Regulation of natural gas production
Ownership and organisationWhat is the ownership and organisational structure for production of natural gas (other than LNG)? How does the government derive value from natural gas production?
The Petroleum Act 1998 (the Petroleum Act), the principal UK legislation governing offshore gas operations, vests ownership of all of the UK’s gas resources in the Crown. The Oil and Gas Authority (OGA) can grant licences (through competitive licensing rounds that generally take place every year, although in exceptional circumstances the OGA may issue a licence outside of a licensing round) that confer rights on licence holders to explore for and produce gas. All licences confer these rights in relation to a limited area and for a limited period.
Licences take the form of a deed and contain binding and enforceable conditions with which the licence holder must comply. They are primarily designed to ensure efficient and maximised oil and gas production, to ensure that the licence rights are properly exploited. The terms and conditions of the licence are set out as model clauses established in secondary legislation. The model clauses applicable to a particular licence are those that are in force at the time the licence was granted, and generally are not affected by subsequent sets of model clauses. The Petroleum Licensing (Exploration and Production) (Seaward and Landward Areas) Regulations 2004, the Petroleum Licensing (Production) (Seaward Areas) Regulations 2008 and the Petroleum Licensing (Exploration and Production) (Landward Areas) Regulations 2014, as amended by SI 2016/1029 and SI 2017/855, set out the model clauses for the various types of licences. Licensees must also now comply with the Offshore Petroleum Licensing (Offshore Safety Directive) Regulations 2015 (OPL Regulations). These regulations are supplemental to the existing licence regime and require prospective licensees to demonstrate financial capability and technical competency, among other things, to the OGA. Prospective licensees must also demonstrate that they have a place of business in the UK.
In respect of taxation, the regime that applies to exploration for, and production of, natural gas in the UK and on the UK Continental Shelf currently comprises ring-fenced corporation tax, supplementary charge and petroleum revenue tax. A ring-fenced corporation tax applies to profits from gas extraction activities or the acquisition, enjoyment or exploitation of gas rights, and is designed to ensure profits from these activities are not reduced for tax purposes by set-off against losses from different trading activities or by excessive interest payment. These profits are ring-fenced and treated as arising from a separate trade for tax purposes. The main current rate of applicable corporation tax is 30 per cent, together with a further 10 per cent charge (known as a supplementary charge (SC)), which is imposed on profits (excluding financing costs and deducting any field, cluster or investment allowances available) that arise as a result of these ring-fenced activities.
For chargeable periods ending on or before 31 December 2015, a petroleum revenue tax (PRT) was imposed on taxable fields that received development consent before 16 March 1993, for which the boundary of the fields was determined by the Department for Business, Energy and Industrial Strategy (BEIS). Broadly, the tax was levied on the field’s licensees based on the share of profits from that field, taking into account claims for deductions for certain specific expenditures and special reliefs (including oil allowance, certain production expenditures and safeguards intended to ensure a minimum return). The Finance Act 2016 reduced the current rate of PRT to zero per cent. Companies may still obtain a PRT refund for payments in accounting periods up to 31 December 2015 against decommissioning losses.
The Ring Fence Expenditure Supplement (RFES) was introduced for accounting periods beginning on or after 1 January 2006 to assist companies that do not yet have sufficient taxable income for ring-fenced corporation tax purposes. The RFES increases the value of losses carried forward from one accounting period to the next by a compound rate of 10 per cent a year for a maximum of 10 years.
During 2017, the government (HM Treasury) consulted on proposals to allow ‘tax history’ to be transferred from sellers to buyers of UK offshore assets, enabling the latter to claim tax relief on their decommissioning costs, which they would not otherwise have been able to access. In the November 2017 budget, it was announced that the government would introduce ‘a transferable tax history mechanism for UK Continental Shelf oil and gas producers for deals that complete on or after 1 November 2018 . . . This will level the playing field between buyers and sellers of oil and gas fields, providing new investors in the UK Continental Shelf with certainty on the tax relief available for the decommissioning costs.’ Legislative provision for this new mechanism was included in the Finance Bill that was introduced to Parliament after the October 2018 budget (having first been published in draft in July 2018) and was granted Royal Assent on 12 February 2019 in the Finance Act 2019.
To incentivise growth in the shale gas sector, the Finance Act 2014 introduced a new allowance covering both conventional and unconventional hydrocarbons onshore called the 'pad allowance'. The allowance removes an amount equal to 75 per cent of the capital expenditure incurred by a company on or after 5 December 2013 from its adjusted ring-fence profits subject to the SC, generally so long as not related to the acquisition of an asset that has previously generated an onshore allowance on or after 16 March 2016.
