Clare Munro, Partner and Head of Energy and Infrastructure Brodies, LLP, UK
Claire Munro introduces Brodies LLP, detailing the services the law firm can provide to clients advising them on regulations in the wake of the Wood Review. Ms Munro discusses the Scottish Independence referendum, routes of legal recourse the new regulator might take to ensure assets remain in production and the implications of the upcoming fiscal review on the oil and gas industry’s prospects in the North Sea.
To what extent has the treasury listened to the recommendations in the Wood Review? How do you think this report is being instilled into the legal framework?
After the 2010 UK general election the sector believed that government had a good understanding of the challenges it faced, but the Budget announcement of an increase in The Supplementary Charge (SCT) in 2011 demonstrated that this understanding had largely been confined to the Department of Energy and Client Change (DECC), and not other areas of government, such as Her Majesty’s Treasury (HMT). A huge effort has been made by both industry and HMT to improve this situation, including joint HMT and industry working groups, which have resulted in new, focused tax reliefs to tackle specific problem areas.
In terms of the new regulator, it will be interesting to see how this entity works alongside DECC and what overlap exists between the two units. Sir Ian Wood noted that a lot of the powers that the new regulator would need to be equipped with are already in place, however the current regulator is under-resourced, which may affect its ability to implement its powers effectively.
What is the status quo of the fiscal regime in the UKCS and how will the fiscal review make a difference to the fiscal regime?
I think fiscal instability and fiscal complexity are issues for the UKCS. People speak about political and fiscal instability together despite the fact that they are different things. Whilst historically the UKCS has been politically stable, the fiscal regime in the UKCS has had serious and far-reaching changes every year for the past 15-20 years. In recent years, some political uncertainty has been generated by the Scottish independence referendum. In comparison, companies often perceive Indonesia as a politically and fiscally risky environment but that country’s fiscal regime has not changed in 40 years. The oil and gas community understands that risks exist in all geographical areas, very often to a far greater extent than in the UK.
Currently oil and gas production in the UK incurs a very high tax rate of between 62-81 percent depending on the asset taxed. In recent years, as a result of the global financial crisis and its effects on the UK, this burden has actually increased by way of the introduction of, and increase to, the supplementary charge. Such high tax rates – despite the focused tax reliefs which have also recently been made available – are probably inconsistent with a desire to maximize the recovery of UKCS reserves, which is what Sir Ian was tasked to review; hence the suggestion of a fiscal review in his report. It is vitally important for the government to understand the contribution of the industry to the economy and the effect of the fiscal regime on the industry, which is why the fiscal review should be welcomed.
One would certainly hope that the fiscal review would be able to suggest a less complex tax regime, which also encourages investment and development of the North Sea in its mature stages. At the moment we have the worst of both worlds – high tax rates with very specific (and therefore complex) reliefs.
What are the fiscal and legal imperatives that would shape a regulatory framework in a yes vote?
The independence referendum does add a degree of political uncertainty to both the proposed regulatory and fiscal reviews. These are both initiatives instigated by the UK government and applicable to the whole UKCS as it is currently constituted. In the event of a ‘yes’ vote, Scotland would have to establish its own regulator and its own fiscal regime.
If there is a “yes” vote it would be imperative to ensure that the handover of powers was done in a way that minimised disruption as far as possible. However, such a transfer of powers would also be an opportunity for a Scottish Government to implement regulatory and fiscal changes as envisaged by the Wood Review. In the longer term it would be important to ensure that government in an independent Scotland really understands the industry and its challenges.
Do you feel there is a problematic situation of owners “sitting” on marginal assets?
In the distant past, companies could acquire offshore production licenses and hold them for several years without developing them. However, this was recognised as a problem quite some time ago and several disincentives have been introduced that have discouraged such practices. PILOT (the joint industry-government body overseen by DECC) especially has undertaken a lot of work in promoting stewardship and as a result of its work the “Fallow” acreage mechanism was introduced, which created a process whereby companies that are not working their assets sufficiently can eventually lose them. It is in everybody’s interest to work assets but it is also important to understand that companies have different economic drivers and different global footprints and to treat licence holders fairly from a regulatory perspective. There are often complex relationships and commercial issues at play in the development of hydrocarbon deposits. One example of a very complex area in the current system, in which I have particular expertise, is the issue of project development agreements and access to infrastructure.
Sir Ian Wood was talking about the need to improve collaboration. Is this an area where Brodies is in a position to contribute more than other law firms who lack that experience?
All the lawyers in our oil and gas team have significant in-house experience. Working in-house, especially in the UKCS where licences are often held, and assets are usually managed through joint venture agreements, gives you experience of having to work in a collaborative and co-operative manner. It is rare that a company unilaterally runs an asset. Virtually everything is a joint venture and in such a business context, one needs to collaborate on a daily basis to get anything done. Having in-house experience instills this important concept into our daily activities.
What key qualities make Brodies an advantageous partner as a legal firm in Scotland?
Brodies is the biggest full service firm in Scotland and growth has been exponential – underscored by the fact that we have grown in Aberdeen from three employees in 2011 to more than 50 today. Our growth has been organic and predicated upon bringing the best local talent to our firm and delivering services of the highest quality to our clients in the UK and beyond
Our unique selling point is that our entire oil and gas team has significant in-house experience; from our junior lawyers to our partners. Lawyers who have worked in-house have a different mindset from those who have not. I worked at BP for eight years, both in the UKCS and overseas, and spent time consulting with another supermajor for a number of years. This perspective helps us understand what clients really want and therefore we can work to provide solutions accordingly. Our oil and gas team includes specialists that have experience with operators and those that have service sector expertise.
Are you experiencing any changes in in your clientele as the UKCS continues to mature?
We work with client companies of all sizes, from start-ups to supermajors. Certain companies may decide for strategic reasons that they wish to enter or exit the UKCS. We can assist clients with no UK background in relation to the regulatory and legal issues of which they should be aware (we are currently working on this for a potential US entrant). We can also assist clients who wish to sell their assets or licence portfolios on exit, including specialist advice in relation to decommissioning issues.
How is Brodies assisting Scottish firms deal with onerous regulation in foreign markets?
Many of our clients, both operator and service sector, seek our expertise in respect of issues beyond the UKCS. This is partly as a result of the international experience of our team whilst working in-house (team members Greg May, Tom Hickey and Finlay Crossan have worked in, or advised on matters in Europe, Africa, the Americas, Australia and Asia), but also because many oil and gas sector contracts are either governed by English law or based on English law contracts. Most of our oil and gas team is dual qualified (Scots and English law) with two of the partners being qualified in both English and US states (California and Indiana). Where specific jurisdictional advice is required, we are able to utilise our membership of TerraLex, a global network of 15,000 legal advisors in more than 150 leading independent law firms located in 100 countries, to deliver advice to clients.