Fracking as Trespass: The Bocardo Decision in the UK- underground rights

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http://www.irishenvironment.com/commentary/fiona-neville-fracking-trespass-bocardo-decision-uk/

Introduction

The debate surrounding the exploration of shale gas is gaining momentum in both the UK and Northern Ireland as gas extraction companies execute the terms of the exploratory licences granted to them by the relevant regulatory authorities. Shale gas is extracted from solid rock using a process known as hydraulic fracturing, otherwise known as fracking, where water containing sand and some toxic chemicals is pumped at high pressure into the rock. Horizontal fracking is a technique which allows drilling and fracking in several directions from a single well. It is the use of this technique which gave rise to the proceedings in the case of Bocardo SA v Star Energy Onshore Limited. Note 1.

This recent UK Supreme Court decision held that the underground encroachment by gas extraction companies was an actionable trespass and the landowner was entitled to compensation for the intrusion onto his land which was done without his permission or indeed knowledge. Much to the dismay of Star Energy Onshore Limited, the drilling company, the High Court awarded substantial damages, calculating the award as a percentage of the value of the oil extracted. The Court of Appeal upheld the decision but reduced the level of damages to a lower level. The case went to the Supreme Court where the landowner appealed the quantum of damages and the drilling company cross appealed on liability. Both were dismissed. However, it is the examination of the law in regard to the ancillary rights necessary to access the petroleum in the first instance that will cause the most concern to gas extraction companies both in the UK and Northern Ireland.

The judgement of the Supreme Court has ramifications for shale gas exploration going forward and raises possible obstacles for gas extraction companies as they make final preparations to begin exploration in Northern Ireland.

Relevant Legislation in the Bocardo Case

The Petroleum (Production) Act 1998, which consolidates previous legislation, including The Petroleum (Production) Act 1934 referred to in the Bocardo case, sets out the regulations governing the ownership and search for petroleum in the UK. Section 2 of the said Act vests the exclusive right to search for petroleum which exists ‘in its natural condition in strata in Great Britain’ in the Crown. It includes the right of ‘searching and boring for the petroleum’. Sections 3 and 4 vest in the Secretary of State the power to grant a licence to search for petroleum. However, the licence is not a permission to enter onto land to carry out the works necessary to access the petroleum but is only a right to search for petroleum, and the necessary ‘ancillary right’ must be obtained by the licensee.

Section 7(1) defines ancillary rights as ‘rights as may be required for the exercise of the rights granted by the licence’. Section 7(3) refers to ancillary rights as those rights necessary to enter onto land to sink boreholes and a right to use and occupy the land in order to erect buildings, lay and maintain pipes and other general construction necessary for the extraction of petroleum. If agreement is not reached with a landowner for the grant of the relevant easement, then compulsory purchase proceedings may ensue. ‘The Mines (Working Facilities and Support) Act 1966’ (hereinafter referred to as ‘the 1966 Act’), provides direction in regard to granting ancillary rights. However, it is restrictive in nature and provides that an ancillary right will not be granted unless it is ‘expedient in the national interest’. The matter of compensation is also relevant, an issue that is thoroughly explored in the Bocardo case.

Facts of the Case

Star Energy Weald Basin Limited acquired the rights of the petroleum production licence originally issued by the Secretary of State in November 1980 to another party. There was no agreed form of wayleave over the lands known as the Oxford Estate of which Bocardo SA was the freehold owner, nor was there an attempt to apply to court for the grant of ancillary rights under the 1966 Act. Three wells were drilled by Star’s predecessor at the edge of the estate. As was common practice at the time, these wells were drilled diagonally in order to maximise the recovery of oil and they entered the substrata under the Estate to depths of between 800 and 2800 feet beneath the surface. In July 2009 Bocardo issued proceedings against the Respondents seeking damages for trespass.