The government also derives revenue through licence charges, and each licence carries an annual charge, called a rental. In the case of most types of licence, rentals fall due each year on the anniversary of the licence award. They are charged at an escalating rate on each square kilometre within the area covered by the licence and were last updated on 1 April 2020.
Regulatory frameworkDescribe the statutory and regulatory framework and any relevant authorisations applicable to natural gas exploration and production.
LicencesThe Crown has the exclusive right to search for, develop and produce petroleum in the UK and beneath the sea adjacent to the UK (the UK Continental Shelf). A licence is required to carry out exploration and production activities. Licences are usually awarded by the Secretary of State (SoS) following annual licensing rounds or can be acquired through asset transfers between companies with consent from the SoS. Licence applications are considered by reference to BEIS’s financial criteria and standards of operatorship. The main types of licence are:
- onshore Petroleum Exploration and Development Licence (PEDL): an exclusive right to explore and produce onshore. Except in special circumstances, PEDLs run for three successive terms (initial term, second term and production term), the mandatory relinquishment at the end of the initial term is 50 per cent and the production term lasts up to 20 years subject to extension with the agreement of the OGA;
- offshore and onshore exploration: a non-exclusive right to conduct non-intrusive exploration operations for three or six years;
- offshore production: an exclusive right to conduct operations from exploration through to production, subject to the OGA approving the field development plans. The production phase (phase three) can last for up to 18 years, subject to extension with agreement from the OGA; and
- offshore innovate licence: from the 29th Licensing Round, all new offshore production licences have become ‘innovate licences’, offering greater flexibility for each applicant to design a work programme around particular circumstances. The licence has an initial term of up to nine years divided into three phases: phase A for geotechnical studies and geophysical data reprocessing; phase B for undertaking seismic surveys and acquiring other geophysical data; and phase C for drilling.
Offshore production licences and PEDL licences are valid for a sequence of terms. The terms follow the exploration, appraisal and production phases of field development. A licence will expire automatically at the end of each term unless the licensee can demonstrate sufficient progress (in terms of exploration, appraisal or development) to merit the continuation of the licence to the next operational phase. Licences may be held by a single company or jointly by several companies working together. Petroleum Act licences (often referred to as exploration licences and production licences) do not cover all gas-related activities. Offshore exploration and production activities are subject to additional regulation by the OGA, the Offshore Petroleum Regulator for Environment and Decommissioning (OPRED), the Health and Safety Executive (HSE) and the Offshore Safety Directive Regulator (OSDR). Onshore exploration and production licence holders are subject to necessary permissions from landowners, planning authorities, BEIS, the HSE, the Control of Major Accident Hazard competent authority and Environment Agency (EA) in England, Natural Resources Wales (NRW) in Wales and the Scottish Environment Protection Agency (SEPA) in Scotland.
In addition to the production licences described above, the exploration for and production of natural gas, including the construction and operation of pipelines, is regulated under a range of environmental and safety legislation. Different requirements apply depending on whether the pipeline is onshore or offshore. Both offshore and onshore pipeline safety is governed by the Pipelines Safety Regulations 1996 (PSR), which are enforced by the HSE.
Offshore Safety DirectiveThe Offshore Safety Directive 2013/30/EU (OSD) entered into force on 18 July 2013. It was introduced as a response to the Deepwater Horizon incident in April 2010 in the Gulf of Mexico with the aim to reduce, as far as possible, the occurrence of major accidents related to oil and gas operations.
The OSD introduces for the first time an EU-wide framework law relating to the environmental and safety management of offshore oil and gas operations in EU waters. It sets common standards and requirements for EU governments to apply in relation to offshore safety and environmental management, and the regulation of offshore activities.
In the UK, the directive has not required any fundamental changes to the existing legal regime for offshore safety and environmental regulation. Indeed, the OSD is modelled on the UK regime in many respects. However, there are a number of measures of potential significance for operators under the OSD and national implementing regulations (the Offshore Installations (Offshore Safety Directive) (Safety Case) Regulations 2015) that provide for new obligations and changes to existing requirements.
These include requirements in relation to the reporting by operators of information relating both to operations and to safety and environmental management to the Offshore Safety Directive Regulator (in the UK being BEIS and HSE), the extension of the meaning of ‘water damage’ under the Environmental Liability Directive 2004/35/EC to include ‘marine waters’ and a new requirement to produce corporate major accident prevention policies that not only cover installations within the EU but will also need to specify the extent to which equivalent policies are in place for operations outside the EU. Important ‘structural’ changes have also been introduced. These include a consolidation of environmental and safety duties, with a single operator having to be responsible for both environmental compliance and safety management at any one time.
