Oil and gas infrastructure: Access provisions and voluntary arrangements (URN 01/540)

Consultation document on review and updating of the oil and gas infrastructure code and on proposals for publication of guiding principles on use of legal powers to settle disputes

Contents

Preface Details of consultation

Summary

Chapter 1 Introduction

Chapter 2 Background and questions on the Code of Practice on certain oil and gas infrastructure

Chapter 3 Access to onshore gas processing facilities (terminals) and to pipelines connecting such facilities to the national transmission system or to larger industrial users

Chapter 4 Infrastructure access dispute resolution by the Secretary of State

Annex 1 Draft revised Code of Practice

Annex 2 Offshore infrastructure Code of Practice: Interim review

Annex 3 New legislative provisions in relation to onshore gas processing facilities/terminals and connecting pipelines

Annex 4 Infrastructure access dispute resolution: Background on legislation

Annex 5 Infrastructure access dispute resolution: Flow chart on process

Annex 6 List of consultees

Annex 7 The consultation criteria

Preface – details of consultation

You are invited to make comments on the proposals in this consultation document. Specific questions are raised in the text, though you are welcome to make comments on any other aspects.

Your response to this consultation exercise may be made publicly available in whole or in part at the Department's discretion. If you do not wish all or part of your response (including your identity) to be made public, you must state in your response which parts you wish us to keep confidential. Where confidentiality is not requested, responses may be made available to any enquirer, including enquirers outside the UK, or published by any means, including on the internet.

The Consultation Criteria, which apply to all public consultations are at Annex 6.

Responses should be sent by 11 May 2001 to:

Infrastructure Consultation Oil & Gas Directorate
Room 241
Department of Trade and Industry
1 Victoria Street
LONDON SW1H 0ET
Fax: 020 7215 5231
E-mail: Infrastructure.Consultation@dti.gsi.gov.uk

Electronic copies of this consultation document can be obtained from the Oil & Gas Website at http://www.og.dti.gov.uk/

Requests for additional hard copies of this consultation document should be addressed to:

Jackie Hill
Oil & Gas Directorate
Telephone: 020 7215 5123
Fax: 020 7215 5231
E-mail: Jackie.Hill@dti.gsi.gov.uk 

If you have any questions about this consultation or wish to discuss particular points before responding please contact:

Celia Frank
Head of Upstream Oil & Gas Sponsorship
Oil & Gas Directorate
Telephone: 020 7215 5039
Fax: 020 7215 5231
E-mail: Celia.Frank@dti.gsi.gov.uk

Executive summary

1. This consultation document invites views on the following issues:

2. Access to infrastructure on the United Kingdom Continental Shelf (UKCS) is a key element in the process of extracting the UK's petroleum resources. Typically, upstream pipeline and offshore processing facilities are built initially to transport and process output from a particular oil or gas field by that field's developers. As this is depleted, spare capacity is progressively made available for use by third party fields on payment of a tariff for transportation and processing services. More and more UKCS fields do not contain sufficient reserves to justify their own infrastructure, but are economic as satellite developments.

3. The framework for upstream third party access (TPA) is a combination of:

4. DTI is responsible, in consultation with industry, for ensuring that the Code is kept up to date and remains relevant to the needs and concerns of industry. An interim review in 1997-8 found that the Code was generally working satisfactorily and had helped to bring some transparency to the process of negotiating TPA to infrastructure. The full review originally envisaged after three years was postponed to allow for implementation of the EC Gas Directive, which effectively moved parts of the Code into legislation.

Review of the effectiveness of the Code

5. Various changes to the context of the Code make a review timely: changes in legislation; commercial developments in response to the maturity of the UKCS; European gas market liberalisation; and the greater interest in competition at all stages of the gas chain.

6. Questions in Chapter 2 of the consultation document cover: the effectiveness and continuing need for the Code; possible improvements; drafting changes to the Code as a result of changes in legislation; publication of information on indicative and actual tariffs; the negotiation process; non-discrimination; and maintenance and future review.

Review of evidence on possible barriers to exploration and development

7. It is important that monopolistic behaviour by infrastructure owners does not limit access and new field development. Government is keen to ensure that pipeline tariffs do not act as a barrier to exploration and development. The review is an opportunity to establish if this is a problem.

Publication of main commercial conditions for access to certain infrastructure

8. In implementing the Gas Directive in August 2000, the Department placed a requirement on the owners of onshore gas terminals to publish annually, from 10 August 2001, their main commercial conditions for access. While responsibility lies with owners to decide what is appropriate, Chapter 3 includes some proposals on generic conditions for comment, and also suggests voluntarily extending publication of main commercial conditions to upstream gas pipelines.

Legal powers to settle disputes over third party access to infrastructure

9. There has never been an application for use of the long-standing powers for the Secretary of State to settle disputes over third party access to pipelines and gas processing facilities. The reasons are not clear, but may include uncertainty about how the Department would in practice settle a dispute. But there have been complaints that tariffs were too high.

10. To reduce any such uncertainty, the Department proposes to clarify the way in which those powers might be exercised by publishing some guidelines. It is important that, as well as reflecting the factors that have to be taken into account under the Petroleum and Pipe-lines Acts, such as available capacity, the outcome should be charges that are fair and cost-reflective. However, it is recognised that there are likely to be significant difficulties in assessing these in practice, in particular in defining the relevant costs and profit rates. The wider effects of new guidelines and any decisions, should the Secretary of State be called on to settle disputes, in motivating continued investment in infrastructure and development will need to be considered carefully. Principles are proposed for discussion in Chapter 4 of this document, and views are sought on how disputes over access should be settled.

Chapter 1: Introduction

1.1 Access to infrastructure on the United Kingdom Continental Shelf (UKCS) is a key element in the process of extracting the UK's petroleum resources. Consequently, there are both legal and voluntary safeguards as a framework for commercial arrangements for third party access (TPA). The Petroleum Act 1998 (which consolidated earlier legislation) and other legislation provide for appeal to the Secretary of State to settle TPA disputes. The Offshore Infrastructure Code of Practice ("the Code") is a voluntary agreement by industry on the process of negotiations, introduced in January 1996 partly as a result of concerns about lack of transparency in the terms of infrastructure access. The Code, with certain changes (see paragraph 2.13), is attached at Annex 1.

Offshore infrastructure Code of Practice

1.2 DTI is responsible, in consultation with industry, for ensuring that the Code is kept up to date and remains relevant to the needs and concerns of industry.

1.3 An interim review in 1997-8 found that the Code was generally working satisfactorily and had helped to bring some transparency to the process of negotiating TPA to infrastructure. A summary of responses to the interim review is at Annex 2. The full review originally envisaged after three years was postponed to allow for implementation of EC Directive 98/30/EC concerning common rules for the internal market in natural gas ("the Gas Directive"), which effectively moved parts of the Code into legislation.

1.4 A full review is now timely for this and other reasons, which prompt a number of important questions for industry and Government:

a. Time to review the working of the Code

b. Changes in legislation, or in the application of existing legislation

c. Basin maturity and commercial developments

d. European gas market liberalisation

Legal powers to settle disputes over third party access to infrastructure

1.5 An important part of the regulatory framework for TPA is the provision for appeal to the Secretary of State to settle a dispute over access to certain infrastructure, under section 17 of the Petroleum Act and other legislation, in recognition of the potential for commercial conflict. (There is no statutory route of appeal in relation to access to oil terminals/processing.) Those powers are reactive, and can be invoked only if negotiations between a relevant infrastructure owner and a third party field owner fail to secure a satisfactory outcome.

1.6 Formal dispute resolution by the Secretary of State has never been requested, and it is not clear why. Commercial negotiations may have been so successful as not to require dispute settlement, but there have been informal but unsubstantiated complaints that tariffs are "too high" and this has been mentioned in various discussions in Pilot (the successor to the Oil and Gas Industry Task Force), as have the risk of souring relations with infrastructure owners and uncertainty about how the Department would in practice settle a dispute.

1.7 Since the Department has direct control over it, it is proposed to clarify the way in which the Secretary of State's dispute settlement powers relating to third party access would be used. It is important that, as well as reflecting the factors that have to be taken into account under the Petroleum and Pipe-lines Acts, such as available capacity, the outcome should be charges that are fair and cost-reflective. However, it is recognised that there are likely to be significant difficulties in assessing the appropriate level of tariffs in practice, in particular in defining the relevant costs and profit rates. The wider effects of new guidelines and any decisions, should the Secretary of State be called on to settle disputes, in motivating continued investment in infrastructure and development will need to be considered carefully. Principles are proposed in Chapter 4 of this document, and views are sought on how disputes over access should be settled.

Consultation response details

1.8 This consultation document discusses and makes some proposals on the related issues of the review of the Code and the principles and process for dispute settlement. You are invited to make comments on these proposals by 11 May 2001. Specific questions are raised in the text, though you are welcome to make comments on any other aspects.

1.9 Administrative details are given in the Preface.

Next steps

1.10 The Department intends to hold meetings during the consultation period with interested parties. After the consultation period we will publish a summary of the views expressed and the reasons for decisions taken (see Preface for confidentiality provision). Subject to the responses, a revised Code will be agreed with industry, and guidance will be issued to clarify the principles and process envisaged in any use of the Secretary of State's dispute settlement powers.

Chapter 2: Background and questions on the Code of Practice on certain oil and gas infrastructure UKCS development context

2.1 Upstream pipelines and offshore processing facilities are typically built initially to process and transport to shore the output of specific oil or gas fields, with spare capacity progressively being made available for use by third parties on payment of a tariff for transportation and processing services. Field-dedicated lines are economically viable when fields are relatively large but become less viable as fields get smaller. As a consequence, there is scope for gains by all parties if the development of small fields is made viable by owners allowing access to existing infrastructure, with the infrastructure owners gaining additional revenue from the new users. Third party tariffs may prolong the life of older fields by contributing to their fixed costs.

2.2 Increasingly, many UKCS fields do not contain sufficient reserves to justify their own infrastructure, but are economic as satellite developments utilising existing facilities. Some of these gains would be lost if monopolistic behaviour limited access to pipelines and deterred the timely development of new small fields. It is, therefore, in the national interest to ensure optimum utilisation of infrastructure already constructed.

Why and how the Code was set up

2.3 Concerns about, inter alia, lack of transparency in the terms of infrastructure access led to the agreement of a voluntary industry Code of Practice on negotiating third party access. The Code was introduced in January 1996, having been developed by industry members with DTI acting as facilitator, to provide a framework for owners and users to follow during the process of seeking, offering and negotiating access to pipelines and other facilities. The Code is an industry document and, as such, observance of its provisions is a matter for the industry.

What is the Code of Practice?

2.4 The Code sets out a framework to be followed during commercial negotiations for access to infrastructure. An important feature of the Code is that it is designed to create transparency in offshore tariffs. It requires that the indicative offers made by infrastructure owners to prospective customers are published regularly, with a time lag of a few months, by the DTI in Energy Trends (currently in Table 12). The indicative offer is not the final contract price: it is an indication of the price that could be expected by anyone seeking a similar service. This is designed to enable potential users of infrastructure to make informed decisions and to allow them to proceed with exploration and development plans without fear of discrimination and to factor T&P costs into their longer term decisions on exploration, appraisal and development.

2.5 Another feature of the Code is that it requires infrastructure owners to unbundle their services where this is requested and practical. Where the user seeks an integrated offer this can still be offered.

2.6 A third feature is to reduce the time taken to move negotiations to a conclusion. To this end the Code specifies a tight time frame for responses to applications and looks toward simplification and standardisation of contractual arrangements and technical specifications.

2.7 The final objective of the Code is that commercial negotiations should be non-discriminatory. This means that infrastructure owners should not attempt to exclude or prefer any potential customer in order to secure commercial or market advantage elsewhere. Under the Code, owners are, however, entitled to make reasonable provision of capacity for their own future use.

Interim review

2.8 The Department undertook to administer the Code, ensuring, in consultation with the industry, that it was kept up to date and remained relevant to the needs and concerns of both users and infrastructure owners and continued to reflect current legislation and regulatory principles.

2.9 It was originally intended that a full review of the operation of the Code would be made after three years of use. In late 1997 the Department conducted an interim review of the Code. This involved asking companies with experience of tariff discussions under the Code to provide feedback on its operation. Taken together, their responses suggested that the Code was generally working satisfactorily and had helped to bring some transparency to the process of negotiating third party access to infrastructure. A summary of the responses received to the interim review was issued in early 1998 and is reproduced at Annex 2.

Current review and consultation process

2.10 As set out in the Code (paragraph 4.1), DTI is responsible for maintaining the Code and ensuring that it remains relevant to the future needs of both users and infrastructure owners and continues to reflect current legislation and regulatory principles. Provision was made for minor changes, and for major changes as a result of industry proposals, with the agreement of the representative bodies named in the Code (UKOOA, BRINDEX and the Shippers Forum (now the Gas Forum) or other representative body of the downstream industry).

2.11 If there were no specific proposals for change, it was proposed that DTI should initiate a review after 3 years, to ensure the Code's content and coverage remained relevant. In the light of the responses to the interim review (see above), the review anticipated for 1999 was deferred to allow for consideration of the implementation into UK legislation of Articles 2.2 and 23 of the Gas Directive.

2.12 Following the implementation of the Gas Directive by the Gas (Third Party Access and Accounts) Regulations 2000 (SI 2000/1937) ("the Gas Regulations") on 10 August 2000, the Code requires some technical amendment since some aspects are now embedded in legislation. This is, therefore, a suitable time to look at the future role of the Code, and to consider its scope, content and effectiveness.

2.13 An updated version of the Code taking in these technical changes and some other practical changes the Department regards as useful but which do not result directly from the Gas Regulations is provided at Annex 1. (This highlights the changes to the main text, but not to Annex A to the Code where the updated legislation has been summarised and substituted for the original.) It also includes proposals for changes to take account of the requirement under the Gas Regulations to publish main commercial conditions for onshore gas terminals and some other changes which are proposed in this consultation document (such as a modified title which better reflects the coverage of the Code).

2.14 In publishing this consultation document, DTI is continuing its role as facilitator. The Code currently makes clear that major changes to the Code will be made only with the agreement of the industry, but we are proposing in paragraph 4.4 of the draft revised Code at Annex 1 to make clear that major changes as a result of legislation will have to be made whether or not the industry agree. However, DTI will consult on how best to reflect those changes. It will be for the DTI to assess whether agreement on such required changes has been secured.

Specific questions

2.15 Views are invited on the scope, content and effectiveness of the Code. The DTI's consultation document on the implementation of the upstream parts of the Gas Directive (issued in March 2000) envisaged that the review would cover three broad areas:

a. the effects of the Regulations implementing the upstream provisions of the Gas Directive and whether these would necessitate any changes to the Code (in particular, paragraph 2.3);

b. consequential amendments to the Code to reflect the new legislative regime it supports;

c. whether those parts of the Code which do not directly relate to the access provision of Article 23 of the Gas Directive required any updating.

2.16 Responses are invited to the following questions, but these are not intended to be exhaustive, and consultees may wish in addition to comment more generally, or on other aspects. Please indicate whether the particular response is from the point of view of an infrastructure owner, user or otherwise.

