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all you need to know about oil, gas law in the UK

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  1. 1. Nature and History ofUK Oil and Gas LawDoran DoehPartnerSNR Denton (CIS) Limited10 October 2011 1
  2. 2. Overview of lecture Systems of ownership and mineral tenure Continental shelf & international law Development of UK law 2
  3. 3. Systems of ownership & mineral tenure Ownership systems - Right to subsurface is held by owner of the surface - Applies in UK (but petroleum vested in Crown) Non-ownership systems - Wild animals and percolating water - Ownership is achieved by p p y possession Free mining systems - Used in states where areas are little explored or unenclosed - By process of mining, miner acquires right to minerals - Registration of a claim gives rights to the minerals 3
  4. 4. Nature of rights in oil & gas Common pool problem (fugacious substance) Shared ownership & rights to extract Rule of capture - Barnard -v- Monongahela Natural Gas Co (Pennsylvania Supreme Court) v - Trinidad Asphalt Co -v- Ambard (Privy Council) 4
  5. 5. Petroleum: a fugacious mineral 5
  6. 6. Competitive Drilling 6
  7. 7. 7
  8. 8. 8
  9. 9. Continental Shelf - 1 Term ‘continental shelf’ first used by geographer - 1898 Important difference between the geologist’s understanding of CS and that of the lawyer - To the scientist - - zone around a land mass, from low-water line to depth at which there is a marked increase of slope to a greater depth 9
  10. 10. Continental Shelf - 2 - To the international lawyer -  zone around territory, extending from outer limit of the territorial sea (12 miles from coast) to depth of 200 meters or beyond that limit to a depth which is capable of or, limit, exploitation (Article 1, Geneva Convention)  zone around territory, extending from outer limit of the territorial sea (12 miles from coast) through the natural prolongation of its land territory to the outer edge of the continental margin, or to a distance of 200 nautical miles from the baselines from which the breadth of the territorial sea is measured where the outer edge of the continental margin does not extend up to that distance  but not beyond specified limits, and subject to detailed p y p j provisions for fixing the outer g edge of the continental margin beyond 200 miles ( (Article 76, UNCLOS) , ) 10
  11. 11. Continental Shelf - 3 Beginnings of the CS legal regime - Truman Proclamation 1945 - preceded by UK-Venezuela agreement on Gulf of Paria in 1942 (non-assertion of claims, plus delimitation) - US claimed ‘th natural resources of th subsoil and seabed of th continental l i d ‘the t l f the b il d b d f the ti t l shelf beneath the high seas but contiguous to the coasts of the United States as appertaining to the United States, subject to its jurisdiction and control’ - claim rested on two principles first - need to exercise jurisdiction over the conservation and prudent utilisation of the resources of the shelf second - the connection between the continental shelf and the land territory of the state - did not affect the legal status of the superjacent waters 11
  12. 12. Continental Shelf – 4 Other Truman-type claims followed - but many divergences 1951-1958 - International Law Commission worked on continental shelf 1958 - UN Conference on the Law of the Sea adopted Convention on the Continental Shelf 56 states are parties to the 1958 Convention - including most of the major coastal states - UK included - a number entered reservations 12
  13. 13. Continental Shelf - 5 Customary international law - evolves from the practice of states - customary international law on CS evolved since 1945 Difficult to say when rules of states’ practice crystallises into customary international law International Court of Justice authoritative on what is public international law law, including in this area North Sea Continental Shelf case 1969 - ICJ declared that there is a body of customary international law on the continental shelf and its content is identical in content with Articles 1 and 3 of the 1958 Geneva Convention 13
  14. 14. Continental Shelf – 6 Article 1 of the 1958 Convention - expressed outer limit of state’s rights in terms of the 200 metres isobath or “beyond that limit, to where the depth of the superjacent waters admits of the exploitation of the natural resources resources” - two interpretations line moving ever outwards with technological capacity to exploit the sea-bed governed by overall conception of the continental shelf, i.e. up to the edge of the continental margin 14
