The regulation of oil and gas exploration in the UK Continental Shelf (UKCS) has undergone something of a makeover in recent years. The original regulatory body, the Oil and Gas Authority (OGA), changed its name to NSTA in March 2022. Further, in March 2021, the North Sea Transition Deal was announced. This committed emissions from upstream oil and gas activities to be reduced by 50% by 2030, against a 2018 baseline. [1]

More recently, the NSTA announced the third phase of its Energy Integration Project, which seeks to coordinate oil and gas infrastructure and capability with renewable energy and carbon capture and storage. The NSTA has also begun publishing yearly Emissions Monitoring Reports as of October 2021. The most recent iteration was published on 5 September 2023. Thus far, the NSTA estimates that total upstream Greenhouse Gas (GHG) emissions declined by 3% in 2022, which, relative to 2018, is an overall reduction of 23%. [2]

In addition to these broader changes, specific regulations relating to net zero have been modified or introduced. These include a new ‘climate compatibility checkpoint,’ to which each proposed licensee will be subjected before being granted permission for exploration. Although a complete overview of the regulatory framework is outside its scope, this blog will address some key regulations and guidance documents recently produced by the NSTA, before turning to ongoing litigation in this area. 

Net Zero Regulation and Guidance

Oil and Gas Strategy

The NSTA is required under the Petroleum Act 1998 to produce a strategy with the objective of ‘maximising the economic recovery of UK petroleum.’ [3]  Following the introduction of the new Oil and Gas Authority (OGA) Strategy in February 2021 (introduced when the regulatory body was still operating under its previous name), the NSTA must combine this principal objective with its duty to assist the Secretary of State in his or her efforts to meet the 2050 net zero target. This includes ‘reducing as far reasonable in the circumstances GHG emissions from sources such as flaring and venting and power generation, and supporting carbon capture and storage projects.’ [4]

The NSTA is required under the Petroleum Act 1998 to produce a strategy with the oThe NSTA must act in accordance with this strategy when exercising their functions in relation to North Sea Exploration. [5]  Several changes to the regulatory framework have been made to reflect this, some of which are discussed below.

Field Development Plan Guidance

Before they can begin exploration, potential licensees must receive development and production consent from the NSTA. An integral part of the application process is the submission of a Field Development Plan (FDP) by the licensee, which provides a description of the proposed development. New guidance relevant to FDPs was introduced in conjunction with the OGA Strategy, and is intended to complement the Strategy and the NSTA’s Stewardship Expectations (addressed in the next section).

The process for the approval of a FDP is split into 3 phases: 
a.    the assessment phase, 
b.    the authorisation phase, and 
c.    the execution phase. [6]

During the assessment and authorisation phases, potential licensees are expected to demonstrate a thorough net zero evaluation. Relevant considerations include forecasting the development’s energy consumption and GHG emissions. If the development model proposed does not have the lowest available GHG emissions, justification must be provided. [7]  Additionally, as part of their authorisation, licensees are required to provide data on yearly emissions forecasts and emissions intensity. [8]

Further, the NSTA, in its assessment of ‘maximising the economic recovery of UK petroleum,’ will now include societal carbon costs. These are accounted for through the use of the carbon appraisal values, which apply to all production related GHG emissions. Societal costs are estimated by placing a value on 1 tonne of carbon dioxide, which is calculated based on the estimated abatement costs consistent with the UK’s climate commitments, including net zero and interim carbon budgets. An explanatory note detailing the valuation of such costs was published in October 2021. The carbon costs are then discounted from the overall calculation of economic recoverability using the Treasury’s social discount rate, which is set at 3.5%. [9]

Net Zero Stewardship Expectation

The NSTA has a total of 12 Stewardship Expectations. Net Zero is covered under Expectation 11, which was published in March 2021 alongside the new OGA strategy.

Expectation 11 sets out how the oil and gas industry should reduce its GHG emissions and support the UK’s net zero target. Proposals include an expectation to align activities with, and track performance against, the targets set by the NSTA, as well as implement performance indicators and targeting relating to GHG emissions and emissions intensity. [10]  Complementary to the Energy Integration Project, the Expectation also suggests parties foster energy integration with renewable and carbon capture and storage developments to maximise emissions reduction. [11]

Further, the NSTA has certain powers which may encourage the performance of such expectations. For example, the NSTA’s UKCS Stewardship Survey collects a range of data from licensees and operators for each production licence in the UKCS. [12] The NSTA may also produce benchmarking data based on the information collected in the Stewardship Survey to encourage improved performance. [13]

However, much of the Expectation’s content places a relatively light burden on industry. This includes generalised language such as expecting industry to ‘seek continuous improvement across all areas of GHG emissions reduction,’ [14] or to ‘embed atmospheric emissions reduction throughout the organisation.’ [15]

Climate Compatibility Checkpoint

Following a review of the compatibility of continued oil and gas licensing with the UK’s climate goals, the Government found that continued licensing is possible, so long as a checkpoint is introduced to monitor progress. The climate compatibility checkpoint was therefore announced in September 2022 following a consultation process. Of the six tests suggested in the consultation, three were included in the Government’s final design. These include:

1. A comparison of the UK oil and gas industry against the emissions reductions set out in the North Sea Transition Deal. This test is split into two parts:

a.    Part one looks at the historical performance to date and whether the sector has met the targets it has committed to;
b.    Part two looks at the projected emissions of oil and gas production and the sector’s ability to meet the targets set out in the Transition Deal.