General effectiveness of the Code

2.17 There is a perception in parts of the industry that tariffs are too high. For example, a report from Pilot's Undeveloped Discoveries Workgroup listed high transportation tariffs as one of the important barriers to the development of undeveloped discoveries. It would be useful to know how significant high tariffs are, and how the Code is currently used by the industry in practice, in order to assess whether it has a continuing value:

a. How is the Code used at the moment? Is it a measure of last resort or is it used as part of the normal process?

b. Are there any aspects of the Code which could be improved, for example because they are confusing or which you think are deficient?

c. Would there be any benefit or case for different requirements applying under the Code in different circumstances, for example related to the size or complexity of fields seeking services, the nature of the infrastructure or the degree of competition locally? If so, please explain.

d. Does the Code fail to address issues of concern?

e. Is the Code failing to deal with any anti-competitive practices?

f. Has your company sought an indicative tariff but not received one under the terms of the Code or received one out of line with a similar offer published in Energy Trends?

g. What are your views and experience of negotiating third party tariffs? In cases where you considered tariffs offered were too high for the economic development of your field, did you consider there was a reasonable explanation, such as the opportunity cost of backing out other production?

Interruptible services

2.18 There has been some concern that, because the Code does not specifically say that it covers interruptible services, infrastructure owners who are reluctant to offer such a service may use the absence of reference to such services in the Code as a reason for refusing to offer them. Infrastructure owners may be reluctant to offer interruptible services because, for example, they are concerned that, by entering into a tariffing arrangement with a third party to transport associated gas on a best endeavours basis, their reputation may be adversely affected should they be unable on occasion to transport or process that third party's gas (because other users are actually using all of the capacity for which they have prior contractual rights), resulting in (some of) the third party's gas being flared or the shutting-in of (some of) the associated liquids production.

a. Should capacity which is available only on an interruptible or best endeavours basis be covered explicitly by the Code?

Consequences of the Gas (Third Party Access and Accounts) Regulations 2000 ("the Gas Regulations")

2.19 A proposed revision of the Code as updated to take account of the Gas Regulations, with some other changes, is provided at Annex 1. There are two types of revision: essentially drafting changes to ensure that the amended Code accurately reflects and does not duplicate provisions now covered by legislation (i.e. paragraph 2.15(a) above); and more substantive proposed amendments about the use of the Code in dealing with changes in the regime brought about by the Gas Regulations (i.e. paragraph 2.15(b) above), which are discussed in Chapter 3.

a. Are the "essential" amendments in Annex 1 correct and clear? Are there any other revisions which need to be made as a result of the Gas Regulations?

b. Are there any other, substantive changes which need to be made as a result of the Gas Regulations?

Publication of information on tariffs

2.20 Since the introduction of the Code of Practice, just over 100 indicative tariffs have been notified to the DTI and published in Energy Trends. These are almost equally divided between oil and gas transportation.

a. How successful do you think the Code has been in creating greater transparency in the negotiation of offshore tariffs? What are the benefits of this?

b. Has the publication of indicative tariffs in Energy Trends been helpful? What use, if any, do you make of the published data on indicative tariffs?

c. Is there value in continuing to publish indicative tariffs in this way? How would the indicative tariffs for gas processing and/or transportation link up with example tariffs published as part of main commercial conditions (see paragraph 3.4 below)?

2.21 The Department and the industry recognise that contracted tariffs can often be very different from an indicative tariff and that there are many valid reasons for this.

a. Would publication of contracted tariffs have value? Would infrastructure owners and users be prepared to publish these?

2.22 In the interests of transparency, the Department is keen to ensure that there is full reporting of tariffs. One cause of possible under-reporting could be that, because the Code suggests returns are made "every 6 months", owners put aside and then overlook submitting a return to the Department. The Department currently receives a number of returns on a more frequent basis from some owners and, in order to remove any possibility of under reporting, proposes that in future it should receive all returns as and when indicative tariff offers are made. The Department would continue to withhold publication until at least 8 weeks following the date of the indicative tariff. The suggested revision of the Code at paragraph 2.7(b)(i) of the draft revised Code at Annex 1 reflects this proposal.

2.23 Another cause of possible under-reporting may result from owners believing the negotiation they are pursuing is not one covered by the Code. The Department understands that the spirit of the Code is that all dialogue in relation to possible third party access is subject to the provisions of the Code. A potentially more comprehensive approach, reflected in paragraph NP8(b)(i) of the draft revised Code at Annex 1, would be to extend the reporting requirement to both prospective users as well as owners of infrastructure. Thus, the Department would be able to identify gaps in returns from owners. It would not be the Department's intention to publish details of an indicative tariff based on a prospective user's report, instead it would follow up with the infrastructure owner if no corresponding indicative tariff had been notified by them to the Department within, say, 4 weeks.

a. Would making returns to the Department at the time indicative offers are made, and/or a duty on users to report offers received, improve the level of reporting of indicative tariffs?

b. Would either of these changes cause any operational difficulties for either owners or users of infrastructure?

2.24 The Department is keen to collect, but not publish, some additional data about negotiated tariffs. The information requested on the current notification form includes the system name and operator contact and the applicant company name. The Department would find it helpful for the form also to include details of the prospective user's field(s) e.g. field name, where this is known, or block reference and therefore proposes that the notification form (Annex E to the draft revised Code at Annex 1) be revised to request this information.

a. Are there reasons why information identifying the prospective development would not be available to be included in the return to the Department?

Negotiation process

2.25 Changes in UKCS activity and business practices may affect the continuing relevance of the Code.

a. Have there been changes that have affected the climate for negotiating TPA? If so, what and how?

b. In what way has the Code been successful in reducing the time taken for negotiations to reach a conclusion? Is the timetable in the Code still relevant to the way companies do business?

c. How has the development of e-commerce affected negotiations and the need for the Code's regime?

d. The Code places a requirement on infrastructure owners to maintain data so that they are ready to negotiate with bona fide enquirers. How well has this worked?

e. Would it be helpful to have data on available capacity and general contract terms (and the other areas specified) published and/or collected together e.g. on a web site?

Divided rights

2.26 There has been no formal decision by the competition authorities that divided rights should apply in an agreement for selling upstream transportation and processing services, although the European Commission has shown some interest. Its preliminary view is that new sales of this type should be on a divided rights rather than joint basis (see paragraph 1.4(b) above). Divided rights means that, where there are several owners of pipeline or processing capacity, their shares in capacity should be sold separately (the Commission's pragmatic view is that where there are multiple owners, this should be in at least two groups, rather than as many individual shares).

2.27 Where infrastructure owners negotiate with third parties on a divided rights basis, the Department's view is that the Code already provides for this possibility. The definition of "owner" in the Code (i.e. "A party who owns physical infrastructure assets (pipelines, platforms or terminals) and/or a party who owns capacity rights in those physical assets but does not own the asset itself") caters for, though it does not require, divided rights selling. The Department therefore does not believe that any change is required to the Code to deal with this issue, though it has suggested in Annex B to the revised Code at Annex 1 that the definition of owner for the purposes of the Code be extended to refer to the definitions of owner in the Petroleum Act 1998, Pipe-lines Act 1962 and Gas Act 1995.

2.28 However, if divided rights selling became more common, it is possible that some changes might be needed or helpful to clarify the negotiation process.

a. Do you think that any change is needed to the Code to allow for divided rights selling or would be desirable to clarify the process?

Non-discrimination

2.29 A key objective of the Code was to ensure that negotiation should be non-discriminatory. The Department has suggested some additional text on the meaning of (non-)discrimination in paragraph NP1 of the draft revised Code.

a. To what degree has the Code been successful in ensuring that negotiations have been non-discriminatory? Please illustrate with examples from within your portfolio.

b. Is the draft revised Code now clear on the meaning of nondiscrimination? If not, how could this be clarified further?

Maintenance of the Code

2.30 The Code established the DTI as facilitator, working with industry groups to ensure that the Code remains relevant to the future needs of both users and infrastructure owners (see paragraph 2.10). A number of representative bodies are named in the Code. The Non Operators' Forum, along with the groups named, has participated in the preparation of this consultation document and has requested that it should be included in the updated Code as one of the groups to be involved in any revision of the Code. This request is reflected in paragraphs 4.2(b) and 4.3 of the draft revised Code at Annex 1.

Future review

2.31 The intention that DTI would initiate a full review of the Code after a further three years, or sooner if circumstances required, to ensure its content and coverage remains appropriate is in paragraph 4.5 of the draft revised Code. Further reviews could similarly take place after a certain period of time, or be triggered by changing circumstances, to assess the continuing effectiveness of the arrangements. We also envisage reviewing the effectiveness of the proposed guidelines on the Secretary of State's dispute settlement powers (see Chapter 4) at the same time. DTI policy is in any case to keep the UKCS regime under review to ensure it remains appropriate in the contemporary circumstances and competitive with other oil and gas regimes.

a. Do you think there should be a further review of the Code to assess the relevance of its content and coverage?

b. If so, should it be after a certain period of time, such as the three years suggested in paragraph 4.5 of the draft revised Code at Annex 1, or should it be triggered by circumstances or events? Please explain your views.

Other issues

2.32 There may be other issues not covered in the questions above which you consider relevant. We would be interested to have your views.

Chapter 3: Access to onshore gas processing facilities (terminals) and to pipelines connecting such facilities to the national transmission system or to larger industrial users

Introduction

3.1 In its current form, the Code applies to access to all offshore oil and gas pipelines, processing facilities and onshore terminals. It recognises, however, in paragraphs 2.4 to 2.6, that the onshore trading environment for gas necessitates particular requirements regarding non-discriminatory access to onshore gas terminals. Access to onshore gas processing facilities/terminals is therefore already treated slightly differently under the Code to access to pipelines or processing facilities offshore and to access to onshore oil terminals/processing facilities. Access to onshore gas processing facilities has been subject to section 12 of the Gas Act 1995 since that Act came into force. There have been no legislative provisions governing access to oil processing facilities/terminals.

3.2 Annex B to the Code as it currently stands makes clear that the scope of the Code, in relation to gas, extends from well-head to "the point at which gas enters the National Transmission System or other onshore pipeline distribution system". This implies that onshore pipelines connecting processing facilities/terminals to the National Transmission System are also covered by the Code and may suggest that the Code should also apply to onshore pipelines connecting processing facilities/terminals directly to larger users. In legislative terms, such pipelines (insofar as they are exempt from the requirements for a public gas transporter's licence under the Gas Act 1986) have hitherto been subject to the access requirements of the Pipe-lines Act 1962 in cases where the pipeline in question exceeds 16 km in length. Before 10 August 2000 there were no legislative provisions governing access to onshore gas pipelines of less than 16 km in length.

3.3 In reviewing the Code against the background of new legislative provisions introduced to give effect to the Gas Directive, consideration has to be given to the treatment of onshore gas processing facilities/terminals and relevant connecting pipelines. A summary of the relevant legislative provisions is at Annex 3. Where those legislative provisions have implications for the Code, as described below, paragraphs NP5 and NP6 of the draft revised Code at Annex 1 offer proposals on how those implications might be addressed.

Implications for the Code

Legal requirement for publication of main commercial conditions

3.4 The new legislation deliberately does not define "publish" or go into detail about the content of the main commercial conditions because it was considered that, in an environment in which negotiation between parties is the norm and where there are so many technical, economic and commercial variables, any attempt to be overly prescriptive in statute would either overlook an important factor or would make legally binding a factor which, in some circumstances, might be entirely inappropriate. The manner in which main commercial conditions are to be "published" and the content of those conditions is therefore deliberately left largely to the owners of relevant infrastructure, who could be expected to be guided by general principles to be included in an updated/amended version of the Code.

a. Do the proposed insertions to the Code at Annex 1 (paragraphs NP5 and NP6 and Annex D) provide appropriate guidance to owners? If not, in what way could they be improved?

Voluntary publication of main commercial conditions

3.5 Paragraph 2.7(a) of the Code already requires that, where it is requested by a bona fide potential user and practical to do so, parties offering a chain of service should separate out the commercial terms to identify the price and conditions for any component part of the total package.

3.6 The amendments to section 12 of the Gas Act 1995 and section 10C of the Pipe-lines Act 1962 introduced by the Gas Regulations go further than the Code in respect of gas services, in that they require the annual publication of main commercial conditions of access to onshore gas processing facilities/terminals and relevant connecting pipelines in all circumstances, i.e. whether or not requested by a potential user. There is no similar legislative requirement to publish main commercial conditions for access to upstream gas (or oil) pipelines (including associated offshore processing facilities).

3.7 Where joint transportation and processing of gas is requested, or is the only practical option, the legal requirement for publication will apply to any onshore processing element of a bundled service but not to the upstream transportation and processing elements. Some infrastructure owners have expressed concern that this asymmetry within a bundled service will result in two separate strands of negotiation for the respective parts of a T&P package (with concomitant confusion, extra effort and cost for all parties), i.e. that it will effectively require separation of services in all circumstances.

a. Do you consider that publication of main commercial conditions for any or all of the parts of a chain of services implies enforced separate negotiations for access to each part of the chain, preventing owners and users from negotiating over access to a bundled chain of service? If so, do you consider this to be a problem?

3.8 In the interests of greater transparency, and as a way of addressing these concerns about asymmetry, if they lead to problems in practice, the Department considers that there is a good case for the voluntary publication of main commercial conditions for upstream gas transportation services, including where there is no associated onshore processing service. While creating some additional effort for owners, greater transparency through publication would benefit potential third party users. It would improve access to this information and allow comparison of alternative conditions, where relevant, thus improving the working of the market.

3.9 The Department therefore recommends that the industry consider adopting this practice as reflected in paragraph NP7 of the draft revised Code at Annex 1.

a. In the interests of greater transparency, should the Code (paragraph NP7) apply to upstream pipelines carrying hydrocarbons to onshore gas processing facilities/terminals the statutory provisions relating to publication of main commercial conditions relevant to onshore processing facilities/terminals and associated onshore pipelines?

b. Should the Code require publication of main commercial conditions if only transportation services are offered (i.e. if offshore processing is not involved)?

c. The proposed Annex D to the draft revised Code (see Annex 1 to this document) gives draft main commercial conditions for onshore gas terminals. Apart from the legal references, would these need to be varied in respect of gas transportation services and, if so, how?

3.10 In the case of oil, however, where there are in general wider options for offtake and processing, there is no legal requirement for the publication of main commercial conditions of access to any part of the T&P chain. The Department does not see a case at present for voluntary publication of main commercial conditions for upstream oil transportation services or onshore processing.

a. Do you agree that there is no case at present to extend voluntary publication of main commercial conditions to oil T&P services?

Factors relevant to access to onshore processing facilities/terminals and relevant connecting pipelines

3.11 As it currently stands, the Code includes factors which may be taken into account when considering access to any infrastructure falling within the scope of the Code (paragraph 2.3). Under the new legislative provisions implementing the Gas Directive, specific factors which the Secretary of State shall take into account in his dispute settlement role (which broadly reflect those in the current Code) are specified only in relation to upstream pipelines and appear in section 10E of the Pipe-lines Act 1962 and section 17F of the Petroleum Act 1998.

3.12 Paragraph 2.19 of this consultation document indicates that some technical amendments to the Code are necessary as some aspects of the Code are now embedded in legislation. Among those aspects are the factors mentioned in paragraph 3.11 above. It is therefore appropriate to delete those factors from what is currently paragraph 2.3 of the Code and replace them with a cross reference to the factors, set out in the Petroleum Act 1998 and the Pipe-lines Act 1962, which the Secretary of State shall take into account when considering an application for dispute settlement in respect of access to upstream pipelines (see paragraph NP2(a) of the draft revised Code at Annex 1).