  15. 15. Continental Shelf – 7 ICJ emphasized vital connection between continental shelf & the land territory of the coastal state - ICJ decision in 1969 North Sea Continental Shelf case ‘what ‘ h t confers the i f th ipso j jure titl which i t title hi h international l ti l law attributes t th tt ib t to the coastal state in respect of its continental shelf is that fact that the submarine areas concerned may be deemed to be actually part of the territory over which th coastal state already h a d i i - i th sense th t although hi h the t l t t l d has dominion in the that, lth h covered with water, they are a prolongation or continuation of that territory, an extension of it under the sea’ - Libya/Malta Continental Shelf Case (1985) “Although there can be a continental shelf when there is no exclusive economic zone, there cannot be an exclusive economic zone without a zone corresponding continental shelf. It follows that …the distance criterion must now apply to the continental shelf.” 15
  16. 16. Continental Shelf – 8 1973 - 1982 - Third UN Conference on the Law of the Sea - tried to establish international regime for mining of hard minerals of deep seabed and ocean floor and other issues relevant to the law of the sea (including continental shelf) - produced comprehensive convention - 320 Articles and 9 annexes - designed to supersede Geneva Convention of 1958 - opened for signature on 10 December 1982 - Convention (known as UNCLOS III) came into force on 16 November 1994 (12 months after ratification by 60 states) th ft tifi ti b t t ) - UK ratified on 25 July 1997 16
  17. 17. Continental Shelf – 9 UNCLOS, Article 76 - coastal state’s continental shelf extends “throughout the natural prolongation of its land territory to the outer edge of the continental margin, or to the distance of 200 nautical miles from the baselines of the territorial sea where the outer baselines…of sea…where edge of the continental margin does not extend up to that distance” - not to exceed either 350 nautical miles from the baselines… of the territorial sea…or 100 nautical miles f ti l il from th 2500 metre i b th the t isobath 17
  18. 18. Continental Shelf – 10 Where a state claims beyond 200 miles to the foot of the continental margin, it will be required to share with an International Sea-Bed Authority either the revenue or resources of this outer belt up to a maximum of 7 per cent of the value or volume after 12 years’ production UNCLOS also recognises 200 mile Exclusive Economic Zone 18
  19. 19. Continental Shelf – 11Present status of law of the sea Conventional regime - Geneva Convention of 1958 Conventional regime - UNCLOS III of 1982 Customary international law Law constantly evolving UK party to 1958 Convention and UNCLOS III 19
  20. 20. Continental Shelf – 12 Seabed and subsoil beneath Territorial Sea is the territory of the coastal state - activities re its exploration and exploitation require no permissive rule of international law Continental shelf very different Permissive rule of international law which authorises state to take measures necessary to explore CS proximate to its coasts & to exploit some of its resources 20
  21. 21. Continental Shelf – 13Delimitation of continental shelf most contentious area dividing line separating areas of jurisdiction between adjacent or opposite states where the CS is the natural prolongation of the land territory of both states 21
  22. 22. Continental Shelf – 14 Article 6 - Geneva Convention - boundary between opposite or adjacent states is to be the median or equidistance line between their respective coasts, in the absence of agreement to the contract and in the absence of special circumstances justifying another boundary (“equidistance/special circumstances rule”) y( q p ) Article 83 - UNCLOS - delimitation between opposite or adjacent states shall be effected by agreement on the basis of international law equidistance most important but not only criterion - equitable principles - Libya/Malta Continental Shelf Case (1985) -general configuration of coastlines and proportionality between length of coastline and length of continental shelf - delimitation 18 minutes north of equidistance line - Anglo-French Continental Shelf Case (1977-8) - “a lateral equidistance line extending...for long distances may…result in inequitable delimitation by reason of distorting effect of individual geographical features” 22
  23. 23. Continental Shelf – 15 In absence of both parties being parties to either or both Conventions, ICJ set out criteria to be applied in North Sea Continental Shelf case in 1969 - agreement should be reached in accordance with broad equitable principles taking account of all relevant circumstances in such a way as to leave as much as possible to each party as constitutes a natural prolongation of its land territory without encroaching on the natural prolongation of the other party; circumstances include configuration of respective coastlines desirability of maintaining unity of hydrocarbon deposits degree of proportionality between lengths of respective coastlines and area of respective continental shelves principle of equidistance 23
