Contractual Implications Of Closure Of A North Sea Oil & Gas Field - The Scottish Power Decision

The recent UK High Court decision of Scottish Power UK Plc v BP Exploration Operating Company Limited & Others1 contains a comprehensive analysis of a number of significant contractual implications following the decision to close down an oil and gas field in the North Sea.

Background

The claimant in this case, "Scottish Power (the "Buyers"), entered into long-term gas sales agreements ( "GSAs") with the four defendants (the "Sellers") to purchase natural gas produced from the Andrew Field, an oil and gas field 230 km north east of Aberdeen in the North Sea. For over 3 ½ years, from 9 May 2011 until 26 December 2014, the production of natural gas from the Andrew Field was interrupted. The main reason for this was so that work could be done to "tie in" the Andrew Field with a nearby oil and gas field known as Kinnoull Field. This involved the modification of the Andrew Field platform to enable the latter to handle oil and gas production from the Kinnoull Field. The tie in was part of a commercial programme on the Sellers part to develop the Andrew Field platform as a base for managing oil and gas from nearby fields and this dispute centred on the contractual implications of the closure.

The Sellers acknowledged liability in respect of their commitment to deliver the daily quantities of natural gas nominated by the Buyers under the GSAs during the closure (of the Andrew Field). It was agreed between parties that the Buyers' sole remedy for the breach was the compensation mechanism provided for in the GSAs, referred to as 'Default Gas' ie, the supply of gas at a reduced price once deliveries resumed. The Buyers maintained, however, that the Sellers were also liable for a separate duty of care under the GSAs to keep the facility operational. The Buyers claimed damages for breach of that duty, in addition to the contractual remedy of Default Gas, at common law.

The key questions that the judge considered in this case were:

Did the Sellers failure to operate the facilities necessary to produce and deliver the quantities of natural gas at the required times amount to a breach of the standard of a Reasonable and Prudent Operator ("RPO") during the interrupted period? If so, did the GSAs provide a sufficiently comprehensive remedial framework in respect of the non-deliveries such that the Buyers remedy was limited solely to Default Gas? If so, was such liability excluded under the GSA by an exclusion of liability for "loss of use" or "loss of...