D.doeh

Nature and History ofNature and History of UK Oil and Gas Law

Doran Doeh

Partner

SNR Denton (CIS) Limited

10 October 2011

11

Overview of lecture

Systems of ownership and mineral tenure

Continental shelf & international law

Development of UK law

2

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 possessionp y p

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

Nature of rights in oil & gas

Common pool problem (fugacious substance)

Shared ownership & rights to extract

Rule of captureBarnard v Monongahela Natural Gas Co (Pennsylvania Supreme Court)- Barnard -v- Monongahela Natural Gas Co (Pennsylvania Supreme Court)

- Trinidad Asphalt Co -v- Ambard (Privy Council)

4

Petroleum: a fugacious mineral

5

Competitive Drilling

6

7

8

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

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 ofcoast) to depth of 200 meters or, beyond that limit, to a depth which is capable of 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 provisions for fixing the outer y p j p gedge of the continental margin beyond 200 miles

(Article 76, UNCLOS)

10

( , )

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 l i d ‘th t l f th b il d b d f th ti t l- US claimed ‘the natural resources of the subsoil and seabed of the continental 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 shelfutilisation 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

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 Convention56 states are parties to the 1958 Convention

- including most of the major coastal states - UK included

- a number entered reservations

12

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 lawInternational Court of Justice authoritative on what is public international 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

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”exploitation of the natural 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

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

‘ h t f th i j titl hi h i t ti l l tt ib t t th ‘what confers the ipso jure title which international law attributes 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

hi h th t l t t l d h d i i i th th t lth hwhich the coastal state already has a dominion - in the sense that, although 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 aeconomic zone, there cannot be an exclusive economic zone without a corresponding continental shelf. It follows that …the distance criterion must now apply to the continental shelf.”

15

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)(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 th ft tifi ti b 60 t t )months after ratification by 60 states)

- UK ratified on 25 July 1997

16

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 outerof 200 nautical miles from the baselines…of the territorial sea…where the outer 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 100 ti l il f th 2500 t i b thsea…or 100 nautical miles from the 2500 metre isobath

17

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

Continental Shelf – 11

Present 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

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

Continental Shelf – 13

Delimitation 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 stateswhere the CS is the natural prolongation of the land territory of both states

21

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 extending...for long distances may…result in inequitable delimitation by reason of distorting effect of individual geographical features”

22

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 muchtaking 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 includecircumstances 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

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 i ht if t i d l d Exclusive rights - if not exercised, no-one else can do so

24

25

PU9430 7/01 3

26

PU9430 7/01 2

27

PU9430 7/01 5

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 b ht b t ti l h h ldi i A l P i Oil C (h ld f th Govt bought substantial shareholding in Anglo-Persian Oil Company (holder of 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 l ti d D f f th R l A t 1914 i G t t t- Regulation under Defence of the Realm Act 1914, empowering Govt to enter land to search for & get petroleum, & preventing others from doing so

28

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 (P d ti ) A t 1918 Petroleum (Production) Act 1918

- left unaffected property rights in petroleum in situ

- tackled competitive drilling problem by forbidding any searching or boring for oiltackled 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 t t k 1700 ll k i D b hi hil t G t d Pearson got to work - 1700 gallons a week in Derbyshire - whilst Govt prepared legislation to resolve doubts about property in oil

29

Development of UK law – 3

Derbyshire fizzled out before legislation prepared & Pearson abandoned exploration

Govt lost interest in new legislation

R i l f i t t i l i l ti i 1934 Revival of interest in legislation in 1934

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

Development of UK law – 4

Petroleum (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 itfor 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 i t & t f lti t G t- licensing system & payment of royalties to Govt

- compulsory grant by surface owners of rights of access to their land

31

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 areas1964 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

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 tit t t f bli i t t l ti f il & ti Licences constitute system of public interest regulation of oil & gas operations

Section 3 enables Minister to make regulations for licensing & model clauses for incorporation in licences

compatible with EU Hydrocarbons Licensing Directive - 1994

33

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 d j il i t th i ff i i h tencouraged major oil companies to manage their affairs in such a way as 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

j f i P t l d S b i Pi li A t 1975 (- major reforms in Petroleum and Submarine Pipelines Act 1975 (now consolidated into Petroleum Act 1998)

- retrospective amendment of petroleum production licences

34

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 d f th t t th li ’ h f th b fit f th t f th t t Secured for the state the lion’s share of the benefit of the property of the state, with international oil companies taking risks of finding & getting it, and being appropriately rewarded for those risks

35

36