The Current EU Regulatory regime
International rules and standards
The International Energy Agency (IEA) works to ensure reliable, affordable and clean energy for its 29 member countries which include most EU Member States as well as 9 others (US, Japan, Canada, Australia, New Zealand, Turkey, Norway, Switzerland and Korea). Member countries must be members of the OECD, have a demand restraint programme for oil consumption and legislation to ensure oil companies under its jurisdiction report as necessary, any that are net importers have to have immediate access to oil stocks equivalent to 90 days average imports. As such the EU is not a member, although the European Commission does sit on some of the committees and during a global disruption and there is a history of close collaboration between the two institutions.
The Energy Charter Treaty was agreed in 1994 (post collapse of USSR) and establishes legal rights and obligations with respect to energy investment, trade and transit of energy goods. The UK is a member in its own right but also as an EU Member States.
The Energy Community Treaty between the EU and non-EU Member States in South East Europe to extend EU energy market legislation to the participants. This is an “EU only” agreement and UK participation is as an EU Member State.
Some Environmental Treaties, Agreements and Organisations are relevant for the sector and linked in many cases to international commitments or obligations. For example, the Aarhus Convention; the UN Law of the Sea Convention (UNCLOS); Convention for the Protection of the Marine Environment of the North-East Atlantic(OSPAR); Minamata Convention; Montreal Protocol; and the International Convention on Oil Pollution Preparedness, Response and Cooperation. Some of these international commitments or obligations have also been independently transposed by the UK. For example there is specific offshore oil and gas legislation to implement OSPAR requirements.
Devolution
Offshore oil and gas licensing is not devolved. The oil and gas licensing regimes for onshore Scotland and Wales are currently being devolved to the respective Devolved Administrations (DAs). Northern Ireland already holds similar powers for onshore oil and gas licensing and will likely be impacted.
Oil stocking is reserved in Scotland and Wales. In Northern Ireland, oil stocking is transferred, but under the Energy Act 1976 the Secretary of State retains powers to give directions to companies in relation to oil stocking.
The Oil Stocking Directive, Offshore Safety Directive, Hydrocarbons Licensing Directive, Seveso III and the Council Directive on health and safety for mineralextracting industries through drilling apply to Gibraltar but not the Crown Dependencies or other Overseas Territories.
EU regulatory regime
The Hydrocarbons Licensing Directive (94/22/EC) restricts criteria to be taken into account by the OGA and included in the terms and conditions of petroleum licences issued to industry as well as requiring a non-discriminatory and transparent process for issuing licences.
The Oil Stocking Directive (2009/119/EC) sets obligations on Member States to hold emergency oil stocks (higher of 61 days average consumption or 90 days average imports) for release in response to major supply disruptions. These stocks must be physically accessible and available at all times (so held by government or industry under legal obligations – not commercial stocks).
Council Regulation 2964/95 introduced registration for crude oil imports and deliveries in the Community, which companies must comply with. Decision 2010/787/EU – “The Coal Decision” lays down rules for State aid for facilitating the closure of uncompetitive coal mines.
Relevant EU safety legislation
Directive on the safety of offshore oil and gas operations (2013/30/EU) aims to reduce the potential for major accidents related to offshore oil and gas activities and limit their consequences. It places a number of obligations on the OGA (as the licensing authority) and BEIS & HSE (as joint competent authority). This requires the licensing authority to take account of certain considerations (including technical, financial, safety, environmental capabilities) before granting or consenting to the transfer of a licence.
It allows for licensees to appoint operators to carry out functions under those licences, and impose further obligations on licensees, in particular to ensure the capability of operators under the licences and making provisions for adequate financial liability cover. It also places obligations on the licensing authority and the competent authority in relation to the appointment and capacity of operators, who are required to carry out functions under a licence in a safe and environmentally sound manner. This includes for example, the need for operators to prepare Report on Major Hazards (Safety Cases) and Oil Pollution Emergency Plans for consideration by the Competent Authority.
