UK Energy Act 2023: Offshore Oil & Gas Impact

Navigating the Evolving Regulatory Landscape: The Energy Act 2023 and UK Offshore Oil & Gas

The United Kingdom's energy sector is undergoing a significant transformation, and at its heart lies the recently enacted Energy Act 2023. This landmark piece of legislation, which received Royal Assent on 26 October 2023, casts a wide net, impacting various facets of the energy industry, from offshore wind and CCUS to hydrogen production. This briefing, however, zeroes in on the profound implications of the Act for the long-standing offshore oil and gas sector. Our energy experts delve into the critical changes that will shape how this vital industry operates and evolves in the pursuit of net zero and enhanced energy security.

Decommissioning Cost Recovery: A Shift Towards the 'Polluter Pays' Principle

A pivotal change introduced by the Energy Act 2023 concerns the recovery of decommissioning costs within the offshore oil and gas sector. Building upon policy statements released in early 2023, the Act now establishes a new fee charging scheme for the Secretary of State's regulatory functions under Part 4 of the Petroleum Act 1998. This scheme is specifically designed to cover costs incurred in relation to the decommissioning of offshore oil and gas and carbon storage infrastructure.

While the finer details of the new scheme, including payment modalities, are to be laid out in forthcoming secondary legislation, a fundamental shift from the existing regime is evident. Currently, fees are payable at the time of submitting a decommissioning programme request or its revision. The expectation under the new Act is that infrastructure owners and operators will only be charged after the approval of a decommissioning programme. This aligns the fee structure with the widely recognised 'polluter pays' principle, a cornerstone of domestic environmental law.

The underlying rationale for this change is to transfer the financial burden away from the public purse and onto the industry itself. For companies operating in this sector, this necessitates a more robust approach to decommissioning planning and financial provisioning. It will be increasingly critical for operators to ensure they have adequately ring-fenced funds and to review and potentially amend existing decommissioning security arrangements to meet their future obligations. Furthermore, the renewed emphasis on "value for money" is likely to lead to more rigorous negotiation of decommissioning liabilities during farm-in/farm-out arrangements and licence exits.

Key Changes in Decommissioning Cost Recovery:

Environmental Regimes: Broadening Scope and Future-Proofing

The second key policy statement underpinning the Act focused on enhancing environmental protection within offshore oil and gas exploration and production. The objective is clear: to maintain high environmental standards throughout the industry's net-zero transition and the integration of new technologies.

The Act empowers the Secretary of State to amend existing regulations, such as the Offshore Petroleum Activities (Conservation of Habitats) Regulations 2001 and the Merchant Shipping (Oil Pollution Preparedness, Response and Co-operation) Regulations 1998, through new secondary legislation. This will broaden the scope of environmental obligations to encompass not only offshore installations and wells but also offshore gas storage facilities, connected infrastructure like pipelines, and onshore handling and storage facilities. Crucially, these obligations can also extend to assets that are currently being, or have been, decommissioned or abandoned.

A significant clarificatory change is the Act's definition of 'gas' for these environmental provisions. It now explicitly includes not only 'gas' as defined in the Energy Act 2008 but also carbon dioxide and hydrogen. This ensures that the Secretary of State's powers are extended to cover emerging technologies like carbon capture and storage (CCS) and hydrogen production, transportation, and storage. This forward-looking approach is vital for ensuring the UK's offshore environmental regime remains robust and adaptable.

Furthermore, the Act reiterates that offshore oil and gas activities and the production and storage of gas are subject to habitats assessment procedures. Any potential impact on relevant protected sites and species must be assessed and, where necessary, mitigated. The Act also includes detailed provisions governing the interaction between the central UK government and devolved authorities in exercising these environmental protection powers, mirroring similar provisions for the offshore wind sector.

NSTA Change of Control Powers: Enhancing Oversight and Certainty

The Energy Act 2023 also introduces significant amendments to the model clauses for existing and future exploration and production licences, bolstering the powers of the North Sea Transition Authority (NSTA). Specifically, the Act grants the NSTA the ability to proactively prevent an 'undesirable change of control' by a licensee before it occurs.

