Electrification projects on the Norwegian continental shelf – legal challenges and opportunities
Electrification of the Norwegian continental shelf (“NCS”) will significantly reduce Norway’s carbon emissions, and we expect to see a future increase in investments in electrification projects in the coming years. However, important clarifications from the Norwegian authorities are required in order to establish more predictability for such high value offshore grid investments.
Oil and gas production has traditionally been powered by way of gas turbines, which emit significant amounts of CO2. In a bid to reduce their carbon footprint, several NCS E&P companies have pledged to reduce emissions by 40% by 2030, and electrification of oil and gas production installations is expected to be a key measure to achieve that goal.
The most commonly used method to supply electrical power to an offshore production installation today, is by way of a single cable connecting an individual platform to the onshore electricity grid. These individual cables are installed, owned and operated by the license group owning the production installation it supplies, and have created limited legal challenges. However, as electrification of offshore installations becomes more prevalent, business- and socio-economic considerations dictate that it will often be preferable to supply power through a multi-user offshore grid instead of individual license-owned cables. For such multi-user offshore electricity grids, the legal framework is far from clear. This article therefore focuses on some of the legal challenges (and opportunities) arising in this regard.
Battle of laws in the cross field between Norwegian petroleum and energy legislation
Three separate statutory acts come into play when constructing and operating offshore multi-user grids supplying petroleum installations in Norway: the 1996 Petroleum Act, which applies to all petroleum activity, the 1990 Energy Act, which applies to production and transmission of electricity on land and in the ocean area inside the baselines, and the 2010 Offshore Energy Act, which applies to production and transmission of electricity in the ocean area outside the baselines.
The Offshore Energy Act would in our view be most suitable for regulating the operation of an offshore grid, based on its purpose. However, the Offshore Energy Act was fairly recently introduced, and still lacks detailed regulations of important issues. Regulations for the licensing phase were adopted in June 2020, but crucial regulations for the operational phase currently seem far away.
The Petroleum Act and the Energy Act are relevant per se. However, it remains to be seen whether the authorities will take the view that either of these acts apply directly to (parts of) an offshore grid, or whether their main importance will be as inspiration for future regulations under the Offshore Energy Act. In this regard, it is worth noting that the obligations of infrastructure owners are considerably different under these two laws, which will be elaborated on below.
Material impact of applicable framework– limitations of the contractual freedom
Both the Petroleum Act and the Energy Act contain regulations limiting the contractual freedom of natural monopoly infrastructure owners. The background and purpose of these restrictions are largely the same – for socio-economic reasons, as many users as possible should benefit from available infrastructure. Hence, there is a need both to establish access rights for third party users, and to limit the infrastructure owner’s possibility of exploiting its monopoly position to make unreasonably high returns.
The compensation for use of the infrastructure is a key commercial consideration for investors looking to invest in an offshore grid, but how this will be regulated remains somewhat uncertain. Under the Petroleum Act, the relevant regime would be the Regulation on Third Party Access. This regulation sets out the elements which may be reflected in a user tariff, including that the owner’s profit shall be “reasonable”. However, the tariff itself is intended to be negotiated between the parties in each individual case, which is not very well suited for a grid. The Gassled regime, where user tariffs are stipulated in statutory regulations, provides another example of a tariff regime under the Petroleum Act. It does not apply directly to offshore electricity grids, but may serve as a basis for inspiration.
Pursuant to the Energy Act, on the other hand, the energy authorities annually stipulate the total permitted income for grid companies with several users. The total permitted income is partly set on the basis of that grid company’s actual historic costs, and partly on the basis of the costs of an efficient (comparable) grid company. Therefore, as opposed to the situation under the Petroleum Act, the more cost efficient you are, the greater return on your investments may be achieved. User tariffs are thereafter stipulated by each grid company based on principles of non-discrimination.
In practice, the infrastructure owner’s compensation from users may be very different under these two regimes. Moreover, it is hard to predict what the state of the law will be going forward, including whether any of these regimes will come into play or whether, preferably, new legislation for offshore grids will be introduced under the Offshore Energy Act. A further complicating issue is that other key matters, such as the tax treatment of investments in offshore grids supplying petroleum installations, are also unclear. This adds up to a situation where it is challenging to make investment decisions for multi-user offshore grids.
Urgent need for clarification – unique opportunity to influence the future
The differences in statutory regimes and rules, and resulting ambiguity, is challenging for companies wishing to invest billions of NOK in electrification projects. We therefore believe there is an urgent need for the Norwegian authorities to clarify which rules are intended to apply for operation of offshore grid solutions. On the other hand, this also provides a unique opportunity for market players to influence the future framework to suit their needs and investment plans.