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England and Wales High Court (Commercial Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> Apache UK Investment Ltd v Esso Exploration and Production UK Ltd  EWHC 1283 (Comm) (17 May 2021)
Cite as:  WLR(D) 291,  4 WLR 85,  EWHC 1283 (Comm)
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QUEEN'S BENCH DIVISION
Strand, London, WC2A 2LL
B e f o r e :
| APACHE UK INVESTMENT LIMITED
|- and -
|ESSO EXPLORATION AND PRODUCTION UK LIMITED
Nigel Tozzi QC (instructed by Norton Rose Fulbright) for the Defendant
Hearing dates: 10 May 2021
Crown Copyright ©
Charles Hollander QC:
B. Security under the BDSAs.
""Provision Amount" means in respect of any Licensee for any Relevant Year, the amount calculated pursuant to Clause 5.1.
"Relevant Year" has the meaning given to it in Clause 3.1.2.
"Year" means a calendar year…
2.1: The object of this Agreement is to provide security for Apache's indemnity in favour of EEPUK (and others) in the SPA in relation to MNSL's Licence Interest Share of the costs of Decommissioning of the Field. ….
3. Determination of Decommissioning Plan
3.1 The estimated Net Cost of Decommissioning is set out in Appendix 2. If, after the date of this Agreement, Apache Corporation ceases to be a Qualifying Surety (and provided that Apache Corporation continues to not be a Qualifying Surety), then Apache shall within three (3) months of Apache Corporation ceasing to be a Qualifying Surety submit to EEPUK a proposed Decommissioning schedule and budget (the "Proposed Plan") which shall substantially follow and be based on the assumptions set out in Appendix 1 and the Oil & Gas UK 'Guidelines on Decommissioning Cost Estimation' with additional detail to specify the base assumptions used to qualify the constituent elements and sub-elements including durations of activities, resource requirements and associated rates, and covering:
3.1.1 an estimate of the dates on which Decommissioning will commence and be completed;
3.1.2 an estimate of the highest Net Cost during the immediately following Year (such immediately following Year being the "Relevant Year"); and
3.1.3 all other matters relevant to the proper preparation for and management of Decommissioning, including but not limited to decommissioning options, alternative uses for Field Property and an assessment of eligibility for derogation from removal obligations.
3.2 If EEPUK does not object to the Proposed Plan within sixty (60) days of the submission, the Proposed Plan shall become the Decommissioning Plan for the Relevant Year.
3.3 For so long as Apache Corporation is not a Qualifying Surety, Apache shall:
3.3.1 on or by 30th June in each third Year since the last Proposed Plan was issued, issue a new Proposed Plan; and
3.3.2 on or by 30th June in every year in which a new Proposed Plan is not issued pursuant to Clause 3.3.1 above, update the most recent Proposed Plan to reflect changes in inflation, discount rates, Decommissioning already conducted, and applicable currency exchange rates (a "Proposed Plan Update").
3.4 If EEPUK objects to a Proposed Plan or a Proposed Plan Update, EEPUK shall provide notice to Apache of EEPUK's objections to the Proposed Plan or the Proposed Plan Update (such notice must include a written statement of EEPUK's objections explaining such objections in reasonable detail), within sixty (60) days of submission of the Proposed Plan or the Proposed Plan Update to EEPUK. If EEPUK fails to provide such notice to Apache within such sixty (60) day period, EEPUK shall be deemed to have approved the Proposed Plan or the Proposed Plan Update. If EEPUK provides Apache with a valid objection notice pursuant to this Clause 3.4, then all Parties shall meet promptly to discuss those objections and shall attempt to reach an amicable resolution. If no amicable resolution has been reached within ninety (90) days of submission of the Proposed Plan or the Proposed Plan Update by Apache, then EEPUK shall be entitled to refer the matter for Expert determination pursuant to Clause 10… The Proposed Plan or the Proposed Plan Update, as adjusted if applicable, shall then be deemed to be approved by the Parties and shall become the Decommissioning Plan for the Relevant Year. …
4. Provision of Security
4.1 Apache undertakes contemporaneously with the signature of this Agreement to provide to EEPUK an Affiliate Guarantee in respect of MNSL's Licence Interest Share of the costs of Decommissioning of the Field Property. …
4.2 Apache shall promptly notify EEPUK if the provider of the Affiliate Guarantee ceases to be a Qualifying Surety. Within ten (10) days of the provider of the Affiliate Guarantee ceasing to be a Qualifying Surety, Apache shall in addition to its obligation under Clause 4.1 but subject to Clause 4.4, be obliged to provide EEPUK with a Letter of Credit in the amount equal to the Provision Amount stated in or calculated for the Relevant Year under Clause 5 (as the case may be). Such Letter of Credit shall expire and be renewed in accordance with Clause 5. …
5. Licence Interest Share of Costs of Decommissioning
5.1 The Provision Amount for the 2011 Relevant Year and 2012 Relevant Year is set out in Appendix 2 (the "Initial Amount"). Commencing with respect to the 2013 Relevant Year, the Provision Amount in respect of each Relevant Year shall be calculated in accordance with the following formula:
Provision Amount = (X x Y) – F
X = MNSL's Licence Interest Share of the estimated Net Cost of Decommissioning as set out in the Decommissioning Plan for the Relevant Year;
Y = a risk factor which shall be one decimal point two (1.2); and
F = the aggregate amount of any Additional Security.
