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Compensation for Oil Extraction Rights: The Situation Remains Fluid

21/06/2010

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United Kingdom

Bocardo SA was given leave to appeal to the Supreme Court against the Court of Appeal’s decision in the long-running dispute with Star Energy UK Onshore Limited, with the hearing set for 22 June 2010.

This article was first published in the Property Law Journal, 21 June 2010.

In a move which has caused understandable concern amongst a much beleaguered energy sector, Bocardo SA was given leave to appeal to the Supreme Court against the Court of Appeal’s decision in the long-running dispute with Star Energy UK Onshore Limited, with the hearing set for 22 June 2010. The issue in dispute is the determination of the correct level of compensation payable to a landowner where an oil company has drilled underneath land without the consent of the relevant landowner (in this case, Bocardo S.A.).

Bocardo had gained a short-lived victory in the High Court in 2008, with damages assessed at £6.9m, calculated on a share of profit basis. The Court of Appeal, however, reversed this decision, reverting to the previously understood approach of assessing damages by reference to the loss suffered by the landowner -  resulting in damages of just £1,000.

With the result in the balance, the imminent appeal to be heard  before the Supreme Court once again raises the spectre of large compensation and consent payments becoming the norm. Given that supplies of domestic fossil fuels are set to become ever more vital as worldwide sources dwindle, the importance of the case cannot be underestimated - both for the energy industry and for the wider public interest.

Statutory Background

Only those acting on behalf of the Crown or holders of statutory licences under the Mines (Working Facilities and Support) Act 1966 are authorised to extract petroleum oil from land in the UK. Licence holders can also apply for necessary ancillary rights, including access to third party land, the right to sink boreholes and to construct and use pipes. However, the grant of ancillary rights is not automatic: it must be shown to be in the national interest and not reasonably obtainable by private arrangement. Provision is also made in the legislation for the payment of compensation to affected landowners.


Petroleum Act 1998

  • Section 2(1):  Her Majesty has the exclusive right of searching and boring for and getting petroleum to which this section applies.
  • Section 3(1):  The Secretary of State, on behalf of Her Majesty, or such persons as he thinks fit licences to search and bore for and get petroleum to which this section applies.
  • Section 7(1):  Subject to the provisions of this section, the Mines (Working Facilities and Support) Act 1966 shall apply (in England and Wales and Scotland) for the purpose of enabling a person holding a licence under this Part of the Act to acquire such ancillary rights as may be required for the exercise of the rights granted by the licence.
  • Section 7(4):  Where an application is made to the Court by virtue of this Section:

(a) in deciding:   

(i) whether to grant any right applied for; or   

(ii) what terms and conditions, if any, should be imposed upon the grant of such a right the Court    shall have regard, among other considerations, to the affect of the amenities of the locality of the    proposed use and occupation of the land in respect of which the right is applied for;

(b) in determining the amount or any compensation to be paid in respect of the grant of any right, an additional amount of not less than 10% shall be made on account of the acquisition of the right in compulsory


Mines (Working Facilities and Support) Act 1966

  • Section 3(1):  No right shall be granted under Section 1 of this Act unless the Court is satisfied that the grant is expedient in the national interest.
  • Section 3(2):  No right shall be granted under Section 1 of this Act unless it is shown that it is not reasonably practicable to obtain the right by private arrangement for any of the following reasons:

(a) that the presence or power to grant the right are numerous  or have conflicting interests:  

(b) that the persons with power to grant the right, or any of them, cannot be ascertained or cannot   be found;  

(c) that the person for whom the right must be obtained or any of them, have not the necessary  powers of disposition, whether by reason of defect in title, legal dispersion or otherwise;  

(d) that the person with power to grant the right and reasonably refuses to grant it or demands  terms which, having regard to the circumstances, are unreasonable.

  • Section 7(4): Where any such case is referred to the court, the court if satisfied that the requirements of this section are complied with in the case of the applicant, and that it is expedient in the national interest that restrictions should be imposed, may, by order, impose such restrictions, on such terms and subject to such conditions and for such period as the court may think just, and upon such order being made the right to enforce the restrictions imposed by the order shall, subject to the following provisions, vest in the applicant.
  • Section 8(2):  The compensation or consideration in respect of any right, in clause restrictions, shall be assessed by the Court on the basis of what would be fair and reasonable between a willing grantor and a willing grantee, having regard to the condition subject to which the right is or is to be granted.

