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Oil companies operating onshore assets in England should be aware of a recent Co ...

Oil companies operating onshore assets in England should be aware of a recent Court judgment1 ruling that drill pipe passing through the substrata of the surface landowner at any depth without consent having been obtained constituted trespass, writes Neil Q Miller*, Dispute Resolution Partner at Norton Rose. More alarmingly, the judge awarded a sum as damages for trespass based on a percentage share of the production volumes (9% of historic income from the oil extracted via the pipelines) and an injunction preventing extraction subject to the oil company agreeing to pay 9% of future gross revenue generated from the oil and gas extracted by the pipelines in question - a sum which exceeded the amount payable in royalties to the Crown under the licence. The decision was appealed and the Court of Appeal has recently handed down its judgment.2 The claimant, Bocardo SA is freehold owner of land in Oxted, Surrey, that is the residential home and estate of Mohamed Fayed. In October 1999, Star Energy acquired a petroleum production licence (PL182) which granted the rights to seek and bore for, and get, petroleum under all relevant land within an area which extends to include 247.5 sq km in the counties of Surrey, Kent and East Sussex. Within that licence area is the Oxted Estate. The licence was originally granted in 1980 to Conoco under the Petroleum Act 1934. Following the discovery of a naturally occurring reservoir below the surface area known as Palmers Wood (which reservoir extends in part beneath the Oxted Estate) nine further appraisal/development wells were drilled to access and drain the reservoir as part of the development of the oil field. Three wells which passed beneath the Oxted Estate were the subject of this dispute. Production facilities established under the licence are located at a site in Palmers Wood and the licensee had obtained all the necessary and usual planning consents. Drilling operations took place principally from two sites - the production site at Palmers Wood and a nearby well site established at Coney Hill (the surface location of which was adjacent to, but not on, land owned by or forming part of the Oxted Estate). Three of the wells were drilled as directional wells from the surface site at Coney Hill to target and allow production from the north eastern region of the oil field, which at various depths between 900 to 2,500 ft extended into or passed through the substrata below the Oxted Estate. By the end of 2007 approximately 1,006,000 barrels of oil had been extracted via the deviated wells. Neither Star Energy nor its predecessors obtained Bocardo’s agreement to drill and insert production pipes under the Oxted Estate. Although entitled to do so, neither Star Energy nor its predecessors had obtained an ancillary right under s 3(1) of the 1934 Act to drill the deviated wells (and, at that time and to date, none had ever been applied for or granted by the Secretary of State for Energy in this context). The Court of Appeal (reluctantly) held based on an ancient legal maxim ‘whoever owns the soil, it is theirs up to heaven and down to hell’ that trespass had indeed been committed - even though the landowner suffered no loss of use or enjoyment of his land - and Bocardo was entitled to more than nominal damages. Section 7 of the Petroleum Act 1998 enables a person holding a licence to acquire such ancillary rights as may be required for the exercise of the rights under a licence, subject to the provisions of the Mines (Working Facilities and Support) Act 1966. As Star Energy could secure the access rights it needed under Section 7 of the 1998 Act, the valuation of these rights under section 8 of the Mines Act became a key issue. The Court of Appeal held that valuation should be based on the principles for compulsory purchase compensation. Applying those principles, the application for an injunction was rejected and Bocardo’s damages reduced to just £1,000 in respect of both historic and future trespass - a pyrrhic victory with severe costs consequences. The case does not preclude landowners from making an application for an injunction to stop an oil company from drilling under their land without permission. However, where what is complained of constitutes a technical breach or infringement a small damages award seems a more likely and proportionate outcome than the grant of an injunction or ransom style damages. The difficulty that the case presents oil companies with is the prospect of having to negotiate ancillary rights under section 7 of the 1998 Act with many different landowners in order to drill or develop underground storage facilities onshore. This potentially costly administrative burden suggests the need for urgent legislative reform. 1. Bocardo SA v Star Energy UK Onshore Ltd and another [2008] EWHC 1756 (Ch) 2. Star Energy UK Onshore Ltd and Another v Bocardo S.A. [2009] EWCA Civ 579 *Miller advised Star Energy
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