The Directive concerning minimum requirements for safety and health protection of workers in the mineral-extracting industries through drilling (92/91/EEC) sets the minimum requirements for improving the safety and health protection of workers in the mineral-extracting industries through drilling (both onshore and offshore) which companies must adhere to.
The Directive on the control of major accident hazards involving dangerous substances (known as Seveso III Directive) (2012/18/EU) (HSE led) sets controls on establishments holding dangerous substances, which could, under specific circumstances, include onshore hydraulic fracturing operations.
Principal climate change legislation
The EU Emissions Trading Scheme (ETS) Directive (2003/87/EC) created a capand-trade scheme with an EU-wide declining cap on total emissions from heavy industry, aviation and the power sector. Installations and aviation operators have to surrender allowances equivalent to their total annual emissions of CO2, and for some sectors nitrous oxide (N2O) and perfluorocarbons (PFCs), setting a price for carbon and incentives for mitigating action/ low carbon investment. Operators either buy allowances from auctions or from the secondary market, or are given allowances for free if they are at risk of carbon leakage (where installations relocate to jurisdictions with less ambitious or stringent climate policies, with negative economic impact on the EU but no reduction in overall global emissions).
The EU ETS covers c900 installations and aviation operators in the UK representing 41% of total UK CO2 emissions. UK emissions savings resulting from the EU ETS, calculated as the difference between ‘business as usual’ emissions and the UK’s share of the EU ETS cap over 2013-2020, are around 550 MtCO2e. The EU-wide carbon price intends to provide a more level playing field across the EU. It also provides a price signal to stimulate investment in low carbon generation, which given the low EU ETS price, is currently supplemented by the UK’s Carbon Price Support.
The introduction of the Market Stability Reserve, agreed in 2014 and due to operate from 2019, will play a key role in amending the volume of allowances available within the EU ETS, which will in turn increase prices and their incentive effect.
The Carbon Capture & Storage (CCS) Directive (2009/31/EC) establishes a comprehensive legal framework for the safe geological storage of CO2 using Carbon Capture and Storage technology. As well as establishing the permitting and licencing regime, the CCS Directive extends the EU environmental liability regime to CO2 storage sites and links CO2 leakage to the EU Emissions Trading System. The ‘CCS-ready’ requirements of the CCS Directive impact on developers of fossil fuel power plants (gas and coal) at or above 300 MW capacity. The requirements are implemented via a suite of CCS-specific domestic regulations between 2010 and 2013.
The Fuel Quality Directive (FQD) (98/7T0/EC) primarily concerns petrol and diesel specifications but includes in Article 7a a requirement on fuel suppliers to reduce the greenhouse gas intensity of energy supplied for road transport – by 6% by 2020. It is intended to promote a range of actions to reduce greenhouse gas emissions, including the use of biofuels and reduction in upstream emissions (e.g. reducing flaring on oil platforms). Directive (EU) 2015/652 included critical elements required to fully implement Article 7a. In September 2017, DfT published its response following consultation on the Motor Fuel Greenhouse Gas Reporting Regulations 2012 in order to effect full UK transposition of the 2020 GHG reduction target (6%) established by Article 7a of the revised Fuel Quality Directive.
Principal environmental legislation
A number of wider environmental Directives impact the sector.
The Habitats Directive (92/43/EEC) requires assessments to be undertaken where a plan or project is likely to have an impact on a Natura 2000 protected habitat. The assessment would be required if areas offered for licensing have the potential to have a significant effect on a relevant site, either individually or in combination with other plans or projects, prior to a licensing decision being made. Following licensing, it requires further assessment to determine whether a project-specific activity (a development proposal) has the potential to have a significant effect on a relevant site, either individually or in combination, prior to a decision being made.
The Marine Strategy Framework Directive (2008/56/ec) aims to promote sustainable use of the marine environment and an eco-system based approach to managing activities within it, including the offshore energy sector. The Maritime Spatial Planning Directive establishes a framework for spatial planning to promote sustainable development of marine areas and resources, including energy.