The OSD has been implemented in relation to the territorial sea adjacent to Great Britain and any areas designated by order under section 1(7) of the Continental Shelf Act 1964, by the Offshore Installations (Offshore Safety Directive) (Safety Case, etc) Regulations 2015 (SCR 2015), the OPL Regulations and the Merchant Shipping (Oil Pollution Preparedness, Response and Co-operation Convention) (Amendment) Regulations 2015 (OPRC Amendment Regulations). These implementing regulations came into force on 19 July 2015. Application of the new regime was phased in over a transitional period between 19 July 2015 and 19 July 2018.
The SCR 2015 amend a range of current legislation applying to offshore gas activities, including the Offshore Installation and Pipeline Works (Management and Administration) Regulations 1995 (MAR), Offshore Installations (Prevention of Fire and Explosion and Emergency Response) Regulations 1995 (PFEER), Offshore Installations and Wells (Design and Construction, etc) Regulations 1996 (DCR), Offshore Installations (Safety Case) Regulations 2005 (SCR 2005) and Reporting of Injuries, Diseases and Dangerous Occurrences Regulations 2013 (RIDDOR), making some changes to duty holder and operator terminology.
Offshore Environmental Civil Sanctions RegulationsThe Offshore Environmental Civil Sanctions Regulations 2018/800 (the OECS Regulations) entered into force on 1 October 2018 to allow OPRED to impose civil sanctions on offshore companies engaged in hydrocarbon-related activities within the regulated zone that breach specified existing environmental legislation.
Before this, such breaches could only be sanctioned through criminal prosecution. The government considered that these civil sanctions will provide OPRED with ‘a more flexible, proportionate and timely enforcement response in respect of breaches that amount to criminal offences’.
The civil penalties apply to offences under the following regulations:
- the Offshore Combustion Installations (Pollution Prevention and Control) Regulations 2013;
- the Offshore Petroleum Activities (Oil Pollution Prevention and Control) Regulations 2005;
- the Offshore Installations (Emergency Pollution Control) Regulations 2002;
- the Merchant Shipping (Oil Pollution Preparedness, Response and Co-operation Convention) Regulations 1998; and
- the Offshore Chemicals Regulations 2002.
The sanctions only apply to breaches that can currently be subject to criminal prosecution, and, therefore, the OECS Regulations do not create any new offences. They are only an alternative means for OPRED to sanction the breaches. OPRED can impose a penalty in circumstances where it is satisfied that a breach has been proven beyond reasonable doubt (the criminal burden of proof).
In most instances, the penalties that OPRED will be able to impose under the OECS Regulations are fixed monetary penalties (FMPs). FMPs range between £500 and £2,500. In some instances, OPRED may instead impose a variable monetary penalty (VMP) up to a maximum of £50,000 where there are ‘aggravating factors’ such as a history of non-compliance. Penalties may only be imposed in respect of acts or omissions occurring on or after 1 November 2018.
BEIS licence conditionsThe conditions in the different types of licence impose a variety of obligations on licence holders, such as obligations:
- to maintain records and samples and to provide information to the SoS;
- to establish and follow exploration, development and production work programmes;
- on the commencement, abandonment and plugging of wells; and
- to develop fields that cross licence boundaries in partnership with the adjacent licence holders.
BEIS is responsible for the setting of government policy for the gas industry. The OGA has primary responsibility for regulating offshore gas exploration and production activities through the petroleum licensing regime.
Environmental and safety regulationIn parallel with BEIS and the OGA’s role, the production, transmission, distribution and supply of natural gas are regulated by a range of environmental and safety regulators. Generally, for environmental matters, OPRED (which is a division within BEIS) is the regulator in the offshore context, whereas the EA (in England), NRW (in Wales), SEPA (in Scotland) and local authorities regulate the onshore environment. The HSE has primary responsibility for regulating safety matters both offshore and onshore. However, for offshore operations, UK implementation of the OSD triggered the creation of a new consolidated competent authority regulator to regulate OSD matters – the OSDR, made up of the HSE and BEIS/OPRED acting jointly on both environmental and safety matters. That said, the HSE and BEIS/OPRED will continue to exist as individual safety and environmental offshore regulators and have separate functions under individual permitting regimes.
