Legal update for energy lawyers - September 2022

This newsletter provides general information and is not intended to be comprehensive or to provide specific legal advice. Professional advice appropriate to a specific situation should always be sought.

Contents:

• ​Rockhopper wins Energy Charter Treaty claim against Italy

• Legal action against Gazprom arising from the Russian invasion

• US offshore safety regulations to be revised

• Ofgem facing legal challenge over rising price cap 

• New North Sea licences likely to be issued

• Contractual pre-action procedure unenforceable

• Disclosure of documents in fraud investigations

• Disclosure Pilot Scheme to become permanent 

1. Rockhopper wins Energy Charter Treaty claim against Italy

An ICISD tribunal has awarded London-based Rockhopper Exploration €190m plus interest in a claim against Italy under the Energy Charter Treaty (ECT). The claim concerned the Ombrina Mare oil field in the Adriatic Sea. Italy had granted an exploration permit to Mediterranean Oil & Gas, which was later acquitted by Rockhopper, but then refused to award the company a production concession once it had discovered hydrocarbon deposits. The refusal was based on rules introduced in 2010 to ban oil and gas concessions within twelve nautical miles of the country’s coast. Italy initially argued that the tribunal had no jurisdiction to decide intra-EU disputes under the ECT, but the tribunal did not agree and refused to change its mind after the CJEU’s landmark ruling in Komstroy v Moldova. Instead, it proceeded to hear the case, finding that Italy had engaged in unlawful expropriation. Although Italy withdrew from the ECT in 2016, it is bound by a twenty-year sunset clause in relation to existing investments (Art 47(3)).

2. Legal action against Gazprom arising from the Russian invasion

Ukraine’s state-owned oil and gas company, Naftogaz, has announced that it is commencing arbitral proceedings against Gazprom. The basis of the claim is Gazprom’s alleged failure to pay “on time or in full” for the transport of natural gas across Ukrainian territory following Russia’s invasion. The arbitration will be conducted under ICC rules and seated in Zurich. Gazprom is likely to face further claims concerning the Russian invasion of Ukraine and the closure of the Nord Stream 1 pipeline. It initially blamed the closure on an engine oil leak, but the Russian government has now admitted that it was in fact a response to sanctions imposed by Western nations.

3. US offshore safety regulations to be revised

Following the 2010 Deepwater Horizon disaster, the US government introduced regulations to improve the safety of offshore well construction and operation. Under the Trump administration, these were watered down through the 2019 Well Control Rule covering drilling, workover, completion, and decommissioning operations. Now the US Department of the Interior is proposing to strengthen the regulations again. According to the Department’s Bureau of Safety and Environmental Enforcement (BSEE), the proposed changes do not simply reflect recent political events. They are also “the result of knowledge and experience gained by stakeholders and BSEE since the 2019 rule was implemented”. If the proposals become law, they will require (among other things) blowout preventer systems to be always able to close and seal a wellbore and will also expedite the introduction of double shear rams, which can prevent a loss of offshore well control in an emergency.

4. Ofgem facing a legal challenge over rising price cap

The Good Law Project (GLP) has announced that it will sue Ofgem for allegedly failing to mitigate the impact of rising energy bills on consumers. The GLP’s position is that Ofgem has a legal obligation to provide evidence that it carried out a proper impact assessment, considered appropriate mitigatory measures for the most vulnerable, and considered instructing a lower social tariff. Having written to Ofgem in July 2022 requesting proof that such an impact assessment had been carried out, the Good Law Project says that it has not been provided with sufficient evidence to assuage its concerns and has therefore put the regulator on formal notice of its intention to commence legal proceedings.

5. New North Sea licences likely to be issued

It has been reported that more than 100 new North Sea oil and gas exploration licences will be issued by the UK government soon to increase domestic production. No official announcement has been made yet and the exact number of licences is not yet known, although there could be as many as 130. The new round of licensing is expected to be launched by the North Sea Transition Authority in early October.  The new Prime Minister, Liz Truss, has repeatedly said that she intends to boost domestic supply as one means of reducing energy prices and increasing the UK’s energy security. More nuclear power stations may also be authorised for the same purpose.

6. Contractual pre-action procedure unenforceable

In Children's Ark Partnerships Ltd v Kajima Construction Europe (UK) Ltd, the defendant applied to strike out or set aside a claim form on the basis that the claimant had failed to comply with a contractual dispute resolution procedure. This stipulated that "any dispute, claim or difference" should be dealt with initially by referring it to a liaison committee. However, the court found the obligation to have no legal force since it was not "defined with sufficient clarity and certainty". The court explained that this kind of provision can be a precondition to the commencement of proceedings, provided the parties are clear about this in the contract, as they were here, and even when it is not a precondition, it can lead to the court staying proceedings while the relevant procedure is carried out. However, the procedure itself must be clear, so that a party knows what it is required to do before issuing a claim form. This case is a reminder that, whilst ADR clauses can operate as a condition precedent to the commencement of proceedings, they must be clearly and precisely drafted to be enforceable.

7. Disclosure of documents in fraud investigations

In a speech given at Cambridge Symposium on 5 September 2022, Lisa Osofsky, the Director of the UK’s Serious Fraud Office (SFO) criticised the number of documents that her organisation is required to produce under the current disclosure framework. This was put in place before the advent of mass digital disclosure when there was much less material for investigators and prosecutors to deal with, but nowadays a standard SFO case’s materials can run into many millions. Ms Osofsky said that the current disclosure regime demands manual review and description of documents which can lead to victims waiting years for a case to come to court. She added that it can also result in human error, which wrongdoers exploit when mounting tactical challenges, sometimes causing a case to collapse after many years’ work. Ms Osofsky did not explicitly call for disclosure requirements to be changed, but instead announced that one of the SFO’s main priorities in the coming months was to “recognise the significant challenges of disclosure for law enforcement in data-rich, document-heavy cases and rebalance the system for victims and justice.” Her speech also referred to the SFO’s recent achievements (and setbacks) and the 2022 – 2025 Strategy which it published in April.

8. Disclosure Pilot Scheme to become permanent

The Disclosure Pilot Scheme has operated in the Business and Property Courts (specialist courts of the English High Court) since January 2019. The Scheme has proved controversial, with critics arguing that it has increased (rather than lowered) the cost of disclosure, as well as increased its complexity. However, the Scheme is now becoming a permanent feature of the English Civil Procedure Rules (CPR), and its rules will be transferred into a new Practice Direction 57AD with effect from 1 October 2022. The only change of substance to the Scheme Rules is that the streamlined procedure for Less Complex Claims will apply to cases worth less than £1m, rather than £500,000, although this threshold is flexible.