Is there a higher risk of non-approval of PDOs going forward?

The Norwegian state may already today be obliged to refuse approval of new plans for development and operation ("PDO") under Article 112 of the Norwegian Constitution, according to the Norwegian Institute for Human Rights ("NIM"). Although the Ministry of Petroleum and Energy ("MPE") does not agree, it has announced that there will be changes to the PDO guidelines and approval process. In this newsletter, we will comment on these developments.

These recent events should be considered against the backdrop of the 2020 Supreme Court decision in the so-called "climate dispute" between various environmental organizations and the Norwegian government. This case concerned inter alia whether the decision to award production licenses in the Barents Sea south and south-east was in breach of the Norwegian Constitution Article 112 which establishes a “right to an environment that is conducive to health and to a natural environment whose productivity and diversity are maintained”. Whilst the environmental organizations lost this case, the Supreme Court majority stated that the government would have a right and obligation to refuse the approval of PDOs if the situation at the time of production would mean that it would be contrary to the interests of climate and environment pursuant to Article 112 of the Constitution to approve the PDO.

Following up this Supreme Court decision, the MPE tasked NIM with assessing when the government will be obliged to reject the approval of PDOs due to climate interests. It was in this connection NIM reached its somehow surprising conclusion that this point may have been reached already, which – if followed up by the MPE – would lead to a major change in Norwegian petroleum policy. NIM additionally stated that PDO approvals granted after the Supreme Court's decision on 22 December 2020 should be reassessed.

NIM's rationale and the government's response

In brief, NIM's rationale is that:

  • the government is obliged to reject the approval of PDOs if the territorial and exported emissions that such approval will lead to are not compatible with limiting global warming to 1,5 degrees; and
  • the best available science suggests that there is no room for new oil and gas production within this limit, and it is therefore "challenging to see that an approval of further plans for development and operation is compatible with the Ministry's obligation pursuant to the Constitution Article 112 to refuse PDOs (…)" (our translation).

Shortly after NIM's conclusion became known to the public, both the Minister of Petroleum and Energy and the Minister of Climate and Environment announced that the government disagrees with NIM's conclusion. However, it is not fully clear whether they disagree to both limbs of NIM's rationale, or only NIM's understanding of the best available science in the area. Statements by the Minister of Climate and Environment in Norwegian broadsheet Aftenposten could suggest the latter.

The changes to the PDO procedure announced in the additional white paper on energy

Also on 8 April, the MPE published an additional White Paper on Energy. In this White Paper, it was announced that the MPE would follow up the Supreme Court's 2020 decision by assessing the climate effects of production and combustion emissions in connection with PDO approval. The White Paper contains no information on which criteria these climate effects will be assessed against, i.e. whether  the MPE will apply the 1,5 degree threshold NIM suggests or whether it will perform a broader assessment against other parameters. The only guideline given in the White Paper is that the scope of the assessments will be adapted to the resource level of the relevant development.

Moreover, it was announced in the White Paper that the PDO guidelines will be updated to require the licensees to perform a qualitative stress test against financial climate risk by comparing the balance price of the development with different scenarios for oil and gas price paths which are compatible with the goals of the Paris Agreement, including the 1,5 degree goal.

Our high-level reflections

The incorporation of climate effects of production and combustion emissions in the PDO approval assessment

  • It appears that climate effects will be assessed as a part of the PDO approval process due to the Supreme Court's ruling that the MPE will be obliged to reject the approval of PDOs for climate reasons at some point in time. However, it still remains uncertain when this obligation will kick in. Such uncertainty is unfortunate, particularly considering the considerable time span between exploration activities and PDO approval. It would be beneficial with additional clarity on this point, including which criteria the MPE considers as a part of this assessment, in order to provide NCS licensees with a predictable framework.

The change to the PDO guidelines

  • It remains unclear when these changes will take effect, and whether they may become applicable to the many PDOs intended to be submitted during 2022.
  • Several NCS licensees will likely be subject to similar reporting obligations as those that will be required as a part of the PDO process pursuant to the Corporate Sustainability Reporting Directive ("CSRD"). However, the update to the PDO guidelines will:
    • likely mean that these obligations apply at an earlier point in time, since CRSD will at the earliest apply in the EU from 1 January 2024 onwards; and
    • mean that the analyses will be included as a part of the PDO process, resulting in that assessed climate risk will impact the Petroleum Directorate's assessment of expected profitability and balance prices.

Further legal action from environmental organizations?

  • A pertinent question is whether these latest developments could spur further legal action by environmental organizations. In this connection, it should be noted that the climate organizations losing the 2020 Supreme Court case have brought their case to the European Court of Human Rights ("ECoHR"), where the matter has recently been admitted. This may mean that the environmental organizations see limited strategic benefit of bringing up a new case for Norwegian courts concerning the constitutionality of approving PDOs, as the process in the ECoHR ensures continued attention around the climate battle fought by legal means.

Please do not hesitate to get in touch in case you wish to discuss any part of this in further detail.