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Published: Fri, 02 Feb 2018
Although the licensing regime is defined and regulated by statute
Although the United Kingdom government has proprietary rights to the petroleum reserves in the UK, experience has shown that it is more efficient and effective for the State to contract with private oil companies, who are better placed to carry out such work in terms of technical expertise and financial position. The UK government uses petroleum production licenses to give legal effect to this arrangement. In this essay I will explore the nature of the petroleum license in three steps. I will set out the precise meaning of the various terms with which we are dealing, I will then examine the UK framework with reference to those definitions and finally assess to what extent the UK oil and gas license can be said to come under any of them.
In order to determine the precise nature of licenses under UK oil and gas law it is necessary to first define what exactly is meant when we use the terms regulation, license and contract. A regulation is a rule of order having the force of law, prescribed by a superior or competent authority, relating to the actions of those under the authority’s control. A license is generally described as the permission granted by a competent authority to exercise a certain privilege that, without such authorization, would constitute an illegal act, a trespass or a tort. Thus a license gives a person or organization permission to engage in a particular activity. Failure to abide by certain laws and regulations can result in suspension or revocation of a license. Licenses are issued by the administrative agencies of local, state, and federal lawmaking bodies. Contractual agreements, on the other hand, are more rigid. A contract is essentially an agreement with specific terms between two or more persons or entities in which there is a promise to do something in return for consideration. It is important to bear these definitions in mind when considering the United Kingdom licensing framework and whether it is apt to label such agreements as contractual.
It is equally important to consider why the distinction even matters. The key here is commercial certainty. Licenses and regulations are more flexible in nature, governments are able to unilaterally amend their terms. Therefore, a contractual agreement offers more protection to the rights of the �licensee�. Contracts cannot be unilaterally or retroactively amended. Thus the significance of the distinction lies in the protection and juridical security afforded to the rights of the licensee under a contractual agreement. If licenses under UK oil and gas law are taken to be contracts, supposedly, these rights will be better protected. It is necessary to keep this in mind as we examine the framework of the United Kingdom regime as this greater protection of rights is a key characteristic of contracts, and is therefore extremely significant to the issue of whether licenses under UK oil and gas law are contractual instruments or not.
In the United Kingdom exploration and extraction licenses are granted by the Department of Energy and Climate Change (DECC). The license takes the form of a deed under which the licensee is bound to observe the conditions of the license. In order to ensure uniformity and equal treatment of competing applicants the DECC is bound to incorporate various conditions (known as model clauses) for different types of licenses into the agreement, although the clauses can be subject to modification. In order to satisfy the interests of both parties the agreement must simultaneously guarantee a considerable degree of economic security for the investor and also reasonable flexibility as to the technical details of its operation for the State. The United Kingdom licensing system tries to meet both these objectives by incorporating a rather self-contained set of model clauses providing for the basic economic relationship (e.g. royalties) and for compliance by the licensee with unilateral ministerial instructions and consents or approval requirements with respect to the details of exploration and production1.
On the face of it, the United Kingdom production license seems to be a contract. If we turn back to the definition of a contract given above (an agreement with specific terms between two or more persons or entities in which there is a promise to do something in return for consideration) it is clear that the contractual license seems to fit this form. It is a deed signed by two parties, one being the Minister and the other the licensee, in which the Minister promises to temporarily transfer rights to the licensee in return for consideration. The model clauses provide that �exclusive license and liberty… to search and bore for and get petroleum� is granted and in return the licensee provides payments and royalties as consideration. It is widely argued that rights held under the license are contractual because this is the language of contract law. Lending support to this argument is the fact that section 6(d) of the 1934 Act (Now s. (4) of the Petroleum Act (1998)) requires the model clauses to be contained in production licenses (subject to the discretion of the Minister) and this is very similar to standard form contracts. Furthermore, The United Kingdom model clauses are considerably detailed. This is highlighted when one compares them to the German statutory requirements and obligations pertaining to the United Kingdom oil and gas license. For example, clause 20(1) of Schedule 5 to the Petroleum (Production) Regulations 1982, with its obligation to avoid certain harmful effects of the operations, is relatively similar to one of the statutory prerequisites for obtaining administrative approval of an operations plan under German Mining Law2. It has been argued that this voluminous character of the United Kingdom license lends weight to the view that it is contractual in nature3. However, form alone is not sufficient to conclude that the license is in fact an enforceable contract. In order to assess the precise nature of the United Kingdom oil and gas license it is necessary to take a closer look at its substance, essentially how it is treated in practice.
One must concede that licenses under UK oil and gas law are contractual in form, however, this does not mean that they are contractual in nature and it is the nature of the license that we are really concerned with. It is a general principle of contract law that the terms of a contract may only be altered with the mutual consent of parties to the contract. However, in the space of just over a decade, the UK government made three unilateral amendments to existing licenses, giving them retroactive effect4. Given the fact that where such licenses are concerned, one party (namely the State) has the ability to unilaterally alter the contract, these licenses cannot be taken to be contractual in substance. This is because, where such alterations take place, they lack the essential feature of a contract � consensus as to terms. When discussing the practical significance of the distinction between contract and license (above), it was stated that contracts cannot be unilaterally or retroactively amended, yet UK oil and gas law licenses do not adhere to this rule, therefore it is submitted that they fall outside the realm of contractual agreements. In addition, the extensive powers of the Minister provided in the model clauses, and the fact that they are laid down by regulations at the insistence of Parliament further taints the licence with a regulatory flavour.
Although the popular consensus of writers on this topic is that the petroleum production licence is a contract between the Minister and the licensee that has to it a regulatory flavour5. It is submitted that the regulatory element of the licence is more than merely trifling as the word �flavour� implies. On the contrary, it permeates the essence of the agreement, to the point that although UK oil and gas licenses remain contractual in form, they retain very little contractual character. Maniruzzaman argues that the license under UK oil and gas law closely resembles a profit-a-prendre6. It is a right, exercised over another’s property, to derive benefit therefrom, and it can be invoked against any third parties that interfere with its exercise. The petroleum production license entitles the licensee to the exclusive right to search and bore for, and get, petroleum under a specific license area. However exclusive the licensee’s right, it is subject to the extensive governmental regulations through Model Clauses which are an integral part of each license and to the extensive Ministrial powers of discretion. Therefore, it cannot be said to be a contractual agreement due to the regulatory overtones and the lack of strict protection for the rights of the licensees. Maniruzzaman�s view of the UK oil and gas license as a profit-a-prendre seems to fit better with the practical nature of the license and it is submitted that this is the best way in which to view this legal instrument.
1 Gunther Kuehne, Oil and Gas Licensing: Some Comparative United Kingdom-German Aspects, 4 J. Energy & Nat. Resources L. 150 (1986)
2 Gunther Kuehne, Oil and Gas Licensing: Some Comparative United Kingdom-German Aspects, 4 J. Energy & Nat. Resources L. 150 (1986)
4 The Petroleum and Submarine Pipelines Act 1975, Oil and Gas (Enterprise) Act 1982 and Petroleum Act 1987
5 Daintith, “The Petroleum Production License in the United Kingdom,” in Daintith (ed.), The Legal Character of Petroleum Licenses: A Comparative Study (1981), p. 217.
6 A F M Maniruzzaman, The New Generation of Energy and Natural Resource Development Agreements: Some Reflections, 11 J. Energy & Nat. Resources L. 207 (1993)
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