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Damages for Trespass by Oil Companies Extracting Oil

17/06/2009

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United Kingdom

The recent Court of Appeal decision of Star Energy UK Onshore Ltd and another v Bocardo SA [2009] EWCA Civ 579 (dated 15/06/2009) will be of relevance to energy companies.

The recent Court of Appeal decision of Star Energy UK Onshore Ltd and another v Bocardo SA [2009] EWCA Civ 579 (dated 15/06/2009) will be of relevance to energy companies.

The case concerned the calculation of compensation for extracting oil from the substrata of an estate where the estate owner (Bocardo – ultimately owned by the Al Fayed family) had not granted access rights for that purpose. It was acknowledged that the Crown owned the petroleum and that the licence from the Crown had been granted to the Appellant to extract the petroleum. 

  • The question was whether it was a trespass because of the lack of consent and, if yes, how would the damages be calculated? It was considered of such importance that the Government made submissions to the Court of Appeal, arguing against the decision of the High Court.

High Court Ruling

The High Court had found in favour of  Bocardo in terms of an actionable trespass and then went on to depart from the well-established approach to assessing the compensation owed to the claimant (BP Petroleum Development v Ryder [1987] 2 EGLR 233).  Bocardo was awarded 9% of the £7 million (£621,180) income that the oilfield had yielded and the same proportion of all of the income generated by the extraction of the oil from under Bocardo’s estate until its depletion, despite the Court finding that the interference did not interfere with the landowner’s use or enjoyment "one iota".

This departure from the approach to quantifying damages raised concerns in the oil industry that the 9% would become a blanket figure applied in all future cases and that the case would  set a dangerous precedent. 

In light of the apparently conflicting first instance decisions of Bocardo and BP v Ryder, the position in relation to compensation for the acquisition of ancillary rights therefore remained  unclear until this ruling.

Court of Appeal Decision

  • The owner of the freehold does have title to the strata beneath the surface of its land – therefore, unless the licensee has the consent of the owner, it will commit a trespass (by the laying and use of its extraction pipes across the owner’s land) even though it has a license to extract the petroleum. There is no express or implied right in the Petroleum (Production) Act 1934 that allows interference with the owner’s property  rights on the basis that the Crown has granted a licence to extract the petroleum.

  • The Court then had to calculate the award for damages for trespass. Whilst it found that a trespass had occurred, this was considered to be “purely technical” because it did not interfere with Bocardo’s use or enjoyment of its land “one iota”.  Moreover, Bocardo had lost no rights because it neither owned nor had the right to search for  (etc) the petroleum  – which were rights belonging exclusively to the Crown and its licensee.

  • Bocardo was awarded damages of just £1,000 based its entitlement to compensation under section 8(2) of the Mines (Working Facilities and Support) Act 1966 for the grant of an ancillary right to the licensee. There was also some uplift (as the compensation was calculated under the 1934 Act as £82.50)  for “generous” negotiations by the oil company that would have been likely in order to save time and lawyer’s fees.

What does this mean for the energy industry?

It is disappointing that the Court of Appeal found that there had been a trespass, as this could cause problems in cases such as the BP v Ryder case where deviated drilling was unknown, or in situations where a deviated way to the apex of the oilfield is used to minimise disruption say to a town centre/village. In the absence of an agreement with each landowner, an ancillary right to bore beneath each house/land would be needed and each house owner/landowner would be entitled to some form  of compensation under section 8(2) of the 1966 Act.

However, it is a positive ruling on how compensation should be assessed; so, in the above example, whilst each householder would be entitled so some form of compensation, it would be very little if there was no practical interference with the use of land. The issue is really one of adding another bureaucratic layer to the process, which will inevitably lead to administrative and professional fees in ensuring that consents are obtained.

It should also be noted that (like BP v Ryder) this decision was based on compensation payable under the Petroleum Act 1998 and deals with compensation for substrata trespass that in real terms does not affect the use or interference with the land. The compensation would be greater if works had included disturbance of the surface (i.e. some physical interference with the use or rights on the land).

The case does not, on the face of it, extend to compensation payable under (e.g.) the Pipelines Act 1962 not the Gas Act 1986, since those Acts contain their own compensatory provisions where compulsory powers are used and (whilst this has no basis in any case law to date) we would therefore hope that a court would then apply an analogous approach to that in Bocardo (and BP v Ryder) which also relied on compulsory purchase compensation principles. 

For further information, please contact Roger Sargologo.

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