Chapter 4: Infrastructure access dispute resolution by the Secretary of State

Background

4.1 As outlined in the Introduction (paragraphs 1.5-1.7), there are longstanding legal powers for the Secretary of State to settle disputes over third party access to pipelines and gas processing facilities, the use of which has never been requested. Various reasons have been suggested for this, including uncertainty about the process and outcome.

4.2 In the interests of reducing this uncertainty and as good administrative practice, DTI proposes to publish guidance on the basis on which the powers would be used if requested. The intention is to help industry by indicating as far as possible the general principles and process which would be applied in individual cases, without constraining the Secretary of State's discretion. The guidance could be annexed to the revised Code, for information, in the same way as relevant legislation. As part of this exercise, we need to know more of the reasons why companies have not asked for use of the powers and to consult on the proposed guiding principles and process, especially since the principles raise some complex issues.

4.3 The legislative background is set out below, followed by a description of the proposed guiding principles and process, together with some questions.

The dispute settlement powers: legislative background

4.4 Companies seeking access to infrastructure falling within the scope of the relevant legislation (the Petroleum Act 1998 (which consolidated provisions of the Petroleum and Submarine Pipe-lines Act 1975), the Pipelines Act 1962 and the Gas Act 1995) must apply in the first instance to the relevant owner of the infrastructure in question. If the parties are unable to agree satisfactory terms for access to that infrastructure, the applicant for access may make an application to the Secretary of State to resolve the dispute. For access to pipelines the Secretary of State has a specific duty to take into account, where relevant, at least a number of factors specified in the relevant legislation (see paragraph 4.6 below). Similar factors are not specified in the legislation relating to access to gas processing facilities/terminals or to pipelines conveying gas from such facilities to the NTS or directly to larger users. However, under general administrative law the Secretary of State is under a duty to take into account all relevant factors. The factors specified in the Petroleum Act 1998 and the Pipe-lines Act 1962 in relation to access to upstream pipelines would therefore form part of the Secretary of State's consideration of a case relating to processing facilities or pipelines conveying gas from such facilities to the NTS or larger users, if those factors were relevant.

4.5 The Petroleum Act 1998, the Pipe-lines Act 1962 and the Gas Act 1995 set out the obligations placed on infrastructure owners and on those seeking access to infrastructure and the Secretary of State's rights and obligations. (The relevant provisions are in Annex A to the revised Code attached as Annex 1 to this consultation document.)

4.6 When considering an application under the Petroleum Act 1998 (or the Pipe-lines Act 1962 in respect of upstream petroleum pipelines), the Secretary of State shall (so far as relevant) take into account:

a. capacity which is or can reasonably be made available in the pipeline in question;1

b. any incompatibilities of technical specification which cannot reasonably be overcome;

c. difficulties which cannot reasonably be overcome and which could prejudice the efficient, current and planned future production of petroleum;2

d. the owner's reasonable needs for the transport and processing of petroleum;1

e. the interests of all users and operators of the pipeline;3

f. the need to maintain security and regularity of supplies of petroleum; and

g. the number of parties involved in the dispute.

4.7 This is not an exhaustive list and the Secretary of State will also take into account any other material considerations, including financial information, relevant to the dispute.

4.8 When considering an application under section 12 of the Gas Act 1995, for access to gas processing facilities/terminals, or section 10C of the Pipe-lines Act 1962, for access to pipelines conveying gas from processing facilities/terminals to the NTS or directly to larger users, the Secretary of State shall take into account all relevant factors, which may include those listed in paragraph 4.6 above.

Guiding principles

The Government's objectives

4.9 The Department's main objective in operating its petroleum legislation is to ensure the recovery of all economic hydrocarbon reserves. The Government has sought to avoid the unnecessary proliferation of pipelines and other infrastructure. Access to infrastructure is therefore important for non-owners. More generally, the Government is committed to promoting greater competitiveness in energy markets. In determining the basis for access, it is therefore necessary to balance a variety of different interests and objectives.

4.10 The maturity of the UKCS means that an increasing proportion of production comes from new fields which are too small to support their own infrastructure to shore. Access to infrastructure services on a fair basis is necessary for their development. At the same time, more production is coming from incremental investment in older fields. These rely on ageing infrastructure which may be economic to maintain only with the income from transportation of third party production. There is also some new investment in pipelines which may be used in future for third party production.

4.11 The Department seeks to ensure that the development option chosen by the prospective developer(s) of a new oil field does not lead to the permanent loss of reserves which could otherwise be recovered economically. This might, for example, happen if gas produced in association with oil from a new field would be flared although its market value exceeded the resource cost of bringing it to market. That might be the result if the least cost export option for the gas was to use ullage (i.e. spare capacity) in an existing pipeline, but-perhaps in the absence of pressure from pipe-on-pipe (or pipe-within-pipe) competition-the pipeline owner(s) were to abuse a position of market power and seek too high a tariff to justify the new field's owner(s) paying for a connection. In such circumstances, the new field owner(s) might ask the Secretary of State to set a lower, cost-reflective tariff, which would bring the best commercial option into line with the best economic option.

4.12 The Department is of the view (and has been since 1975, when the upstream regulatory regime was introduced) that any tariff imposed by the Secretary of State should reflect a fair payment to the owner for real costs

and for opportunities forgone. In a Lords Committee debate on 15 October 1975 (see Annex 4) on what became section 17 of the Petroleum Act 1998, it was recognised that spare pipeline capacity has a commercial value and that the owner, having borne the cost and risk of installing the pipeline system, should be entitled to derive a fair commercial consideration for that value.

Proposals for tariff setting principles

4.13 Where, as in upstream oil and gas transportation and gas processing, there are so many technical, economic and commercial variables, any attempt to be too prescriptive in setting out guidance on whether to grant a third party access to an owner's pipeline infrastructure or gas processing facilities and on what terms is likely either to overlook an important factor or to introduce a factor which, in some circumstances, might be entirely inappropriate. The guidance proposed here is therefore, of necessity, in general terms.

4.14 It is proposed that, if called on to resolve a dispute over access to infrastructure on the UKCS, the Secretary of State would adopt an approach which reflects the commitments given in the Lords debate in 1975 (though there would not now be a presumption in favour of using historic capital costs since accounting practices have since changed, particularly in regulated industries) and which follows the pattern set by the Framework and Frigg Treaties (see Annex 4).

4.15 The main issue in such an approach would be the need to identify the costs relevant to the contract proposed and to decide on fair and appropriate terms. This would have to be decided on a case by case basis. Although the Secretary of State's discretion to use the powers in section 17F of the Petroleum Act 1998, section 10E of the Pipe-lines Act 1962 and section 12 of the Gas Act 1995 cannot be constrained by published guidance, in the interests of some increase in clarity we propose that he would be guided by the general principles set out below. However, the increase in clarity will be limited by the fact that these raise some difficult issues, in particular the definition and treatment of capital costs and the rate of return that might be applied, and each case will be different. There is a tension between rewarding past investment in infrastructure (to maintain the attractiveness of the UKCS for continued investment) and ensuring that tariffs are set low enough to encourage exploration for and development of new fields. The relative weight to place on these factors would vary from case to case.

4.16 The questions beginning at paragraph 4.18 below include an opportunity for respondents to indicate those principles which they believe should guide the Secretary of State. However, it may be helpful to suggest the principal factors which are likely to be relevant in the most common scenarios. The following broad cases might apply:

Where spare capacity can be made available to a third party applicant in infrastructure whose capital costs have already been recovered (but acknowledging that it may in practice not be easy to determine whether the capital costs of a specific piece of infrastructure have already been recovered), it is anticipated that the Secretary of State would set a tariff reflecting the incremental costs imposed on the infrastructure owner(s) (i.e. the additional costs to the owner(s) of providing connection and pipeline services to the third party); in the case of a line associated with a field at or near the end of its economic life, the prospective tariff for third party access may need to be set above incremental pipeline costs to ensure that the line is maintained and remains available for third party use.

On equity grounds and in order to retain an incentive for further such investment, in newer infrastructure or infrastructure constructed or oversized with a view to taking third party business (e.g. FPS-the Forties Pipeline System or CATS-the Central Area Transmission System), the tariff set by the Secretary of State would normally include an allowance for capital cost recovery.

For infrastructure with insufficient ullage to accommodate a third party's requirements, given the owner's rights and existing contractual commitments, the Secretary of State is not likely to require access to be provided. If he were to do so, the tariff would need to reflect the cost to the infrastructure owner of backing off his own production to accommodate the third party's (i.e. be based on the concept of opportunity cost).

4.17 The Secretary of State would normally expect the parties to agree on, or at least propose, an appropriate basis for tariff escalation and procedures for dealing with unexpected changes in throughput. Although the main issue in a particular case in practice is likely to be the financial terms for the tariff, there may, of course, also be other (non-financial) aspects which the Secretary of State may be called on to settle. As the Secretary of State's powers do not provide for further intervention in a contract, having made a determination he would not expect to be involved further in that particular case.

Questions about the powers and proposed principles of guidance

4.18 We would welcome your views on the following:

a. What benefits do you see in the existence of these powers (e.g. "deterrent" effect) and their use?

b. What circumstances do you see as most likely to lead to an appeal?

c. Have you ever approached DTI for help - formally or informally - in reaching agreement? If so, what was your experience? What worked well and what could be done better? If you have considered a formal appeal to the Secretary of State, why was this not pursued?

d. Are the principles set out above the right principles for the Secretary of State to consider? Are there others which should be considered? In particular, views are invited on the most appropriate basis for making an allowance for capital cost recovery, recognising the difficulties inherent in different measures of cost and in recompensing risks.

e. Should some aspects be given greater weight than others? If so, please specify.

f. What type of guidance would you find helpful?

g. Although the Secretary of State would normally expect parties to agree on the basis for any tariff escalators, what in your view are appropriate escalators?

h. Do the needs of smaller organisations differ from larger ones? If so, how might this be reflected in the guidance and the Secretary of State's considerations?

i. Would it be helpful for this guidance to be annexed to the industry's Code, as proposed in paragraphs 1.5 and NP2(b) of the draft revised Code at Annex 1?

The dispute settlement process

4.19 No applications have to date been made to the Secretary of State and the lack of precedents or illustration of the process may be a contributory factor to possible reluctance to seek a resolution.

4.20 The legislation sets down a number of events and milestones relating to the process of making and handling of applications, but is silent on the timing or detail of many of the steps. The underlying assumption, as in other legislation, is that the Secretary of State would behave in a way that was reasonable in the circumstances.

4.21 The cases which may come to the Secretary of State will by definition be sensitive and are likely to be complex. The Department intends to treat each with due care, as quickly as reasonable, taking account of the individual circumstances/characteristics of the case. However, it is difficult, in the absence of experience of such cases, and without fettering the Secretary of State's discretion, to give detailed guidance on the timetable and the elements of the process.

4.22 However, the Department is aware that uncertainty about these elements may deter potential applicants and is prepared to issue more detailed guidance on the process if responses to this consultation suggest that would be useful to the industry. a. Should the guidance include advice about the process as set out in the Acts? If so, what advice would be helpful?

Proposals on timetable and other elements of the dispute settlement process

4.23 To ensure that each case is considered on its merits and that the possible complexities of potential applications is recognised, the Department does not consider that it would be helpful to the process to tie it to a rigid timetable. However, the Department recognises that it is important to provide applicants and owners with adequate opportunity to respond to requests for information from the Secretary of State when considering an application. The Department considers that knowledge of these elements of the timetable is likely to be helpful to parties to the application. We propose that the Department's guidelines should include an outline of this process and provide some indication (where not specified in the legislation) of the timing and nature of events. Annex 5 contains a flowchart of the milestones in the legislation (both the Petroleum Act 1998 and the Pipe-lines Act 1962 for pipelines and the Gas Act 1995 for onshore gas terminals, relevant extracts from which are in Annex A to the Code attached at Annex 1). The responses to the proposals and questions below would help to decide whether and how this flowchart could be elaborated.

Timetable

4.24 We would welcome views on the following:

a. How long in general do negotiations for access to infrastructure take? It would be helpful if you could provide examples of simple and complex cases in their experience and give an indication of the length of time taken.

b. Is concern that the Department may take a long time to consider an application a factor deterring third party access seekers from making an application?

c. In the context of commercial negotiations, what would be a reasonable period for a decision by the Secretary of State? Is speed or full consideration of all material factors the more important?

d. What are the pressures on parties to conclude? In general, to what period of time into the future do negotiations relate? Months ahead, years ahead?

4.25 As regards timing once an application has been made to the Secretary of State, it is proposed that:

a. the timing provided for by section 17 of the Petroleum Act 1998 and section 10 if the Pipe-lines Act 1962 is followed in relation to applications under section 12 of the Gas Act 1995 and under section 10C of the Pipe-lines Act 1962 (access to pipelines connecting terminals to the NTS or to larger users);

b. where the Secretary of State sees fit to request further information, a period of 14 days will be allowed for the provision of this information;

c. where the Secretary of State requests such information to be delivered in person rather than in writing, in addition to the 14 days' notice of the nature of the information required, at least 7 days' notice of the date of the meeting(s) will be provided.

Information required by the Secretary of State

4.26 The information required by the Secretary of State is likely to be financial and technical information that the parties concerned have readily to hand, together with knowledge of the negotiation as progressed to date.

a. Are there other considerations of which you think the Secretary of

State should be aware? If so, please explain.

b. Do the time intervals proposed allow sufficient preparation time for infrastructure owners and appellants without unnecessarily extending the process?

About the outcome

4.27 The information provided to the Secretary of State in considering an application will be treated as confidential, as will the detail of individual determinations. However, in the same way that indicative tariffs are currently published (with a time lag), there may be value in making it known that a determination has been made.

a. Would you find it helpful to have knowledge that a determination had been made? If so, how should this be made available, e.g. published in Energy Trends (or its successor or electronically).

b. What level of detail would be appropriate? Should publication cover: i) the number of applications received in a given period (should this be in arrears?); ii) the number rejected and the number considered further; iii) only the outcomes i.e. determinations made and should there be a time lag before publication; iv) whether applications were made under the Petroleum Act 1998, the Pipelines Act 1962 or the Gas Act 1995 or should they be amalgamated; v) the period of time between application and outcome?

4.28 We invite views on any of the questions here and in general on what could be usefully published to increase transparency and improve operation of the market.

1. This includes the need for owners to make reasonable provision of capacity for their own future use. In Annex B to the Code (the definitions section), "reasonable" is defined by example:

Owners of infrastructure are entitled to make reasonable provision of capacity for their own future use. "Reasonable" in this context is not capable of exhaustive definition and is therefore illustrated here by example. It includes:

Reasonable provision would not include, for example, deliberately refusing access in order to deny market access to a competitor or to gain some other market advantage. Nor would it seem reasonable for an infrastructure owner to refuse access on the basis that the owner will have a requirement for it in time for some as yet unidentified purpose.

2. This includes sterilising capacity to provide other services within the system (in addition to the capacity actually requested) as a result of accepting the particular request for service. Examples would be:

3. This includes the need to honour all existing contractual commitments - an environment in which contracts which were freely entered into are respected is essential for business; and the effect on existing users. For example, accommodating a new user may cause compression suction pressure to rise which would have a material detrimental impact on the deliverability of the existing fields.

