New code of practice on access to infrastructure

One of the barriers to development in the UKCS identified by the Progressing Partnership Working Group (PPWG) set up under PILOT was the perceived difficulty of obtaining access on fair and transparent terms to existing infrastructure. Particularly for smaller discoveries, the cost of infrastructure access could be the critical factor in marginal economics of development. The previous code was widely viewed as being "weak and woolly" while the statutory powers of the Secretary of State to determine the conditions of access under the Petroleum Act 1998, the Pipelines Act 1962 and the Gas Act 1995, fine in theory, were in practice never invoked.

This has been addressed by the publication of a revised Infrastructure Code of Practice, developed by the DTI and UKOOA amongst others, which represents a significant development for infrastructure owners and potential users. The code is available from the UKOOA website at http://www.oilandgas.org.uk/issues/economic/icopfinal.pdf. This will open a PDF in a new window.

Status of the Code

The Code is non-statutory and remains voluntary but over fifty companies have already signed up and it is to be expected that most infrastructure owners on the UKCS will sign. There is no express sanction for failure but there has been an implicit threat from the DTI to "name and shame" defaulters.

It applies to all UKCS oil and gas infrastructure from the wellhead to the beach, including initial processing onshore to stabilise crude oil or prior to introduction of gas into the National Transmission System. It is not clear to what extent the Code will apply to infrastructure which crosses international boundaries but the DTI has indicated that the Norwegian authorities are looking at the Code in the context of ongoing discussions over a treaty with respect to infrastructure which crosses the median line. The DTI has also indicated that the Code would apply to a request from outside the UKCS for access to a pipeline within the UKCS.

Publication of information

The first innovation of the new code is in relation to the amount of information that infrastructure owners are required to publish. High level information on capacity through the DEAL website will indicate whether capacity is generally available, limited or whether the pipeline is effectively full – this is unlikely to add substantially to what is already in the public domain. However, in addition, owners are required to make available, ideally also on the web or if not then promptly on request, more specific information on their infrastructure for potential users such as entry and exit specifications, details of processing available, and available capacities for dealing with oil and gas under various parameters. This information is available to applicants without having to specify the purpose of their enquiry and they may therefore enquire through agents. In order to obtain further data, prospective users must be prepared to identify themselves and the broad outlines of their proposed development.

One practical issue will be how easy it is to provide the required information in relation to topsides processing facilities as these tend to be very much tailored arrangements.

Involvement of the Secretary of State

The code recommends use of standard terms as a basis for negotiation and provides a best practice guide to the negotiation process in the form of a flowchart. The parties must set their own timetable and agree a point at which the prospective user will serve notice on the Secretary of State that negotiations are underway. Thereafter, if negotiations have not been completed within six months of such notice the parties are obliged to refer the matter to the Secretary of State. This automatic referral is supposed to remove the "stigma" which in the past prevented parties invoking the Secretary of State's statutory powers to intervene in negotiations over access. An extension of time can be agreed if negotiations are complex, are proceeding well and the DTI agrees.

One issue which may cause difficulties in practice is at what point it is appropriate to submit a notice to the DTI on the basis that negotiations should be concluded within 6 months. It is the responsibility of the user to do this but the owner/operator is permitted to make comments on the feasibility of the proposed timescale. This may be a point of contention in difficult cases. A further issue which may give rise to dispute is the point at which a binding agreement is concluded – if the parties agree legally binding heads of terms, this may be enough to satisfy the DTI but significant disputes can arise over the drafting of fully termed agreements.

Terms of access

The Code requires that access is fair and non-discriminatory – it does not require the infrastructure owner to have fixed prices since services may differ from case to case but like cases should be treated similarly. It is acceptable for owners to reserve reasonable capacity for their own use. Generally, owners should be willing to offer services on an unbundled basis i.e. separating out the costs of different components to allow potential users to "mix and match" although it may be permissible to refuse to unbundle a particular service where this would have the effect of sterilising capacity elsewhere in the system. The Code does not specify what constitutes a fair price but refers to the DTI's existing guidance (which is in the course of revision) on dispute resolution in relation to third party access.

One area where the Code does not provide answers relates to blending – this is an area which may be addressed in future.

Liabilities and indemnities

The Code offers some guidance on liabilities and indemnities in general terms although UKOOA is looking to provide further advice in this area. The guidelines in the Code are generally in line with current commercial practice. There is however one new provision which is the suggestion that generally a party should accept a duty to mitigate its losses when seeking recovery from another party. In so far as this reflects the common law duty to mitigate loss there can be no objection to it. However, when applied to an indemnity regime it may give rise to confusion if not properly interpreted.