Most offshore environmental requirements in this context are imposed by bespoke secondary legislation, which is specific to the oil and gas industry. Key obligations include the requirement, at various stages in offshore exploration and production, to carry out an environmental impact assessment, obligations on operators to prepare oil pollution emergency plans (see the following paragraph), the prohibition of discharges or combustion activities except in accordance with conditions set in offshore permits and the regulation of carbon emissions.
The Merchant Shipping (Oil Pollution Preparedness, Response and Co-operation Convention) Regulations 1998 (as amended in 2015 by the OPRC Amendment Regulations) and the Offshore Installations (Emergency Pollution Control) Regulations 2002 (together, the OPEP Regulations) are the main components of the legal framework under which the UK government regulates potential environmental incidents involving offshore installations to ensure that preventative measures are in place to limit pollution. In particular, obligations are imposed on operators to implement robust emergency planning arrangements, and powers are reserved for the UK government to step in and take measures to enforce any necessary remedial actions.
Other key pieces of secondary environmental legislation (as amended in some cases) applicable to offshore activities include:
- MAR, PFEER, DCR, SCR 2005 and RIDDOR, all amended by SCR 2015, which implemented the OSD (see Offshore Safety Directive section above for full references to legislation);
- Offshore Petroleum Activities (Oil Pollution Prevention and Control) Regulations 2005;
- Offshore Combustion Installations (Pollution Prevention and Control) Regulations 2013, as amended by the 2018 Regulations;
- Offshore Petroleum Production and Pipe-lines (Assessment of Environmental Effects) Regulations 1999, as amended by the 2020 Regulations;
- Offshore Chemicals Regulations 2002;
- Pipeline Safety Regulations 1996;
- Greenhouse Gas Emissions Trading Scheme Regulations 2012;
- Energy Savings Opportunity Scheme Regulations 2014;
- Environmental Assessment of Plans and Programmes Regulations 2004 (and Scotland and Wales equivalent regulations);
- Offshore Petroleum Activities (Conservation of Habitats) Regulations 2001;
- Conservation of Offshore Marine Habitats and Species Regulations 2017; and
- Marine and Coastal Access Act 2009 and Marine Licensing (Exempted Activities) Order 2011 (and Scotland and Wales equivalent orders).
The Petroleum Act 1998 is not primarily concerned with environmental protection (its principal purpose is to regulate the terms on which petroleum rights are granted to companies). However, it does impose certain requirements and duties on oil and gas companies in respect of environmental matters. For example, applicants for production licences must demonstrate adequate environmental competence and (usually) include an environmental assessment of the licence block’s environmental sensitivities. Companies are also required pursuant to the Petroleum Act regime to provide evidence of environmental management systems, and also financial provision to cover the costs of remediating damage caused by pollution in the event of a spillage. The Petroleum Act also establishes a specific regulatory regime for the decommissioning of offshore oil and gas installations and infrastructure.
For onshore operations, the Petroleum Act 1998 also governs the granting of petroleum rights, but a different suite of legislation to that which is applicable offshore applies in respect of environmental regulation. While the laws differ for onshore upstream operations, the basic principles are the same. The principal legal regimes are:
- the planning regime, including the Planning Act 2008, the Infrastructure Planning (Environmental Impact Assessment) Regulations 2017, the Town and Country Planning Act 1990 (TCPA) and the Town and Country Planning (Environmental Impact Assessment) Regulations 2017, which impose obligations in relation to certain kinds of development to carry out an environmental impact assessment and prevent the granting of consent unless the decision-maker has first taken into account environmental information provided by the applicant. The TCPA and the Planning Act 2008 also enable decision makers to impose on a consent conditions relating to the environment; and
- the environmental permitting regime under the Environmental Permitting (England and Wales) Regulations 2016, which require an environmental permit to be obtained and complied with for certain regulated activities associated with onshore upstream activities such as groundwater discharges and mining waste generation.
The Environmental Permitting (England and Wales) (Amendment) (EU Exit) Regulations 2019 were created on 8 January 2019 and came into force on 31 December 2020. The regulations aim to ensure that the environmental permitting regime in England and Wales can continue to function after Brexit.
As well as making the necessary amendments to ensure the continuation of the environmental permitting regime on exit day, the main amendment to the regulations is the insertion of a new Schedule 1A to modify the effect of more than 300 cross-references to over 20 EU Directives implemented by the Environmental Permitting (England and Wales) Regulations 2016.
Unconventional gas productionAre there different rules for, or any restrictions on, unconventional natural gas production (including fracking)?
Unconventional gas is produced from shale rock and is extracted by means of hydraulic fracturing (fracking). Separate licensing rounds are held for offshore and onshore licences. The last landward licensing round took place in December 2015.
