Petroleum Licences in the UK: Contract or Regulation?
06 October 2017
Akin Gump Strauss Hauer & Feld LLP
Under the Petroleum Act 1998, the Secretary of State is authorised to grant licences for the exploitation and production of hydrocarbons. The legal characteristic of such licences has been an open question. If petroleum licences 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 licences would be governed by the law of contract. There are a number of important consequences resulting from the legal characterisation. These include (as the case, below, illustrates) the procedure for amendments of licence 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 licence is a contract R (Benjamin Dean) v the Secretary of State for Business, Energy and Industrial Strategy  EWCH 1998 (Admin) (Holgate J).
A petroleum licence had been granted for the exploration for and production of coalbed methane. Subsequently, it was realised that greater potential lay in the exploitation of shale gas. The claimant sought to use arguments relating to the legal characteristics of a petroleum licence 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 licences and contains no powers to vary an executed licence. In response, the Secretary of State submitted that the licence was contractual in nature and therefore capable of being varied by further agreement between the parties.
The Court emphasised 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 licences 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 licence therefore is a contract, and capable of being varied. Variation must be by mutual agreement.
- Petroleum licences lack certain traditional public law features. For example, there is no right of appeal regarding their terms. Compare this to a planning licence: once granted, the only recourse if the licensee is dissatisfied is an administrative or court appeal. Planning licence amendments do not need to be by agreement, but can be made unilaterally.
- A petroleum licence 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 licence). The use of a deed (rather than a simple contract) reflects the formalities needed when creating an interest in land.
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 licence. Furthermore, third parties cannot use public or administrative law arguments to disrupt or challenge the licence and petroleum operations.
By: Marc Hammerson (Partner), Nicholas Antonas (Counsel) and Emma Richardson (Trainee Solicitor). Marc Hammerson and Nicholas Antonas are both consulting editors to our popular title, Oil and Gas Decommissioning.