The Strategic Environmental Assessment Directive (2001/42/ec) provides for a process of appraisal by which environmental impacts are considered and factored into national and local decisions regarding plans and programmes, covering for example licensing regimes for oil and gas exploration and extraction. The Environmental Impact Assessment Directive (2014/52/eu) requires developers to assess potential environmental impacts of relevant new projects, including those in the energy sector, before they are allowed to proceed.
The Industrial Emissions Directive (2010/75/eu) establishes controls on emissions (e.g. of atmospheric pollutants) from industrial facilities (including those in the energy sector) where the aggregated thermal capacity of associated combustion plants is at or >50MW and requires adherence to Best Available Techniques (BAT) (set out in sectoral BAT Reference documents). All UK refineries are captured under this Directive and must carefully consider how to comply with its requirements whilst remaining competitive within Europe (and globally where such regulations are not universally applied).
The National Emissions Ceiling Directive (2001/81/ec) sets national ceilings for a range of pollutants to improve air quality and prevent harm to human health. Nationally determined action to comply with the ceilings can impact on a range of energy-related installations, including those offshore. The Ambient Air Quality Directive (2008/50/ec) sets binding limits on concentrations of major air pollutants to protect human health and can impact energy installations in areas where concentrations are breached.
The Waste Framework Directive (2006/12/ec) establishes basic concepts and definitions of waste, provides for regulation of waste management facilities, management of hazardous waste and recycling and recovery targets and also impacts on the management and recovery of waste streams produced or used in the energy sector. The Mining Wastes Directive (2006/21/ec) controls waste from extractive industries, including onshore fracking fluids.
The Trans-frontier Shipment of Waste Regulation (EC No 1013/2006) controls shipments of waste within and outside the EU including a ban on transfers of hazardous waste to non-OECD countries and applies to shipments of waste including those which emanate directly from the offshore oil and gas industry. The Ship Recycling Regulation (EU/1257/2013) aims to manage environmental impacts associated with the recycling of ships, including (to a potentially limited extent) offshore installations such as end of life mobile drilling rigs.
The Water Framework Directive (2000/60/EC) aims to ensure “good status” for all bodies of water (e.g. inland surface waters, coastal waters and groundwater) and as such regulates abstraction and use of water by power plants, refineries and onshore shale gas operations and also places limits on the levels of radioactivity in water.
The Environmental Liability Directive (2004/35/ec) requires operators of industrial facilities (including those in the energy sector) to bear costs where an accident leads to significant environmental damage.
The REACH Regulation (EC) No 1907/2006) requires manufacturers, suppliers and users of chemical products, including those for use in the energy sector (e.g. in nuclear, shale, refining and offshore operations) to register, evaluate and control associated risks.
Biocides used in shale and offshore operations must also comply with the Biocidal Products Regulation ((EU) 528/2012) which establishes procedures for an EU-levelassessment of active substances before they can be approved and for the subsequent authorisation by Member States or at Union level for the making available on the market of the biocidal products they are used in.
The Persistent Organic Pollutants Regulation (2007 No. 3106) aims to reduce emissions of dioxins, furans, PCBs and polycyclic aromatic hydrocarbons and applies to equipment and processes used in the energy sector, including offshore.
The European Pollutant Release and Transfer Register ((EC) No 166/2006) requires annual reporting of emissions and discharges of over 90 pollutants plus waste transfers from industrial installations including those in the energy sector (e.g. offshore oil / gas installations).
The Mercury Regulation ((EC) 1102/2008) requires reporting on the amounts of mercury generated by industrial facilities and sent to receiving facilities in the EU for storage / disposal (i.e. exports of mercury outside the EU are prohibited), including mercury obtained from the “cleaning” of natural gas on offshore oil / gas installations.
The Fluorinated Greenhouse Gases (F-Gases) Regulation (S.I. 2009/261) aims to reduce releases of F-gases from refrigeration equipment, air-conditioning units, electrical switchgear, heat pumps and fire protection systems, including those in use in the energy sector, through containment, recovery and destruction making a significant contribution to reductions in greenhouse gas emissions.
