Following the result of the general election, we can now expect to leave the EU at the end of January, although very little will change on that date as we will move into a transitional period when existing EU rules and trade terms continue to apply in the UK.
Those hoping for the Brexit debate to be over will be sadly disappointed as attention will simply turn to negotiation of the crucial trade deal with the EU.
The infamous “cliff edge” of a no-deal Brexit will now shift to December 31 2020. If the trade deal is not in place by then, we will default to the equally infamous and largely misunderstood WTO rules.
The industry will focus its attention on lobbying for its key aims in the trade deal – frictionless movement of goods between the UK and the EU, access to skilled labour, access to the single energy market, and a voice on energy issues at EU level, all of which are likely to require a high degree of regulatory alignment.
Turning to more local concerns, June 2020 will see the Forties Pipeline System (FPS) shut down for around three weeks in order to carry out essential maintenance and upgrades to the system. This is part of a plan by Ineos to invest £500 million on the FPS so that it remains safe and reliable to 2040 and beyond.
Planned shutdowns are common in the industry, but the shutdown of a pipeline that carries about 40% of the UK’s oil and gas production comes with significant implications. The main one relates to labour, with the shutdown requiring perhaps 2,000 additional personnel offshore.
These issues come on top of the challenges of dealing with IR35 changes. The oil and gas industry has used individual contractors for many years; in part to manage the cyclical nature of its labour requirements.
Many of these contractors provide their services through personal service companies, which has given them potential tax advantages. The UK Government’s draft Finance Bill 2019 extends IR35 compliance obligations from the public to the private sector.
Until now, contractors have made the assessment of whether they should be viewed as an employee or self-employed, and taken the risk on any tax consequences.
From April 2020, operators and service companies will need to assess every worker providing services to their business through an intermediary, such as a personal service company, to ensure that they are compliant with IR35 payroll rules or whether payroll costs should be applied at source to the fee.
If the client fails to follow this process, they may be liable for the tax and National Insurance contributions otherwise due. The Conservatives indicated during their election campaign that they would review the current HMRC proposals.
However, at the time of writing, it is not known how far such a review will go, or when it will take place.
The Oil and Gas Authority has been flexing its muscles during 2019, issuing a letter to operators in June signalling an evolution in its approach.
Tom Wheeler, director of regulation, said: “Despite good progress, we still see too many issues taking too long to resolve or ending up in deadlock between disputing parties, threatening MER UK.
“Therefore, to help embed the new culture, and to ensure that any companies not onboard do not profit at the expense of the majority, we will be progressively more proactive in using the OGA’s powers.”
We have seen evidence of the OGA’s willingness to investigate where it believes parties are failing to comply with their MER UK obligations, but these issues are not straightforward and can involve very complex analysis of commercial models.
This may be the year when the OGA issues its first penalty and that may prompt the first formal challenge to the exercise of its powers.
Finally, I don’t think you need to be a genius to work out that in the next 12 months the energy transition is going to be an even bigger part of the public discourse than it has been over the last 12 months, which have seen the advent of Greta Thunberg’s school strikes as a global phenomenon, Extinction Rebellion bringing direct action to the streets of London, the end of a number of high-profile sponsorships of arts institutions by oil companies including Shell and BP, increasing climate change litigation and the decision of the European Investment Bank to phase out financing for fossil fuels within the next two years.
Oil and Gas UK, with the support of the OGA, has produced its Vision 2035, focusing on the fact that oil and gas has an important role as part of the energy mix as the UK seeks to meet its legal commitment to reducing emissions to net zero by 2050 (or in Scotland 2045), but that the industry has to do more to reduce the carbon footprint of its operations. Expect to hear more about this in 2020, including from me.
Penelope Warne, senior partner, CMS
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