Oil and Gas Authority's powers to fine will 'encourage firms to do things differently', expert says

The Oil and Gas Authority (OGA) will become an executive agency of the UK government's Department of Energy and Climate Change (DECC) on 1 April, and is expected to become a government-owned company next year. A bill to establish legislation setting out its role and powers, which could potentially also include the right to attend corporate meetings and access company data, is due to be introduced in the first session of the next parliament, according to the announcement.

Energy industry expert Bob Ruddiman of Pinsent Masons, the law firm behind Out-Law.com, said that although the maximum proposed fine "may not seem substantial in a certain context", it would "act as a deterrent, or rather an encouragement to do things differently, because operators will want to avoid establishing a track-record of having sanctions applied against them".

"Aside from reputational damage, attracting such a fine could have an impact on fund raising and equity market activity, and would raise issues about an operator's competency," he said. "It is a useful tool for OGA chief executive Andy Samuel to have at his fingertips, but crucially he must also be given the resources to be able to recruit the right number and calibre of people to administer all of these emerging powers."

"These measures are consistent with the recommendations of the Wood Review and are another step along the way towards maximising recoveries and working towards better stewardship of the UK's hydrocarbon reserves," he said.

The OGA has been established following the recommendations of industry expert Sir Ian Wood in his Maximising Economic Recovery (MER) review last year. Once fully established, it will be responsible for implementing a new 'MER UK' strategy, in collaboration with government and industry.

The UK government published its full response to the Wood Review last week, including its proposals for the powers that should be given to the OGA once fully established. It has recommended that the OGA be able to sanction companies that do not comply with the terms of their licences or with MER UK, ranging from improvement notices to fines and the power to ultimately revoke licences where necessary. The maximum fine could be increased to £5m through regulations if necessary.

The OGA would also be able to provide dispute resolution services where required, in a way which would prioritise those disputes that present the most significant strategic risks to the successful recovery of oil and gas from the North Sea. As announced alongside the 2015 Budget, the OGA would also be given the necessary powers to allow it to scrutinise companies' decommissioning plans to ensure that they are cost effective.

The UK government announced a package of measures at the Budget, which it said could lead to over £4 billion of additional investment and at least 120 million additional barrels of oil equivalent recovered over the next five years. The changes include the introduction of a single 'investment allowance' from 1 April, as well as reductions in the petroleum revenue tax (PRT) rate and supplementary charge on company profits.

"Industry asked us to prioritise the investment allowance and we have delivered, fast-tracking its design and implementation at the Budget," said Priti Patel, the exchequer secretary to the Treasury. "Existing field allowances incentivised £14bn of investment and this is a wider ranging, more powerful tool to encourage further activity in this vital sector."

The UK government is consulting on the design of the industry levy that will be used to fund the OGA, alongside the £3m in annual funding committed by the government for the five years from April 2016 to ensure that the new regulator is well-funded from the outset. The levy will initially apply only to offshore petroleum licence holders and will be collected from October 2015, according to the consultation, which closes on 20 April.