R. (on the application of Cox) v Oil and Gas Authority: the OGA’s pre-tax approach to maximising economic recovery of UK petroleum is approved by the Administrative Court
Issue 8 of the Energy and Natural Resources Case Law Update
In this judgment, the Administrative Court confirmed that it is for the Oil and Gas Authority (OGA) (now known as the North Sea Transition Authority), not the court, to decide how to interpret the statutory objective of “maximising the economic recovery of UK petroleum” for the purposes of the Petroleum Act 1998 (the Act).
This judicial review reminds us that the Administrative Court will show considerable deference to the expert view of a regulator, in this case the OGA (the First Defendant), when it is exercising its statutory functions. The court will be reluctant to intervene unless there has been a clear error of law. No such error was found in this case.
The OGA is required (pursuant to the Act) to produce an Oil and Gas Strategy for the UK setting out how the “principal objective” of “maximising the economic recovery of UK petroleum” (the MER objective) is to be met.Taking a “pre-tax” approach to this has been the approach for some time, and the OGA did so in an updated Strategy published 16 December 2020 (the OGA Strategy).
The court found that such approach is lawful and correct.
The Secretary of State for Business, Energy and Industry (the SSBEI or Second Defendant) is under a legally binding commitment to meet the “net zero” target (the Net Zero Target) contained in the Climate Change Act 2008 (CCA) by 2050. This Net Zero Target was inserted into the CCA in response to the Paris Agreement adopted at COP 21 in December 2015. The court disagreed that the existence of this Net Zero Target rendered the pre-tax approach to MER irrational. The claimants were also let down by expert evidence which did not comply with the Civil Procedure Rules (CPR) on expert evidence.
The Energy Act 2016 established the OGA as the independent regulator for oil, gas and carbon storage industries in the UK. The OGA became responsible for producing a strategy to meet the MER objective. The OGA Strategy, under challenge in these proceedings, was the first such strategy published by the OGA since being empowered to do so.
The OGA Strategy includes changes which make clear that meeting the Net Zero Target is part of the MER objective, and that the Strategy is intended to assist the Secretary of State to meet that Target.
For the purposes of the MER objective, the OGA Strategy sets out the following definition of “economically recoverable”:
“…those resources which could be recovered at an expected (pre-tax) market value greater than the expected (pre-tax) resource cost of their extraction, where costs include both capital and operating costs (including carbon costs) but exclude sunk costs and costs (such as interest charges) which do not reflect current use of resources.” (emphasis added).
The claimants in this case were three active environmental campaigners. They challenged the OGA Strategy on two grounds:
- that there was an error of law and/or frustration of statutory purpose because the pre-tax approach taken in the OGA Strategy proceeded on the basis of an incorrect definition of the MER objective (Ground 1), and
- that the OGA Strategy, and this pre-tax approach, was inconsistent with the Net Zero Target and therefore irrational (Ground 2).
The pre-tax approach has been followed by successive governments, starting well prior to the OGA’s receipt of the statutory duty to give effect to the MER objective. Nevertheless, the claimants now sought to challenge the OGA’s adoption of that approach in the OGA Strategy.
The claimants’ concerns centred around subsidies, in the form of tax breaks, allegedly given to oil and gas companies. According to the claimants, by ignoring the impact of these subsidies, the OGA was not maximising economic recovery, since the recovery in question might be economic to the operator but not to the UK as a whole. The claimants further asserted that this approach was irrational as it would result in greater oil and gas production, conflicting with the legal duties under the Net Zero Target.
The court’s decision
The court dismissed the claim entirely, on both grounds, and approved the OGA’s choice of wording in the OGA Strategy. The court looked back at the history of the MER objective and found there was no support for the claim that Parliament must have intended to require the OGA to take into account tax implications. The court also dismissed the irrationality argument. Irrationality is a high bar to meet in a judicial review claim, and this claim fell some way short of it.