5.2 By no later than 1st October in the Year preceding each Relevant Year for which Apache is required to provide EEPUK with a Letter of Credit, Apache shall advise EEPUK of the Provision Amount resulting from the computations set out in Clause 5.1 for the Relevant Year.
5.3 If by 1st October of the Year preceding a Relevant Year, the Decommissioning Plan for the Relevant Year has yet to be approved or deemed approved under Clause 3, or Apache has not provided the calculation of the Provision Amount in accordance with Clause 5.2, the Provision Amount for the Relevant Year shall be deemed to be the same as the Provision Amount for the preceding Relevant Year, or if there is no Provision Amount for the preceding Relevant Year or at all, then the Provision Amount shall be equal to the Initial Amount (as the case may be "Interim Amount"). In the event that the Provision Amount for the Relevant Year for which the Interim Amount applies is subsequently approved, deemed approved or determined by the Expert pursuant to clause 10 at a time in which Apache Corporation is not a Qualifying Surety, then Apache shall (subject to Clause 4.4) be obliged to provide a substitute Letter of Credit in the amount of the Provision Amount so approved, deemed approved or determined and EEPUK shall be obliged to return to Apache for cancellation the Letter of Credit in the amount of the Interim Amount promptly upon EEPUK's receipt of the new substituted Letter of Credit. …
5.4 A Letter of Credit provided pursuant to Clause 4.2 shall (subject to Clause 4.4) be renewed for each Relevant Year by no later than 1 December preceding such Relevant Year provided that the renewed Letter of Credit may be stated to take effect from the expiry date of the expiring Letter of Credit. On provision of a renewed Letter of Credit which takes immediate effect,"
C. The Proposed Plans: factual summary
D. The Proposed Plans: submissions
a. The starting point is Clause 4.2 and the obligation on Apache to provide EEPUK with a Letter of Credit "in the amount equal to the Provision Amount stated in or calculated for the Relevant Year under Clause 5 (as the case may be)." For that purpose, in the events which have occurred, the Relevant Year must mean 2020.
b. It is highly unlikely that the parties used the expression Relevant Year to mean different things in different places in the BDSAs. So, it is to be assumed that the Relevant Year for other purposes is also 2020.
c. The effect of EEPUK's submissions is that "Relevant Year" means different things in different clauses in the BDSAs, which is highly unlikely.
d. "Year" is defined as calendar year and Clause 3.1.2 defines "Relevant Year" as "the immediately following year". That latter expression is ambiguous. It could mean "the following calendar year" although the word "immediately" would then be redundant. Alternatively, it could mean "the year immediately following the day in question", so on 1 June 2020 the immediately following year is 2020. This latter construction should be preferred because it gives Relevant Year the same meaning as in Clause 4.2.
e. Clause 5 assumes there will be a Decommissioning Plan for every relevant calendar year; however, on EEPUK's case there will be no Plan at all for 2020.
f. Moreover, for the purpose of Clause 5.3, on EEPUK's case the "Interim Amount" is not interim at all but a final amount.
g. EEPUK's construction is inconsistent with Clauses 5.1, 5.2 and 5.3.