The Ozone Depleting Substances (ODS) Regulation (S.I. 2009/216) prohibits and controls the production of ODS plus their use in refrigeration equipment, airconditioning units, heat pumps and fire protection equipment – including those in the energy sector – so as to reduce atmospheric emissions of ODS in line with the Montreal Protocol. A number of these requirements including the Waste Framework Directive, REACH Regulation, Biocidal Products Regulation and the ODS Regulation make reference to and depend on the EU’s Classification Labelling and Packaging Regulation which provides the framework for identifying and communicating chemical hazards.
Additional relevant cross cutting issues and areas of legislation include:
The Health and Safety at Work Framework Directive (89/391/EEC) which sets the general requirements to protect workers’ health and safety that employers in the mineral extraction industries have to comply with, alongside the specific sectorol requirements of Directive 92/91/EEC (a ‘daughter directive’ of Directive 89/391/EEC).Other daughter directives (e.g. the hazard-specific directives) also apply to the sector.
The Pensions Directive (2003/41/EC) which aims to ensure Member States do not seek to influence the investment strategy of pensions schemes and could impact coal liabilities.
Existing frameworks for how trade is facilitated between countries in this sector
The arrangements described in this section are examples of existing arrangements between countries. They should not be taken to represent the options being considered by the Government for the future economic relationship between the UK and the EU. The Government has been clear that it is seeking pragmatic and innovative solutions to issues related to the future deep and special partnership that we want with the European Union.
Oil Stocking obligations that currently apply to the UK (and other EU member states) are established by the EU Directive 2009/119/EC. Oil stocking is not covered by WTO rules. Internationally, the International Energy Association (IEA) sets oil stocking requirements are set for its 29 member countries, which include the UK.
Both the EU and IEA rules are designed to ensure member countries uphold a certain level of stored oil supplies, which can be used to address short term supply disruptions. The EU obligation is currently higher than enforced by the IEA (the IEA obligation representing around 60% of the EU requirement). When the UK leaves the EU, IEA rules will continue to apply to the UK.
Free-trade Agreements (FTA) are agreements between states and include trade extractive industries material. Such agreements involve cooperation between at least two countries to reduce trade barriers – such as import quotas and tariffs – and to increase trade of goods and services with each other. They also aim to ensure timely and frictionless import/export processes.
The Comprehensive Economic and Trade Agreement (CETA) – an agreement between Canada and the EU – seeks to strengthen economic relationships through the creation of an “expanded and secure market” for goods and services that are covered by the agreement. Beneficial aspects of the agreements include: savings on customs duties; the creation of a more level playing field for intellectual property rights; ease of access to professionals on account of mutual recognition of professional qualifications; and commitment from both sides to sustainable development.
CETA has secured preferential tariffs of 0% on a variety of oil and gas products, such as non-crude petroleum products, and petroleum oils. Other examples of Free Trade Agreements between the EU and third countries which are beneficial to the sector include the 2011 EU-Korea Free Trade Agreement, which grants zero tariff access for South Korea’s crude oil exports.
European Economic Area Agreement (EEA) extends EU internal market rules to the participating EFTA States — Iceland, Liechtenstein and Norway. In order to be part of the EEA, and be part of the Internal Market, states incorporate a wide range of EU rules including the third energy package, with some derogations. However, EEA EFTA States do not get to vote on the adoption of EU rules that will apply to them as EEA members.
World Trade Organisation’s (WTO) General Agreement on Tariffs and Trade (GATT) is the WTO’s principal rule-book for trade in goods. The WTO rules also include rules for dealing with trade in services, relevant aspects of intellectual property, dispute settlement, and trade policy reviews. Through these agreements, WTO members operate a non-discriminatory trading system that spells out their rights and their obligations. The EU’s current external tariffs on oil products are low, ranging from 0 to 3.9% applied rates. In the cases of substances such as refined oil products from crude oil, they are zero.