R. (at Cox’s request) v. Oil and Gas Authority1: OGA’s pre-tax approach to maximizing the economic recovery of UK oil is approved by Administrative Court

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In this judgment, the Administrative Court confirmed that it was for the Oil and Gas Authority (OGA) (now known as the North Sea Transition Authority), and not the court, to decide how to interpret the statutory objective of “maximizing the economic recovery of British oil” for the purposes of the Petroleum Act 1998 (the Act).

Key points to remember

This judicial review reminds us that the Administrative Tribunal will show great deference to the expert opinion of a regulator, in this case the OGA (the first defendant), when carrying out its statutory functions. The court will be reluctant to intervene unless there has been a manifest error of law. No such error was found in this case.

The OGA is required (by law) to produce an oil and gas strategy for the UK setting out how the ‘primary objective’ of ‘maximizing the economic recovery of UK oil’ (the MER objective) is to be achieved. achieved.

Taking a “pre-tax” approach to this has been the approach for some time, and the OGA did so in an updated strategy released on December 16, 2020 (the OGA Strategy).

The court concluded that such an approach is legal and correct.

The Secretary of State for Business, Energy and Industry (the SSBEI or Second Defendant) is legally committed to achieving the “net zero” target (the net zero goal) contained in the Act of 2008 on Climate Change (CCA) by 2050. This net zero goal was inserted into the CCA in response to the Paris agreement adopted at COP 21 in December 2015. The court was not of agreement that the existence of this net zero objective made the MER’s pre-tax approach irrational. Plaintiffs have also been disappointed by expert testimony that does not comply with the Rules of Civil Procedure (RPC) on expert testimony.

Facts

The Energy Act 2016 established the OGA as the independent regulator of the oil, gas and carbon storage industries in the UK. The OGA became responsible for producing a strategy to achieve the MER objective. The OGA policy, challenged in these proceedings, was the first such policy issued by the OGA since it was empowered to do so.

The OGA strategy includes changes that make it clear that achieving net zero is part of the MER goal, and the strategy is intended to help the Secretary of State achieve that goal.

For the purposes of the MER objective, the OGA strategy defines the following definition of “economically recoverable”:

“…resources that could be recovered at an expected (pre-tax) market value greater than the expected (pre-tax) cost of the resources to extract them, where costs include both capital and operating costs (including including carbon costs) but exclude sunk costs and costs (such as interest charges) that do not reflect current resource use. (emphasis added).

The plaintiffs in this case were three active environmental activists. They challenged the OGA strategy for two reasons:

  • that there was an error of law and/or a breach of statutory purpose because the pre-tax approach adopted in the OGA strategy proceeded on the basis of an incorrect definition of the purpose of the MER (ground 1), and
  • that the OGA strategy and this pre-tax approach were incompatible with the net zero objective and therefore irrational (reason 2).

The pre-tax approach has been followed by successive governments, beginning long before the OGA received the statutory obligation to give effect to the objective of the RFG. Nevertheless, the plaintiffs now sought to challenge the OGA’s adoption of this approach in the OGA’s strategy.

The plaintiffs’ concerns centered on subsidies, in the form of tax breaks, allegedly given to oil and gas companies. According to the claimants, by ignoring the impact of these subsidies, the OGA was not maximizing the economic recovery, since the recovery in question may be economic for the operator but not for the UK as a whole. The plaintiffs further claimed that this approach was irrational as it would lead to greater oil and gas production, in conflict with legal obligations under net zero.

The court’s decision

The court dismissed the claim entirely, on both grounds, and approved the OGA’s choice of language in the OGA’s strategy. The court reviewed the history of the purpose of the MER and found that there was no support for the assertion that Parliament must have intended to require the OGA to consider tax implications. The court also rejected the argument of irrationality. Irrationality is a high bar to reach in an application for judicial review, and this application falls far short.

Floor 1

The plaintiff’s first ground was that the meaning of the statutory provision “economic recovery of British oil” is a question of law for the court. They argued that there was only one permissible definition, which required an after-tax approach, and that it was not open to the OGA to choose its own other pre-tax meaning. The definition adopted by the OGA, according to which the assessment of the achievement of the objective of MER is carried out on a pre-tax basis, was erroneous because it did not take into account the favorable tax treatment allegedly granted to the oil industry and gas. The plaintiffs pointed to evidence of such negative tax flows in 2015-2016 and 2016-2017 and argued that ignoring this tax position would mean that “the OGA can approve activities that are not economic for the UK as a whole and therefore lose value to society.”2

The court was not open to the idea that there was only one meaning to this term or that the court was the forum in which the true meaning was to be found. The court confirmed OGA’s status as an expert regulator and that it was up to OGA to advise on the best method of economic valuation.

The court also considered what the position would be if the plaintiffs were correct that there is only one correct meaning or approach to REM. In such circumstances, the plaintiffs had failed to demonstrate that the interpretation chosen by the OGA requiring a pre-tax analysis was not likely to be that one-way street (in other words, even if it is not had only one meaning, it would not necessarily be the meaning for which plaintiffs argued). The court observed that if the legislature had intended there to be a diversion from the pre-tax approach, which has been followed since the early 1990s, it would have been much more clearly signaled.

Floor 2

The court then considered the plaintiff’s assertion that the OGA’s definition of “economically salvageable” was irrational. This claim was based on the argument that OGA’s pre-tax approach was inconsistent with the net zero goal because such an approach would lead to increased oil and gas extraction.

However, in light of the court’s findings on Ground 1, their argument on Ground 2 also ran into difficulties.

  • At first instance, the court found that the OGA strategy had taken climate change into account “in various ways”3 and that it could be seen in “many places”4 including, for example, an obligation for data subjects to help the SSBEI achieve net zero. This meant that the plaintiffs had failed to demonstrate a lack of consideration for climate change and therefore the plaintiffs were required to argue that what the court found to have been “fully permissible” under ground 1 was nevertheless irrational under ground 2. .5
  • Second, the court disagreed that the OGA definition would necessarily lead to increased emissions, especially since that was not even the argument advanced by the plaintiffs, who instead claimed that the definition “very likely” increased the amount of recovered oil, meaning that any corresponding increase in emissions could “only logically” be “quite possible”.6 The court also found that the plaintiffs’ position oversimplified the OGA strategy and confused the concept of the “value” of economically recoverable oil with the “quantity” of that oil.seven
  • The claimants presented expert evidence which allegedly showed that the UK tax regime encourages production which is “economically unviable” and “increases UK oil and gas production beyond this which would be the case with a more normal tax system”.8 However, the court did not give any weight to this evidence since it both departed from the field of expertise and did not meet the requirements of part 35 of the CPR.9

Accordingly, the court found that the plaintiffs had not met the high bar required to establish that the OGA’s chosen definition of “economically salvageable” was irrational.ten

In summary, the OGA, as the expert regulator, has the right to decide what it means to “maximize the economic recovery of British oil”, and a definition which includes a pre-tax approach is both legal and rational, notwithstanding net zero goal.

The challenges of rationality in judicial review proceedings are difficult to resolve. Climate change legal reviews brought by environmental activists may be more likely to succeed when they rely instead on procedural grounds or breaches of specific legal obligations, such as the recent legal review brought by activists, including Friends of the Earth against the SSBEI in relation to the Net Zero strategy.11

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