The war in Ukraine has caused many businesses to rapidly reassess projects in Russia, involving Russian nationals with ties to the Kremlin or the importation of Russian goods. This may stem from an ethical or reputational perspective, or to ensure compliance with sanctions.
When thinking about investments by Russian owned or controlled entities into the UK oil and gas industry, a number of regulatory powers may be relevant, quite apart from sanctions, some of them new or the subject of recent guidance.
First, the North Sea Transition Authority (NSTA), rebranded last month from the Oil and Gas Authority (OGA), has the ability to assess owners’ ‘fitness’. This includes licensees, their directors and managers and those that control them.
It can exercise this power not just on an assignment or other significant licence event but at any time on its own initiative. The NSTA’s recent guidance on this power states that it will usually consider issues such as:
• Whether the individual is bankrupt or associated with any corporate insolvency;
• Whether the individual has been convicted of a relevant offence or been involved in civil proceedings, or been the subject of an investigation or disciplinary proceedings by other regulators, or has been involved with any business to which the above apply;
• Whether the individual has been candid and truthful in dealings with regulators, and demonstrates a readiness and willingness to comply with regulatory requirements.
However, this list is not exhaustive. It may take other matters into account if considered relevant. For example, the NSTA’s obligations have regard to: “[t]he need to maintain a stable and predictable system of regulation which encourages investment in relevant activities” and “[t]he need for the United Kingdom to have a secure supply of energy”.
The NSTA has a right to approve transfers of offshore licences including in asset sales. It has no right of approval in relation to share sales but can retrospectively require the licence to be transferred on if unhappy with a change of control.
The NSTA’s predecessor used those powers in 2015 in connection with the proposed acquisition by LetterOne (owned by Mikhail Fridman) of 12 North Sea fields from RWE Dea. This was based on concerns about the effect that possible future sanctions imposed on LetterOne might have on the continued operation of these fields.
The OGA published in December 2021 a letter indicating its approach to exercising these powers in relation to changes of control in which it noted that its focus would be on:
• Any change to the technical or financial resources available to the licensee that may prejudice the licensee’s ability to meet its [licence and NSTA Strategy] commitments.
• The potential impact of a change of control on the ability of the vendor to meet its commitments in its post-completion portfolio.
© Supplied by CMSNational security risks were already the subject of heightened attention even prior to the Ukraine invasion as a result of the National Security and Investment Act 2021 (NSIA), which came into force at the start of this year.
The NSIA gives the government sweeping new powers to scrutinise, and potentially block, acquisitions and investments in the UK in order to protect national security.
It introduces a mandatory notification system for mergers in certain sensitive sectors, including energy. Failing to notify and get clearance of a notifiable acquisition renders the transaction void and the parties subject to up to five years imprisonment. Civil penalties include fines of up to £10 million, or 5% of turnover.
Mandatory notification for upstream companies is triggered where, broadly:
• the target carries on business in the UK or supplies goods or services to the UK;
• the target owns, operates or is developing an upstream petroleum facility or holds a licence for an upstream petroleum facility which had a throughput of more than 3 million tonnes in the 12 months prior to the acquisition;
• the acquirer gains control, or a greater degree of control, of the target – for instance where shareholdings pass the 25%, 50% or 75% mark.
There are also triggers in relation to downstream gas and electricity businesses and the supply of crude oil-based fuels in the UK.
Even if the transaction is not subject to mandatory notification, parties may choose to notify on a voluntary basis as the Secretary of State can “call in” and examine a wide range of transactions. This includes the acquisition of assets – both tangible and some intangible – and the acquisition of material influence below the level of a notifiable transaction.
Making a voluntary notification gives the parties a clear timetable within which the Secretary of State must exercise the call in powers. These might otherwise hang over the companies for up to five years from completion.
If, when the transaction is reviewed, national security concerns are identified, the Secretary of State can order any necessary and proportionate remedies to prevent, remedy or mitigate that risk. This might include blocking or unwinding the transaction or less draconian conditions or undertakings.
It is clear that many transactions in the energy sector will now need to be assessed for potential application of the NSIA.
The legislation is widely drafted, and in some respects vague, but there is as yet little guidance on its scope. It will take some time for clear rules of engagement to develop, which is leading to a conservative approach to notifications in the meantime.
Judith Aldersey-Williams is a partner in the CMS Energy & Climate Change Team.