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UK regulatory regime governing Offshore Gas Storage September 2008 Contents Introduction 3 Current Regulatory Regime 4 The Petroleum Act 1998 4 Use of the Sea-Bed and associated Geological Features: The Crown Estate 4 Safety regulations 4 Environment 5 Other consents 5 Connecting to the Grid: physical requirements 5 Connecting to the Grid: the Uniform Network Code Gas Transporter Licence 5 Third party access (“TPA”) to offshore gas storage 6 Exemptions 6 UK offshore gas storage precedent: the Rough facility 6 Building a Third Party Access Exemption Case 7 ‘Open Season’ procedure 7 Future reforms 9 The Energy Bill 2008 9 Storage in non-hydrocarbon features 10 Issues for gas storage developers to consider 11 Introduction This note provides an overview of the regulatory regime governing offshore gas storage in the UK. This note does not attempt to advise and should not be relied upon in relation to a particular course of action. CMS Cameron McKenna LLP would of course be delighted to so advise, upon instruction. This note contains copyright material and may not be reproduced or distributed without permission. Whilst the Gas Act 1986, Town and Country Planning Act 1990 and other provisions have certain application for onshore gas storage facilities (depending on type), the UK government has acknowledged that the current regulatory framework for the offshore storage of natural gas is unclear and was not intended to cover the range of storage activities now contemplated. Whilst the Energy Act 2004 extended provisions to cover offshore storage facilities, to address the present lack of clarity the government is implementing a new regulatory regime under the Energy Bill 2008 designed specifically to cover offshore gas storage. In summary, under the new regime, UK offshore gas storage (whether in depleted hydrocarbon fields or salt caverns etc) will generally require: • a Crown Estate lease; and from the Department for Business Enterprise and Regulatory Reform (“DBERR”): • a Gas Unloading and Storage Licence (“GUSL”) • a Coast Protection Act consent. In addition, certain Health and Safety Executive requirements will apply; and associated pipelines will be regulated by DBERR’s Pipeline Works Authorisation Unit. In addition: • Third party access (and exemptions) will remain regulated by the Office of Gas and Electricity Markets (“Ofgem”). UK regulatory regime governing offshore gas storage September 2008 3 Current regulatory regime No single piece of legislation explicitly covers offshore gas and Safety Executive for the purposes of the Offshore storage activities and consents may be required at present Installations (Safety Case) Regulations 2005. In its role as the under some or all of a number of pieces of legislation statutory regulator of health and safety, the Health and Safety including: the Petroleum Act, the Food and Environment Executive (“HSE”) has wide-ranging powers of inspection, Protection Act 1985, the Coast Protection Act 1949; and the enforcement and ultimately prosecution under the Health and Transport and Works Act 1992. Significant provisions of these Safety at Work Act 1974. Certain other safety related and other regulations are discussed further below. provisions may also apply to a particular storage operation such as provisions relating to safety zones around installations, under the Petroleum Act. The Petroleum Act 1998 At present, the Petroleum Act 1998 applies to offshore gas These arrangements should not be substantively affected by storage in depleted fields, even if used solely for storage (as the government’s future proposals (see section 4 below), opposed to continuing production). although DBERR has stated that “some minor consequential adjustments may be needed to ensure full consistency with the Therefore the development of a depleted gas field into an offshore new regulatory framework.” gas storage facility is currently governed by the relevant existing Production Licence, together with certain provisions of the Gas Pipelines Act 1986 (as detailed later) where relevant. Pipelines running to and from gas storage facilities are regulated under the Pipelines Safety Regulations 1996, which It should be noted that gas storage in non-hydrocarbon features applies to onshore pipelines in Great Britain and to those in (such as salt caverns) is not generally regulated under the Petroleum territorial waters and the UK Continental Shelf. The pipeline Act1 although the Food and Environment Protection Act 1985 operator must ensure that the construction of a pipeline is in (“FEPA”) provides a short-term licence regime for placing objects accordance with Health and Safety Executive requirements. (such as well head platforms) in the sea environment. Environment Use of the Sea-Bed and associated Geological Features: The Crown Estate The development of an offshore gas storage facility will have to comply with those provisions of UK, EU and international Developers need to be granted exclusive rights to use the law that provide for the protection of the marine environment. geological features in question for gas storage; The