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Energy security and drilling rights

3 March 2014

The March 2014 Ukraine crisis has once again focused European attention on the risks of excessive reliance on Russian gas supplies. Since 2003, European Union member states have gradually reduced their dependence both on Russian gas and on the Ukraine as a route for gas pipelines. Europe now imports just under 30% of its gas from Russia, compared with 45% in 2003. Improved infrastructure also offers alternative routes, such as the Baltic Nord Stream pipeline, and greater resilience. Nonetheless, a 10% increase in gas futures prices in immediate response to the Ukraine crisis must add to pressures on the UK and other governments to promote energy security as a major policy objective. While there are some significant alternative energy projects in distant prospect, such as the Swansea Bay Tidal Lagoon project, for which planning consent was sought in February 2014, fossil fuels remain an essential element in the UK's energy mix.

The UK government faces a significant difficulty in that debates about the exploitation of onshore oil and gas reserves have been dominated by controversies and public concerns about the extraction of shale gas by means of hydraulic fracturing - or "fracking". Fracking involves drilling boreholes several kilometres deep and then pumping fluid at high pressure into rock strata to create narrow fractures from which gas can escape. British Geological Survey estimates, revised in June 2013, suggest that economically exploitable shale gas reserves within the UK might be sufficient to meet domestic demand for more than 40 years.

Public and media concern has focused on the possible risks of fracking, including contamination of ground water, environmental damage and possible seismic activity. Indeed, the UK government put a moratorium on fracking activities in 2011 following traces of seismic activity which were initially linked to fracking activities near Blackpool. The moratorium was lifted in December 2012 after geological reports suggested there was no such link. Nonetheless, campaigning environmental groups such as Greenpeace have asked for thousands of people to join in a “legal block” – essentially creating a patchwork of “no-go” areas across England intended to impede or to prevent large scale fracking. Although directed primarily at fracking, public campaigns tend not to distinguish clearly between fracking and conventional onshore drilling, with the result that protest and controversy tends to cluster around any onshore energy project.

What is the legal basis for the Greenpeace campaign?

Although the Crown owns oil and gas reserves, ownership of the strata through which drilling must pass to access those reserves generally goes, at whatever depth, with surface ownership of the land. That principle was confirmed by the Supreme Court in Bocardo v Star Energy [2010] UKSC 35. The result is that rights to access reserves require not only a licence from DECC but also agreement with surface landowners - potentially running into the tens or even hundreds.

The planning regime has also developed in response to increased onshore oil and gas activity. In particular, DCLG guidance issued in July 2013 confirmed that where directional drilling is to take place underground, planning applications must include a map showing the areas within and beneath which that directional or horizontal drilling will take place. That guidance, based on legal advice obtained by DCLG, prompted a change in industry practice which had previously tended to include within planning applications only the well pad, surface works, traffic and local amenity measures. One consequence of the recently confirmed need to show the area of underground drilling is that it significantly increases the risk of objections from surface owners during the planning process.

Taken together, the need for surface owner agreement and the increased likelihood of planning objections have generated significant delays and additional
costs not only for fracking operations but also for conventional drilling projects. From an operator's perspective, there is no easy or inexpensive route from the initial licence to drilling, whether for exploratory purposes or production. The period between the grant of a licence and any significant activity on site can easily run into several years.

Applying for ancillary rights

Sections 3 and 4 of the Petroleum Act 1998 (the “1998 Act”) provide that the Secretary of State (on behalf of the Crown) has the power to grant licences to bore for shale gas and other oil and gas reserves in Great Britain. The award of licences is discretionary and they are generally issued over large areas granting exclusivity to operators in particular locations. However, whilst the grant of a licence to the petroleum licence holder by the Secretary of State entitles the licensee to “search and bore for” petroleum or gas, it does not entitle a licensee to access a property without the landowners consent to search for and/or extract shale gas. In order to obtain the additional rights which the licence holder will need in this respect, the licence holder must first seek to negotiate with the landowner on a private treaty basis in order to secure any additional rights required (the negotiations could, for example, include a payment to the landowner for any inconvenience).

If no agreement can be reached, the licence holder has no option but to apply for ancillary rights under the compulsory purchase scheme prescribed by the Mines (Working Facilities and Support) Act 1966 (the “1966 Act”). This enables the licence holder to apply for a court order granting the rights and easements required, including a right to enter onto land and sink boreholes in the land, erect buildings on the land and to lay pipes on the land.

The grant of rights is not a foregone conclusion. The initial application is to the Secretary of State. Unless satisfied that there is no prima facie case for the grant, the Secretary of State must refer the matter to the court - meaning, in this case, the Chancery Division. The court's power to make an order is limited by section 3 of the 1966 Act. The court must be satisfied that:

  • the grant of the right is expedient in the national interest, and
  • the applicant can show that it has not been possible to obtain the rights by private arrangement (for example because the person with the power to grant the right has refused to grant it or demands that the rights be granted on terms which are not reasonable), or
  • the persons with power to grant the rights are "numerous or have conflicting interests"

In practice, it is easier to meet the section 3 test where there are several surface landowners, particularly where they are likely to take differing views towards the project. Where there is only one landowner the applicant must show that commercial negotiations have been pressed as far as possible. Where there are numerous landowners, it is probably enough to show that negotiations would be protracted or difficult rather than having to show that they had run their course.

However, even where the involvement of numerous landowners provides a more straightforward route to court, the process remains slow and costly. An
application might easily take up to a year to come to a hearing, and it is quite possible that the court would be inclined to let objectors have their day in court.

If rights are granted by the Court, it will be on terms which should include payment by the licence holder of “fair and reasonable” compensation in a sum to be determined by the Court, with a statutory uplift of 10% directed by section 7(4) of the 1998 Act. Whether or not the grant of ancillary rights is in the national interest is of course a highly topical question. The Government intends to exploit the UK’s potential reserves of shale gas, especially in view of the current reliance by the UK on the import of gas – the UK is said to import around 80% of its gas whereas it is estimated that around 10-15% of the UK’s shale gas reserves would be sufficient to meet the gas needs of the UK for more than 40 years. Given the renewed sense of insecurity stemming from the Ukraine crisis, that degree of prospective energy security must be at least highly persuasive.

Companies looking to search for and extract shale gas have generally not tended to use compulsory powers, instead opting to negotiate terms with the landowner once licensed by the Secretary of State. However, high levels of public concern about, and opposition to, fracking schemes has also extended to conventional projects. Unless the UK government progresses its broad proposal, made in February 2014, of relaxing or removing the need for surface owner agreement to directional drilling at depth, it is likely that licence holders will be compelled to consider 1966 Act applications as the only viable - though slow, expensive and uncertain - way to overcome strong and concerted local opposition to projects.