LICENCE TO DRILL: Recent Supreme Court ruling will not bore a hole in oil companies future finances

October 4, 2010

This article was prepared for and first featured in Infrastructure Journal

The UK Supreme Court has recently upheld a Court of Appeal ruling that left a landowner with a minimal award of damages after an oil company trespassed on his land whilst carrying out horizontal drilling. Judicial attention paid to the extent to which land owners own the earth beneath their properties and the approach taken to the calculation of damages is noteworthy.

This judgment is of extreme importance to and must be taken note by onshore oil companies and landowners alike. The case's commercial and economical importance is nowhere better highlighted than when the then Secretary of State for Energy and Climate Change made written submissions to the Court arguing against a large award of damages.

The Facts

The Claimant ('Star Energy Weald Basin Ltd') had obtained a licence from the Crown to extract petroleum from an onshore oil field situated under land owned by the Defendant company ('Bocardo SA'). Star Energy had applied for and obtained a licence to use deviated wells drilled from neighbouring land to search for, bore and obtain oil from the oilfield. At several hundred feet below the surface these deviated wells entered Bocardo's land, forming the basis for Bocardo's claim of trespass. At no point did Star Energy, or its predecessors, seek to obtain Bocardo’s permission to lay pipes below the surface of Bocardo's land, nor did it apply for any ancillary right to enable it to extract the oil.

High Court

Bocardo issued a claim for trespass and an injunction to stop the extraction process and/or damages. The High Court limited the claim for damages to six years prior to the issue of the claim and ruled in favour of Bocardo. Unless there had been an express agreement to the contrary a registered freehold owner of the surface of land also owned the strata beneath, and thus the soil which the drilling of the pipelines disturbed.

Attention was paid to the level of compensation due to Bocardo and a factor the Court took into account was the bargaining position and strength to negotiate an access agreement with Star Energy that Bocardo had lost out on. The Court found that a fair and reasonable award of damages was £620,000 (equal to 9% of the income previously generated from the sale of oil extracted from the oilfield under the land) and 9% of Star Energy's future revenue. This was estimated as approximately £6 million.

It is clear to see why this First Instance judgment sent shockwaves through the onshore oil industry. The floodgates for claims of extortionate damages arising out of oil drilling unwittingly trespassing another’s land had officially been opened.

Court of Appeal

It is no surprise that Star Energy appealed against the High Court decision. The Court of Appeal reluctantly agreed that Star Energy’s activities did constitute trespass, even though Bocardo’s use and enjoyment of its land had not been disturbed or affected. Trespass had already been committed over a number of years and so an injunction to prevent otherwise would not be appropriate. Attention was paid to the level of damages to be awarded.

Bearing in mind the general compensatory principle for the assessment of damages, including any loss of any right to the landowner specifically in trespass cases, the Court considered the amount of money which Star Energy would have had to pay had it applied to the Court for ancillary rights to carry out drilling, exploration and extraction under a licence and what would have been the result had Star Energy approached Bocardo to negotiate an access agreement in the first place. It was decided that Star Energy would have wished to avoid incurring the time and expense of negotiating and litigating for access, and would have been generous in its negotiations to gain the outcome it desired. Damages of £1,000 were awarded to Bocardo for past and future trespass.

Supreme Court

Bocardo appealed to the Supreme Court on the question of damages awarded, and Star Energy appealed on the question of whether a trespass had in fact occurred. The Supreme Court unanimously upheld the decision of the High Court and the Court of Appeal in relation to the question of trespass. Bocardo was the undisputed freehold owner of the land and so trespass had been committed.

The Supreme Court also upheld the Court of Appeal's award of damages of £1,000 (albeit by a 3:2 majority). The Supreme Court rejected Bocardo's argument that it should be entitled to a share of the value of oil extracted through its land, via Star Energy's trespass. It was Star Energy's licence to drill and extract oil that contributed to an increased value in Bocardo's land (coupled with a right to grant access for the oil) rather than purely the knowledge that oil existed beneath the surface.

Thankfully for the onshore oil industry the Supreme Court ruling represents a significant departure away from the damages awarded in the First Instance.

Implications for landowners and energy companies

  • By way of this award the Supreme Court has confirmed that in similar cases a landowner will usually only be entitled to a nominal sum by way of damages;
  • Much to the relief and delight of UK onshore oil companies involved in the exploration and extraction of oil the door is no longer open for landowners to make blanket demands for royalties in similar cases where a trespass had occurred;
  • The Supreme Court decision does not however prevent landowners from applying for an injunction to stop oil companies drilling below the surface of their land without permission;
  • Injunctions remain a discretionary remedy option, and the decision certainly does not give oil companies freedom to trespass without punishment; and
  • Oil and gas companies searching for resources must seek to reach a contractual agreement with landowners securing and outlining access rights, and be willing to pay a premium to landowners in securing the rights without having to incur the costs and time of obtaining these through court procedures.

Related pages:

Litigation, Arbitration and Alternative Dispute Resolution more

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