  24. 24. Continental Shelf – 16 Nature of the rights of the coastal state Not full sovereignty Sovereign rights to explore and exploit Exercise of rights must not affect status of superjacent waters as high seas Entitled to all mineral resources of its CS E l i rights - if not exercised, no-one else can d so Exclusive i ht t i d l do 24
  25. 25. 25PU9430 7/01 3
  26. 26. 26PU9430 7/01 2
  27. 27. 27PU9430 7/01 5
  28. 28. Development of UK law – 1 Origins of UK legal regime for onshore exploitation Desire of UK Govt to assure security of oil supplies for Royal Navy’s oil-burning fleet of ships G t bought substantial shareholding i A l P i Oil C Govt b ht b t ti l h h ldi in Anglo-Persian Company (h ld of th (holder f the first Middle Eastern oil concession in Iran) - Anglo-Persian Oil Company (Acquisition of Capital Act 1914 Legislation - Bill in 1917 - dropped after opposition - R Regulation under D f l ti d Defence of th R l A t 1914 empowering G t t enter f the Realm Act 1914, i Govt to t land to search for & get petroleum, & preventing others from doing so 28
  29. 29. Development of UK law – 2 Pearson & Sons Ltd stressed to Govt importance of avoiding unrestricted competitive drilling - led to great waste of resources in US P t l Petroleum (Production) A t 1918 (P d ti ) Act - left unaffected property rights in petroleum in situ - tackled competitive drilling problem by forbidding any searching or boring for oil except by persons acting on behalf of Govt or holding a licence granted by the Minister of Munitions P Pearson got to work - 1700 gallons a week i D b hi - whilst G t prepared tt k ll k in Derbyshire hil t Govt d legislation to resolve doubts about property in oil 29
  30. 30. Development of UK law – 3 Derbyshire fizzled out before legislation prepared & Pearson abandoned exploration Govt lost interest in new legislation R i l of i t Revival f interest i l i l ti i 1934 t in legislation in National Govt claimed search for oil unduly hampered by uncertainties about property Led to Petroleum (Production) Act 1934 - key legislation, now consolidated into Petroleum Act 1998 30
  31. 31. Development of UK law – 4Petroleum (Production) Act 1934 principal purpose & effect was to vest in the Crown - the state - property in all petroleum in situ in GB, together with the exclusive right of searching and boring for it no provision for payment of compensation - on the grounds there is no need to compensate someone for the loss of something he never knew he had established - li licensing system & payment of royalties t G t i t t f lti to Govt - compulsory grant by surface owners of rights of access to their land 31
  32. 32. Development of UK law – 5 1934-1964 - not much activity - disappointing results 1973 - Wytch Farm - large oil field in Dorset 1959 - Groningen gas field in Netherlands - showed that there might be large petroleum resources in British sector of continental shelf under Geneva Convention 1964 - Petroleum (Production) Act 1934 extended to offshore areas - Continental Shelf Act 1964 - ‘shipped the 1934 Act regime to the CS’ Licensing regime for onshore applied to offshore 32
  33. 33. Development of UK law – 6 Licensing regime established by section 6 of the 1934 Act, now section 3 of the 1998 Act Govt retained right to do the work itself, but has never used it Li Licences constitute system of public i t tit t t f bli interest regulation of oil & gas operations t l ti f il ti Section 3 enables Minister to make regulations for licensing & model clauses for incorporation in licences compatible with EU Hydrocarbons Licensing Directive - 1994 33
  34. 34. Development of UK law – 7 Regulations not changed much between 1964 & 1974 Public Accounts Cttee of the House of Commons reported in 1971-1972 - posted prices regime operated by Middle Eastern oil producing states encouraged major oil companies t manage th i affairs i such a way as t d j il i to their ff i in h to ensure their North Sea operations did not produce any profits taxable in the UK Oil price shock in 1973 made North Sea much more economic & strategically important Labour Govt in 1974 - major reforms in P t l j f i Petroleum and S b d Submarine Pi li i Pipelines A t 1975 ( Act (now consolidated into Petroleum Act 1998) - retrospective amendment of petroleum production licences 34
  35. 35. Development of UK law – 8 Oil Taxation Act 1975 - marginal rate of taxation of 90 per cent after all allowances used up - combination of Corporation Tax and Petroleum Revenue Tax Major change in legal environment Did not adversely affect investor confidence in UK oil & gas industry S Secured f the state the lion’s share of th b d for th t t th li ’ h f the benefit of the property of the state, fit f th t f th t t with international oil companies taking risks of finding & getting it, and being appropriately rewarded for those risks 35
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