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The October Oil & Gas Update has a distinct regulatory flavour. , who joined the MMS Oil & Gas Team as Partner in Spring 2011 is one of Scotland's leading experts on Carbon Capture. As it happens, Richard will be presenting on Carbon Capture this Wednesday (12 Oct) in Aberdeen at the Marcliffe. Please click here to book a space. Continuing the regulatory theme, Pamela Coulthard, our Environmental specialist, writes on prospects for carbon credits. , an Oil & Gas Trainee, follows by writing on the deliberations of OSPRAG and possible impact on the UKCS oil spill and safety regime, following on from Macondo. Lastly, reminds us of the end of mandatory retirement and the need to prepare for a new World.
We try to give quality in Oil & Gas Update and we hope that you find this latest edition useful.
CCS Set to Harness Offshore Skills Base
Scotland's geology could play a key role in creating new opportunities for UK oil and gas supply companies, as the focus on Carbon Capture and Storage (CCS) projects is pushed to the fore in the quest to safeguard a low-carbon economy. According to a report by the Scottish Carbon Capture and Storage ('SCCS') consortium, the Captain sandstone formation under the Moray Firth could in the future hold as much as 1,200 million tonnes of CO2, the equivalent of 15 years' of emissions from Scotland's power stations.
The SCCS, one of the leading UK groupings of academia and industry carrying out research into CCS, also concluded 'CCS could create 13,000 jobs in Scotland (and 14,000 elsewhere in the UK) by 2020, and increase in the following years, with a demand for a wide range of professional and craft skills. Some of these jobs will be filled by skilled personnel transferring from other industries (e.g. oil and gas)'.
Exploring the wider opportunities, the report also commented that: 'The UK plc share of the worldwide CCS business is potentially worth more than £10 billion per year from around 2025, with the added value in the UK worth between £5 billion and £9.5 billion per year'.
These findings provide further verification that the CCS industry globally will need to draw heavily on the skills and resource of the oil industry and that the oil industry may find new business CSS opportunities in due course. 'In due course' is the key issue, as the reality is that CCS projects are currently only surviving on governmental subsidies, with limited business opportunities for the supply chain.
There are reportedly only eight large-scale CCS projects operating worldwide. Some of these fall outwith the strict definition of CCS, with a focus on enhanced oil recovery (EOR) and gas re-injection. Pure CCS projects are heavily dependent on public funding, with the UK government, for instance, set to provide up to £1 billion of funding for the first UK CCS demonstration project. Across the world, up to US$40 billion has already been allocated to CCS projects.
We are, therefore, some distance away from an 'open season' for the oil and gas supply chain trying to get into CCS. Winning work depends on being part of a successful consortium, in one of a small number of tendering processes, or picking up contracts from the few CCS projects currently under development.
Looking to the future, when CCS has been proven to work on a large-scale commercial basis, what are the areas of greatest potential for the oil and gas sector? Without being exhaustive, some examples are:
- location and testing of CCS stores - to date, CCS projects have sought to utilise existing formations, with existing data and infrastructure. Examples are Shell's proposed Golden Eye project, alongside Scottish Power and CO2Deepstore, as well as the Norwegian Sleipner project. Where a new structure is being considered, or an existing structure requires to be tested, there will be much analytical work needed
- offshore operations experience - the oil industry has developed, over decades, experience of working in a complex and hazardous environment. Rather than the CCS industry looking to reinvent the wheel, it is already relying on the oil industry's know-how, which has become clear during the UK government's CCS competition. A number of onshore utility companies, with significant experience in onshore power station and pipeline stages, have teamed up with offshore operators and the supply chain
- transportation - CCS will largely be transported to sinks by pipeline, ship or tanker. The oil industry has many years' experience in managing and operating such assets.
As with all large energy infrastructure projects, legal issues will be to the fore. Taking the three examples above, contracts for surveys, front-end engineering and design work, operating and maintenance, transportation, shipping and processing will be needed, which is only a small example of such contracts. These frameworks are already familiar to the oil and gas industry and can be adapted for use in the CCS sector.
Liability will be a significant issue, not only in respect of harm to people and property but also relating to unplanned emissions to the environment, should the CCS infrastructure fail. Who would be liable in such an event, how heavy could any financial penalty be and how would the relevant environmental legislation apply, would be among the questions which require addressing.
Within the consortia themselves, there will be many internal relationships to be formalised, not least the allocation of responsibilities and liabilities. Consideration has to be given to whether incorporated project vehicles should be used, joint ventures established or joint operating agreements, or equivalent documents, drawn up.
