Oil and Gas Authority proposed Governance Guidance and Consultation

When the OGA first proposed new Supporting Obligations pertaining to governance in its consultation on the OGA Strategy, there was a concern among respondents as to its value and purpose. Respondents were primarily concerned that this Supporting Obligation would empower the OGA to interfere in companies’ everyday affairs and add an unnecessary layer of regulation that was not required, given that corporate governance is already well regulated.

The Oil and Gas Authority (“OGA”) response was that while it recognised that a number of corporate governance codes already exist, not all players on the UKCS were subject to such a code, and that it would also include ‘Strategy based specific requirements where relevant’. The OGA Strategy (including Supporting Obligations on governance) came into effect in February 2021. The OGA has now published proposed Governance Guidance (the “Guidance”) explaining in more detail how it is envisaged that these Supporting Obligations will be implemented. Its formal consultation into the proposed Guidance is open for responses until 12 November 2021.

Supporting Obligations

For reference, the Supporting Obligation contained in paragraph 3 requires the licensee to “apply good and proper governance at all times, including complying with any principles and practices as the OGA may from time to time direct” and the Supporting Obligation at paragraph 4 obliges the licensee to ‘comply with a direction made by the OGA under paragraph 3’.

The Proposed Guidance

Purpose of the Guidance

The Guidance is intended to set out the circumstances under which the OGA will usually review the adequacy of a licensee’s governance structures and arrangements and how it will assess adequacy.

Once implemented, the OGA expects that the Guidance will assist it in influencing and promoting good governance among licensees in a number of areas, ensuring that the objectives of the OGA Strategy are fulfilled.

The proposed Guidance primarily concerns:

• the adoption and application by a Relevant Board of an appropriate and recognised corporate governance code;
• the adoption and application by a Relevant Board of the specific principles established in the OGA Strategy;
• a commitment by the Relevant Board to appropriately address various environmental and corporate social responsibility concerns; and
• how the OGA will monitor compliance with the Guidance including by requiring the Relevant Board to account for the implementation of the Guidance

Importantly, the OGA highlights that the Guidance is not legally binding and is not a substitute for any regulation or law. Furthermore, any assessment by the OGA into a licensee’s governance is undertaken entirely for the OGA’s own purposes and will not have broader effect.

Who will be affected by the Guidance?

The Guidance focuses on the governance of a licensee, which is regarded as the responsibility of the Relevant Board. “Relevant Board” is defined as ‘the Board of Directors or equivalent with effective control over the Licensee’. This definition encompasses the Board of the particular licensee company but also includes any other Boards in the licensee’s group which may have been delegated responsibility for governance. In effect, this extends the application of the Guidance from the immediate Board of a Licensee to the Board at Group level which has de facto control over the licensee company. Any such Board will be expected to apply the Guidance.

Corporate Governance

The Guidance acknowledges that licensees come in many different shapes and sizes and so does not adopt a ‘one size fits all’ approach. Once in effect, the Guidance will require all licensees to adhere to a recognised corporate governance code which is appropriate for a company of its composition. The Guidance refers to the UK Corporate Governance Code, the Wates Principles of Corporate Governance and the QCA Corporate Governance Code but is clear that it would consider other codes that may be appropriate, in particular in the case of overseas companies.

The Guidance also requires Boards to adhere to additional principles established in the Guidance covering five key areas:

• Purpose and Leadership, Board composition, and Director Responsibilities: in addition to fulfilling statutory duties, directors should possess appropriate senior level knowledge and experience of the industry, including of the UKCS and the OGA Strategy (including the requirement to assist the Secretary of State to meet the net zero target), and should include an experienced, suitably qualified financial officer with responsibility for internal control and risk managements systems and the integrity of financial statements.
• Delivery of licence commitments and the OGA Strategy principles: the Relevant Board, and its committees, will be expected to promote the long-term success of the licensee through various measures, for example, by identifying opportunities to create and preserve value and mitigate risk and by taking account of financial risks to third parties (including joint venture partners, users of shared infrastructure, employees and the supply chain) in its decision making. Boards should also adopt a prudent approach to the issuing of dividends or other capital distributions taking account of the highly cyclical nature of the industry and the potential impact on the licensee’s ability to meet its liabilities.
• Audit, risk, internal control, and reporting principles: the Relevant Board must ensure compliance with all relevant and applicable financial accounting principles and regulations.
• Environmental governance principles: Relevant Boards are expected to establish a culture of greenhouse gas emissions reduction, track performance against government and industry targets, prepare for mandatory climate reporting in accordance with TCFD standards and apply the recommendations of the OGA ESG Taskforce to support achieving the net zero target.
• Corporate social responsibility principles: a Relevant Board will be required to ‘give due consideration to all key social responsibilities attendant with the Licensee’s operations and interactions with stakeholders’ including the benefits of a diverse and inclusive workplace and the commitments made by the industry in the North Sea Transition Deal and the requirements of the OGA’s Supply Chain Expectation, the OGUK Supply Chain Principles, and the BEIS Prompt Payment Code.

Operation of the Guidance

In the Guidance, the OGA has confirmed that it does not intend to systematically monitor compliance with the Supporting Obligation at paragraph 3 or the Guidance; however, the OGA will be vigilant in terms of actions and behaviours which may be inconsistent with the Guidance. In doing so, the OGA has stated that it will consider evidence through a number of means, including the Stewardship Review process.

If it is considered that a licensee’s governance is insufficient, then the OGA may review the licensee’s arrangements and the licensee may then be required to demonstrate compliance with paragraph 3 of the Strategy.

Notably, the Guidance states that Sanctions may be issued if the OGA determine that the licensee has failed to comply with the OGA Strategy as a result of any inadequate governance.

Implementation

The OGA has not confirmed when the proposed Guidance is expected to take effect; however, it is noted that licensees must implement the Guidance within six months of its formal publication.

The Consultation

The consultation seeks general comment from industry and other interested parties on each of the aspects that it covers, including as to whether the proposed timescale for implementation is achievable. It also seeks industry’s views on what impact the Guidance may have on industry, either generally or in terms of costs and benefits.

If you are interested in responding, you may do so by email to [email protected] or by writing to the OGA’s Aberdeen address by 12 November 2021. Further information is available within the ‘Consultation on Proposals to Issue OGA Governance Guidance’ document here.

Comments

Some respondents to the OGA’s consultation on the OGA Strategy expressed concern about regulatory overlap and increased ‘red tape’ in relation to the inclusion of the new Supporting Obligations on governance. Now that further detail is available as to the OGA’s proposed approach, it will be interesting to see whether those concerns remain.

For those companies, large or small, which have already committed to compliance with a corporate code and which have established ESG plans, the governance is unlikely to add significantly to their compliance burden.

Our previous publication on the OGA Strategy consultation and responses can be read here.

The proposed Guidance is available here and the consultation into the proposed Guidance is available here.