Crown DBERR have stated that any future applications for offshore Estate can currently grant leases in an area of the seabed gas storage facilities under the new regime will be subject to a within 12 nautical miles of the UK’s territorial sea limit. It is similar degree of environmental scrutiny as exists at present. possible that rights could be asserted under the United Nations Environmental controls should be similar to those of FEPA, and Convention on the Law of the Sea 1982 in areas of the (post Marine Bill) the Marine Act, so that there is consistency continental shelf beyond the UK’s territorial waters, although of environmental protection across sectors. at present the position beyond the 12 mile limit is unclear. The currently applicable UK domestic legislation protecting the marine environment includes FEPA (which is, however, subject Safety regulations to a number of exemptions and exclusions in relation to oil Offshore2 and gas activities and installations); the Offshore Petroleum Offshore gas storage facilities are also subject to the Production and Pipelines (Assessment of Environmental Effects) requirements of the Health and Safety at Work Act 1974 and Regulations 1999; the Offshore Petroleum Activities (Conservation its subordinate regulations. In particular, no facility may of Habitats) Regulations 2001; the Offshore Combustion operate without a safety case which is accepted by the Health Installations (Prevention and Control of Pollution) Regulations 2001; and the Offshore Chemicals Regulations 2002. 1 Note later discussion of application of Petroleum Act/Gas Act to third party access. 2 For onshore safety regulations, a gas storage facility may require consent from the relevant Hazardous Substances Authority (usually the planning authority) under the Planning (Hazardous Substances) Act 1990 and the Planning (Hazardous Substances) Regulations 1992. Safety issues during construction and operation of the site are also regulated under the Borehole Sites and Operations Regulations 1995 and the Health and Safety at Work Act 1974, both of which are overseen and enforced by HSE. 4 UK regulatory regime governing offshore gas storage September 2008 Any developer of an offshore gas storage facility will also have provisions are in addition to or in substitution of Sections I and to act in compliance with two key pieces of international J, which govern entry and exit requirements respectively. For legislation: the Convention of 1972 on the prevention of the purposes of the UNC a “Storage Operator” is the person marine pollution by dumping of wastes and other matter and (or several persons jointly) operating a gas storage facility. the 1992 OSPAR Convention for the Protection of the Marine Environment of the North East Atlantic. A number of EU A Storage Operator must enter into a Storage Connection Directives will also be relevant. The purpose of this note, Agreement (which constitutes the Network Entry Agreement however, is not to set out in detail the rules covering the and Network Exit provisions) with the relevant pipeline operator environmental aspects of offshore gas storage, but rather to for the location at which the stored gas must enter the NTS. flag key issues and legislation for further consideration. This agreement details the conditions necessary for the gas to flow, and sets out the detailed commercial information agreed between the parties, based on Section R of the UNC. Other consents Depending on the nature of the gas storage facility, certain Gas Transporter Licence other consents may need to be obtained including under the Coast Protection Act 1949. Local planning authority consent Depending upon the gas storer’s level of involvement throughout may also be required, particularly if the facility requires the the storage value chain, and competition restrictions on development of any onshore infrastructure. integrated storage and transportation operators, the operator of an offshore gas storage facility may require a gas transporter licence under the Gas Act 1986. The obligation is imposed Connecting to the Grid: physical upon any persons conveying gas through pipes to any requirements premises, or to a pipeline system operated by a licensed gas operator (subject to certain exceptions and exemptions). Most gas held in storage will at some point need to flow into the National Grid’s National Transmission System (“NTS”), and therefore will be governed by the Uniform Network Code (“UNC”) (as detailed below). Connecting to the Grid: the Uniform Network Code The UNC comprises a legal and contractual framework to supply and transport gas in Great Britain. It has a common set of rules for industry players which aim to ensure that competition can be facilitated on level terms. It governs processes such as the balancing of the gas system, network planning and the allocation of network capacity. For the purposes of offshore gas storage, Section R of the UNC will apply, which sets out provisions as to the terms on which users of the system may off-take gas from the NTS for injection to gas storage facilities, and deliver gas withdrawn from storage facilities to the NTS.