Annex 1

Oil and gas infrastructure Code of Practice

An agreed industry document on the principles and procedures governing access to certain oil and gas infrastructure Consultation draft, February 2001

1 Introduction

1.1 This non-statutory Code is intended for the guidance of infrastructure owners and users and provides a framework which, it is intended, all parties could usefully follow during the processes of seeking, offering and negotiating access to , processing facilities, onshore terminals and pipelines which handle gas prior to its introduction into a pipeline distribution system operated by a public gas transporter (including Transco's National Transmission System) or to an interconnector and/or oil up to and including the point at which it is stabilised. The purpose is to streamline and facilitate the timely application of these processes and ensure that access is easy and fair, with terms offered on a negotiated non-discriminatory basis.

1.2 The Code comprises general principles to assist in the conduct of these processes and a set of actual procedures which, if followed, should help ensure that the principles are adhered to.

1.3 Nothing in this Code is intended to, or can, fetter the discretion of the Secretary of State for Trade and Industry in the exercise of his powers to set tariffs under the Petroleum Act 1998, the Pipe-lines Act 1962 and the Gas Act 1995. The relevant provisions of those Acts are set out in Annex A and those provisions, of course, prevail over those of the Code in the event of any inconsistency between them. Where the parties concerned have followed the guidance offered by the Code, the Secretary of State will be assisted in considering applications to him under the legislation. Subject to any over-riding provisions of any relevant inter-Governmental agreement, the Code will apply to foreign owned pipelines to the extent necessary to cover actual and proposed use of such pipelines by fields on the UK Continental Shelf.

1.4 Annex B contains a glossary of terms used in this Code and these have the meaning given to them there. That glossary supplements certain definitions contained in the relevant legislation (see Annex A). In addition, the principles set out below are, where appropriate, followed by an annotation designed to explain them. This should help to avoid misunderstanding about the purpose and meaning of the Code.

1.5 There is at present no intention to include in the Code formal arrangements for an arbitration or disputes resolution procedure, although this matter will need to be kept under review. DTI guidance on the formal dispute settlement powers referred to in paragraph 1.3 is attached at Annex C [not included in this draft]. However, DTI will continue to be available to play an informal role, at the request of a party, as a mediator/facilitator in disputes to see whether the issues can be resolved by agreement without recourse to the formal regulatory powers available under the legislation referred to above.

1.6 The DTI will also be responsible for ensuring, in consultation with the Industry, that the Code is kept up to date and remains relevant to the needs and concerns of the Industry (see section 4 below).

2 Principles

Applications

2.1 The Code of Practice applies to all existing and future oil and gas infrastructure on the UK Continental Shelf related to activities in the hydrocarbon supply chain from wellhead through to receiving terminals and initial processing facilities. (See Annex B for definitions.)

2.2 The Code applies to users, infrastructure owners and owners of capacity rights in infrastructure systems who may not own the physical asset itself. (See Annex B for definitions of owners.)

Non-discrimination

2.3 The principle of non-discriminatory negotiated access should apply to all infrastructure coming within the scope of this Code.

NP1. This means that relevant infrastructure owners should be obliged to consider all bona fide requests for the use of capacity without favour of any particular company or client, including any company in which the owner has an interest, and should negotiate in good faith to endeavour to reach timely agreement with the party requesting capacity. Discrimination involves the application of dissimilar conditions to equivalent transactions, some of which may or may not be with affiliated companies. Non-discrimination requirements do not prevent different tariffs being applied where there are identifiable differences in the cost of supplying the facility. In the case where the infrastructure owner's own production is displaced by that of a third party, the tariff should reflect the opportunity cost (i.e. profit foregone) by the owner from its reduced throughput, as well as the incremental costs. This effectively requires the third party to contribute to the fixed costs of the operation, and ensures that the owner is not worse off. If backing off its own production imposes additional physical costs on the owner, these would also be included as part of the incremental cost of providing access.

NP2. However, owners of infrastructure and applicants for access should note in their negotiations:

a) the factors which the Secretary of State has a duty to consider when exercising his rights under the relevant legislation (section 17F(8) of the Petroleum Act 1998 and section 10E(8) of the Pipe-lines Act 1962: see Annex A); and

b) the additional guidance the Secretary of State promulgates about the basis he is minded to adopt when deciding whether to grant third party access to an owner's pipeline infrastructure or gas processing facilities and on what terms (see Annex C [not included in this draft; refer to Chapter 4 of the consultation document for proposals]).

NP3. Where capacity is not available within the existing infrastructure and the owner does not wish to incur directly the additional investment costs involved, the owner is expected to provide the incremental capacity and it is the responsibility of the user to fund such investment including compensation for those costs and exposures (including an appropriate return on capital) agreed by the owner and user in line with normal industry practice, for example:

i. costs required to leave the infrastructure capable of performing the same services (but not better) as it was prior to the addition of the incremental capacity;

ii. any additional decommissioning liabilities; and

iii. the cost of studies undertaken by the infrastructure owner in defining the scope of modifications required to make incremental capacity available.

NP4. The requests of all potential users shall be considered on a nondiscriminatory basis. This means that where potential users are competing for capacity (and none wishes to invest in expanding the capacity of the system) the owners should make the capacity available to those users which offer the best deal for the owners, taking due account of any risk and fiscal considerations, and the timing by which the prospective users can enter into a binding commitment.

Gas processing terminals

2.4 There are some particular requirements regarding non-discriminatory access to onshore gas processing terminals. The development of the onshore trading environment makes absolute the requirement that terminals provide a timely and non-discriminatory service to users of such facilities. Contractual arrangements at terminals should be transparent to buyers and sellers using such facilities providing such transparency does not breach confidentiality restrictions. This requires terminal operators making available on request to all potential bona fide users full details of allocation procedures in place. Infrastructure systems should operate on the principle of clearly specified priorities which are known to all users of the system. A system of "equal priority" where applied should also involve the principle of "equal misery" in the case of partial system constraints. It is recognised that existing contracts or capacity constraints may mean that a new user cannot be granted equal priority to existing users of such facilities.

2.5 The terminal owner should recognise a duty to facilitate timely and efficient operation of the allocation, attribution and substitution processes. The definitions of allocation, attribution and substitution must be clear. The processes should be carried out strictly according to the rules defined for each terminal in an impartial non-discriminatory way. For example, manipulation of the use of tolerances, allocation or attribution systems to favour one user against another is considered unacceptable practice. Allocation or attribution systems must not be manipulated in favour of the owner's gas. The objective must be to allow users of such facilities access to information allowing them to understand the basis of their allocation and attribution and which, in turn, allows them to assist their customers to compete on level terms in the downstream market. If additional costs are incurred as a result of an agreement by the terminal owner to make additional information and services available to any party, the issue of the recovery of these costs will be a matter for commercial negotiation between the relevant parties.

2.6 It is also recognised that terminal owners will be in receipt of a significant amount of information of a potentially commercial nature. Owners should impose clear controls on dissemination of such information. In particular, such information should not be passed preferentially to, or used preferentially by, the terminal owner, an affiliated company, or any other person involved in gas marketing. The general principle is that if information is made available regarding upstream operations, such as outages, etc, it should be made available to all infrastructure users.

Publication of main commercial conditions of access

NP5. In accordance with section 12 of the Gas Act 1995 and section 10C of the Pipe-lines Act 1962, owners (as defined in section 12(6) of the Gas Act 1995) of gas processing terminals and owners (as defined in section 66(1) of the Pipe-lines Act 1962) of relevant pipelines must publish annually from 10 August 2001 their main commercial conditions for access. Any changes to those conditions must be published as soon as they become effective. The Secretary of State has powers, under section 12(5) of the Gas Act 1995 and section 10C(11) of the Pipe-lines Act 1962, to specify by notice information which is to be included in the main commercial conditions. Owners of relevant infrastructure, when considering the content of their main commercial conditions, should take into account the generic factors outlined in paragraphs 2.4 and 2.5 above and in NP8 below. These conditions must enable an applicant for access to make a reasonable assessment of the cost, or the method of calculating the cost, of access. They should also take into account the guidance at Annex D on what should be included in main commercial conditions. Where relevant infrastructure owners have followed the guidance in this Code, the Secretary of State may be assisted in considering whether to issue notices under section 12(5) of the Gas Act 1995 or section 10C (11) of the Pipe-lines Act 1962.

NP6. Publication of main commercial conditions may be by way of a physical document produced by the owner or by electronic means. The terms and conditions may be made available on demand rather than generally distributed each year although a copy of the annual publication, and any in-year changes, should be forwarded to the DTI (see DTI contacts at paragraph 4.6). Changes to the main commercial conditions which occur within a year should be brought to the attention of those organisations which had earlier requested copies of the annual main commercial conditions as soon as those changes become effective. Where an owner has a website, the main commercial conditions and any in-year changes to them should be made available there, regardless of whether they are also made generally available in hard copy. Whatever the chosen general form of publication, if an applicant for access does not have facilities enabling him to access electronic documents, the owner must be able to make the main commercial conditions, and any in-year changes, available in hard copy on request.

NP7. Although not a statutory requirement, owners (as defined in section 27(1A) of the Petroleum Act 1998 and section 66(1) of the Pipe-lines Act 1962: see Annex A) of upstream pipelines carrying hydrocarbons to onshore processing facilities/terminals should publish their main commercial conditions for access on the same basis as set out in paragraphs NP5 and NP6 above.

Price transparency and the separation of services

2.7 Precise terms of access will be commercially negotiated (in the case of gas processing terminals and upstream gas pipelines, against the background of the published main commercial conditions - see Annex D) with appropriate separation of services and a framework of transparency and standardisation within systems.

NP8. Precise terms of access should be freely negotiated between the parties. To prevent a dominant party exploiting its position, and to encourage competition and reduce costs, this Code includes the following principles as regards separation of services, transparency and standardisation:

(a) Separation of services

i. In the Code separation of services refers to those activities that may be offered by more than one company so that each significantly distinct component can be separately priced and provided. Typically, the separate service will begin and end where there is an alternative supply choice/decision point or the realistic potential for one. This "separation" may also be appropriate where, although there is only one discrete chain of service, the parts of the chain have different ownership. Such unbundling of services and tariffs, where this is practical and the customer requests it, is a requirement of the Code.

ii. It is recognised that there will be circumstances where the user values a "one stop shop" offer. It can reduce complexity in the purchasing process for the user and provide a way of tailoring the service to the user's needs. The supplier of the combined service may offer a discount to the user over the total price of the components of separated services. However, this discount should reflect genuine economies of scope and scale and should not be the result of a supplier leveraging monopoly power over a dominant market position in one component to deny the user choice in other parts of the chain as this would block competition.

iii. As a principle, upon a bona fide request from a potential user, the parties offering a chain of service should separate out the commercial terms to identify the price and conditions for any component of the total package for which a practical alternative provision could be made. Technical issues should be discussed with prospective users with a view to finding solutions to enable separation where practical, not used as spurious reasons to avoid it. Examples of meaningful separation are:

(b) Transparency

Transparency will encompass:

(i) pertinent pricing information, namely:

(ii) relevant technical and operating aspects, such as:

(iii) appropriate contract terms, such as:

(c) Standardisation

A standard approach to the presentation of the data cited above should aid transparency, improve customer choice and reduce the cost of negotiations. It is unlikely that detailed standardisation of general technical/operational and contract terms of different systems would be beneficial as these variables range widely between systems. However, within systems, reasonable standardisation which balances the risks and benefits to owners and users should be possible and can lead to lower costs and greater efficiency. It is an objective of the Code for companies to examine the extent to which such standardisation can be introduced.

(d) Timeliness

Commercial negotiations should proceed in a timely fashion. Neither side in a negotiation has any good reason needlessly to delay negotiations. A fundamental principle of the Code is that such delay is unacceptable. There are two caveats, however. The first relates to delays which are an inevitable consequence of overcoming technical problems of bringing the user into the system. This does not mean that a party may indulge in bogus technical debate for commercial or, indeed, any other end. The second concern is that avoidance of delay should not be used as a strategy to extract commercial advantage in those circumstances where the issues require, in good faith, further negotiations. Under the relevant legislation, the Secretary of State shall not entertain an application for dispute settlement unless he is satisfied that the parties have negotiated for a reasonable time.

Safety, system integrity and environmental protection

2.8 Access to infrastructure systems will be given only provided it does not jeopardise the safety and integrity of the system and does not lead to potential unacceptable environmental damage. It is the duty of all infrastructure owners and applicants for access to comply with any relevant legislation in respect of health and safety and environmental protection.

3. Procedures

3.1 Infrastructure owners involved in tariffing arrangements or who could reasonably expect to be involved in such arrangements should maintain up-to-date data on their system(s) which should be made available to any bona fide enquirer. However, if a company feels that the cost of maintaining such data is out of proportion to the value of the tariffing business involved, it can ask the DTI (see contact point at paragraph 4.6) for an exemption from this obligation. The data should include:

(a) Technical description: Hydrocarbon entry specification, pressure regimes/compressor curves, entry and exit, dehydration regime, process diagrams and other operating conditions;

(b) Operational capability including measures of past performance and reliability; planned changes affecting operational capability should be indicated;

(c) Services that can be provided;

(d) Indicative forecast of available capacity normally for 5 years ahead, but for a longer period for significant infrastructure; and

(e) Pertinent general contract terms: lifting procedures, ownership, priorities, system allocation principles, substitution terms, voting rights, etc.

3.2 To streamline the negotiating process it is essential that there be an open and free exchange of bona fide data between owner and user. The data should be properly substantiated and the most recent and accurate which both parties have at their disposal. Data often change as negotiations proceed and users should recognise the time and cost involved to the owner in taking account of such changes. The user should also provide a suggested timetable for the negotiations.

3.3 The owner will, within 10 working days of an application, provide in good faith indicative terms, including an indicative tariff and its period of validity, on the basis that such oil or gas is within the technical specification of the system. (This does not require the user to demonstrate that the oil or gas is within specification since this may not be known at the time of the application. The indicative tariff, however, has relevance if the specification is met.) The owner will also wish to advise the potential user at this time of the detailed information which will be required if the enquiry is to be taken any further forward. To obtain such terms the user will need to indicate in good faith the amount of capacity, its timing and duration and the nature and kind of the service required and products to be delivered.

3.4 Where the oil or gas is not, or may not be, within the technical specification or requires additional investment to bring it within the system, the owner will give within 10 working days an initial response setting out the sorts of actions and technical studies which would need to be addressed before a finalised tariff offer can be made and such oil or gas could enter the system.

3.5 If, after considering the above response, the user wishes to proceed with negotiations for access such notification will be made to the owner. Within 30 working days of receipt of such a notification, or within any such other time as the parties may agree, the user will provide all specific information on the service requested. This should cover all relevant information such as, but not limited to:

a. production profiles b. compositions c. start-up date d. broad outline of development concept e. hydrocarbon specification (such as H2S and CO2 content, gravity, etc)

NP9. Within 30 working days of receiving such information, or within such time as the parties may agree, the owner will provide the potential user with a detailed technical response to the service requested. Such response will provide details, including costs, of any incremental capacity requirements such as whether offshore compression or processing is required, as well as information on available capacity (in compression, pipeline and terminal facilities), operating conditions of the pipeline and compression system, procedure for tying in to the system, scope for gas conditioning capability, etc. It will also indicate whether the service can be provided to the user's timetable and, if not, give details on when capacity (with amounts) will become available. If during the exchange of detailed information the owner believes that the indicative price is no longer appropriate this information will be conveyed to the user with reasons for the change.