h. The commercial purpose of these provisions is to ensure that EEPUK is properly secured and that security is adjusted so EEPUK neither receives too much or too little security. But on EEPUK's case even though there is an obligation to provide security in March 2020, that security is based on out of date figures and there is no possibility of amending that for the rest of that calendar year, which is not in accordance with commercial common sense
a. The correct starting point is the definition of "Relevant Year" as the immediately following calendar year. That means the next calendar year. It would be extraordinary if, as Apache submit, the immediately following year on 1 June 2020 was 2020. It is obviously 2021.
b. Once Apache's submission on that point is rejected, then it is apparent that the obligation to present a Plan is an obligation in relation to 2021, not 2020.
c. That conclusion makes sense of Clauses 5.1, 5.2 and 5.3 which cannot be explained consistently on Apache's case.
d. It is true that on this submission the wording of Clause 4.2 presents a difficulty, because in "in the amount equal to the Provision Amount stated in or calculated for the Relevant Year under Clause 5 (as the case may be)" the wording has gone adrift but that is no reason to reject this construction.
e. Apache's submission in any event misunderstands Clause 5.3, which is concerned both with the Interim Amount as well as the Initial Amount.
E. The Proposed Plan: Discussion
F. The Additional Wells
"29 Preparation of programmes.
(1) The Secretary of State may by written notice require—
(a) the person to whom the notice is given; or
(b) where notices are given to more than one person, those persons jointly,
to submit to the Secretary of State a programme setting out the measures proposed to be taken in connection with the abandonment of an offshore installation … (an "abandonment programme").
30 Persons who may be required to submit programmes.
(1) A notice under section 29(1) shall not be given to a person in relation to the abandonment of an offshore installation unless at the time when the notice is given he is within any of the following paragraphs—
(a) the person having the management of the installation or of its main structure;
(b) a person to whom subsection (5) applies in relation to the installation;
(ba) a person to whom subsection (5)(a) and (b) applied in relation to the installation, but who—
(i) transferred the right mentioned in that subsection to another person, and
(ii) has not obtained a consent required under the licence in relation to the transfer;
(c) a person outside paragraphs (a) and (b) who is a party to a joint operating agreement or similar agreement relating to rights by virtue of which a person is within paragraph (b);
(d) a person outside paragraphs (a) to (c) who owns any interest in the installation otherwise than as security for a loan;
(e) a body corporate which is outside paragraphs (a) to (d) but is associated with a body corporate within any of those paragraphs.
(5) This subsection applies to a person in relation to an offshore installation if—
(a) the person has the right—
(i) to exploit or explore mineral resources in any area,
(i) any activity mentioned in subsection (6) is carried on from, by means of or on the installation, or
(ii) the person intends to carry on an activity mentioned in that subsection from, by means of or on the installation, or if he had such a right when any such activity was last so carried on.
(6) The activities referred to in subsection (5) are—
(a) the exploitation or exploration of mineral resources in the exercise of the right mentioned in subsection (5)(a);
31 Section 29 notices: supplementary provisions.
(1) Subject to subsection (3), the Secretary of State shall not give a notice under section 29(1) in relation to an offshore installation to a person within paragraph (e) of section 30(1) if the Secretary of State has been and continues to be satisfied that adequate arrangements (including financial arrangements) have been made by a person or persons within paragraph (a), (b) or (c) to ensure that a satisfactory abandonment programme will be carried out.
(3) Subsections (1) and (2) shall not apply if there has been a failure to comply with a notice under section 29(1) or if the Secretary of State has rejected a programme submitted in compliance with such a notice.
34 Revision of programmes.
(1) Where the Secretary of State has approved a programme submitted to him under section 29—
(b) either he or any of those persons [who submitted it] may propose that any person who by virtue of section 36 has a duty to secure that the programme is carried out shall cease to have that duty, or that a person who does not already have that duty shall have it (either in addition to or in substitution for another person).
(2) In the case of a proposal of the kind mentioned in subsection (1)(b), any person who would if the proposed change were made have a duty to secure that the programme is carried out must be a person who—
(a) if the programme relates to an offshore installation, is within paragraph (a), (b), (ba), (c), (d) or (e) of section 30(1) when the proposal is made, or has been within one of those paragraphs at some time since the giving of the first notice under section 29(1) in relation to the installation; …
44 Meaning of "offshore installation".
(1) In this Part of this Act, "offshore installation" means any installation which is or has been maintained, or is intended to be established, for the carrying on of any activity to which subsection (2) applies.
