Apache North Sea Limited v Neo Energy Central North Sea Limited & Ors

A contractual expert must determine the issues referred under the parties’ agreed machinery by applying the contractual standard and exercising the judgment, skill and experience contemplated by the agreement. The expert is not confined to asking whether the operator’s conclusion was one which no reasonable operator could have reached.

Contractual construction remains a matter for the court, but an expert may need to construe the agreement provisionally when answering the questions within the expert’s remit. Any resulting mistake of law or construction can be challenged after the determination, where the agreement so provides.

Where a contract requires estimates to be made using defined assumptions, later changes are relevant only to the extent permitted by the contractual wording. A major retrospective change in tax legislation had to be taken into account under the agreement.

The claimant and the defendants were parties to a Decommissioning Security Agreement concerning security for future decommissioning liabilities relating to North Sea oil and gas fields. The claimant prepared a proposed 2023 decommissioning plan. The defendants challenged aspects of the plan and referred them to expert determination.

The proceedings concerned the proper construction of the agreement, including the treatment of decommissioning costs and inflation in assessing commercially recoverable reserves, the capital expenditure assumptions, the effect of clause 6.6, the impact of the UK Energy (Oil and Gas) Profits Levy Act 2022, and the scope and operation of the expert determination machinery.

1. Construction of the life-of-field assessment. The production estimates had to be prepared using the methodology in paragraph 7.9 of Appendix 5 and by applying the Reasonable and Prudent Operator standard. The phrase “defined economic conditions” referred to the economic conditions identified and used by the Operator in assessing commercially recoverable petroleum. The agreement did not require decommissioning costs, or inflation on those costs, to be included in that assessment. Whether they should nevertheless be included was a judgment for the Operator, or the Expert in the event of disagreement, applying the contractual standard.
2. Capital expenditure. Paragraph 7.10 did not prescribe the amount of additional capital expenditure to be included in the life-of-field estimates. That was a judgment for the Operator applying the Reasonable and Prudent Operator standard, subject to the Expert determining what a reasonable and prudent operator would have prepared.
3. Clause 6.6. The clause applied to any assumption used to calculate the Provision Amounts, not merely assumptions expressly stated in Appendix 5. In relation to the prescriptive Appendix 5 assumptions, however, it applied only where the specified rate or figure for the specified period changed. It did not create a rolling adjustment for later published figures.
4. The Expert’s remit. The Expert had to answer two distinct questions: first, whether the challenged estimates had been made in accordance with the agreement; and, if not, what estimates should have been made. The first question was not a “no reasonable operator” threshold. The Expert had to use the production profiles which, in the Expert’s judgment, would have been prepared by a Reasonable and Prudent Operator.
5. Timing and the levy. The relevant assessment date was 30 June 2022. The UK Energy (Oil and Gas) Profits Levy Act 2022 constituted a major change in tax legislation within paragraph 5.3 of Appendix 5 and had to be taken into account, notwithstanding its enactment after 30 June and its retrospective effect.
6. Construction issues before the Expert. The agreement did not require all construction issues to be determined by the court before the expert determination. The Expert could proceed on the basis of an understanding of the agreement necessary to answer the questions within the remit. Any mistake of law, including an error in construction, could be challenged before the English courts after the determination.
7. Outcome. The parties were directed to use best endeavours to agree declarations giving effect to the conclusions. In default, the declarations were to be settled at the hand-down hearing.