3.6 If sufficient capacity is available for a service within the technical specification of the system it should be reasonably straightforward for an offer capable of acceptance to be made. Unless the parties agree otherwise such an offer should generally be forthcoming within one calendar month of the user indicating, after receipt of the above information, a wish to negotiate access. However, if the service is outside the specification or requires new investment either to increase existing capacity or to install new processing equipment, a longer period of time may be necessary to enable the owners to make an offer. An offer in such circumstances should generally be made within three months rather than the one calendar month indicated above. However, if this is not achievable an extended timetable will be agreed between the parties whilst respecting the principles set out in paragraph 2.7(d).

3.7 Negotiations should, as far as practicable, be based on standard terms and conditions for technical/operational and contractual terms. As the negotiations progress, the parties may agree to change substantially the standard terms with which they started; equally, they may agree to abandon some or to add new ones to the package. The principle is that the parties do not become hide-bound by the standard terms so that they constrain the process of negotiation; their value lies in the fact that they are a ready and agreed starting point for concepts which are common to the infrastructure system and the industry and which do not need to be negotiated from scratch with every new deal.

4. Maintenance of the Code

4.1 The DTI will be responsible for maintaining the Code and for ensuring that it remains relevant to the future needs of both users and infrastructure owners and continues to reflect current legislation and regulatory principles. Owners, users and potential users will provide the DTI with information and data they consider relevant to the DTI's maintenance of the Code. Such information should be sent to the address below (see paragraph 4.6).

4.2 This could necessitate changes, at the request of any party, being proposed either to the principles or the procedures of the existing Code. Such changes could be categorised:

a. Minor changes

These could involve minor drafting changes designed to remove ambiguities or minor changes to existing procedures and principles to reflect changing offshore practices.

b. Major changes

These would involve major changes in the scope and operation of the Code. For example, the introduction of a disputes resolution procedure within the Code would be categorised as a major change. Any party requesting such changes should canvass the views of the appropriate Industry representative bodies, such as UKOOA, BRINDEX, the Non Operators' Forum, the Gas Forum, etc prior to proposing any change to the DTI and should indicate the level and nature of support from these bodies.

4.3 The DTI will inform UKOOA, BRINDEX, the Non Operators' Forum and the Gas Forum (or alternative representative body of the downstream industry) of any proposed changes to the Code. If no objections are received from these representative bodies such changes will be included in a suitably dated version of the Code. Copies of the Code would be made available on the Web and on request to any party . If objections are made which cannot be resolved the change involved would be considered major.

4.4 Insofar as they do not result from legislative requirements, major changes to the Code will be made only with the agreement of the Industry. The procedure for making such changes could take a number of different forms. It could involve the appointment of an outside person or body, or specialist industry committee or other agency, to take the matter forward, and would always involve a consultative process. But, as indicated, no such changes will be made without the specific agreement of the Industry. It will be for the DTI to assess whether such agreement has been secured.

4.5 Even if no specific changes are proposed, the DTI intends to initiate a further full review of the Code in 3 years' time, or sooner if circumstances require it, to ensure that its content and coverage remain appropriate. Any changes proposed would, however, follow the above procedure.

DTI contact point

4.6 Any queries regarding any aspects of the application and interpretation of the Code should be addressed to:

Peter Haile
Oil and Gas Directorate
DTI Room 286
1 Victoria Street
London SW1H 0ET
Tel: 020 7215 5037
Fax: 020 7215 5292
E-mail: Peter.Haile@dti.gsi.gov.uk

Annex A

[This replaces the previous Annex A]

Legislative background

1. General

1.1 Companies seeking access to infrastructure falling within the scope of the relevant legislation (the Petroleum Act 1998, the Pipe-lines Act 1962 and the Gas Act 1995) must apply in the first instance to the relevant owner (as defined in the relevant Act) of the infrastructure in question. If the parties are unable to agree satisfactory terms of access to that infrastructure, the applicant for access may make an application to the Secretary of State to resolve the dispute. In considering such applications, the Secretary of State will have regard to all material considerations, and for access to pipelines he will have a specific duty to take into account a number of factors specified in the relevant legislation. The Secretary of State's discretion in exercising his powers under the Acts cannot be fettered.

1.2 The extracts below from the Petroleum Act 1998, the Pipe-lines Act 1962 and the Gas Act 1995 set out (a) the obligations placed on infrastructure owners and on those seeking access to infrastructure and (b) the Secretary of State's rights and obligations. The main rights in each case are:

Petroleum Act 1998 and Pipe-lines Act 1962 (upstream petroleum pipelines):

those seeking access must apply to the infrastructure owner (as defined in section 27(1A) of the Petroleum Act 1998 and in section 66(1) of the Pipe-lines Act 1962), specifying the nature and quantity of the product they are seeking to be handled by the infrastructure;

where agreement is not reached between the applicant and the owner, the applicant many apply to the Secretary of State for dispute settlement;

if the Secretary of State is satisfied that the parties have been in negotiation for a reasonable time he must notify the parties that he intends to consider the matter and give each party 21 days to make any input before he begins his consideration;

when considering the application the Secretary of State has a duty to take into account a number of factors as specified in the Acts;

the Secretary of State has a right to demand relevant information from the parties in order to assist his consideration of the case - this may include financial information - which he has a general duty not to disclose to others;

if the Secretary of State decides that access should be granted he may serve a notice to that effect on the parties. That notice may set the tariff for access;

allow for connections to be made to the owner's infrastructure; and authorise the owner to recover any necessary payments from the applicant.

Gas Act 1995:

owners (as defined in section 12(6) of the Gas Act 1995) of gas processing terminals must publish, annually from 10 August 2001, their main commercial conditions for access. Changes to those conditions must also be published as soon as they become effective - this is enforceable through civil proceedings in the courts;

those seeking access must apply to the terminal owner, specifying the nature and quantity of the product they are seeking to have processed and the period of time during which the gas is to be processed;

the parties are required to negotiate in good faith - this is enforceable through civil proceedings in the Courts;

where agreement is not reached between the parties, the applicant may apply to the Secretary of State for dispute settlement;

if the Secretary of State is satisfied that the parties have been in negotiation for a reasonable time he must notify the parties whether he intends to require them to negotiate further, consider the matter further or reject the application; he must notify his decision to the parties;

where the Secretary of State decides to consider the matter further he has a duty to allow certain persons to make representations to him;

if the Secretary of State decides that access should be granted he may give a direction to that effect to the terminal owner. That direction may specify the terms on which access is to be granted, including the tariff to be charged and any other payments which might be necessary.

Pipe-lines Act 1962 (Pipelines connecting terminals to the nts or to larger users):

owners (as defined in section 66(1) of the Pipe-lines Act 1962) of relevant gas pipelines must publish, annually from 10 August 2001, their main commercial conditions for access. Changes to those conditions must also be published as soon as they become effective - this is enforceable through civil proceedings in the courts;

those seeking access must apply to the pipeline owner, specifying the nature and quantity of the gas they are seeking to have conveyed;

the parties are required to negotiate in good faith - this is enforceable through civil proceedings in the courts;

where agreement is not reached between the parties, the applicant may apply to the Secretary of State for dispute settlement;

if the Secretary of State is satisfied that the parties have been in negotiation for a reasonable time he must notify the parties whether he intends to require them to negotiate further, consider the matter further or reject the application; he must notify his decision to the parties;

where the Secretary of State decides to consider the matter further he has a duty to allow certain persons to make representations to him;

if the Secretary of State decides that access should be granted he may give a direction to that effect to the pipeline owner. That direction may specify the terms on which access is to be granted, including the tariff to be charged and any other payments which might be necessary.

1.3 The Acts also contain a number of definitions which are also set out below. Any terms used in this Code must be read against the background of these definitions.

2. Extracts from relevant legislation

NB: the endnotes are for illustrative purposes only and are not part of the legislation

2.1 The Petroleum Act 1998

Construction and use of pipelines

14. - (1) No person shall-

a. execute in, under or over any controlled waters any works for the construction of a pipeline; or

b. use a controlled pipeline of which the construction was begun on or after

1st January 1976,

except in accordance with an authorisation given in writing by the Secretary of State.

2. In this Part of this Act-

"controlled pipeline" means so much of any pipeline as is in, under or over controlled waters; and

"controlled waters" means the territorial sea adjacent to the United Kingdom and the sea in any area designated under section 1(7) of the Continental Shelf Act 1964.

Acquisition of rights to use controlled petroleum pipelines.

17F.- (1) This section applies to controlled petroleum pipelines.

(2) Any person who seeks a right to have things conveyed by a controlled petroleum pipeline of which he is not the owner ("the applicant") shall, before making an application to the Secretary of State under subsection (5), apply to the owner of the pipeline for the right.

(3) An application under subsection (2) shall be made by giving notice to the owner specifying what is being sought.

(4) Such a notice shall, in particular, specify-

a. the kind of things to be conveyed (which must be of a kind the pipeline is designed to convey); and

b. the quantities to be conveyed.

(5) If the owner and the applicant do not reach agreement on the application, the applicant may apply to the Secretary of State for a notice under subsection (9) securing to the applicant the right to have conveyed by the pipeline in respect of which he has made an application to the owner under subsection (2) the quantities specified in the notice under subsection (3) of things of a kind so specified.

(6) The Secretary of State shall not entertain an application under subsection (5)

unless he is satisfied that the parties have had a reasonable time in which to reach agreement between themselves on the application under subsection (2).

(7) Where a person applies to the Secretary of State under subsection (5) and the Secretary of State is satisfied as mentioned in subsection (6), the Secretary of State shall-

a. give notice to the owner of the pipeline and the applicant that he proposes to consider the application; and

b. after the expiry of 21 days beginning with the date on which notice under paragraph (a) was served, but before considering the application, give them an opportunity of being heard with respect to the application.

(8) When considering the application, the Secretary of State shall (so far as relevant) take into account-

a. capacity which is or can reasonably be made available in the pipeline in question;1

b. any incompatibilities of technical specification which cannot reasonably be overcome;2

c. difficulties which cannot reasonably be overcome and which could prejudice the efficient, current and planned future production of petroleum;2

d. the owner's reasonable needs for the transport and processing of petroleum;1

e. the interests of all users and operators of the pipeline;3 f. the need to maintain security and regularity of supplies of petroleum; and g. the number of parties involved in the dispute.

(9) Where the Secretary of State is satisfied that, if he served a notice under this subsection, the pipeline in question could be operated in accordance with the notice without prejudicing its efficient operation for the purpose of conveying, on behalf of its owner, the quantities of permitted substances which the owner requires or may reasonably be expected to require, the Secretary of State may serve such a notice on the owner and the applicant.

(10) A notice under subsection (9) may contain such provisions as the Secretary of State considers appropriate for any of the following purposes-

a. to secure to the applicant the right to have conveyed by the pipeline the quantities specified in the notice under subsection (3) of the things of a kind so specified;

b. to secure that the exercise of the right is not prevented or impeded;

c. to regulate the charges which may be made for the conveyance of things by virtue of the right; and

d. to secure to the applicant the right to have a pipeline of his connected to the pipeline by the applicant or owner.

(11) A notice under subsection (9) may also authorise the owner to recover from the applicant payments by way of consideration for any right mentioned in subsection (10)(a) or (d) of amounts specified in the notice or determined in accordance with the notice.

Section 17F: supplemental.

17G.- (1) Where an application is made to the Secretary of State under section 17F (5) in respect of a pipeline which is situated partly in, under or over controlled waters and partly in a foreign sector of the continental shelf, the Secretary of State shall consult the relevant authorities in the other country with respect to the application before considering it himself.

(2) For the purpose of considering an application under section 17F(5), the

Secretary of State may by notice require the owner or the applicant to provide him with such information relevant to the application as may be specified or described in the notice.

(3) The information mentioned in subsection (2) may, in particular, include financial information relevant to the owner's or the applicant's activities with respect to petroleum production projects and controlled petroleum pipelines.

(4) The Secretary of State shall not disclose to any person any information obtained under subsection (2) without the consent of the person by or on behalf of whom it was provided, unless he is required to do so by virtue of any obligation imposed on him by or under any enactment.

(5) In section 17F(9), "permitted substances" means the things which may be conveyed by the pipeline in accordance with an authorisation (or, if no authorisation for the use of the pipeline is required by section 14(1), means the things which the pipeline is designed to convey).

(6) Before serving a notice under section 15(6) on a person other than the holder of the relevant authorisation, the Secretary of State shall give that person an opportunity to make applications under section 17F in respect of the proposed pipeline to which the authorisation relates; and section 17F and subsections (1) to (5) above shall have effect for this purpose as if references to a pipeline and the owner of it were references to the proposed pipeline and the proposed owner of it.

(7) Before serving a notice under section 16(1) on a person other than the owner of the relevant pipeline, the Secretary of State shall give that person particulars of the modifications which he proposes to specify in the notice and an opportunity to make applications under section 17F in respect of the pipeline; and section 17F and subsections (1) to (5) above shall have effect for this purpose as if references to a pipeline were references to the pipeline as it would be with those modifications.

(8) The use of a pipeline by any person in accordance with a right secured to him by the Secretary of State by virtue of section 17F is not a contravention of section 14(1); but a person to whom a right is so secured may not assign the right to any other person.

Enforcement

21.- (1) Any person who-

a. contravenes any provision of section 14(1); or

b. contravenes any provision of a notice under section 16, 17 or 17F(9) served on him in his capacity as the owner of the pipeline to which the notice relates in a case where no authorisation for the use of the pipeline is required by section 14(1); or

c. makes a statement which he knows is false in a material particular, or recklessly makes a statement which is false in a material particular, for the purpose of inducing the Secretary of State-

i. to issue any authorisation; or

ii. to agree under section 18(1)(b) that an authorisation is to cease to be in force; or

iii. to specify a period under section 18(3)(b); or

iv. not to serve a notice under section 18(6),

shall be guilty of an offence and liable on summary conviction to a fine not exceeding the statutory maximum or on conviction on indictment to a fine.

(2) If a person executes any works in contravention of section 14(1) the Secretary of State may at any time serve on him a notice requiring him to remove such of the works as are specified in the notice as works to be removed.

(3) The recipient of a notice under subsection (2) shall comply with the notice within the period specified in the notice; and if he fails to do so the Secretary of State may comply with the notice on his behalf and recover from him any expenses reasonably incurred in doing so.

(4) If a person executes any works in contravention of section 14(1) and the Secretary of State considers that it is urgently necessary to do such things in relation to the works as he could have required that person to do by a notice under subsection (2), the Secretary of State may do those things and recover from that person any expenses reasonably incurred in doing so.

(5) The fact that anything is done or omitted-

a. by the recipient of a notice under subsection (2) for the purpose of complying with the notice; or

b. by the Secretary of State under subsection (3) or (4),

shall not relieve him from liability for any damage which is attributable to the act or omission and for which he would have been liable had the act or omission not been authorised by this section; but the Secretary of State shall be entitled to recover from the person who executed the works in question the amount of any damages which, in consequence of the works, are paid by the Secretary of State by virtue of this subsection.

Extract from section 27 (Meaning of "owner")

(1A) For the purposes of this Part of this Act (other than section 16, section 17(1) and the first reference in section 17F(2)), in the case of downstream gas pipelines and controlled petroleum pipelines-

"owner" in relation to a pipeline includes a person in whom the pipeline is vested; and a person who has the right to use capacity in the pipeline, where such right has been acquired by that person on terms that-

(a) he is entitled to use the capacity for a period of one year or more; and

(b) the right is capable of being assigned or otherwise disposed of to another person; and

"proposed owner" in relation to a proposed pipeline includes a person in whom the pipeline is proposed to be vested.