(2) This subsection applies to any activity mentioned in subsection (3) which is carried on from, by means of or on an installation which is maintained in the water, or on the foreshore or other land intermittently covered with water, and is not connected with dry land by a permanent structure providing access at all times and for all purposes.
(3) The activities referred to in subsection (2) are—
(a) the exploitation, or the exploration with a view to exploitation, of mineral resources in or under the shore or bed of relevant waters;
(5) For the purposes of this section—
(a) any floating structure or device maintained on a station by whatever means; and
(b) in such cases and subject to such exceptions as may be prescribed by Order in Council, any apparatus or works which are by virtue of section 26 to be treated as associated with a pipe or system of pipes for the purposes of Part III of this Act, but, subject to paragraph (b), does not include any part of a pipeline within the meaning of that section;"
a. The notice served on MNSL (as it then was) dated 29 May 2000 which required MNSL to submit to the Secretary of State an abandonment programme setting out the measures proposed to be taken in connection with the abandonment of the offshore installations specified. The Field Installations identified were as follows:
|Field First Production Date
|Subsea Installation comprising wells, with protective structures and associated manifolds tied back to Beryl A via a Subsea Distribution Unit
b. The notice served on MNSL dated 18 January 2005 which required MNSL to submit to the Secretary of State an abandonment programme setting out the measures proposed to be taken in connection with the abandonment of the offshore installations specified. The Field Installations identified were as follows:
|Date First Production
|Nevis South Phase 1 & 2: All subsea equipment including wells, protection structures and manifolds associated with the Nevis field
|Field First Production Date
|All subsea equipment including the Buckland North Drill Centre Subsea Template/Manifold and Buckland South Drill Centre Subsea Manifold
"…Notwithstanding any provision to the contrary in this Agreement, and except as provided in Clause 7.1.2(b), on and from Closing, the Buyer [Apache] shall procure that the Company [ABIL] complies with all applicable laws, and all applicable provisions of the Licence Interest Documents, relating to decommissioning of each of the Field Facilities and the Buyer shall indemnify, defend and hold the Seller [EEPUK], the Seller Affiliates and the Seller Associated Parties harmless from and against all Decommissioning Obligations relating to ownership or operation of the Remaining Assets, whether arising before, at or after the Effective Date and from and against any breach of the foregoing obligation regardless of: (i) how the Decommissioning Obligations arose or arise; (ii) whether the Decommissioning Obligations are or were foreseeable or unforeseeable; and (iii) whether the Decommissioning Obligations result from any acts or omissions, negligence or breach of duty, whether statutory or otherwise, conduct or statements of any or all of: the Seller, the Seller Affiliates, the Company or the Seller Associated Parties or the condition of the Field Facilities and / or the Interests, including:
9.1.1 the proper plugging, replugging, and abandoning of all Wells associated with the Interests, whether drilled or plugged before at or after the Effective Date;
9.1.2 removing and disposing of all the Field Facilities; and
9.1.3 compliance with the provisions of the Licences, the other Licence Interest Documents and all applicable laws and government rules, regulations, orders and requirements associated with the abandonment of all the Field Facilities and the Licence Areas, provided that the Buyer shall not be required by the provisions of this clause 9.1 (but without prejudice to any other provisions of this Agreement) to reimburse the Seller, any Seller Affiliate or any Seller Associated Party for amounts actually expended by the Seller, the Company, any Seller Affiliate or any Seller Associated Party prior to the Effective Date in respect of any Decommissioning Obligations."
"The object of this Agreement is to provide security for Apache's indemnity in favour of EEPUK (and others) in the SPA in relation to MNSL's Licence Interest Share of the costs of Decommissioning of the Field. Apache hereby agrees to provide security as aforesaid in accordance with the terms of this Agreement."
""Decommissioning" means the decommissioning and/or dismantling and/or demolition and/or removal and/or disposal of the Field Property or any part thereof including any operations carried out in connection with or in contemplation of the foregoing (including planning, acquiring long-lead items and maintenance of the Field Property following cessation of production but pending the commencement of decommissioning operations), together with any necessary site reinstatement all as may be required under:
(a) Legislation (including without limitation any Statutory Decommissioning Programme in respect of Field Property); …
"Field" means the field commonly known as the [Buckland / Nevis] Field lying within the area of the Licence and operated (or previously operated) under the JOA.