And what is to happen with regard to the decommissioning liabilities, not only relating to the CCS operations themselves but also to any previous producing activities at the site?
The CCS industry is already well populated with experts from the oil and gas industry, who recognise the opportunities and challenges. They know that, as in the oil industry, safety is paramount, risk must be minimised and cost must be justified. These lessons have been learned and applied over decades in the hydrocarbons sector and will provide the oil and gas supply chain with much new work, as CCS becomes proven on a commercial scale.
Important Changes to CRC
The Department for Energy and Climate Change ("DECC") recently proposed a set of major changes to the CRC Energy Efficiency Scheme ("CRC") in an attempt to simplify the regime. The proposals include changes to the rules on organisational structures, the sale of allowances, the overlap with climate change agreements and the EU Emissions Trading Scheme ("EU ETS") and the number of fuels covered by the CRC. It is understood that DECC will consult on draft legislation to implement the proposed changes in February 2012.
The CRC is a mandatory scheme for large non-energy intensive UK commercial and public sector organisations. The ultimate aim of the scheme is to reduce energy use. Basically, participants have to measure and report on their energy consumption and buy allowances for the amount of CO2 emissions associated with their energy consumption. Allowances are sold by the Government and participants are free to trade allowances with each other. There are significant financial penalties for failing to comply with the scheme. CRC has been operational since April 2010 and it currently has over 2,700 registered participants.
In its original guise the scheme allowed revenues raised by the sale of emissions allowances to be recycled back to participants based on their performance at improving energy efficiency. However, this mechanism was removed by the Government last year essentially turning CRC into a carbon tax; a move which has understandably proven to be highly unpopular with participants.
Changes Relevant to the Oil and Gas Industry
One of the most important proposed changes to CRC for the oil and gas industry is that, from Phase II onwards (April 2013), all EU ETS installations and onshore sites with Climate Change Agreements will be excluded from the scope of the scheme. This means that when assessing whether an organisation is covered by the CRC, it will no longer have to consider energy supplied to facilities covered under these separate regimes. DECC has also confirmed that it will separately also start a consultation to revise the regime for Climate Change Agreements with the ultimate aim of making it "less burdensome on businesses and more effective".
Proposals also to reduce the number of fuels covered by the scheme from 29 to 4 mean that organisations will have a slightly lighter administrative burden. From Phase II onwards organisations will require to report on consumption levels for electricity, gas, kerosene and diesel used for heating purposes.
DECC has proposed that the current rules for aggregation of groups for CRC participation on the basis of group structure are to remain. However, the rules on disaggregation are to be made more flexible, allowing groups to disaggregate much more freely. Potentially this proposal could abolish the need for large organisations to participate in groups which do not reflect their natural structure.
The initial proposals on reforming the CRC undoubtedly go some way towards creating a greater degree of flexibility for participants and avoiding unnecessary overlap with other established environmental regimes. The CRC does, however, remain complicated and generally controversial. The proposed changes to some of the fundamental rules which govern the scheme represent good news for the oil and gas industry. It remains to be seen, however, whether the continuing unpopularity of the CRC will push the Government to rethink matters even further.
The Safety of Offshore Oil and Gas
The Oil Spill Prevention and Response Advisory Group ("OSPRAG"), which was formed in May 2010 to provide a focal point for the sector's review of industry practices in the UK following the Deepwater Horizon incident in the Gulf of Mexico, concluded its work on Wednesday 21 September 2011 with the launch of its final report. The report assessed the UK's capability to respond to a similar event, finding that there was already a high degree of confidence in the UKCS regulatory regime in terms of health, safety and environmental issues. While OSPRAG has now disbanded following publication of the report, it is hoped that the work done and recommendations made will maintain this confidence.
OSPRAG's remit was threefold: to review UK Continental Shelf regulation and arrangements for oil spill prevention and response; to assess the adequacy of financial provisions in relation to a UKCS response; and to monitor and review information from the Deepwater Horizon incident and to help to implement any necessary recommendations identified. In other words, the group was focused on strengthening the industry's ability to respond quickly in the event of a similar incident, and to ensure such incidents are prevented as far as possible.
