The High Court rejects a Net Zero challenge to UK oil and gas policy

On 18 January 2022, the High Court rejected a judicial review of the Oil and Gas Authority’s (the “OGA”) revised Strategy in relation to UK North Sea oil reserves (“OGA Strategy”) in R (On the Application of Cox & Ors) v The Oil and Gas Authority & Ors [2022] EWHC 75 (Admin).

The claim was brought by three environmental campaigners on the grounds that the OGA’s strategic objective, set out in the Petroleum Act 1998, was illegal and irrational in light of the UK’s “Net Zero” carbon target set out in the Climate Change Act (the “CCA”), which was recently elaborated in the UK Government’s Net Zero Strategy: Build Back Greener (the “Net Zero Strategy”), published in October 2021.

While this claim was rejected,  further similar challenges are anticipated as the Net Zero Strategy is implemented or conflicts with other policy priorities (including in recently initiated judicial reviews brought by ClientEarth and Friends of the Earth, discussed here).

Background

The applicants were three individual environmental campaigners.

The defendant, the OGA, is an independent regulator whose principal objective, set out in Part IA of the Petroleum Act 1998 (the “Act”) and section 2 of the Energy Act 2016, is “maximising economic recovery of UK petroleum”. The objective relates specifically to the reserves in the strata of the UK Continental Shelf under the North Sea. The two acts also require the OGA to publish and revise or review its strategy for achieving this objective every four years, starting in 2016.

The latest strategy was published in 2020. In it, the OGA defines the threshold for “Economic Recovery” of UK petroleum as recovery which has positive net present value, based on discounted pre-tax market value of the reserves minus pre-tax operating and capital costs, including cost of greenhouse gas emissions.  

The campaigners’ judicial review challenge alleged that the OGA Strategy was unlawful on two bases. The first ground was that it was an error of law and/or a frustration of statutory purpose. The second was that it was irrational in light of the Net Zero Strategy.

Its reasoning as to the first ground was as follows:

(i) Only the Court, not the OGA, had the power to define a statutory term such as ‘economic recovery’.

(ii) For recovery to be ‘economic’ in the sense of the OGA’s statutory objective, it must yield positive net tax flows. However, the Claimants alleged that the OGA Strategy failed to account for tax incentives received by oil companies, which meant that in some years net tax flows had been negative. This, the Claimants reasoned, meant that the industry’s work was in a sense ‘uneconomic’.

As to the second ground, the Claimants argued that the decision to adopt the OGA strategy was irrational essentially because:

(i) the Net Zero Strategy places a direct duty on the Government to ensure that the net UK carbon account in 2050 is nil;

(ii) the review leading up to the OGA Strategy included public statements that the Government would build the OGA Strategy into the Net Zero Strategy;

(iii) the decision to include a policy of maximising economic recovery into the OGA Strategy meant that carbon emissions would increase, as fossil fuels would be extracted which would otherwise not have been; and

(iv) that made the OGA’s definition of “economically recoverable” irrational.

The decision

Mrs Justice Cockerill rejected the Claimants’ challenge on both grounds.

In relation to the first ground, she accepted that certain statutory provisions must have a single meaning, arrived at by the Court’s statutory construction. However, she said that the notion of maximising economic recovery was not such a provision. Instead, it was an “imprecise instruction” requiring a specialist authority such as the OGA to further define it. This, she said, was supported by the Explanatory Notes to the Infrastructure Act 2015 which state that the [OGA’s] strategy “will set out what is meant by maximising the economic recovery of UK petroleum”.

Mrs Justice Cockerill further confirmed that the requirement for recovery to ‘economic’ did not mean, as the Claimants alleged, that the recovery of reserves had to produce a positive ‘true tax position’. Instead, it was a deliberately broad term intended to include wider economic benefits in the national interest such as supply security and job creation.

The Court also rejected the claim that the strategy of MER was irrational in light of the Net Zero target. The judge considering whether to grant permission for this ground to proceed (as part of the two-stage process in judicial review) had doubted whether this ground was arguable, but granted permission because of the overlap with the other ground. Mrs Justice Cockerill held that it “cannot be right” to conclude the Net Zero target meant maximum economic recovery of petroleum was irrational as such a conclusion would “effectively override” the statutory objective of the OGA, as set out in section 9A of the Act. She said this view was supported by the fact that the OGA’s objective of maximum economic recovery was only inserted into the Act in 2015, at a time when the CCA’s Net Zero target had already been in force for 7 years and was well-understood. Instead, Mrs Justice Cockerill said, the OGA merely had to have “proper regard” to the Net Zero target in balancing its objectives and on the evidence had done so.

The Court further held that it was not irrational to believe, as the OGA Strategy implies, that increased recovery does not necessarily lead to increased emissions – particularly since the OGA’s metric for economic recovery includes the cost of emissions.

Comment

The case is likely to be a first skirmish in what will be a long running battle between environmental campaigners, various actors in the private sector and the government over the practical meaning of the Net Zero target ranking in the government’s wider list of competing priorities. It shows that the Net Zero target cannot straightforwardly be assumed to prohibit any government policy which is likely, at least in some respects and for some period of time, to increase carbon emissions. Its impact is more nuanced than that.

What, then, does the Government’s statutory obligation to achieve Net Zero by 2050 mean? That is likely to be tested again in future litigation, as campaigners find new policies to target and new ways to frame their arguments. So watch this space.