Extract from section 28(1)

"controlled petroleum pipeline" means any controlled pipeline or one of a network of controlled pipelines operated or constructed as part of a petroleum production project or used to convey petroleum from the site of one or more such projects-

a. directly to premises, in order for that petroleum to be used at those premises for power generation or for an industrial process;

b. directly to a place outside Great Britain;

c. directly to a terminal; or

d. indirectly to a terminal by way of one or more other terminals, whether or not such intermediate terminals are of the same kind as the final terminal;

"controlled pipeline" and "controlled waters" have the meanings given to them by section 14;

"gas processing facility" means any facility in Great Britain operated otherwise than by a public gas transporter which carries out gas processing operations;

"petroleum" has the same meaning as in Part I of this Act, and includes petroleum which has undergone any processing;

"petroleum production project" means a project carried out by virtue of a licence granted under section 3, or an equivalent project in a foreign sector of the continental shelf, and includes such a project which is used for the storage of gas;

"public gas transporter" means a public gas transporter within the meaning of Part I of the Gas Act 1986;

"terminal" includes-

a. onshore facilities in the United Kingdom for such initial blending and other treatment as may be required to produce stabilised crude oil and other hydrocarbon liquids to the point at which a seller could reasonably make a delivery to a purchaser of such oil and liquids;

b. gas processing facilities; and

c. a facility for the reception of gas prior to its conveyance to a place outside Great Britain;

2.2 The Pipe-lines Act 1962

Additional provisions relating to certain gas pipe-lines

10C.- (1) The owner of a gas pipe-line to which this section applies (a "relevant gas pipe-line") -

a. shall publish at least once in every year the main commercial conditions relating to the grant to another person of a right to have gas conveyed in the pipe-line on that person's behalf; and

b. shall publish any changes to the published conditions as soon as they become effective.

(2) In subsection (1) "year" means any year ending with 9 August.

(3) The owner of a relevant gas pipe-line shall ensure that the conditions which he is required to publish under subsection (1) do not discriminate against any applicants or descriptions of applicants, or any potential applicants or descriptions of potential applicants, for a right to have gas conveyed in the pipe-line.

(4) Any person who seeks a right to have gas conveyed on his behalf in a relevant gas pipe-line ("the applicant") shall, before making an application to the Secretary of State under section 10, apply to the owner of the pipe-line by giving him notice of what is being sought.

(5) Such a notice shall, in particular, specify-

a. the kind of gas to be conveyed (which must be of the kind the pipe-line is designed to convey); and

b. the quantities of gas to be conveyed.

(6) Where an applicant gives notice under subsection (4), he and the owner of the pipe-line shall negotiate in good faith and endeavour to reach agreement on the application.

(7) If the owner and the applicant do not reach any such agreement, the applicant may make an application to the Secretary of State under section 10 with respect to the pipe-line.

(8) The Secretary of State shall not entertain such an application under section 10 unless he is satisfied that the parties have had a reasonable time in which to fulfil their duties under subsection (6).

(9) For the purpose of considering an application under section 10 with respect to a relevant gas pipe-line, the Secretary of State may by notice require the owner or

the applicant to provide him with such financial information relating to the owner's or applicant's activities with respect to relevant gas pipe-lines as he may specify or describe in the notice.

(10) The Secretary of State shall not disclose to any person information obtained under subsection (9) without the consent of the person by or on behalf of whom it was provided, unless he is required to do so by virtue of any obligation imposed on him by or under any enactment.

(11) In this section "main commercial conditions" means-

a. such information as would enable a potential applicant for a right to have gas conveyed in a relevant gas pipe-line to make a reasonable assessment of the cost of, or the method of calculating the cost of, acquiring that right;

b. the other significant terms on which such a right would be granted; and

c. such other information as the Secretary of State may from time to time specify by notice.

Enforcement of certain duties in section 10C

10D.-(1) The duty in section 10C(6) shall be a duty owed to any person who may be affected by a failure to comply with it

(2) Where a duty is owed by virtue of subsection (1) to any person, any breach of the duty which causes that person to sustain loss or damage shall be actionable at the suit or instance of that person.

(3) In any proceedings brought against a person in pursuance of subsection (2), it shall be a defence for him to prove that he took all reasonable steps and exercised all due diligence to avoid contravening the duty.

(4) Compliance with the duties in section 10C(1) and (3) shall be enforceable by civil proceedings by the Secretary of State for an injunction or interdict or other appropriate relief or remedy.

Provisions for securing that upstream petroleum pipe-lines are so used as to reduce necessity for construction of others.

10E.- (1) This section applies to upstream petroleum pipe-lines.

(2) Any person who seeks a right to have things conveyed by an upstream petroleum pipe-line of which he is not the owner ("the applicant") shall, before making an application to the Secretary of State under subsection (5), apply to the owner of the pipe-line for the right.

(3) An application under subsection (2) shall be made by giving notice to the owner specifying what is being sought.

(4) Such a notice shall, in particular, specify-

a. the kind of things to be conveyed (which must be of a kind the pipe-line is designed to convey); and

b. the quantities to be conveyed.

(5) If the owner and the applicant do not reach agreement on the application, the applicant may apply to the Secretary of State for a notice under subsection (9) securing to the applicant the right to have conveyed by the pipe-line in respect of which he has made an application to the owner under subsection (2) the quantities specified in the notice under subsection (3) of things of a kind so specified.

(6) The Secretary of State shall not entertain an application under subsection (5) unless he is satisfied that the parties have had a reasonable time in which to reach agreement between themselves on the application under subsection (2).

(7) Where a person applies to the Secretary of State under subsection (5) and the Secretary of State is satisfied as mentioned in subsection (6), the Secretary of State shall serve on the owner of the pipe-line and the applicant notice of the time (being some time not less than twenty-one days from the date of the service of the notice) at which the question of conferring on the applicant the right sought by him will be considered by the Secretary of State, and the owner and the applicant shall be entitled to be heard when that question is so considered.

(8) When considering the application, the Secretary of State shall (so far as relevant) take into account-

a. capacity which is or can reasonably be made available in the pipe-line in question;

b. any incompatibilities of technical specification which cannot reasonably be overcome;

c. difficulties which cannot reasonably be overcome and which could prejudice the efficient, current and planned future production of petroleum;2

d. the owner's reasonable needs for the transport and processing of petroleum;1

e. the interests of all users and operators of the pipe-line; f. the need to maintain security and regularity of supplies of petroleum; and g. the number of parties involved in the dispute.

(9) Where the Secretary of State is satisfied that, if he served a notice under this subsection, the pipe-line in question could be operated in accordance with the notice without prejudicing its efficient operation for the purpose of conveying, on behalf of its owner, the quantities of things which the owner requires or may reasonably be expected to require, the Secretary of State may serve such a notice on the owner and the applicant.

(10) A notice under subsection (9) may contain such provisions as the Secretary of State considers appropriate for any of the following purposes-

a. to secure to the applicant the right to have conveyed by the pipe-line the quantities specified in the notice under subsection (3) of the things of a kind so specified;

b. to secure that the exercise of the right is not prevented or impeded;

c. to regulate the charges which may be made for the conveyance of things by virtue of the right; and

d. to secure to the applicant the right to have a pipe-line of his connected to the pipe-line by the applicant or owner.

(11) A notice under subsection (9) may also authorise the owner to recover from the applicant payments by way of consideration for any right mentioned in subsection (10)(a) or (d) of amounts specified in the notice or determined in accordance with the notice.

Section 10E: supplemental

10F.-(1) For the purpose of considering an application under section 10E(5), the Secretary of State may by notice require the owner or the applicant to provide him with such information relevant to the application as may be specified or described in the notice.

(2) The information mentioned in subsection (1) may, in particular, include financial information relevant to the owner's or the applicant's activities with respect to petroleum production projects and upstream petroleum pipe-lines.

(3) The Secretary of State shall not disclose to any person any information obtained under subsection (1) without the consent of the person by or on behalf of whom it was provided, unless he is required to do so by virtue of any obligation imposed on him by or under any enactment.

(4) If the owner of a pipe-line fails to comply with a requirement imposed by a notice served under section 10E(9) with reference to the pipe-line he shall be guilty of an offence and liable, on summary conviction, to a fine not exceeding level 5 on the standard scale; and, if the failure continues after his conviction, he shall be guilty of a further offence and liable, in respect thereof, to a fine not exceeding twenty-five pounds for each day on which the failure continues.

Extract from section 66(1)

"gas pipe-line" means -

a. a pipe-line, other than an upstream petroleum pipe-line, which is used to convey gas to premises or to a pipe-line system operated by a public gas transporter and in respect of which an exemption has been granted by or under the Gas Act 1986 from the requirement for a public gas transporter's licence; or

b. an interconnector;

"gas processing facility" means any facility in Great Britain operated otherwise than by a public gas transporter (within the meaning of Part I of the Gas Act 1986) which carries out gas processing operations;

"gas processing operation" means any of the following operations, namely-

a. purifying, blending, odorising or compressing gas for the purpose of enabling it to be introduced into a pipe-line system operated by a public gas transporter (within the meaning of Part I of the Gas Act 1986) or to be conveyed to an electricity generating station, a gas storage facility or any place outside Great Britain;

b. removing from gas for that purpose any of its constituent gases, or separating from gas for that purpose any oil or water; and

c. determining the quantity or quality of gas which is or is to be so introduced, or so conveyed, whether generally or by or on behalf of a particular person;

"interconnector" means a pipe-line, other than an upstream petroleum pipe-line or a pipe-line operated by a public gas transporter (within the meaning of Part I of the Gas Act 1986), which is used to convey gas to or from a place outside Great Britain

"owner" --

(c) in relation to a pipe-line, means the person in whom the pipe-line is vested and, for the purposes of section 10 in the case of gas pipe-lines only (other than section 10(1)), and for the purposes of sections 10B to 10F (other than the first reference in section 10E(2)), includes a person who has the right to use capacity in the pipe-line, where such right has been acquired by that person on terms that-

i. he is entitled to use the capacity for a period of one year or more; and

ii. the right is capable of being assigned or otherwise disposed of to another person;

"petroleum" includes any mineral oil or relative hydrocarbon and natural gas existing in its natural condition in strata, whether or not it has undergone any processing; but does not include coal or bituminous shales or other stratified deposits from which oil can be extracted by destructive distillation;

"petroleum production project" means a project carried out by virtue of a licence granted under section 3 of the Petroleum Act 1998, or an equivalent project in a foreign sector of the continental shelf, and includes such a project which is used for the storage of gas;"

1. "terminal" includes-

a. facilities for such initial blending and other treatment as may be required to produce stabilised crude oil and other hydrocarbon liquids to the point at which a seller could reasonably make a delivery to a purchaser of such oil and liquids;

b. gas processing facilities; and

c. a facility for the reception of gas prior to its conveyance to a place outside Great Britain;

"upstream petroleum pipe-line" means a pipe-line or one of a network of pipe-lines operated or constructed as part of a petroleum production project or used to convey petroleum from the site of one or more such projects-

a. directly to premises, in order for that petroleum to be used at those premises for power generation or for an industrial process;

b. directly to a terminal; or

c. indirectly to a terminal by way of one or more other terminals, whether or not such intermediate terminals are of the same kind as the final terminal.

2.3 The Gas Act 1995

Acquisition of rights to use gas processing facilities

12.- (1) The owner of a gas processing facility -

a. shall publish at least once in every year the main commercial conditions relating to the grant to another person of a right to have gas processed by the facility on that person's behalf; and

b. shall publish any changes to the published conditions as soon as they become effective.

(1A) In subsection (1) "year" means any year ending with 9th August.

(1B) Any person who seeks a right to have gas processed on his behalf by a gas processing facility ("the applicant") shall, before making an application to the Secretary of State under subsection (1F), apply to the owner of the facility for the right.

(1C) An application under subsection (1B) shall be made by giving notice in writing to the owner specifying what is being sought.

(1D) The notice shall, in particular, specify-

a. the period during which the gas is to be processed by the facility;

b. the kind of gas to be processed (which must be of, or similar to, the kind which the facility is designed to process); and

c. the quantities of gas to be processed.

(1E) Where a person gives notice under subsection (1C), he and the owner of the gas processing facility shall negotiate in good faith and endeavour to reach agreement on the application.

(1F) If the owner and the applicant do not reach any such agreement, the applicant may apply to the Secretary of State for directions under this section which would secure to the applicant the right specified in the notice under subsection (1C).

(1G) The Secretary of State shall not entertain such an application unless he is satisfied that the parties have had a reasonable time in which to fulfil their duties under subsection (1E).

(2) Where an application is made under subsection (1F), it shall be the duty of the Secretary of State -

a. to decide whether the application is to be adjourned (so as to enable further negotiations to take place), considered further or rejected;

b. to give notice of his decision to the applicant; and

c. in the case of a decision that the application is to be considered further, to give to the owner of the facility, to any person who has a right to have gas processed by the facility, and to the Health and Safety Executive, notice that the application is to be so considered and an opportunity of being heard about the matter.

(3) Where, after further considering an application under subsection (1F), the Secretary of Stare is satisfied that the giving of directions under this section would not prejudice the efficient operation of the facility, or the processing by the facility of -

a. the quantities of gas which the owner of the facility or any associate of the owner requires or may reasonably be expected to require to be processed by the facility for the purposes of any business carried on by him; and

b. the quantities of gas which any person who is not such an associate and has a right to have gas processed by the facility is entitled to require to be so processed in the exercise of that right,

the Secretary of State may give such directions to the owner of the facility.

(4) Directions under this section may-

a. specify the terms on which the Secretary of State considers the owner of the facility should enter into an agreement with the applicant for all or any of the following purposes -

i. for securing to the applicant the right to have processed by the facility, during the period specified in the directions and in the quantities so specified, gas which is of a kind so specified;

ii. for securing that the exercise of that right is not prevented or impeded;

iii. for regulating the charges which may be made for the processing of gas by virtue of that right;

iv. for securing to the applicant such ancillary or incidental rights as the Secretary of State considers necessary or expedient, which may include the right to have a pipe-line of his connected to the facility by the owner;

b. specify the sums or the method of determining the sums which the Secretary of State considers should be paid by way of consideration for any such right; and

c. require the owner, if the applicant pays or agrees to pay those sums within a period specified in that behalf in the directions, to enter into an agreement with him on the terms so specified.

(5) Section 22 of the 1986 Act (effect of directions) shall apply in relation to-

a. any directions under this section as it applies in relation to any directions under section 19, 19B(11), 19D(11) or 21(1) of that Act; and

b. any obligation to comply with the duty in subsection (1E) as it applies in relation to any obligation to comply with the duties in sections 19B(7) and 19D(7) of that Act;

and in subsection (4) of section 22 of the 1986 Act as applied by this subsection the reference to the Director shall be to the Secretary of State.

(5A) Compliance with the duty in subsection (1) shall be enforceable by civil proceedings by the Secretary of State for an injunction or interdict or for any other appropriate relief or remedy.