2. The operational GHG emissions intensity compared to other global producers in terms of production emissionss

3. The status of both current and future production relative to the UK’s demand for oil and gas in a net zero scenario. [16]

As the Government outlined in its response to the consultation, the checkpoint has not been placed on statutory footing and does not include a pass/fail standard. Rather, the checkpoint will act as a guiding factor in the decision of the Minister when considering whether to endorse further licensing rounds by the NSTA. However, the legal status of the checkpoint has been kept under review by the Government. [17]

In deciding upon the above design, the Government chose to not include some of the Climate Change Committee’s (‘CCC’) suggestions; including a measurement of the ‘production gap’ between the amount of fossil fuels the planet can burn under the Paris Agreement limits, and the quantity of fossil fuels currently expected to be burned. [18] The Government rejected an argument of the CCC that halting new licences for North Sea exploration would result in a reduction in the production gap. Rather, the Government reached the view that demand would be driven to more emissions-intensive locations for production. [19]  Instead of incorporating this in the checkpoint, the Government has given officials discretionary choice to include such calculations in documents for the Minister to consider.

The Government also rejected a proposal to measure the scope 3 emissions produced as a consequence of production. [20]  Their consultation response acknowledges that there are reliable methods to measure such emissions, including from oil and gas companies themselves. However, they cited the limited control that producers have over the scope 3 emissions from production and the lack of clarity over what steps the Minister should take even where they have clear knowledge of what scope 3 emissions are. Scope 3 emissions are to be addressed in the Supreme Court’s upcoming judgment in Finch, though the Government will eventually need to offer guidance on the correct approach to regulating such emissions.  

Therefore, the climate compatibility checkpoint appears to be relatively narrow in scope, with no binding function on the decision-making of Government. This was the verdict of the Climate Change Committee, who stated that, given the checkpoint only applies to licensing stage of production, the test was too narrow to fully assess the climate impacts of developments. [21]  They suggest that the test should be extended to the processes of exploration, consenting and production, and that, when assessing the sector’s emission under tests 1 and 2, the target should be a reduction of 68% by 2030, rather than the 50% target in the North Sea Transition Deal. [22]

Current litigation

There are several ongoing cases relating to the production of oil and gas from the North Sea. The first relates to the Jackdaw oil drilling well. In July 2022, Greenpeace applied for judicial review of the NSTA’s decision to approve the gas field development. The challenge is based on a failure by the NSTA to calculate emissions produced from the burning of the gas from the field, i.e. scope 3 emissions. The Jackdaw development plan was exempt from the climate compatibility checkpoint as it had already been licensed before its introduction.

In December 2022, two separate claims for judicial review were brought by Uplift and Greenpeace against the 33rd licensing round currently being undertaken by the NSTA. Greenpeace argued that the Government’s failure to consider scope 3 emissions made the decision unlawful. Permission was granted for both claims in April 2023 and both were heard on 25-26 July 2023 in the High Court. 

Uplift’s argument is based on 3 submissions:

a.  The approval of the licensing round was unlawful as the Secretary of State failed to take account of the advice of the Climate Change Committee. This includes the Committee’s criticism of the North Sea Transition Deal’s 50% by 2030 target and the failure to assess scope 3 emissions of new oil and gas licensing rounds. The Secretary of State and the NSTA also failed to consider reasonable alternatives to the granting of new licences.
b.  The decision to grant the licensing round is unlawful because the Secretary of State failed to provide any reasons for the compatibility of the round with the climate compatibility checkpoint and the UK’s overall climate objectives. 
c.  The decision to adopt the climate compatibility checkpoint was unlawful as it excluded the test for downstream/scope 3 emissions on the basis of reasons that were legally irrelevant and irrational. Further, the decisions to not include the test of the ‘global production gap’ was unlawful, on the basis of a mistaken interpretation of the obligations imposed by the Paris Agreement. 

All of these cases therefore address the adoption and format of the climate compatibility checkpoint, particularly the issue of assessing scope 3 emissions. The latter will likely receive greater clarification in the upcoming Supreme Court judgment of the Finch case.

Conclusion

Following the introduction of the new OGA strategy, the Government has made several changes to the regulatory framework governing North Sea oil and gas production. This includes more stringent guidance, such as that relating to FDPs, in which the carbon costs of the development are priced into the Government’s assessment of economic recoverability. However, regulation such as the Net Zero Stewardship Expectation and the climate compatibility checkpoint are more relaxed. The checkpoint in particular has been the target of criticism by the CCC and is currently subject to legal challenge in the High Court. 

Aside from the legal debate, the checkpoint and the other elements of the regulation addressed in this blog will likely receive greater scrutiny in the political setting as the climate crisis worsens, and if the current Government continues its plan to expand production licences. 

Gabriel Kocjancic Nelson will commence pupillage at Francis Taylor Building in October 2023.

1  North Sea Transition Deal, page 10
2  Emissions Monitoring Report 2023, page 2
3  Petroleum Act 1998, s.9A
4  Oil and Gas Authority Strategy, page 6
5  Petroleum Act 1998, s.9B
6  Requirements for the planning of and consent to UKCS Field Developments, page 7
7  Ibid, page 17, para 65
8  Ibid, page 21, para 90
9  Ibid, page 18, para 71
10  Net Zero: Stewardship Expectation 11, page 2, para A.3
11  Ibid, page 1, para 1.1
12  Ibid, page 4, para 4.1.1
13  Ibid, para 4.1.2
14  Ibid, page 2, para 3A.1
15  Ibid, page 3, para 3B.2
16  Climate Compatibility Checkpoint Design, page 7
17  Designing a Climate Compatibility Checkpoint for Future Oil and Gas Licensing in the UK Continental Shelf: Government Response to the consultation, page 34
18  Climate Change Committee Consultation Response, page 7
19  (n16), page 33
20  Ibid, page 30
21  (n18), page 6
22  Ibid, page 7