Previously, the NSTA could only consider a change of control after the event. This left them with a theoretically difficult-to-exercise power to revoke a licence if a further change of control didn't happen within three months. This also created uncertainty for potential acquirers, who often relied on non-binding 'letters of comfort' from the NSTA. The NSTA's limited use of its power, only once in May 2023 to revoke three licences due to a licensee failing to meet regulatory requirements post-change of control, highlighted the practical challenges.

The Act's new pre-emptive approach offers greater certainty for investment in the UK Continental Shelf (UKCS). It strengthens the NSTA's capacity to ensure the UK's energy security by allowing only properly vetted and suitable entities to acquire licence interests. The regulatory certainty that corporate transactions will not be subject to post-event unwinding is a welcome development for all stakeholders in the sector.

Key Regulatory Legislation Impacted by the Energy Act 2023:

• Petroleum Act 1998: Amendments to facilitate the new charging scheme for decommissioning.
• Offshore Petroleum Activities (Conservation of Habitats) Regulations 2001: Potential amendments to broaden environmental obligations.
• Merchant Shipping (Oil Pollution Preparedness, Response and Co-operation) Regulations 1998: Potential amendments to broaden environmental obligations.
• Energy Act 2008: Definition of 'gas' expanded to include CO2 and hydrogen.

Who Regulates Offshore Oil & Gas in the UK?

The regulation of offshore oil and gas operations in the UK is a multifaceted process, involving several key bodies and a comprehensive suite of legislation. The primary regulator is the North Sea Transition Authority (NSTA), formerly the Oil and Gas Authority (OGA). The NSTA is responsible for licensing, exploration, production, and the overall stewardship of the UK's offshore oil and gas resources. Its functions were significantly enhanced by the Energy Act 2016, which established it as an independent regulator.

Environmental regulations are overseen by various bodies, including the Environment Agency (for England), Natural Resources Wales, NatureScot (for Scotland), and the Department of Agriculture, Environment and Rural Affairs (DAERA) in Northern Ireland. The Department for Energy Security and Net Zero also plays a crucial role in setting and enforcing environmental standards, particularly concerning pollution prevention and control.

The legal framework is extensive, encompassing acts like the Petroleum Act 1998, which governs licensing, and a wide array of specific regulations covering:

• Environmental protection (e.g., Offshore Chemicals Regulations 2002, Offshore Petroleum Activities (Oil Pollution Prevention and Control) Regulations 2005).
• Safety (e.g., Offshore Installations (Safety Zones) Order 2018, Offshore Installations (Offshore Safety Directive) (Safety Case etc.) Regulations 2015).
• Pollution prevention and control (e.g., Merchant Shipping (Prevention of Pollution) Regulations).
• Habitats and conservation (e.g., Offshore Marine Conservation (Natural Habitats &c.) Regulations 2007).

The Energy Act 2023 integrates and updates many of these existing regulatory requirements, ensuring the framework remains fit for purpose as the industry navigates the energy transition.

Frequently Asked Questions:

Q1: When did the Energy Act 2023 come into force?
The Energy Act 2023 became law on 26 October 2023.

Q2: What is the 'polluter pays' principle?
It is a principle of environmental law that means those who generate pollution should bear the costs of managing it to prevent damage to human health or the environment. The Act applies this to decommissioning cost recovery.

Q3: How does the Act affect environmental obligations for offshore activities?
It broadens the scope of who can be held responsible for environmental protection and expands the types of infrastructure and assets covered, including those related to CCS and hydrogen.

Q4: What is the NSTA's new power regarding licensees?
The NSTA can now prevent 'undesirable changes of control' by a licensee before they happen, rather than only reacting afterwards.

Q5: Does the Act impact new energy technologies?
Yes, by clarifying that environmental regulations for 'gas' now include carbon dioxide and hydrogen, it ensures new technologies like CCS and hydrogen production are covered.

Conclusion: A More Robust and Future-Ready Regulatory Framework

The Energy Act 2023 represents a significant evolution in the regulatory landscape for the UK's offshore oil and gas sector. By embedding the 'polluter pays' principle more firmly through changes in decommissioning cost recovery, broadening the remit of environmental protection, and empowering the NSTA with pre-emptive control over licensee changes, the Act aims to foster a more responsible, secure, and sustainable energy future. Industry participants must remain vigilant and adapt to these changes, ensuring robust planning and compliance to navigate the evolving regulatory environment successfully.

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