In February 2013, the UK Onshore Operators Group (UKOOG), an industry body representing the UK onshore oil and gas industry, published ‘UK Onshore Shale Gas Well Guidelines: Exploration and appraisal phase’. The UKOOG published a second issue of these guidelines, updating the first, in January 2015. The guidelines focus on the exploration and appraisal stages of shale gas projects and set out the best practice by reference to the legislation governing shale gas exploration.
Key regulation governing compliance with environmental laws does not fall within the jurisdiction of the BEIS or the OGA (except in relation to certain pipelines), and is implemented by the Department for Environment, Food and Rural Affairs, the EA (which plays a role in issuing some of the permits required to carry out onshore exploration and production in England), NRW in Wales, SEPA in Scotland and relevant local authorities (for obtaining planning permissions).
In addition to obtaining a PEDL, operators intending to explore, develop and produce shale gas must obtain a range of other consents and permissions, depending on the location and physical and environmental conditions and constraints that apply to any particular project. Consents and permissions required include (as appropriate) landowner consents, planning permissions, environmental permits, Coal Authority authorisation, well consents (in certain circumstances), field development consents, well notifications, a notification of intention to drill to search for or extract minerals, abstraction licences, and flaring and venting consents. The Infrastructure Act 2015 added hydraulic fracturing consent from BEIS to the existing regulatory regime as a final check that all the necessary environmental and health and safety permits have been obtained.
The HSE enforces health and safety law onshore under the Health and Safety at Work etc Act 1974. The HSE monitors well integrity and site safety perspective of shale gas operations. Regulations applying to shale gas operations include the Borehole Site and Operations Regulations 1995, the DCR 1996 (which apply to wells both on and offshore), Environmental Permitting (England and Wales) Regulations 2016, Water Resources Act 1991 and the Reporting of Injuries Diseases and Dangerous Occurrences Regulations 1995, among others. Onshore and offshore pipeline safety is governed by the PSR, enforced by the HSE.
Local authorities in England and Wales are able to keep 100 per cent of business rates collected from shale gas sites. In 2016, the UK Community Foundations ran a pilot scheme at selected shale gas sites in the UK to consult on how to share out the £100,000 community benefits scheme for each gas well site (which rewards communities hosting shale gas exploration sites). The UKOOG also consulted with stakeholders on how the incentive of 1 per cent revenue from production wells could be shared with local communities. Her Majesty’s Treasury initiated a consultation on setting up a sovereign/shale wealth fund to benefit local communities and regional economies in August 2016 and published a response setting out some principles for administering such a fund in November 2017.
On 2 November 2019, the UK government announced an effective moratorium on fracking, with a presumption against issuing any further hydraulic fracturing consents. This followed a report from the OGA that found that it is not currently possible to accurately predict the probability or magnitude of earthquakes linked to fracking operations. A ministerial statement said that the moratorium would be ‘maintained until compelling new evidence is provided which addresses the concerns around the prediction and management of induced seismicity’. Future applications for hydraulic fracturing consent will be considered ‘on their own merit, in accordance with the law’, but the shale gas industry should take the government’s position into account ‘when considering new developments’. It is not currently clear whether the moratorium relates to all forms of fracking. The Infrastructure Act 2015 defines associated hydraulic fracturing based on the volume of fluid used, setting a base limit of 1,000m3 of fluid per frack stage or 10,000m3 per well. No guidance has been provided on whether the government will consider fracking using lower levels of fluid or different techniques such as proppant squeeze, a form of fracking with acid.
Onshore oil and gas extraction is a devolved matter for the governments in Scotland, Wales and Northern Ireland. In Scotland, in October 2019, the SNP government reaffirmed its ‘final policy position’ of no support for unconventional oil and gas development. While fracking is not outlawed by specific legislation, the devolved government has promised not to issue licences for onshore unconventional oil and gas projects, including fracking, shale gas or coalbed methane projects. A moratorium has been in place in Wales since 2015, with the Welsh government issuing a statement in December 2018 confirming that it will not support fracking. The situation in Northern Ireland is complicated by the current suspension of the devolved Northern Ireland Assembly. The Assembly in 2015 announced a presumption against fracking ‘until there is sufficient and robust evidence on all environmental impacts’. In May 2019, however, the Department for Economy in Northern Ireland launched a consultation on an application to test a large onshore area for natural gas. The Department is currently analysing responses, and aims to present recommendations and deliver a final report on whether to grant a petroleum licence to a ‘future Minister’.
Required security and guaranteesAre participants required to provide security or any guarantees to be issued with a licence to explore for or to store gas?
No.