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Energy Update 30 September 2013



United Kingdom

Energy Update 30 September 2013

Welcome to this edition of Fieldfisher's Energy Update.

This month we look at the recent UK government decision on gas storage, Rhys Griffiths discusses the level of recent health & safety fines and David Haverbeke comments on Belgium's new gas-fired power tender.  We look at a new study that finds that shale oil reserves could be much higher in some areas outside North America and Simon Moore discusses fracking litigation claims.  The government in the UK finalises the decommissioning tax relief that was recently announced.  Finally, we look at a recent case that illustrates the need to spend the necessary time documenting precisely what has been agreed in any negotiation.

We hope you will find this of interest.

UK Government rules out subsidies to boost gas storage

UK Energy Minister, Michael Fallon confirmed recently that bill payers would not be asked to subsidise increased investment in new gas storage facilities.  Independent analysis, commissioned by the government, concluded that there was no case for the government to support new storage.  It found that the UK energy market was functioning well in attracting gas from a range of sources to meet both current and future demand.  The government considered several options for intervention including placing obligations on gas companies to secure supplies, holding more gas in storage during winter and providing subsidy for new storage facilities but it was concluded that the costs of intervention would far outweigh any benefit to security of supply.  Britain has capacity to hold about 15 days’ worth of national gas demand in storage – much lower than storage levels elsewhere in Europe and in the US.

Fieldfisher Corporate Energy Partner, David Wilkinson, believes that the government's approach to the security of gas supply is being driven by a belief that the UK's diverse range of sources of supply (North Sea, LNG, interconnectors, etc) are sufficient to overcome medium to long term disruptions, so that additional storage is needed to manage short term disruptions such as an interconnector coming off line.  This means that fast cycle storage facilities will be more attractive.  This may partly explain Centrica's recent announcement regarding halting certain storage projects it was in the process of developing.  Whether faster cycle facilities will now be more attractive as an investment remains to be seen as, while it is generally accepted that the need for gas is only likely to increase, the role that will be played by renewables projects remains uncertain and affects the level of demand for gas.  Bearing in mind the time it takes to develop a facility, nothing is likely to happen quickly though, which means that, while Michael Fallon waits for the market to provide the right level of facilities, further winters where the country eats into its excess capacity at times of peak demand are likely to occur with the consequential spike in wholesale prices.

For a link to Mr. Fallon's policy note and the independent analysis click here.


Health and Safety fines can be costly both on a monetary and reputational level

The fines and costs which may flow from a safety-related incident can be significant, not to mention the reputational stigma which the company will suffer. Fieldfisher's Rhys Griffiths sets out examples of recent prosecutions which give a flavour of the punishments handed down following conviction.

For examples of recent prosecutions click here.

David Haverbeke discusses Belgium's tender for new gas-fired power

Belgium’s tender for new gas-fired power capacity eligible for state support is believed to have been widened to include open cycle as well as combined cycle units, according to a report by Platts.  David Haverbeke, a partner in the Brussels office of Fieldfisher discusses this tender including the list of potential candidates, the timing of the tender keeping in mind EU regulations, the subsidy element including its duration and potential challenges to the tender.

Click here to read more.

Study points to vast global shale oilfields beyond North America

A report by analytics firm IHS published recently suggests that commercially recoverable reserves of "tight oil" held in shales and other challenging rocks in the rest of the world could be double or more those of North America. The study suggested that the geology of the 23 best opportunities outside the USA and Canada is better than North American ones. These include the Vaca Muerta of Argentina, the Bazhenov shale of Siberia and the Silurian shales of North Africa which could produce more than the Bakken shale of North Dakota and the Eagle Ford of Texas.  The list also includes lesser-known geological plays in Europe, the Middle East, Asia and Australia.

In total, these 23 opportunities could hold 175bn barrels of extractable oil, compared with about 40bn barrels in North America.  However, the findings also show that costs for extracting “tight oil” reserves are significantly higher in other countries than in North America, suggesting they will need a higher oil price to be commercially viable.

For further information click here.

Litigation claims caused by fracking

The 2012 English Supreme Court decision involving Mohammed Al Fayed and his damages claim for a percentage of the profits generated by the extraction of oil from under his Surrey estate without his knowledge or permission established that any claim by a landowner for the payment of a share of production profits by an exploration & production company will be nominal, based only on the loss to the landowner of the so called "amenity value" of his land. Calculation of that (small) amount of money is based on the principle (as was the case with Mr Al Fayed where oil was extracted from under his land by diagonal drilling) that no permission has been obtained from the landowner resulting in a civil damages claim for trespass because an owner of land owns not only the surface, but also all the rights to extract minerals beneath underneath it.

So what else may be done to recover damages, or attempt to prevent any exploration for shale gas at all? Fieldfisher's Simon Moore takes a look.

Click here to read more.

UK Government finalises decommissioning tax relief for oil and gas companies

In a recent speech Chancellor George Osborne gave to a conference in Aberdeen, he signalled the finalised UK Government policy on decommissioning tax relief.  The new Decommissioning Relief Deed, negotiated between industry and the Treasury, will encourage investment in oil and gas fields that are smaller or more difficult to develop.  The Government has also doubled the value and extended the scope of the allowance applicable to small fields and created new reliefs for unexplored deepwater fields, large shallow-water gas fields and older 'brownfield' sites.  It is estimated that this decommissioning tax relief will drive at least £17 billion of increased investment, extending the life of the North Sea basin with an additional 1.7 billion barrels extracted.

For a link to the speech click here.

Negotiating or mediating your agreement – don't stop until it is legally binding

A recent English case at the Court of Appeal (Frost v Wake Smith and Tofields Solicitors EWCA Civ 772) illustrates the need to spend the necessary time documenting precisely what has been agreed or, where that is just not possible, ensuring that those involved understand the need for further work to be undertaken to conclude an agreement.

Click here to read more.

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