Setting the original basis for calculation

For more than twenty years following the High Court ruling in the case of BP Petroleum Development Limited v Ryder (1987) 2 EGLR 233, it had been accepted that the statutory compensation under the 1966 Act should be based on the reduction in value of the affected land arising from the enforced grant or wayleave, as opposed to the oil company gains from the oil extraction.

A New Approach

Recently, however, this accepted view has been challenged.  In Bocardo v Star Energy UK Limited and another [2008] EWHC 1756(Ch), the High Court held that:

  • the extraction of oil through pipelines and under Bocardo’s estate without consent was an "actionable trespass", despite the fact that
    • the oil vested in the Crown
    • Star Energy had a valid licence to drill, pursuant to Section 2 of the Petroleum Production Act 1934
  • ancillary rights to access oil under third party land were not implied by the legislation
  • the assessment of compensation by the Court under section8(2) of the 1966 Act should not be made by reference to the compulsory purchase regime, but should instead be based on an unfettered commercial negotiation between the parties

The High Court awarded Bocardo damages in a sum equivalent to 9% of the income generated from the oil field, with the same percentage being due to Bocardo going forward. (This amounted to a sum of £6.9m between July 2000 and December 2007). Although the Court clarified that in arriving at this figure it had done so by considering the specific bargaining position of the parties in this case (thus technically not overriding Ryder), the decision understandably raised significant concerns within the energy sector.  Star Energy appealed.

Restoring the Accepted View

  • On appeal, the High Court decision was reversed, with the Court of Appeal ([2009] EWCA Civ 579) ruling as follows:
  • Deviated drilling onto third party land without consent was still an actionable trespass even though the oil belonged to the Crown and notwithstanding the fact that the pipelines, at depths of 800 to 2,800 feet, did not interfere with the use or enjoyment of Bocardo's land "one iota".  The Court held that there was neither a common law nor a statutory justification which could negate such trespass
  • Ryder had been correctly decided in holding that compensation should be assessed on compulsory purchase principles (i.e. by reference to the loss to the landowner, rather than the gain by the grantee oil company)
  • The Court should take into account any key value of that land (e.g. by being the only land to which the oil company can drill to access the oil) or special status for the grantee (i.e. the fact that the oil company would pay more to have the exclusive right of access to the oil)
  • The correct measure of compensation payable pursuant to Section 8(2) of the 1966 Act was £82.50.  This comprised:
    • £50.00 (being the standard compensation for a deep tunnel)
    • an extra 50% to take account of the fact that Star, as licence holder of adjoining land, was a special purchaser
    • an extra 10% as required by statute where such rights are granted compulsory
  • The final award, however, amounted to £1,000, on the basis that in negotiating a consent payment Star Energy would presumably have been prepared to be generous in order to secure exclusive access.

A Further Challenge?

Following the successful appeal, energy companies heaved a collective sigh of relief believing that their fears of large landowner compensation payments had finally been laid to rest.

However, should the Supreme Court revert to the approach to compensation taken by the High Court, this would have huge implications for oil companies, with percentage-based payments likely to result in significant extra cost and delay to the process of oil extraction in the UK. The problems could be particularly acute, for example, in relation to the discovery of an oil reservoir under a densely populated area where numerous consents/payouts would be required.  This could undermine the financial viability of extraction projects and create a situation which, arguably, could possibly be seen as contrary to public policy, given the scarcity of the country’s oil reserves. Indeed, when granting Star Energy leave to appeal the decision to the Court of Appeal, Sir John Chadwick expressly recognised that the decision in this case "raises issues of wide public importance in relation to the extraction of oil and gas onshore"; and these concerns were further reflected by the fact that even the government made representations in Star Energy's favour. 

Being prepared

Given that the spectre of large compensation payments has not yet been laid to rest, energy companies would be well advised to check that all necessary consents are in place for all parts of their pipelines, as a potential shift to gain compensation would make litigation a far more attractive proposition for claimants finding themselves in the same type of situation as in the Bocardo case.

Energy companies should therefore pay particular attention in ensuring that:

  • necessary consents are in place and are correctly drafted;
  • consents are safely stored and readily accessible; and
  • all such consents are registered against the relevant landowner’s title or protected  by way of a C(iv) land charge (if the land is unregistered).

The public information as to the nature of the appeal has been extremely limited and does not give away the claimant’s strategy. The oil and gas sector will therefore have to wait with baited breath for news of the full basis of Bocardo’s challenge to the Court of Appeal decision and, more crucially, the final ruling by the Supreme Court.

Given the increasing value attributed by society to secure domestic fossil fuel production and the significant public policy implications generally, energy companies will no doubt be hoping that this further appeal will ultimately prove to be unsuccessful.

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