"Field Property" means property owned, leased or otherwise provided by the Licensees jointly pursuant to the JOA or, where there is no longer a JOA in force, property owned, leased or otherwise provided by the remaining Licensee which pertains to the Field, and any new field facilities including wells, platforms, structures, equipment and pipelines, which pertain to the Field and which result from operations after the date of execution of this Agreement, provided that Field Property shall exclude such new field facilities unless EEPUK or its Affiliates can be required to submit or carry out an abandonment programme in relation to such new field facilities under the terms of the Petroleum Act 1998 …"
G. The Additional Wells: submissions of the parties
a. Prior to the Effective Date of the SPA, MNSL was issued with s.29 notices covering the Nevis and Buckland Fields.
b. The fact that the Additional Wells were drilled after those notices were issued is immaterial as the notices are wide enough to include any and all installations identified in the relevant fields at the time when an abandonment programme is submitted.
c. There is nothing in s.29 itself which limits the ambit of a s.29 notice to those offshore installations and submarine pipelines which are in existence at the time when the notice is served.
d. At the time of the relevant s.29 notices, although EEPUK did not come within s.30(1)(a)-(d) of the Act, it was caught by s.30(1)(e) as it was a body corporate "associated with a body corporate" which comes within s.30(1)(a) to (d).
e. Under s.34(1)(b) the Secretary of State could now propose that EEPUK should carry out any programme which has been submitted to and approved by him in respect of the work identified in those notices, which includes the Additional Wells.
f. Thus, unless Apache can show that the Additional Wells fall outside the powers of the Secretary of State, Apache is obliged to provide security to protect EEPUK from the possibility of being required to incur decommissioning costs in respect thereof.
a. EEPUK does not in fact contend that it can be required to carry out an abandonment programme in relation to the Additional Wells under the terms of the Act (and accordingly that the Additional Wells do fall within the definition of Field Property within the BDSAs). On the contrary, its case is a negative: that it does not accept that it is not liable for such works.
b. No one has suggested that the Secretary of State intends to require EEPUK to decommission the Additional Wells and EEPUK has not tried to prove that. Its case is essentially a non-admission which is insufficient as a basis for requiring the provision of security.
c. The central issue is whether the Additional Wells fall within the definition of "Field Property" in Clause 1.1 of the BDSAs. If they do not (as Apache contends), then it is common ground that account did not need to be taken of them.
d. Whether or not the Additional Wells fall within the definition of "Field Property" depends on whether EEPUK or its Affiliates can be required to submit or carry out an abandonment programme in relation to such new field facilities under the terms of the Act.
e. On a proper construction of the relevant provisions of the Act, EEPUK cannot be required to carry out an abandonment programme in relation to the Additional Wells under the terms of the Act.
f. Each of the Additional Wells (which were "offshore installations" for the purposes of the Act) were drilled for the first time after the ownership of ABIL passed to Apache under the SPA. It follows that a s.29 notice cannot logically have been given in relation to the Additional Wells at a time at which EEPUK fell within s.30(1)(e) of the Act, and EEPUK cannot therefore be required to carry out an abandonment programme under s.34 of the Act. In particular, a s.29 notice can only be given in relation to an offshore installation that actually exists.
g. Thus the s.29 notices did not relate to the Additional Wells, which did not exist at the time. It follows that the Secretary of State cannot impose a duty on EEPUK to carry out an abandonment programme in relation to the additional wells under s.34 of the Act, and that the Additional Wells do not fall under the definition of "Field Property" for the purposes of the BDSAs.
h. The above conclusion is consistent with the obvious purpose of the statutory provisions set out above. That purpose is to ensure that parties who have derived a financial benefit from an offshore installation should also be responsible for its decommissioning.
H. The Additional Wells: discussion
"In circumstances where a section 29 notice is not withdrawn from a party that has disposed of its interest (see below) they would not be liable for any new installations or pipelines emplaced in the field. In these cases OPRED will prepare a separate section 29 notice referencing the new installations and the relevant parties. However, the exiting party would be liable for any new equipment added to an installation already covered by their existing notice."
This does not seem to me to take the matter any further.
a. The amount of security required in the events which have occurred is to be determined with reference to the 2021 Proposed Plan in accordance with the scheme in BDSAs Clauses 3-5 and not the (purported) 2020 Plan.
b. The security is not required to include provision in relation to the Additional Wells.