Energy > AG Speaking Energy > Petroleum Licenses in the UK: Contract or Regulation?
25 Sep '17

Under the Petroleum Act 1998, the Secretary of State is authorized to grant licenses for the exploitation and production of hydrocarbons. The legal characteristic of such licenses has been an open question. If petroleum licenses are a statutory instrument, they would be subject to principles of public and administrative law. Whereas, if deemed to be a creation of private law, petroleum licenses would be governed by the law of contract. There are a number of important consequences resulting from the legal characterization. These include (as the case below illustrates) the procedure for amendments of license terms and potential administrative law arguments that the Secretary of State should be prohibited from acting ultra vires (i.e., outside his powers).

In a recent case, the High Court in London addressed this question and confirmed the prevailing academic view: namely, that a petroleum license is a contract R (Benjamin Dean) v the Secretary of State for Business, Energy and Industrial Strategy [2017] EWCH 1998 (Admin) (Holgate J).

Facts

A petroleum license had been granted for the exploration for and production of coalbed methane. Subsequently, it was realized that greater potential laid in the exploitation of shale gas. The claimant sought to use arguments relating to the legal characteristics of a petroleum license in order to prevent fracking.

The claimant argued that by entering into a deed of variation to alter the length of the Initial Term, the Secretary of State had acted ultra vires. It was submitted that the 1998 Act is a complete statutory code governing licenses and contains no powers to vary an executed license. In response, the Secretary of State submitted that the license was contractual in nature and, therefore, capable of being varied by further agreement between the parties.

Decision

The Court emphasized that it was not concerned with the merits of the fracking proposal, but that its focus was solely with the legal issues. It held:

  • Petroleum licenses need the English law requirements of a contract: namely, an offer (by the Secretary of State as grantor), an acceptance (by the licensee), good consideration and the intention to create legal relations. The license therefore is a contract, and capable of being varied. Variation must be by mutual agreement.
  • Petroleum licenses lack certain traditional public law features. For example, there is no right of appeal regarding their terms. Compare this to a planning license: once granted, the only recourse if the licensee is dissatisfied is an administrative or court appeal. Planning license amendments do not need to be by agreement, but can be made unilaterally.
  • A petroleum license gives the licensee a right to own production, and then sell it to third parties. These are private law rights and, accordingly, should be governed by private law.

The judge determined these rights to be a property transaction (similar to a mining license). The use of a deed (rather than a simple contract) reflects the formalities needed when creating an interest in land.

Going Forward

The conclusions of the court should be a comfort to licensees for two reasons. A mechanism exists to vary Work Programmes and/or the duration of the Initial or Second Terms of a petroleum license. Furthermore, third parties cannot use public or administrative law arguments to disrupt or challenge the license and petroleum operations.