons including rate of return, strategic fit and resource constraints, there is an active market in the trading of oil and gas assets.
Transactions are generally structured as asset sale and purchases, although corporate sale and purchases are also used. A form of transaction well known in the industry is the “farm-in”, where the purchaser will obtain a percentage interest in an asset by carrying out or funding work on the asset (often the drilling of a well), for the costs applicable to that interest plus a premium.
JOAs traditionally included “pre-emption” provisions giving existing parties in the venture a first right of refusal or matching right for proposed sales of interests in the venture. Much time has been spent by in-house lawyers in the sector in analysing proposed transactions to advise whether the terms of sale were covered by pre-emption provisions. In an effort to streamline commercial transactions and to encourage trading activity, pre-emption provisions are not now included in new JOAs and there has been a cross-industry agreement to apply a uniform and streamlined approach to the application of most existing pre-emption provisions. This agreement was set out in the “Master Deed” (a giveaway that English law governs many contractual arrangements in the sector), a significant joint industry and government initiative whose signatories include the vast majority of oil companies and the Secretary of State for Trade and Industry (as he was then).
The Master Deed also made radical changes to the “conveyancing” process for the transfer of oil and gas assets. This process was becoming increasingly complex and time consuming, due to the number of contracts requiring to be assigned and/or novated and the number of parties required to agree and execute the documentation. An innovative approach was taken, resulting in a process whereby the completion document (the execution deed) assigns and/or novates the listed asset agreements and is signed by the seller, the buyer and a pre-appointed attorney, known as the administrator, on behalf of the remaining parties not directly involved in the sale or purchase of the interest.

Decommissioning

The issue of decommissioning offshore oil and gas facilities gained widespread media coverage in 1995 with the Brent Spar, and as the UK continental shelf becomes an increasingly mature hydrocarbon region, the decommissioning of facilities is an increasingly important issue. With decommissioning costs currently estimated (Economic Report, cited above) to be in the range of £15 to £20 billion, the economic impact is clear.

The legal regime governing decommissioning originates from the 1982 United Nations Convention on the Law of the Sea. The UK’s international obligations for decommissioning are now primarily governed by the regional 1992 Convention for the Protection of the Marine Environment of the North East Atlantic (“OSPAR”) and, in particular, OSPAR Decision 98/3 on the decommissioning of disused offshore installations. Decision 98/3 essentially prohibits dumping offshore installations at sea or leaving offshore installations in place, with a limited potential derogation for concrete installations and the footings of certain large steel installations.

The UK regulatory regime involves the submission of a decommissioning programme and budget to the DBERR. When approved, the submitting parties are jointly and severally liable to carry this out. These parties are generally the parties to the seaward production licence applicable to the offshore facilities to be decommissioned, although the legislation does potentially allow for notices to be served on a wider category of persons. This is a current issue of debate in the industry, particularly in the context of the sale of interests in facilities, as the legislation allows for persons who no longer have any interest in a field and its associated facilities to be subsequently held liable for the decommissioning of those facilities, presumably only where the existing interest holders in the field and facilities have defaulted on their decommissioning obligations.

The future

As the oil and gas sector is envisaged to remain a significant component of the UK economy for many years to come, the industry will continue to require the active support of the legal profession, both in-house and from private practice.

David Ogilvie is Legal Manager, Aberdeen of Conoco Phillips (UK)

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Health and safety: lest we forget

The UK continental shelf is a hostile environment and there are inherent dangers in exploring for and producing oil and gas reserves in this region. The Piper Alpha disaster of 1988, which resulted in 167 deaths, is probably the starkest reminder of these dangers. Safety, health and environmental issues therefore have to be of the highest priority to the industry.

Lord Cullen’s public inquiry into the disaster gave rise to a new health and safety legislative regime for the oil and gas industry, centred round offshore “safety cases”, currently governed by the Offshore Installations (Safety Case) Regulations 2005. Unlike earlier prescriptive health and safety regulations, the safety cases that now require to be created for each offshore installation must demonstrate how major accident hazards are adequately controlled, and that a suitable management system is in place. A duty holder can only bring an installation into use when the safety case has been accepted by the Health and Safety Executive.