When North Sea oil and gas assets are sold on an asset basis (as opposed to a share sale of the company which owns the interests), it is generally necessary for the seller to assign/transfer to the buyer all of the various agreements which establish the seller’s title to the asset, govern asset operations and provide the route to market for production.
A typical asset sale will involve the assignment of the licences and the transfer of a large number of other agreements (often 50+, and, sometimes, many more than that) from a seller to the buyer. Each of these agreements will have counterparties whose consent (and signature on the transfer document) is needed to transfer the agreement. This process is separate to the requirement for the seller to obtain the consent of the NSTA to the transfer of the licence(s) pursuant to the terms of the licence(s).
Transactions can be delayed, and potentially frustrated, where consenting parties refuse to consent and/or sign the transfer documents. This has been a longstanding concern for the NSTA and industry participants. To address these issues, Offshore Energies UK previously published “Negotiations Best Practice” (2017) and “Transactions Best Practice” (2019) which set out best practice guidance on negotiating and completing transactions.
On 28 March 2023, the North Sea Transition Authority (NSTA) launched a consultation inviting views on proposed guidance on the conduct of licence assignments in the UKCS.
The NSTA aims to uphold “a stable and predictable system of regulation which encourages investment in oil, gas, carbon storage operations and in energy transition projects”. While recognising that there can be good reasons why a party may withhold consent to a transfer, the NSTA is concerned that, notwithstanding those previous publications and guidance, the time taken to obtain consent for licence assignments can cause delays, threaten transactions, and undermine investor confidence in the UKCS.
The NSTA wants to “minimise the number of transactions which proceed slowly or reach an impasse”. The proposed guidance will seek to “support and provide confidence to current licensees and potential future investors during transactions”. Further, the proposed guidance aims to strike the balance between “the benefits achieved by a liquid market for the ownership of licence interests and protecting the rights and interests of existing participants in the UKCS who wish to maintain their current holdings”.
The proposed guidance sets out the NSTA’s expectations for:
- buyers and sellers; and
- consenting parties.
Buyers and sellers are expected to run an efficient, well organised consents process. To this end:
- The buyer and seller should develop a transaction Project Plan at the outset.
- Where a consenting party might reasonably require information on the buyer’s financial and technical capability, the buyer and seller should prepare and provide the consenting party with a capability pack, setting out financial, corporate and technical information on the buyer.
- Reasonable queries from consenting parties should be responded to promptly and constructively.
- Where a consenting party raises significant issues the buyer and seller should “propose suitable and reasonable terms to secure the Consenting Party’s consent”.
- The NSTA should be regularly updated on progress.
Consenting parties are expected to behave properly in considering consent requests. For example, in engaging with the buyer and seller, a consenting party will normally be expected to:
- Deal promptly with the consent request.
- Cooperate and collaborate with the buyer and seller.
- Appoint a principal point of contact, responsible for the progression of the application.
- Attend an initial planning meeting and before doing so, review the Capability Pack and, if possible, request any additionally required information.
- Explain why any additional information is needed.
- Explain why any condition on consent is needed and give reasons for any withholding of consent. Conditions imposed should be proportionate and not used as leverage for other unconnected commercial matters.
The consultation will run until 23 May 2023, with the new guidance expected to be published later in the year.
As the North Sea hydrocarbons basin has matured, new investors have entered the UKCS, often with non-traditional funding structures. At the same time, transactions have become more complex - for example, as a result of sellers retaining decommissioning and/or other liabilities. These factors often complicate transfer processes.
As mentioned above, licence assignments require the consent of the NSTA. The consent process involves an assessment by the NSTA of the buyer’s financial and technical capability. However, as the NSTA makes clear in the proposed guidance, this assessment “is done specifically and exclusively for the NSTA’s own purposes” and “Third parties should not rely on any statement (or absence of any statement), decision, action or inaction of the NSTA, or rely on the NSTA in any other way, to satisfy themselves as to adequacy of a Licensee’s financial capability and technical capability, or otherwise”.
Accordingly, NSTA consent is no replacement for a consenting party’s own assessment of a proposed buyer’s competence and capability. The NSTA expects parties to conduct a robust and transparent process in which issues are identified and, if possible, addressed quickly. The NSTA is not saying that there will be no circumstances in which a consenting party may not legitimately withhold consent, or impose conditions on its consent. However, where a consenting party withholds or conditions its consent it should be prepared to defend its position as being reasonable and proportionate in the circumstances.
It is clear that a balance will need to be struck. From the perspective of counterparties, there have been relatively recent examples of transactions having occurred (some with NSTA consent) where the buyer has subsequently encountered financial difficulties, resulting in the buyer’s inability to meet licence and contractual commitments. This in turn has resulted in default by the buyer and the counterparties having to meet the deficit. This means that some counterparties have recent “real life” experience of such scenarios and might continue to adopt a conservative approach to their assessment of new entrants.
Further, it remains to be seen how the guidance will land within the industry who are already having to move at pace to meet the challenges posed by the net zero objective and the windfall tax.