Continued extraction of UKCS petroleum is ruled not to be “irrational” in light of UK’s net zero commitments

On 20 January 2022, the High Court issued its decision rejecting a judicial review that took direct aim at the UK’s oil and gas industry.

In R v The Oil and Gas Authority [2022] EWHC 75, representatives of non-profit organisation Paid to Pollute brought the challenge against the Secretary of State for Business, Energy and Industrial Strategy and the Oil and Gas Authority. In December 2020 Parliament approved a revised strategy for the OGA which, while now requiring industry participants to  take appropriate steps to assist with meeting the net zero target, continued to maintain the OGA strategy’s existing focus on “maximising the economic recovery of petroleum from UK waters”. In considering economic recoverability, the OGA’s practice is to assess on a pre-tax basis. 

Basis of the legal challenge 

The question put to the High Court boiled down to whether there was an error of law or frustration of statutory purpose if the objective of “maximising the economic recovery of UK Petroleum” was assessed without considering the substantial tax reliefs available across the oil and gas industry.

Paid to Pollute and Uplift’s case was that the exclusion of taxes from the regulation of extraction activities creates a commercial environment that potentially incentivises oil and gas companies in ways that will result in an increase in emissions. As a result, the OGA’s strategy maximises extraction activities which are not truly ‘economic’, but rather result in a “net loss for society”. It was argued that this position was fundamentally incompatible with the UK’s legally binding commitments to reduce its CO2 emissions to net zero by 2050.

The Government argued that the regulation of taxes and tax reliefs properly falls within the remit of HMRC rather than the OGA, so pre-tax assessment was the appropriate basis for the OGA to assess economic recoverability for the purposes of its strategy. It also argued that the OGA could only regulate direct emissions from the industry but did not “have the power” to regulate emissions produced further down the supply chain. The OGA’s strategy was presented as a part of the Government’s overarching strategy to achieve its net-zero commitments.

The High Court’s view 

The challenge was roundly rejected by the High Court, which held that the use of a pre-tax assessment was not unreasonable in the circumstances, and that there was no evidence to support the claimants’ characterisation of the OGA’s strategy as “irrational”. The judgment went to some lengths to explain the legal deficiencies in the claimants’ case, and to discuss the evidence supporting that the OGA’s approach to economic recoverability could be considered for the benefit of the UK “as a whole”.   

Impact on energy stakeholders

Welcoming the judgment, the OGA has stated it remains firmly focused on regulating and influencing the oil, gas and carbon storage industries to both secure energy supply and support the transition to net zero.

Domestic litigation is increasingly being used as a tool for climate change activism. However, UK legal challenges will need to be robustly supported by evidence and legal merit before posing risk to Governmental policy supported by statute and due process.