Judgement

The High Court considered two points. Firstly, was the licensee entitled to search for petroleum under the Oxford Estate without consent or without the relevant ancillary right being in place? Smith J held that the petroleum production licence did not confer such a right and the actions therefore amounted to trespass. Secondly, the court had to consider the appropriate level of compensation taking cognisance of the fact that Bocardo had suffered a trespass over a lengthy period of time. The Court assessed the damages based on a percentage of the value of the petroleum together with interest. The sum totalled £621,180 plus interest. An injunction was granted against Star prohibiting further acts of trespass until the damages were paid.

It soon became apparent that the judgement had wide reaching consequences for the industry and the case was immediately appealed. A more detailed examination of land ownership, trespass and damages followed in the Court of Appeal and later in the Supreme Court.

Ownership below and above the surface

Unsurprisingly, the Court of Appeal accepted that ownership of airspace is nonexistent, considering air travel. However, what is the position in regard to ownership below the surface? The Court accepted that the ownership of lands includes ownership of the strata below it together with any minerals found there unless otherwise transferred by implied or express grant. In this case the right to the petroleum was vested in the Crown under the relevant sections of the Petroleum Acts but the Appellant retained ownership of the strata beneath the surface of the land. This finding was upheld in the Supreme Court with Lord Hope commenting that the depth of the drilling was not ‘so deep as to reach the point of absurdity’.

Trespass

The Supreme Court upheld the ruling of the Court of Appeal that an actionable trespass had occurred. Despite the fact that the drilling and installation of pipelines did not interfere with Bocardo’s use or enjoyment of the land or that Bocardo had no right to search for the oil below the surface of his land the Court found that Star Energy should have had the consent of the land owner to lay the pipelines. Alternatively, they should have applied for the relevant ancillary right under the Petroleum Acts and the 1966 Act.

Damages

The Court of Appeal unanimously rejected the calculation of damages by the Court of First Instance. The Court of Appeal decision, which was endorsed by the Supreme Court, assessed the damages based on the consideration that would have been paid if an agreement had been reached by the parties before the drilling had commenced. In accordance with section 8 of the 1966 Act this amounted to £82.50 but the Court awarded a sum of £1,000.00 which was conservative considering the amount of damages awarded in the first instance, but substantially higher than the statutory measure. It is probable going forward that gas extraction companies will be willing to negotiate beyond this figure in order to secure agreement, taking into account the overall profits and the pitfalls of failure to agree including legal costs, delay and negative publicity.

The Supreme Court unequivocally held that the sum should be calculated on the basis of the compulsory purchase price as outlined in section 8 of the 1966 Act, although it also approved the award of damages by the Court of Appeal, which were higher than allowed under the 1966 ACT. Lord Brown made it clear that a ‘ransom’ value on strips of land would be unacceptable as the activity of extracting oil in this matter was a new ‘scheme’ which only the licensee had the power to exercise. Bocardo lacked the ability and indeed the right to search for the petroleum and it would be unjustified to value the ancillary right based on what was extracted when the appellant would never be in a position to extract it.

Implications for Shale Fracking in UK

Despite the nominal award of £1,000 in this case, the unequivocal determination by the Supreme Court that an actionable trespass had occurred will cause a major headache for gas extraction companies going forward. The outcome of the case suggests that significant power has shifted to the landowners who can effectively delay works until compulsory purchase orders are issued by the courts. The cost to gas extraction companies could put the whole project into jeopardy considering the court costs, costs of delaying the project, and compensation costs to the landowners in accordance with the 1966 Act.

A further complication will be the calculation of compensation for the affected landowners. The Supreme Court’s holding in the case as to damages — that the measure of damages is calculated on the basis of the compulsory purchase price as outlined in section 8 of the 1966 Act, and not on the basis of a percentage of the value of the petroleum together with interest — is entitled to precedential effect. Yet the actual calculation of damages is subject to differing interpretations as the Supreme Court upheld the Court of Appeal decision that did not strictly apply the compulsory purchase price, but instead added some extra value. That result raises uncertainty for fracking companies as to how other courts will apply the holding of the Bocardo court on the actual value of damages.