The claimant’s first ground was that the meaning of the statutory provision “economic recovery of UK petroleum” is a question of law for the court. They argued that there was a single permissible definition, which required a post-tax approach, and that it was not open to the OGA to choose its own alternative pre-tax meaning. The definition used by the OGA, pursuant to which the assessment of compliance with the MER objective takes place on a pre-tax basis, was wrong because it failed to take account of the favourable tax treatment allegedly afforded to the oil and gas industry. The claimants pointed to evidence of such negative tax flows in 2015-16 and 2016-17 and argued that disregarding this tax position would mean that “the OGA can approve activities that are not economic for the UK as a whole and therefore lose society value.”2
The court was not open to the suggestion that there was only one meaning to this term or that the court was the forum in which the true meaning was to be found. The court confirmed the OGA’s status as the expert regulator, and that it was a matter of the OGA’s discretion for it to give its view of the best method of economic assessment.
The court also considered what the position would be should the claimants be correct that there is one single meaning or correct approach to MER. In such circumstances, the claimants had failed to show that the OGA’s chosen interpretation requiring pre-tax analysis was not capable of being that single meaning (in other words, even if there were only one meaning, it would not necessarily be the meaning for which the claimants contended). The court observed that if Parliament had intended for there to be a diversion from the pre-tax approach, which had been followed since the early 1990s, this would have been much more clearly signalled.
The court then went on to consider the claimant’s assertion that the OGA’s definition of “economically recoverable” was irrational. This assertion was based on the argument that the OGA’s pre-tax approach was inconsistent with the Net Zero Target because such an approach would lead to increased extraction of oil and gas.
However, in light of the court’s findings on Ground 1, their argument under Ground 2 also ran into difficulties.
- In the first instance, the court found that the OGA Strategy had taken climate change into account “in various ways”3 and that this could be seen in “numerous places”4 including, for example, a duty for relevant persons to assist the SSBEI with meeting the Net Zero Target. This meant that the claimants had failed to demonstrate a lack of proper regard for climate change, and as a result the claimants were required to argue that what the court had found to have been “entirely permissible” under Ground 1 was nonetheless irrational under Ground 2.5
- Second, the court disagreed that the OGA’s definition would necessarily result in increased emissions, not least since that wasn’t even the argument put by the claimants, who instead claimed that the definition “quite possibly” increased the amount of petroleum recovered, meaning that any corresponding increase in emissions could “only logically” be “quite possible.”6 The court also found that the claimants’ position oversimplified the OGA Strategy and confused the concept of the “value” of economically recoverable petroleum with the “amount” of such petroleum.7
- The claimants adduced expert evidence which purportedly showed that the UK’s tax regime incentivises production that is “economically unviable” and “increases UK oil and gas production beyond what would be the case with a more normal tax regime.”8 However, the court did not place any weight on this evidence since it both strayed outside the ambit of expertise and did not comply with the requirements of CPR Part 35.9
As a result, the court found that the claimants had failed to meet the high bar required to establish that the OGA’s chosen definition of “economically recoverable” was irrational.10
In summary the OGA, as an expert regulator, is entitled to decide what “maximising the economic recovery of UK petroleum” means, and a definition which includes a pre-tax approach is both lawful and rational, notwithstanding the Net Zero Target.
Rationality challenges in judicial review proceedings are difficult to succeed in. Climate change judicial reviews brought by environmental campaigners may be more likely to succeed when they rely instead on procedural grounds or breaches of specific statutory duties, such as the recent judicial review brought by campaigners including Friends of the Earth against the SSBEI in relation to the Net Zero Strategy.11
1 EWHC 75 (Admin).
2 EWHC 75 (Admin), at .
3 EWHC 75 (Admin), at .
4 EWHC 75 (Admin), at .
5 EWHC 75 (Admin), at .
6 EWHC 75 (Admin), at .
7 EWHC 75 (Admin), at .
8 EWHC 75 (Admin), at .
9  EWHC 75 (Admin), at .
10 EWHC 75 (Admin), at .
11 EWHC 1841 (Admin).