Of the recommendations made, the report highlighted two of particular significance: the creation of the Oil Spill Response forum (to be governed by Oil & Gas UK), and the development of the OSPRAG Capping device that was launched at Offshore Europe. The predominant objective of the new forum is to further develop and maintain an effective, robust and sustainable oil spill response capability for upstream operations on the UKCS. The capping device, designed specifically for the harsh conditions in the UK, has been hailed a huge breakthrough and a great achievement given that it was developed in just 7 months.
Despite the positive conclusions reached regarding the UK's regulatory system in the sector, it is of course crucial for operators to be aware of their obligations and the main areas of potential liability following a major incident. For example, operators must show their financial capacity to meet potential liabilities by becoming members of the Offshore Pollution Liability Association Limited ("OPOL"), which requires the acceptance of strict liability for costs associated with offshore spills up to a maximum of $250 million. Operators could face claims from regulators for breaching licence terms, under statute for any breaches of applicable legislation, or could face private actions arising under contracts (for example with partners or contractors) or in response to personal injury or property damage caused through the negligence of the operator.
Oil and gas activities are also under the spotlight of the European Union. In October 2010 a Commission Communication was published entitled "Facing the challenge of the safety of offshore oil and gas activities", and a public consultation on oil and gas offshore safety was held earlier in the year. The Communication concluded that further action is needed to ensure that best available practices are adopted uniformly throughout the EU, and that the Commission plans to work towards a more coherent legal framework for offshore exploration and production activities in Europe. The European Parliament (EP) has also published a report calling for a review of oil spill insurance and liabilities provisions, and on 13 September the EP also adopted a non-legislative Resolution in anticipation of formal legislative proposals soon to be published by the Commission. In the Resolution the EP rejected an EU wide moratorium for deep-sea drilling, provided that new permits would only be issued where appropriate safety and financial regimes are in place. However the Commission's overall plans for the sector remain unclear; the current Energy Commissioner, Gunther Oettinger, has been reported as continuing to favour freezing the issue of new drilling permits until the causes of the Deepwater Horizon incident are known. While the UK industry and Government remain clear that there is no place for a moratorium in the UK, and are unconvinced that another layer of regulation would strengthen the existing offshore regime, any measures adopted at EU level must be observed by Member States. Legislative proposals are expected this autumn.
Retirement and Performance Management
With the repeal of the default retirement age has come a choice for employers -either put in place your own compulsory retirement age which you must be able to objectively justify, or else operate without a retirement age. For many in the oil and gas sector, the approach to be taken will not be business-wide but will depend on the area of the business and the type of work being undertaken.
The reason for this is that you need to be able to show that a retirement age is objectively justified as a proportionate means of achieving a legitimate aim. Courts and tribunals have accepted a number of aims as legitimate, including:
- Ensuring the prospect of future promotion
- Workforce planning
- Maintaining diversity via an age-balanced workforce
- Avoiding an adverse impact on pensions & benefits
- Ensuring service of a high quality
- Protecting older workers' dignity by avoiding capability reviews
However, the last two in particular are potentially dangerous. If you intend to use them, you would need to be sure you could demonstrate that capability actually decreases beyond your chosen compulsory retirement age. You would need evidence! The same would be true if you sought to use the safeguarding of health and safety as a legitimate aim. You would need to be able to show that this was affected by age.
You would also need evidence that a retirement age corresponds to a real business need, that it goes no further than necessary in achieving that need, and that alternative ways of meeting that need do not exist.
It may well be that a legitimate aim exists in relation to certain parts of your organisation, but not across the board, and therefore, you may choose to implement a compulsory retirement age for some workers but not others.
Regardless of what decision you make on retirement age, you will need to revise your procedures for dealing with employees approaching the end of their working lives to ensure they are fair.
Where you have a compulsory retirement age, a procedure similar to that used when dealing with the default retirement age may be best e.g. meetings to discuss retirement, the possibility of working beyond, and a right of appeal. This is because, if you dismiss, "retirement" is no longer a potentially fair reason for dismissal. You would most likely be arguing that compulsory retirement at a justified age is "some other substantial reason" for dismissal and so you need to show you followed a fair procedure.
If operating without a retirement age, the need to address any shortcomings in your performance management systems is particularly pressing because you will need to have an increased reliance on "capability" as the potentially fair reason for dismissal.
Should you require advice on your future approach to retirement and performance management issues, please contact .
If you think your business may be affected by any of the above, or if you have any other questions, please contact:
Head of Oil & Gas
01224 356 146
This briefing is written as a general guide only. It is not intended to contain definitive legal advice which should be sought as appropriate in relation to any particular matter.