Maximising economic recovery from a chilly North Sea

Is Competition law having a chilling effect on the Oil and Gas Authority’s call to 'Maximise Economic Recovery' from the UK North Sea?

The UK’s new Oil and Gas Authority (OGA) has a primary responsibility to implement the recommendations of a report by Sir Ian Wood, to 'Maximise economic recovery' from the UK Offshore oil industry, commonly known as MER.

There is no agreed definition for MER yet, but it is expected to take account of a value of employment, strategic security attaching to domestic hydrocarbon production, taxes paid directly by the industry and its staff, and increased taxes paid by other businesses which benefit from the industry’s presence, thus derived indirectly from the industry. The OGA Chief Executive, Andy Samuel, has published further guidance on OGA’s approach to this in his 'Call to Action' to achieve MER.

Sir Ian’s report indicates that OGA should 'facilitate and encourage collaboration on exploration, cluster field development and use of infrastructure to [MER],' and Chapter six of the Call to Action, entitled 'Improve Collaboration on Decommissioning' suggests that 'Effective collaboration will increase the size of the prize.'

There is an important MER initiative requiring industry to 'align commercial behaviours' to protect critical infrastructure (such as through preparations of joint Regional Development Plans by multiple operators).

Collaboration

Unfortunately, collaboration of any kind is perceived by the industry to carry risks, including potential breach of competition law, and OGA has indicated a varying attitude depending on circumstances. For example collaboration may be seen as contrary to the commercial interests of individual companies. Traditionally this has been a very common view in the North Sea industry, however OGA has indicated it is unlikely to be sympathetic if companies avoid collaboration for this reason.

Competition law

Competition law is perceived to have a serious chilling effect, and with good reason as penalties for breaches can be severe. Fines of up to 10% of worldwide turnover can be imposed, and individuals can be imprisoned in the worst cases. Other risks include lengthy and expensive investigations, third party damages claims and reputational damage.

Breaches

Breaches can occur in unexpected ways. If the OGA were to request commercially sensitive data and then share it, this could trigger substantial penalties for operators even though the OGA is a third party, and a Government body!

One possible defence is for the OGA to require mandatory disclosure, rather than ask for it, as the compulsion removes the element of culpability.

The sector is being forced to think differently about its operations; it is important to understand where the distinction between legitimate collaboration and a criminal cartel would lie in a particular case.

'Collaboration' might be a high risk activity with regard to strategic OGA initiatives on information exchange and benchmarking, or operational initiatives such as joint procurement and selling, or existing joint operating agreements. If any commercially sensitive information is exchanged, such as future plans for development and production, pricing, sales and real ullage, this is high risk.

There is greater leeway if minimum information is shared in the context of agreements to do something specific jointly. This is why joint operating agreements, areas of mutual interest agreements and joint bidding agreements are common and do not necessarily breach competition law. It is important to keep clear evidence of the reasons for sharing information, such as achieving greater efficiency.

Involvement of the OGA does not legitimise anti-competitive conduct, but it may help to show transparency and good faith by those involved.

The OGA has indicated that it will work closely with industry to clarify the boundaries of competition law, however this remains a work in progress; the situation remains complex and unclear. The OGA does not have any formal competition powers.

Competition and Markets Authority

The Competition and Markets Authority (CMA), which enforces competition law in the UK, has written recently to the Department for Energy and Climate Change (which established OGA) alleging that establishment of an independent regulator for UK North Sea oil and gas to facilitate information exchange between industry participants may have a negative impact on competition in the sector.

We recommend that anyone who may be affected by competition law takes qualified legal advice, in particular in the absence of clear guidance from the CMA.

We believe creating a block exemption for the industry, as has been done for Agriculture and Transport, would be a sensible approach. Unfortunately, this would have to be done at EU level. In the interim, the UK government should act as quickly as possible to clarify the position, taking a unified approach aligned with achievement of MER objectives.

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