2017 has been an interesting year for everyone following legal developments on the Norwegian Continental Shelf (NCS). The year's happenings range from an extension of the scope of the secondary decommissioning liability to court proceedings concerning the legality of production license awards in the Barents Sea. In this newsletter, the Thommessen oil & gas team will put some of this year's important events into context, and summarise two key NCS legal trends in 2017.
Among these key trends, we note that new measures have been implemented to ensure that the regulatory regime will be able to face new challenges on the NCS, with a maturing shelf and oil majors seeking to exit. Secondly, there has been a noticeable development in environmental organisations' approach to challenging the oil and gas industry, where legal routes are increasingly pursued. Some of these actions will likely not result in anything but raising public attention, but there is excitement concerning the outcome of certain cases.
Adapting the regulatory regime to new NCS realities
The main example of adaptions in 2017 was the Ministry of Petroleum and Energy's (MPE) new practice concerning secondary decommissioning liability in corporate transactions. The MPE has made it clear that going forward, a condition for the MPE's approval of sale of shares (directly or indirectly) in NCS licensees will be that the seller or the parent company of the seller remains secondary liable for decommissioning costs towards the other licensees bound by a disposal decision and the Norwegian State. Historically, secondary decommissioning liability has not been imposed for corporate transactions, only for asset transactions (i.e. sale and purchase of license interests). The change of practice is widely considered to be a response from the MPE to the gradual change of NCS players from subsidiaries of the traditional oil majors to smaller independent companies and private equity backed enterprises, and a move to ensure that at the time of decommissioning someone will be there to pick up the bill.
The most apparent effect of this change of practice is that "clean exits" from the NCS seems to be history. Although the change seems drastic, it is likely to be mitigated through indemnities from the buyer, potentially supplemented by appropriate security arrangements (such as decommissioning security agreements).
Another example of this development is the amendment of the criteria in the Petroleum Regulation for awarding and approving transactions in production licenses on the NCS. The changes include, inter alia, an explicit right to include national security considerations in the decision process when awarding licences or approving transactions, if the applicant or licensee is controlled by a non-EEA state or citizens of a non-EEA state. According to the MPE, these updates are mainly aimed at clarifying the relationship between the Petroleum Regulation, the Petroleum Act and Directive 94/22/EC. However, some have claimed that the MPE through these changes is seeking greater leeway to restrict foreign ownership of the offshore fields on the NCS, a move seen to be potentially targeting growing Russian interest in the resources on the NCS.
Legal challenges from environmental organisations
2017's most significant examples of the trend towards environmental organisations initiating legal processes against the oil industry were the lawsuit concerning the validity of the decision to award licenses in the Barents Sea in the 23rd licensing round, and Bellona's complaint to the EFTA Surveillance Authority (ESA) concerning the legality of the tax refund regime.
The city court proceedings in the Barents Sea case were completed mid-November. The prevailing view is that the environmental organisations initiating the proceedings will not succeed in their claim that the 23rd license round is invalid and that the purpose of their claim merely was to raise public attention. There is, however, a certain excitement related to the outcome of the case. In the very unlikely event that the final result (after appeal rounds) is that the award of production licenses in the 23rd license round is invalid, this could in a worst case scenario prevent future decisions to award new production licenses and approvals of plans for development and operation on the NCS.
Another example of this trend is the environmental organisation Bellona's complaint to ESA concerning the legality of the Norwegian tax refund regime for exploration costs. Exploration costs are tax deductible when they are incurred, and if such costs cannot be set-off against taxable income, they can be carried forward against future income. However, in order to incentivise newcomers on the NCS, the right to claim refund of the tax value of exploration costs was introduced in 2005. This regime means that E&P companies may claim payment in cash from the Norwegian State of the tax value of such exploration costs on an annual basis, instead of carrying the loss forward.
In August 2017, Bellona filed a complaint to ESA claiming that the refund regime is illegal state aid in breach art 61 of the EEA Agreement. The Norwegian Oil and Gas Association on the other hand has publicly defended the scheme, maintaining that the tax refund regime is not state aid, but postponement of tax. ESA has not made a decision on the matter, but some are concerned that ESA may view the tax refund regime for exploration costs as illegal state aid. In a worst case scenario ESA may in such case order a return of the aid over the last 10 years. If this becomes the final result, Norway will be obliged to ensure that users of the tax refund regime return their advantage from the regime. This would have significant negative effects for the companies concerned.