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LEGAL, FINANCE & ESG
CLIMATE CHANGE LITIGATION – Fixing the focus on current and future obligations
By Vanessa Castillo, Senior Solicitor, Brodies LLP
Recent legal challenges brought against the OGA are a reminder of the scrutiny that the oil and gas industry is coming under in respect of current obligations and decisions made in respect of energy transition.
In May, campaign group Paid to Pollute applied to the High Court for judicial review of the decision by the Oil & Gas Authority (OGA) and the Secretary of State for Business, Energy and Industrial Strategy (BEIS) to adopt the OGA Strategy, as well as challenging its legality. The claim was brought against the OGA and Business Secretary Kwasi Kwarteng, with backing from environmental groups including Greenpeace UK, Friends of the Earth Scotland, and Parents for Future.
The revised OGA Strategy The revised OGA Strategy came into force on 11 February 2021, and expanded on its original main objective. Now, in addition to the maximising of economic recovery, the OGA Strategy also requires action to achieve net-zero carbon by 2050. This includes, as part of the central obligation, the requirement to take necessary steps to assist the Secretary of State in meeting the net-zero target, including the reduction of greenhouse gas emissions from sources like flaring and venting, and encourages and affirms support for carbon capture and storage projects. The new OGA Strategy was supplemented by the revised Decommissioning Strategy, published by the OGA on 9 May 2021, which provides, among other things how decommissioning can deliver maritime restoration as part of the UK's energy transition to net-zero.
Challenge against OGA strategy Paid to Pollute allege that the OGA Strategy's purpose of maximising economic recovery of oil and gas is "irrational" and will encourage more oil and gas to be extracted, thus jeopardising the UK's climate targets and commitment to netzero emissions.
www.ogv.energy I September 2021
They allege that by not including the tax breaks available to the industry in the definition of "economic recoverability", the OGA Strategy fails to take account of the fact that the OGA itself is not maximising the revenue available from taxing the industry, which is not economically beneficial to the UK as a whole and is, therefore, unlawful. They argue that it is anticipated that the UK taxpayers will cover £18.3 billion of decommissioning costs. These costs will allegedly increase if more oil and gas is extracted in the UK. The group states that its goal is for the government to implement policies to instead invest in green industries.
OGA RECOMMENDS DISCLOSURE of key environmental metrics to bolster the sector’s already strong reporting
The OGA and BEIS have not publicly commented.
What next? The outcome of the review is yet to be published, but at the end of 2020, the High Court was also asked, in a separate legal challenge, to consider the OGA's role in issuing letters of comfort as part of acquisition transactions and whether the OGA was fully considering the financial implications for acquirers, against the burden of decommissioning costs. The claimant, Mr. Edward Thornton, argued that insufficient consideration was being given to ensuring the taxpayer was protected from the burden of decommissioning costs. The 2020 case was unsuccessful but that action, when considered alongside the current judicial review, highlights shifting social awareness and reaffirms the need for oil and gas companies to closely consider all their current obligations, alongside planning for the wider energy transition. The industry needs to be conscious that any action taken in respect of energy transition or as part of any plan for net-zero emissions, is being closely observed by activists who have shown they will resort to litigation if they deem such actions to be insufficient, contrary to law or non-transparent.
The growing awareness of climate change and the need to respond, the increase in shareholder resolutions on environmental policies, the recent IPCC report, and the extreme weather events occurring around the globe, have placed companies under close scrutiny to report on how they are meeting their environmental, social and governance responsibilities. The oil and gas industry’s social licence to operate has come under threat as the sector’s environmental credentials are examined and the industry needs to demonstrate how it will support the transition to net-zero by 2050 and beyond. As a result of this increasing focus on the environment and sustainability, financial institutions are increasingly aware of the impact a business has on people and the planet, and the Oil and Gas Authority (OGA) is working with industry and the investor community to promote the importance of ESG and influence best practice. Investors can benefit from investing in businesses that report well on ESG, as clear reporting provides both resilience to, and oversight of, the changes which may be required in the event of stricter disclosure practices being enforced by governments. Many G20 nations have already stated they will make climate-related disclosures