The pace of opposition to fracking is accelerating and gas extraction companies may come before a less sympathetic court, particularly in Northern Ireland where the agricultural sector, generally opposed to fracking, is held in high esteem both on a local and political level.

The Position in Northern Ireland

The spotlight will be firmly put on Northern Ireland in 2014 as Tamboran Resources (UK) ltd, furthers its plans to begin the exploratory phase early in 2014. However, this may be somewhat premature considering the lack of regulation and planning that is in place for these works in Northern Ireland. The UK legislation is not applicable in Northern Ireland but there is legislation enacted in Northern Ireland that contains similar statutory provisions.

‘The Petroleum Production Act (Northern Ireland) 1964’ vests all rights and ownership of petroleum resources in Northern Ireland in the Department of Commerce and the Department of Enterprise, Trade and Investment (DETI) as its successor department. Any firm that intends to explore for, drill for or extract oil and gas must hold the requisite Petroleum Licence from DETI, and by doing so also abide by the requirements of the associated regulations, ‘The Petroleum Production Regulations (Northern Ireland) 1987’, ‘The Petroleum Production (Amendment) Regulations (Northern Ireland) 2010’ and ‘The Hydrocarbon Licensing Directive Regulations (Northern Ireland) 2010’. Any query in regard to the granting of necessary ancillary rights will be determined in accordance with the statutory provisions contained in the ‘The Mineral Development Act (NI) 1969’ which will be examined in further detail.

Under the UK Petroleum Act 1998, a Government licence known as a Petroleum Exploration and Development licence (PEDL) must be obtained in order to extract shale gas. In Northern Ireland petroleum licences operate in a similar manner. Exploration and production activities are subject to a range of drilling and development consents, planning permissions, health and safety and environmental requirements. Note 2. As per schedule 1 of The Petroleum Production (Amendment) Regulations (Northern Ireland) 2010’, DETI assesses the technical competence, environmental awareness, financial viability and capacity of licence applicants before making a decision on granting a licence. Four licences were granted in 2011, however, the question is whether the Department of Environment (DOE) is sufficiently prepared from a planning perspective. The DOE may grant planning permission for any type of development, however, issues relating to land ownership or use are solely for the applicant to deal with. The Department has no power to grant any form of ancillary rights to access land; it is a matter between the prospective developer and landowner. No planning applications have been received by the DOE to date and no guidelines in relation to fracking have been released by the DOE therefore little is known about the role that the Department will play going forward.

Land Ownership

The Land Registry maintains the registers of titles to land in Northern Ireland. It operates under the authority of the Land Registration Act (Northern Ireland) 1970 and the Land Registration Rules (Northern Ireland) 1977. Note 3. Ownership of the airspace above the land is non-existent. Section 11(2) and 11(3) of the Land Registration Act specifically states that ownership of minerals and petroleum remains vested in DETI. There is no case law in Northern Ireland to suggest that ownership of the strata below the surface is not retained by the landowner. One can therefore deduce that the ownership of the strata is retained by the landowner and relevant ancillary rights must be obtained in order to access the minerals.

Easements, Ancillary Rights and Compulsory Purchase

While NI land law does differ from English land law in some fundamental respects, the principles of trespass are essentially the same as is the law regarding easements. The Bocardo case raised the issue of compensation in the event of a trespass being committed by failing to have the necessary easement in place. As discussed above, the 1966 Act was examined in the attempt to resolve this issue as the grant of ancillary rights to a petroleum licence holder involves the compulsory acquisition of rights over land. Sections 2 and 3 provide for the compulsory purchase of land and section 8(2) of the said Act states that compensation for inconvenience will be ‘assessed by the court on the basis of what would be fair and reasonable between a willing grantor and willing grantee’. It was this principle that was applied in the assessment of damages in the Bocardo case.

