Thornton, R (On the Application Of) v Oil and Gas Authority

The claimant sought judicial review of the Oil and Gas Authority’s decision to provide a letter of comfort allowing a change of control in respect of an onshore petroleum licence. The principal legal issues were the correct interpretation and interaction of Model Clauses 40 and 41 in Schedule 2 to the 2014 Regulations, the scope and application of the OGA’s published Financial Guidance (including assessment of financial capacity and viability), and the OGA’s duty under section 8 of the Energy Act 2016 to have regard to minimising public expenditure related to relevant activities.

The court held that Model Clause 40 regulates actions taken by a licensee in dealing with rights under the licence, whereas Model Clause 41 addresses change of control of the licensee and provides the OGA with powers of revocation; a change of control of the licensee is therefore not caught by Clause 40 simply because the licensee itself did not act. The court rejected an argument based on lifting the corporate veil.

The court found that the OGA’s internal submission had considered the financial position and risks including the possibility of insolvency, that the OGA did compare the post-transaction position to the pre-transaction position in substance, and that the Financial Guidance had been applied within a range of reasonable judgment (including assessment of the directors and financial capacity). The OGA had identified a foreseeable risk that decommissioning liabilities might not be met, reported it to the Department and nevertheless considered, on balance, that issuing the letter of comfort was the course most likely to ensure licence obligations were discharged. Permission to bring judicial review was refused.

The claimant, a local resident, applied for judicial review of the Oil and Gas Authority’s decision to supply a letter of comfort to permit completion of a sale and purchase agreement transferring control in effect of the licence-holder (Third Energy UK Gas Ltd) to York Energy (UK) Holdings Ltd. The application was dealt with in a rolled-up hearing combining permission and the substantive judicial review. Interested parties were named but did not participate.

Background and parties:

• Original licence dated 1968 was varied in 2018 to incorporate the Model Clauses in Schedule 2 to the Petroleum Licensing (Exploration and Production) (Landward Areas) Regulations 2014.
• Third Energy Onshore (licensee group) undertook a sale of its onshore assets to York Energy UK; Barclays (as primary investor) wrote off debt and provided £9 million working capital at completion.
• The OGA produced an internal submission and decided to provide a letter of comfort dated 4 July 2019 stating it was not minded to exercise powers to revoke licences or seek further changes of control.

Nature of the claim and relief sought: The claimant sought judicial review challenging (i) the OGA’s interpretation of Model Clauses 40 and 41, (ii) alleged failure to assess financial capability of both parties to the transaction as required by its Financial Guidance, (iii) failure to undertake all aspects of the Financial Guidance (financial viability and capacity), and (iv) failure properly to have regard to the duty under section 8 of the Energy Act 2016 to minimise public expenditure, in particular the risk of decommissioning costs falling on the taxpayer.

Issues framed by the court:

1. Whether Model Clause 40 extends to changes of control where the licensee has not itself acted.
2. Whether the OGA failed to assess financial capability of both parties to the transaction in breach of its published Financial Guidance.
3. Whether the OGA failed to address both financial viability and capacity for newly incorporated applicants and to verify director/shareholder track records.
4. Whether the OGA failed to have regard to the need to minimise public expenditure and improperly abdicated responsibility by merely notifying the Department.

Court’s reasoning and conclusions:

• On interpretation, the court held Model Clause 40 concerns acts by a licensee dealing in rights and prospective proceeds under the licence, whereas Model Clause 41 specifically regulates change of control and confers revocation powers on the OGA. The wording is clear and the scheme coherent; policy arguments cannot rewrite the clauses. The veil-lifting argument failed.
• On financial assessment, the court found the OGA Internal Submission had considered the relevant financial comparisons, explicitly identified foreseeable risks (including insolvency and decommissioning shortfall), and evaluated the post-transaction financing package and assumptions. The degree of inquiry into directors' resumés and financial matters was within reasonable judgment; the claimant’s expert did not show no reasonable decision-maker could have been satisfied.
• On the duty to minimise public expenditure, the OGA had expressly identified foreseeable risk that decommissioning might not be funded, reported it to the Department and took that risk into account in deciding whether to issue the letter of comfort. That was a lawful discharge of the duty; the OGA did not unlawfully abdicate responsibility.

The court refused permission for judicial review, concluding the claimant’s grounds were not made out.

This was a first instance judicial review application. Permission to bring judicial review was refused and the claim was dismissed. The court held that (1) Model Clause 40 regulates acts of a licensee dealing in licence rights while Model Clause 41 governs change of control and confers revocation powers on the OGA, so Clause 40 does not apply to a change of control where the licensee has not acted; (2) the OGA’s financial assessment, as shown in its internal submission, considered both pre- and post-transaction financial positions and applied its Financial Guidance within a range of reasonable judgment; and (3) the OGA lawfully had regard to the duty in section 8 of the Energy Act 2016 by identifying and reporting foreseeable risks and by taking them into account when deciding to issue the letter of comfort.