(6) In this section -

"gas" means any substance which is or (if it were in a gaseous state) would be gas within the meaning of Part I of the 1986 Act;

"gas processing facility" means any facility which carries out gas processing operations and which is operated otherwise than by a public gas transporter;

"gas processing operation" means any of the following operations, namely -

a. purifying, blending, odorising or compressing gas for the purpose of enabling it to be introduced into a pipe-line system operated by a public gas transporter or to be conveyed to an electricity generating station, a gas storage facility or any place outside Great Britain;

b. removing from gas for that purpose any of its constituent gases, or separating from gas for that purpose any oil or water; and

c. determining the quantity or quality of gas which is or is to be so introduced, or so conveyed, whether generally or by or on behalf of a particular person, and "process", in relation to gas, shall be construed accordingly;

"main commercial conditions" means -

a. such information as would enable a potential applicant for a right to have gas processed by a gas processing facility to make a reasonable assessment of the cost of, or the method of calculating the cost of, acquiring that right;

b. the other significant terms on which such a right would be granted; and

c. such other information as the Secretary of State may from time to time specify by notice;

"owner", in relation to a gas processing facility, includes a lessee and any person occupying or having control of the facility;

"pipe-line" has the same meaning as in the Pipe-lines Act 1962;

"public gas transporter" has the same meaning as in Part I of the 1986 Act.

(6A) Subsections (1) to (3) of section 49 of the Pipe-lines Act 1962 (service of documents) shall apply for the purposes of this section as they apply for the purposes of that Act.

(7) For the purposes of this section a person is an associate of the owner of a gas processing facility if

a. both of them are companies; and

b. one of the companies has control of the other, or both are under the control of the same person or persons;

and subsections (2) to (5) of section 416 of the Income and Corporation Taxes Act 1988 shall apply for the purposes of paragraph (b) above as they apply for the purposes of Part XI of that Act.

(8) In relation to any time before the appointed day, this section shall have effect as if for the words "public gas transporter", in each place where they occur, there were substituted the words "public gas supplier".

1. This includes the need for owners to make reasonable provision of capacity for their own future use. (In Annex B to this Code (the definitions section), "reasonable" is defined by example.)

2. This includes sterilising capacity to provide other services within the system (in addition to the capacity actually requested) as a result of accepting the particular request for service. Examples would be: where taking in a small field could reduce the ullage [i.e. spare capacity] to the extent that a current negotiation with a large field could not be completed; in circumstances where a particular small field consumes all of the, say, de-propanising capacity at an oil treating facility thus preventing the use of upstream capacity which would otherwise be available; where a sour gas field would, by coming in, preclude the owners from a future opportunity to operate the system sweet.

3. This includes the need to honour all existing contractual commitments - an environment in which contracts which were freely entered into are respected is essential for business; and the effect on existing users. For example, accommodating a new user may cause compression suction pressure to rise which would have a material detrimental impact on the deliverability of the existing fields.

Annex B

Definitions

Allocation, attribution and substitution

Allocation

The allocation process entails working out how much of the total volume of gas of a given energy value flowing out of a terminal and into the onshore transmission system has been input by individual fields feeding into that system. An example of such a process is given below:

Field Allocated Volume
A 30
B 50
C 20
Total 100

Substitution

This occurs when a field produces gas to satisfy the gas sales nomination of another field. In the above example this could be as follows:

Field Sales Nomination Allocated Volume Substitution
A 50 30 +20
B 30 50 -20
C 20 20 0
Total 100 100 0

i.e. Field B is substituting 20 units to Field A.

Attribution

This takes account of the amounts substituted between fields as follows:

Field Sales Nomination Allocated Volume Substitution Attributed Volume
A 50 30 +20 50
B 30 50 -20 30
C 20 20 0 20

Allocated volume approximates how much a field has produced. The Attributed volume approximates how much a field has sold (which may all have been produced by that field or may include a volume of Substitution from another field).

Bona fide enquirers

A genuine enquiry for access or services made in good faith. In practice, these will be established by whether the potential user has a locus under the Petroleum Act 1998, Pipe-lines Act 1962 or the Gas Act 1995 and so the concept should be self-regulating.

Coverage of the Code of Practice

The Code of Practice applies to all existing and future infrastructure on the UK Continental Shelf used or capable of use in the hydrocarbon chain from well-head to the receiving terminal and processing facilities. It includes initial reception blending and other processing required to produce stabilised crude and other hydrocarbon liquids to the point at which the seller in a sale at arm's length could reasonably make delivery. For natural gas it includes processing facilities, and onshore terminals and pipelines which handle gas prior to its introduction into a pipeline distribution system operated by a public gas transporter (including Transco's National Transmission System) or to an interconnector .

Existing contractual commitments

Pre-existing contracts to transport or process oil or gas.

Indicative terms

These terms include, but are not limited to, a price/tariff given by infrastructure owners to potential users within 10 working days of an application to access their infrastructure. It does not constitute an offer capable of acceptance, but such a price/tariff will be offered in good faith as an indication that the owner is willing to negotiate terms on that basis.

Non-discriminatory negotiated access

Non-discrimination in this context does not mean setting fixed common prices for particular services. Non-discrimination refers to the framework by which different companies and interests gain access to infrastructure. Under the Code infrastructure owners should not, by virtue of their ownership, discriminate by giving special preference to particular companies or agents. Infrastructure owners, however, can make 'reasonable' provision for future use as illustrated below .

Owner

In general, this means a party who owns physical infrastructure assets (pipelines, platforms or terminals) and/or a party who owns capacity rights in those physical assets but does not own the asset itself. Specific definitions of "owner" in relation to pipelines are given in section 27(1A) of the Petroleum Act 1998 and in section 66(1) of the Pipe-lines Act 1962 and in relation to gas processing facilities in section 12(6) of the Gas Act 1995 (see Annex A).

Reasonable provision of capacity

Owners of infrastructure are entitled to make reasonable provision of capacity for their own future use. "Reasonable" in this context is not capable of exhaustive definition and is therefore illustrated here by example.

It includes:

Reasonable provision would not include, for example, deliberately refusing access in order to deny market access to a competitor or to gain some other market advantage. Nor would it seem reasonable for an infrastructure owner to refuse access on the basis that the owner will have a requirement for it in time for some as yet unidentified purpose.

Unbundling

Separating out services or activities in the hydrocarbon transportation/processing supply chain from reservoir to redelivery point that may be offered by more than one company so that each significantly distinct component can be separately identified, costed, priced, valued and provided.

User

A party who has contracted to use (or has a bona fide intention to enter into a contract to use) offshore infrastructure covered by this Code, who is not the owner.

Annex D

[This is a wholly new Annex]

Main commercial conditions of access

Main commercial conditions should contain at least the following:

The method by which an application for access is to be made (taking into account the obligations placed on applicants by section 12 of the Gas Act 1995 and section 10C of the Pipe-lines Act 1962);

The normal timescale within which the owner will respond to requests for access and, assuming that the applicant supplies all relevant information in the first instance, within which an indicative tariff will be given;

Examples of tariffs;

The methods the owner will use to set the tariff (see section 12 of the Gas Act 1995 and section 10C of the Pipe-lines Act 1962);

Technical and operating requirements for access;

Requirements on environmental protection and safety;

General contractual terms and conditions on use of the infrastructure and on payment;

Restrictions on access which may arise as a result of existing contractual arrangements or capacity constraints;

Indications of information which will generally be made available to an applicant (e.g. allocation, attribution and substitution procedures) and the owner's right to recover additional costs resulting from additional information and/or services being made available; and

A requirement that this Code should be followed.

Annex 2

Offshore infrastructure Code of Practice: Interim review (1997)

The following is a summary of comments received from the offshore community on the operation of the Code of Practice in response to David Saunders's letter of 6 October 1997:

General

UKOOA note that the Code has been widely adopted by the industry and continues to be supported by UKOOA member companies, who were extensively involved in its development, in its present form. A substantial portion of infrastructure requests are now made and responded to in close conformance with the timetables and mechanisms of the Code and are subsequently reported to the DTI for publication in Energy Trends. In addition, however, a significant number of approaches are made to some infrastructure owners by companies who specifically request a more informal approach. UKOOA say that experience is that these less formal requests are handled with equal diligence by infrastructure owners and in accordance with the fundamental principles of the Code.

Company 1 say that their experience of the Code has been a positive one and they continue to support the intent and actions required of them as an operator.

Company 2 believe that, in general, the Code is working well and they support its continued use in its present form. They note that they support UKOOA's response.

BP (owner and operator of the Forties Pipeline System, FPS) is fully committed to complying with all aspects of the Code concerning access to offshore infrastructure. It sets the overall context within which FPS manages its dealings and relationships. All requests for the use of capacity will be considered without favour to any particular company or client, taking into account all existing contractual commitments and making reasonable provision of future capacity for BP's own use. Terms of access will be commercially negotiated with appropriate separation of services and within a framework of transparency and standardisation. FPS is in negotiation with a number of customers at any point in time and these negotiations are conducted within the framework set out in the Code. The principles of the Code are incorporated within FPS's published customer care standards against which their performance is measured.

Overall, Company 4 believe that the Code has provided a framework which has operated effectively in respect of their infrastructure discussions as both an owner of infrastructure and as operator of fields seeking to use infrastructure. They believe that the existence of the Code has conditioned negotiations to the extent that, even if the timescales indicated in it are not actually followed, both parties are more conscious of the need to agree a timetable which is consistent with the needs of both parties, particularly as it may affect the incoming field's development schedule.

Company 5 note that enquiries for access to infrastructure are not always, or even predominantly, based on a 'standard' service. Therefore, in order to respond to an enquiry for transportation and/or processing services, approval for any indicative offer is required from both internal management and co-venturers. The tight time limits scheduled by the Code often prove difficult to attain bearing in mind this inherent time-consuming, but strictly necessary, approval process. Notwithstanding this, they say that, overall, the Code would seem to provide useful guidelines for both the enquirer and the infrastructure owner in order to respond to an enquiry in a fair and timely manner.

Company 6 note that they had a number of concerns during the development of the Code but were able to support it in its final form. Their experience of using the Code has generally been satisfactory but some of their original concerns remain. For example, they pointed out at an early stage of discussions that introduction of the Code could add an administrative burden in an area where commercial negotiations generally work well. In practice, they have indeed found a tendency for some companies to make requests for tariffs even where there is virtually no likelihood of subsequent follow up. They also raised concerns about the practicality of the short timetable set by the Code for indicative offers. They say that it has proved difficult in some cases to meet the required timetable, particularly when many co-owners are also involved. Despite their continuing concerns, they say that they continue to hold the view that there is active and strong competition between the various liquids and gas transportation and processing systems in the UK and they reiterate their ongoing support for the Code in its present form.

Company 7 have no evidence that the Code is not working well or that it is faulty in any respect. They are sure that in certain circumstances it is effective in ensuring the relevant parties behave satisfactorily. They support the view held by the DTI in the past that the application of the Code is much preferred to any formal regulation. They believe that this should remain the case, especially as there is little, if any, evidence that the Code is failing. If there is any criticism at all, it is that the emphasis is very much directed at the infrastructure owner. This is not surprising as it is perceived as having control over the use by others of its assets. As a matter of balance, however, they believe that it is no less important that a party seeking access should be doing so on a bona fide basis and is willing to disclose all the information that is pertinent to securing a meaningful proposal from the system owners. There can be many matters which an offshore infrastructure owner needs to bear in mind when indicating the availability of capacity and the terms that may be relevant. In Company 7's experience (on each side of the negotiating table), the parties involved have usually taken a mature and sympathetic approach to the issues affecting each other, although sometimes these can take a little while to emerge. They note that the nature of offshore production (whether gas or liquids) usually requires very careful consideration of the effects of commingling or slugging, arising from the mixing of gas or liquids of different qualities, to ensure that product streams reliably remain within delivery specifications for ultimate sales. The parties involved are usually the best placed to examine all such matters. Company 7 believe that regulations addressing open access are inappropriate when the existing and new streams are likely to have material differences in quality and composition, requiring special attention to operating and processing details. They believe that the current Code is an appropriate mechanism for application to the offshore regime. It allows for differences to be taken into account whilst striving for non-discriminatory negotiated access and a degree of price transparency. To date, they consider that the existing Code achieves that end and they have no evidence of any anti-competitive practice. They continue to support in its present form since it provides the framework to ensure that unacceptable behaviour is likely to receive the attention of the DTI. They also note their support for UKOOA's response.

Company 8 note that they have had recourse to the Code on a number of occasions, both as an operator and as a third party user of infrastructure in both the Southern and Northern North Sea. In general, they have found the Code an assistance in the negotiation process. With a minor exception, it has improved the response time to requests for both information and commercial terms. Based on admittedly limited experience, their main concern is the lack of definition provided by requesters at the outset of discussions. As operator they have found that a prospective user may have a relatively undefined project, covering any number of options over a wide range of possible reserves and production levels, and require a suite of indicative tariff offers in fairly short order. This can lead to undue emphasis being placed on making such offers, which may prove meaningless once the final development plan is finalised, rather than having a more meaningful discussion on the main options and their impact on the kind and level of service required. Company 8 note their support for the Code as an adjunct to the commercial process.

Company 9 note that the fact that the Code exists does facilitate and streamline negotiations between infrastructure owners and potential users, particularly in situations in which the infrastructure owner has spare capacity but does not wish to provide the service requested. However, the short time allocated in which to respond to a request under the Code gives infrastructure owners little choice but to put forward pre-approved tariff levels which, in all likelihood, are excessive, in order to secure the appropriate negotiation leverage. To allow an individual assessment of each request, Company 9 argue that the infrastructure owners should be afforded a minimum of 30 days in which to respond. Infrastructure owners may also choose to submit a high initial offer knowing that it will be published. Clearly, historical tariffs published under the Code could adversely impact future negotiations if and when market conditions change. This may explain the fact that published tariffs often differ from final negotiated levels.

Company 10 say that, in their view, the Code has worked well in achieving the objective of non-discriminatory access to offshore infrastructure. The Code has been integrated into their normal processes for initial contact with third parties for indicative tariffs and capacity availability. As a result, negotiations between owners of infrastructure and prospective customers have been facilitated. The Code has generally worked well and they highlight the following areas: the infrastructure owner and the service requester interests are balanced in that the Code outlines the obligations of the owner and therefore the expectations of the requester; the Code provides for DTI facilitation between companies and they have been able to work with the DTI to reach an understanding on areas where the Code is unclear; the Code helps speed up initial discussions and initial tariff offers have been speeded up, although the 10 day period has proved difficult in areas where a large number of co-owners are involved and they recommend some flexibility on the time limit in cases where there are many co-venturers (ie moving to a 15 day initial notice period to allow complete agreement amongst large numbers of co-owners).

Company 10 have identified a number of points of concern based on their experience of the operation of the Code. These include publication of tariffs produced at certain stages of a negotiation and the need to produce tariffs where capacity is sterilised. On the latter point, they note that the Code provides for owners to consider sterilisation of capacity and deferral of own production in their offer. They have found that, where the full financial effects of sterilisation and deferral are high, the offer can become both unrepresentative and un-commercial. They believe that unrepresentative tariffs send confusing messages to prospective enquirers and should be avoided and that non-commercial tariffs consume precious resources in preparation. Infrastructure owners should have the option of declining such a tariff in concept before it is prepared.

Company 10 propose that the DTI could provide some feedback on how a company has performed under the Code, both from themselves and also how other companies perceive them. They propose that the DTI could publish clarifications, or guidance notes, to the Code on substantive issues that they have discussed and agreed with other companies. They also propose that, at the start of any facilitation exercise, the boundaries ahead should be clear to all parties.

In general, Company 11 (as a pipeline operator) have found that the Code provides a clear and useful mechanism for channelling third party requests for access. In their limited experience, the suggested timescales for responding to requests have proved difficult to meet, not least due to the time required for third party multi-partner groups to get past the stage of agreeing and signing a confidentiality agreement.