On examination of Northern Ireland legislation, provision has been made in the Mineral Development (NI) Act 1969 to deal with such a situation in Northern Ireland. Section 23 of the said Act provides that the Ministry has the power to compulsorily acquire land or an ancillary right if ‘necessary or expedient’ to facilitate the working of mines and minerals or if it is in the ‘public interest’ to do so. This test is therefore very similar to that of the UK. In NI this power extends to facilitating any person to whom a prospecting licence is granted, for instance a gas extraction company. According to section 23, the exercise of such power shall be referred to as a “mining facilities order” and the land or ancillary right acquired referred to as an “acquired mining facility.

However, gas extraction companies will be mindful of section 24(5) which states that section 23 does not authorise the compulsory acquisition of any land, or of ancillary rights over any land, which is the property of Her Majesty or any government department or any religious denomination or educational institution, which could cause difficulty, particularly as these institutions are not defined.

Section 38 of the said Act deals with the issue of compensation in circumstances where ancillary rights are obtained by means of compulsory purchase. Unlike the UK, a landowner must prove ‘damage’. This could be very difficult to prove considering that the works are taking place deep within the strata and the ‘damage’ may not come to light for a significant period of time. If ‘damage’ is proven the next hurdle will be calculation of damages. The act provides that the value of the land shall be determined in accordance with rules of Article 6(1) of the Land Compensation (Northern Ireland) Order 1982. Article 6(1) states that ‘ the value of land shall be taken to be the amount which the land if sold in the open market by a willing seller might be expected to realise’ thus drawing parallels with section 8(2) of the 1966 Act. However, the significant difference between the UK legislation and NI legislation is that the burden proof is considerably higher in Northern Ireland as ‘damage’ must be proven.

In the Bocardo case, the court was emphatic that the existence of the scheme would not permit an enhancement of the value of the affected property, giving rise to a ‘ransom’ value, as the value of the ancillary right existed exclusively because of the exploitation of petroleum, of which the Crown and its licensees had exclusive rights. In considering the abovementioned legislation and the persuasive precedent set in the Bocardo case, it is probable that an inflated value for land or a necessary ancillary right would be unacceptable in Northern Ireland. However, ‘ransom strips’ are likely to remain an issue as a determined objector will challenge the compulsory acquisition procedure. An order for compulsory purchase could also be judicially reviewed and bearing in mind the delay in bringing judicial review proceedings in Northern Ireland gas extraction companies could run into huge debt before works even begin.

Planning

Aside from permission that will be required for ancillary infrastructure such as roads, pipes and storage, there will be obvious issues such as traffic, noise, lighting, and even possible water or air pollution. There does not appear to be any form of rigorous regulation in place in preparation for this industry in Northern Ireland unlike in the UK where the Minerals Planning Authority (MPA) will make their decision in regard to planning in accordance with the policies set out in the National Planning Policy Framework (NPPF) and ‘Planning practice guidance for onshore oil and gas’. Note 4. The procedure used to determine these applications is set out in the Town and Country Planning Act 1990 and the Town and Country Planning (Development Management Procedure) (England) order 2010 (SI 2010/2184). No such guidance in available in Northern Ireland.

The Planning Act (NI) 2011 is yet to be fully implemented and could eventually provide clearer regulatory guidelines in regard to fracking in Northern Ireland. On the face of it the Act appears to be more pro development and will transform how planning decisions are made by decentralising the decision making process. Many planning decisions will be in the hands of local councils following the reform proposals under the act, but will fracking proposals be considered a major planning applications and be considered centrally? One must also consider whether the expertise lies within the Northern Ireland Environment Agency (NIEA) to deal with these applications in terms of environmental impacts, as the NIEA will be the primary authority for consultation responses under planning applications and will also have to determine Pollution Prevention & Control (PPC) permit applications that will follow on from the grant of planning. Both decisions would be exposed to judicial review.