Subject to certain exceptions (particularly related to crossings and tie-ins) the prevailing indemnity regime in the UKCS is one of mutual hold harmless indemnities regardless of fault under which, in most cases, there is no need for any payment since each party absorbs its own losses. However, often these indemnities are extended to wider "groups" including affiliates, employees, co-venturers and so on. In some cases this may involve one party paying a claim to a member of the other party's group and then recovering the amount of that claim from the other party. The purpose of the mutual hold harmless regime is twofold:

• It removes the need for litigation since risk is allocated clearly on a no fault basis;
• It removes the economic efficiency of a number of parties potentially being liable for the same losses and therefore multiple insurances arising.

In the case of tie-ins and crossings, one party is paying for another party's loss up to a given cap, regardless of fault, but the same arguments regarding legal certainty and efficient insurance can be applied.

If a party is obliged to comply with a duty to mitigate in these circumstances then this immediately raises the prospect of litigation over whether that party has complied with its duty to mitigate. If there is a risk that a party may be found not to have mitigated its loss, then it may be liable in circumstances where it would previously have expected to be held harmless and may therefore feel the need to take out insurance to protect its position. This apparently reasonable statement may have the unintended consequence of undermining the intentions of the mutual hold harmless system. Of course, it may be argued that these effects will not arise unless a party fails to take reasonable steps to mitigate. However, what is reasonable in any given case is unlikely to be a black and white matter.

The common practice in the North Sea in light of the decisions in the Piper Alpha cases has been to expressly state that indemnities apply irrespective of negligence or breach of duty, statutory or otherwise. Since a breach of a duty to mitigate would be a breach of a contractual or common law duty, the indemnities should apply as they are set out, even when there has been such a breach. However, there is always a risk that a party may try to argue against this approach in a particular instance and that a court faced with the difficulty of trying to reconcile two apparently contradictory clauses may qualify the complete indemnity in some way.

If the indemnities are intended to apply notwithstanding a breach of the duty to mitigate, then it may be asked what is the purpose of the duty? This, however, is a question which may be applied to a large number of obligations in the agreement, including those dealing with issues such as health and safety. There are at least two purposes which such a clause may serve:

• In certain cases a breach may give rise to the right to terminate the agreement or other remedies such as withholding of certificates and/or retained sums;
• The clause may allow commercial or moral pressure to be placed on the other party to alter its behaviour.

Whether the recommended clause will become standard in transportation and related agreements (or from there whether it spreads to other kinds of upstream agreement) and if so, whether it has any of the undesirable consequences indicated above, will ultimately be a matter for the industry to determine.

Publication of agreement summaries

Another innovation of the Code is the requirement for signatories to publish the key commercial terms of construction and tie-in agreements, transportation and processing agreements or operating services agreements concluded in future (with some transitional flexibility for those already under discussion), within one month of these becoming unconditional. These are to be posted on the owner/operator's website and should follow a pro-forma attached to the Code. Prices and tariffs are to be quoted in the form of a range "of sufficient accuracy to reflect the cost to the user of the services to be provided". This will replace the current indicative tariff process but is without prejudice to the statutory obligation of owners of gas processing terminals and pipelines to publish their terms and conditions of access annually.

The publication of this data on concluded agreements raised potential issues of competition law, in relation to which the framers of the Code sought advice from the Office of Fair Trading. This advice is annexed to the Code. The OFT accepted that the intent of the Code was pro-competitive and stated that at present they do not believe the Code raises any competition concerns. However, the OFT reserved the right to revert to the issue if they received a complaint in the future based on the working of the Code in practice.

The Code is neutral on the contentious issue of joint selling of pipeline capacity - the questions and answers published by UKOOA state "The question of divided rights or joint marketing is one for system owners to resolve." However, the DTI has indicated that where capacity is jointly marketed, then it is acceptable for the operator to undertake the obligations under the Code on behalf of the owners.

The UKOOA questions and answers also indicate that the OFT considers that infrastructure owners are unlikely to have breached the Chapter II prohibition on abuse of a dominant position where they have had due regard to the Secretary of State's principles for setting terms in arriving at the terms that they offer to, and agree with, third parties.

Conclusion

While the Code leaves a number of practical areas to be clarified in the future, it does represent a significant advance in the powers of potential users of infrastructure and should go a long way to meeting their demands for more transparent access. However, the long term implications of the Code, particularly in terms of competition and the liability and indemnity regime will take some time to emerge.