Publication of indicative tariffs

UKOOA note that, at the time of the development of the Code, concern was raised by member companies about publication of indicative tariffs. There was both a general concern that publication could create misleading signals which could hinder normal commercial negotiations and a more specific concern that publication may prejudice pipeline owners versus owners of offshore loading systems, where publication of tariffs is not required. These concerns remain, but do not detract from the overall support from UKOOA member companies for the Code in its current form.

Company 4 have no particular concerns on the publication of indicative tariffs, as long as those reviewing the data are always aware of the basis for the numbers in the table. They believe that reporting to the DTI of the issue of indicative tariff information should occur by exception rather than all companies being expected to advise the DTI, albeit verbally, that they have not issued any indicative tariffs for a certain period.

During the development of the Code, Company 6 were concerned that publication of indicative tariffs may mislead and that, by causing a potential user to pause and query an offer of terms, may actually delay the negotiation of access. They continue to hold the view that publication of indicative tariffs is potentially misleading and does not help the process of commercial negotiation. They ask that these concerns be reconsidered.

Company 10 note that the Code envisaged that only the initial offer, not capable of acceptance, is indicative and therefore published in Energy Trends. In practice, they find that at significant milestones in a negotiation, say if the development options widen to include both a platform and an FPS, a tariff may be requested again. In such cases they would regard these offers as indicative and forward them to the DTI for publication.

Company 11 say that the tariff publications in Energy Trends provide an interesting reference, although in some cases it appears that the indicative numbers represent an initial negotiating position rather than providing a true guide on the cost of transportation and processing.

Is the Code used only as a measure of last resort or, as originally envisaged, as part of the normal process?

Company 1 say that, while their experience of this is varied, it is consistently the case that the Code offers an industry-accepted safeguard to prevent tardiness. Introduction of the Code has, in the main, encouraged operators and their co-venturers to prepare for the eventuality of third party requests to access their infrastructure. Consequently, many companies have developed off-the-shelf heads of terms which serve as a useful basis to initiate negotiations. It is not the case that the Code is used as a "threat", merely as a tool for guidance in the initial stages of developing a commercial proposal.

In Company 2's experience (based primarily on their experience as a pipeline operator) the Code is generally used as a part of the normal business process. However, not every potential user who makes an enquiry wants to use the process. For instance, a potential user may not want the industry to be aware that an enquiry has been made, since it may be possible to identify the likely source of an enquiry despite the anonymity of the report in Energy Trends. However, they do not believe that it is necessary to amend the information reported in order to make it less easy to identify the potential user.

Company 4 believe that, because the Code is assisting in the standardisation of the commercial processes and their completion in a mutually acceptable timeframe, it is achieving its main objectives. Whether it is seen as a last resort or not is not particularly material as long as the main objectives are met because of it.

Are there any aspects of the Code which lead to confusion or which you think are deficient?

Company 1 say that the tenor of the Code is clear. They argue that it would be difficult and perhaps impractical to make the Code more prescriptive with regard to the process following the issue of an indicative tariff and, in this respect, in most cases it provides the appropriate kick-start to discussions.

Company 2 find the Code to be clear and do not believe that there are areas that lead to any significant confusion. In particular, they believe that the 10 working day deadline for responding to enquiries is working well.

The pipeline they operate has managed to meet all requests within the stipulated deadline and has received very positive feedback from potential users regarding the speed and quality of its responses under the Code.

Company 9 have sought clarification on whether an operator needs to give an indicative tariff if the request is not made with reference to the Code.

Does it fail to address issues of concern, for example in its treatment of interruptible tariffs and offshore loading?

Company 1 note that the Code does not extend to offshore loading and processing systems (FPSOs) and they suggest some consideration be given to the possibility of addressing this.

To date, Company 4 have not had any reason to consider whether there are any problems with specialised tariffing arrangements (such as interruptible services or offshore loading) fitting in with the requirements of the Code.

Company 6 note that interruptible tariffs raise complex operational and commercial issues (in part because they potentially cover a wide range of levels of service) and it is their view that it would be inappropriate for the Code to lay specific requirements on owners to offer such tariffs, beyond the general requirement to act in a non-discriminatory manner and to negotiate on a commercial basis.

Company 10 believe that, because of the reputation risks of forcing another operator to flare gas (or shut down), an interruptible gas tariff is not an alternative when ullage in the infrastructure is not available and, therefore, that the Code should not require their use.

Is it failing to deal with any anti-competitive practices?

Company 1 argue that the provision for price transparency, in particular the unbundling or separation of services, encourages the infrastructure owners to put forward a competitive offer. However, in the instance where the infrastructure owners are the obvious and only option, the levels of tariff and commercial terms are always far from acceptable. This can often lead to a protracted period of negotiations and the resultant potential to delay developments if a pragmatic approach is not applied to resolve these differences.

Has your company sought an indicative tariff offer but not received one under the terms of the Code or received one out of line with a similar offer published in Energy Trends?

Company 1 argue that there clearly exist opportunities under the Code, whether real or manifest, where the owners of infrastructure can avoid providing indicative terms. In the event that this is due to a lack of capacity or provision for future capacity from surrounding equity developments one cannot have cause for complaint. However, the opportunity not to provide a tariff and terms could be used when the infrastructure operator/owner is also a co-venturer in the new development but does not support the timing or other aspects of the development. They say that such a conflict is, perhaps, an expected feature of the competitive and commercial environment in which they operate. Recent offers have in their experience been in line with previous indicative offers published in Energy Trends.

Responses from the offshore community were received as follows:

Respondent Date of respondent's letter
Mobil North Sea Limited 28 October
UK Offshore Operators' Association 31 October
Conoco Europe Gas Limited 31 October
Esso Exploration & Production UK 31 October
Phillips Petroleum Company United Kingdom Limited 31 October
Shell UK Exploration and Production 31 October
Elf Exploration UK plc 6 November
Total Oil Marine p.l.c. 6 November
Amerada Hess Limited 10 November
Marathon Oil U.K., Ltd. 12 November
Amoco (U.K.) Exploration Company 17 December

Additionally, BP's views on the Code have been taken from two Forties Pipeline System brochures, FPS Customer Care Standards and The Forties Pipeline System - providing integrated oil & gas liquids transportation for the North Sea.

One other response (which is not summarised above) was also received, on 10 October 1997, from Roger Turner of Turner & Co.

Responses summarised by Mike Earp, DTI, 18 February 1998

Annex 3

New legislative provisions in relation to onshore gas processing facilities/terminals and connecting pipelines

1. The Regulations implementing the Gas Directive into domestic legislation (the Gas (Third Party Access and Accounts) Regulations 2000 SI 2000/1937) made the following specific changes (in addition to others) to two existing Acts of Parliament to bring those Acts into line with the relevant downstream provisions of the Directive:

require owners of onshore gas processing facilities to publish, annually from 10 August 2001, the main commercial conditions on which they are prepared to grant access (and to publish any changes to those conditions as they become effective);

require applicants for access to apply in the first instance to the owner of the relevant facility;

require applicants for access and owners of relevant facilities to negotiate in good faith;

define, in broad terms, "main commercial conditions"

requires owners of relevant gas pipelines1 to publish, annually from 10 August 2001, the main commercial conditions on which they are prepared to grant access (and to publish any changes to those conditions as they become effective);

requires applicants for access to apply in the first instance to the owner of the relevant gas pipeline;

requires applicants for access and owners of relevant gas pipelines to negotiate in good faith;

defines, in broad terms, "main commercial conditions".

2. In both cases, the amendments include provisions allowing applications for dispute settlement to be made to the Secretary of State.

3. The access requirements of the downstream and upstream provisions of the Directive differ from each other in order to recognise the different characteristics of the respective sectors. The upstream provisions consequently list a number of specific factors which shall be taken into account in considering applications for the settlement of disputes (see Chapter 4 of this consultation document). Those factors do not appear in the Directive's downstream provisions. As a consequence of regarding onshore gas processing facilities/terminals and relevant connecting pipelines as downstream for the purposes of the Directive, the amended legislation applicable to such facilities and pipelines similarly does not contain the same specific factors for consideration as now appear in the amended legislation relevant to access to upstream pipelines (section 17F of the Petroleum Act 1998 and section 10E of the Pipe-lines Act 1962).

1 "gas pipeline" in this context means a pipeline, other than an upstream petroleum pipeline, which is used to convey gas to premises or to a pipeline system operated by a public gas transporter and in respect of which an exemption has been granted by or under the Gas Act 1986 from the requirement for a public gas transporter's licence.

Annex 4

Infrastructure access dispute resolution: Background on legislation parliamentary debate on petroleum and submarine pipelines bill 1975

1. In a Lords Committee debate on 15 October 1975 on what became section 17 of the Petroleum Act 1998, the Government of the day gave the following assurances on the use of the Secretary of State's powers to require access and to set a tariff:

pipeline owners would have all costs reimbursed, including indirect ones (e.g. the cost of interruption to the owner's throughput while a line is modified to enable third party use);

the tariff would be set so that the third party would bear a fair share of the total running costs incurred after his entry;

unless the supply in question were marginal or the pipeline owner had already made other sufficient arrangements to recover the full capital costs, the financial arrangements proposed would normally be expected to take account of the basic (historic) capital costs as well as the costs arising from the entry of the third party;

there were no circumstances in which, in those cases where the Secretary of State was called upon to intervene, the owner of a pipeline would be financially worse off through the admission of a third party.

2. The last point was seen as a fundamental, basic safeguard in such cases (which were expected to be the exception and not the rule). There is no intention to move away from that principle (or expectation).

International treaty provisions

3. More recently, the Governments of the UK and Norway have agreed a Framework Treaty Article 6 of which contains provisions on third party access and dispute settlement which broadly parallel the new provisions in section 17F of the Petroleum Act 1998 and section 10E of the Pipe-lines Act 1962 but which introduce the concepts of "fair commercial terms" and "relevant economic factors", which include costs relevant to the contract proposed, comparable tariffs and other conditions applied to the use of the pipeline.

4. There is a similar but not identical provision in Article 16 of the Frigg Treaty, which also covers the onshore terminal.

Annex 5

Infrastructure access dispute resolution: Flow chart on process

Annex 6

Consultation list

AGIP Dominic Whittome
AGIP John Bailey
Amerada Hess Lydia Latham
Aquila Energy Limited Jessica Fincham
Arthur Anderson Galina Carroll
BG International David Evans
BG plc I Priestner
BHP Petroleum Ltd Nick Witney
BP Amoco Gas Andy Laird
BRINDEX Sheenagh Kent
British Gas Trading Simon Goldring
CalEnergy Gas (UK) Mike Sparkes
Caminus Energy S Esau
Centrica plc Colin Lyle
Centrica plc G Mayhew
Chemical Industries Association K J Wey
Chevron UK Ltd Geoff Freter
CIECO Exploration and Production (UK) Ltd James Stockley
Confederation of British Industry Fiona Davies
Conoco (UK) Limited Amanda Goodwin
Department of Enterprise Trade and Investment J Beattie
DETR Nigel Foster
Dynergy UK Ltd M Goss
Eastern Generation M Turner
Eastern Power and Energy Training Annette Webster
Energy Intensive Users Group Jeremy Heywood
Enron Capital & Trade Resources Kyran P Hanks
Enterprise Oil UK Tim Trafford
Ernst & Young Stephanie Wood
European Commission (DG COMP) Michael Albers
European Commission (DG TREN) Christopher Jones
ExxonMobil Gas Marketing Keith Gutteridge
Gas Transportations Company Orson Pluck
Health & Safety Executive Barry Watkinson
Health and Safety Executive (SPDD1) Peter Roberts
HM Treasury A D Reed
Interconnector (UK) Ltd R Cornish
International Petroleum Executive N Aldridge
Kerr-McGee Oil (U.K.) plc Frank Sharratt
LASMO plc Andy Crouch
Major Energy Users Council John Hannam
Marathon Oil UK Ltd R Carter
Marathon Oil UK Ltd Mike Ash
National Assembly for Wales Ron Loveland
Non-Operators' Forum Alan Wiggett
Northern Ireland Office Grace McCullogh
Office of Fair Trading Ian Windle
OFGEM R Marriot
OMV (UK) Ltd Mike Tosdevin
Paladin Resources plc Cuth McDowell
PH Energy Analysis Patrick Heren
Phillips Petroleum Co.UK Ltd Brage Sandstad
PowerGen B Seabourne
Premier Oil plc Ray Brookes
Scotland Office Elizabeth Stark
Scottish and Southern Energy Plc V Hunter
Scottish Executive Mr Maguire
Scottish Power Beverley Ireland
Shell UK Exploration and Production Andy Proffitt
Shell UK Exploration and Production Wim Thomas
Society of British Gas Industries J Stiggers
South Coast Power Ltd J Smith
Statoil (UK) Limited J Slaughter
Summit UK Oil Ltd Alan Wiggett
Talisman Energy (UK) Ltd Paul Blakeley
Texaco North Sea Hugh D Falconer
The Gas Forum H Boyd
Total Fina Elf Andrew J Knights
TXU Upstream Europe Tony Deighton
UKOOA Mike Madden
UKOOA David Odling
UKOOA Ruth Parkhouse
UKOOG H Boyd
V-IS-On Gas Lisa Waters
Volunteer Energy Limited J D Ryan
Wales Office Anne Morrice

and all other UKCS licensees

Annex 7

The consultation criteria

The following criteria on consultations are taken from the Cabinet Office Code of Practice on written consultation.

1. Timing of consultation should be built into the planning process for a policy (including legislation) or service from the start, so that it has the best prospect of improving the proposals concerned, and so that sufficient time is left for it at each stage.

2. It should be clear who is being consulted, about what questions, in what timescale and for what purpose.

3. A consultation document should be as simple and concise as possible. It should include a summary, in two pages at most, of the main questions it seeks views on. It should make it as easy as possible for readers to respond, make contact or complain.

4. Documents should be made widely available, with the fullest use of electronic means (though not to the exclusion of others) and effectively drawn to the attention of all interested groups and individuals.

5. Sufficient time should be allowed for considered responses from all groups with an interest. Twelve weeks should be the standard minimum period for a consultation.

6. Responses should be carefully and open-mindedly analysed, and the results made widely available, with an account of the views expressed, and the reasons for decisions finally taken.

7. Departments should monitor and evaluate consultations, designating a consultation co-ordinator who will ensure the lessons are disseminated.

We confirm that we have complied with this Code in preparing this consultation. The complete Code is available on the Cabinet Office's web site, address: www.cabinet-office.gov.uk/servicefirst/index/consultation.htm. The Department of Trade and Industry consultation co-ordinator is:

Andrew Dobbie
Telephone: 020 7215 6509

Central Directorate
E-mail: Andrew.Dobbie@dti.gsi.dti.gov.uk 

Department of Trade and Industry
1 Victoria Street
London SW1H 0ET

to whom any comments or concerns about this consultation process should be addressed.

Back | Title | Table of Contents
Appendix 1 | Appendix 2 | Appendix 3 | Appendix 4 | Appendix 5 | Appendix 6 | Appendix 7 | Appendix 8 | Appendix 9
Appendix 10 | Appendix 11 | Appendix 12 | Appendix 13 | Appendix 14 | Appendix 15 | Appendix 16 | Appendix 17
Index Map | Plate 1 | Plate 2W | Plate 2E | Plate 3W | Plate 3E | Plate 4W | Plate 4E | Plate 5 | Plate 6
Plate 7 | Plate 8W | Plate 8E | Plate 9W | Plate 9E | Plate 10W | Plate 10E | Plate 11 | Plate 12 | Legend