The application of the EIA regulations to planning approvals will be critical. It is not clear that EIA is required for fracking when the EIA regulations are considered but if EIA is not carried out that decision will inevitably be challenged. If an EIA is carried out it will also be inevitably challenged on the basis that it is not comprehensive.

Conclusion

There are a number of obstacles that currently frustrate the establishment of the fracking industry in Northern Ireland. Despite the desire of the Supreme Court judges for agreement to be reached with landowners, there will be landowners who will be vehemently opposed to fracking companies drilling under their lands and will seek judicial review of any decision to grant the necessary ancillary right. NI legislation provides that a court may make an order of compulsorily acquisition if it is in the ‘public interest’ to do so. This test is subjective and a landowner could resist such an order on the basis that it is not in the public interest to do so, raising for example environmental concerns.

Despite the UK Supreme court voicing its disdain for ‘ransom strips’ it will be inevitable and the possibility of multiple cases based on the amount of land that fracking will encompass may raise questions about the commercial viability of the operation. As drilling begins direction of pipes may change which may again delay works as further land agreements are sought.

In considering the outcome of the Bocardo case and the common law principles of land ownership and trespass I do not believe that gas extraction companies will attempt to encroach onto lands in Northern Ireland without permission. However, I do think the test for the granting of ancillary rights will inevitably lead to judicial review proceedings. Decisions on planning, decisions by the NIEA, and the application of EIA regulations will inevitably be challenged leading to further protracted judicial review proceedings. In light of these inevitable challenges, it is incomprehensible that there is no planning guidance in place to facilitate works at this crucial stage.

The UK Government’s determination to establish the industry in the UK is resolute and some of the legal uncertainties dogging the industry are being addressed by the UK Government at the present time. Plans to enact legislation that will permit fracking firms to run shale gas pipelines deep under private land without getting prior permission have recently been unveiled. Note 5. The draft Infrastructure Bill has yet to be published, however, it is likely to contain reforms to current trespass laws and will assist in speeding up the planning process for fracking companies. Note 6. The UK Government is currently running a twelve week consultation period on the suggested policy reforms therefore details of the proposed reform will only be made available on completion of this process, with the Government insisting that the legislation is entirely dependent on the outcome of that consultation. Note 7. It is unlikely that the consultation process will dramatically alter the UK Governments intentions. The future reality for landowners in Northern Ireland will remain deeply uncertain until draft legislation is published.

 

Fiona Neville is a Qualified Solicitor and a part time postgraduate student at Queens University Belfast studying Environmental Law & Sustainable Development.

 

Notes:

1. 3 EGLR 145 (2010).

2. Ballesteros, M, Pelsey, F, Reins, L. “Regulatory provisions governing key aspects of unconventional gas extraction in selected member states,” Final Report, Milieu Law & Policy Consulting (July 2013).

3. Wallace, H (1987). Land Registry Practice in Northern Ireland. Northern Ireland: SLS Legal Publications.

4. Department for Communities and Local Government, Planning practice guidance for onshore oil and gas July 2013.

5. UK Government. (2014). Queens Speech 2014. Available: www.gov.uk/government/speeches/queens-speech-2014. Last accessed 6th June 2014.

6. Andrew Grice. (2014). Queen’s Speech: Controversial Infrastructure Bill will allow fracking companies to drill under homes without owner’s permission. Available: www.independent.co.uk/news/uk/politics/queens-speech-controversial-infrastructure-bill-will-allow-fracking-companies-to-drill-under-homes-without-owners-permission-9489230.html. Last accessed 6th June 2014.

7. Damian Carrington. (2014). “Government confirms plan to let fracking firms drill under homes,” The Guardian.  Available: www.theguardian.com/environment/2014/jun/04/plan-fracking-firms-drill-homes-queens-speech. Last accessed 6th June 2014.