By Barrister Aemen Maluka
From an economic point of view, Gas Flaring is essentially a wasteful activity, giving rise to negative externalities in terms of precious hydrocarbon loss and environmental damage. The drilling or testing of oil wells gives rise to the gaseous release of various associated hydrocarbons along with the emergence of crude oil and thus gas flaring can occur either accidentally or as a deliberate consequence of waste disposal activities of the operator. For the UKCS in particular the problem of offshore flaring is more complex and frequent than onshore risks of gas flaring and thus its prevention and control forms a significant part of the UK climate policy commitments at the UK and International level.
While the UKCS being a mature province has come up with its own self regulated, internal efforts from the industry through policies, procedures and best practice procedures to achieve zero flaring the past few years, particularly with the beginning of the EU-ETS II phase, have witnessed a greater involvement of the EU in terms of dealing with gas flaring in the UKCS.
The UK ETS
A voluntary Emissions Trading Scheme (UK-ETS) was launched by the United Kingdom between 2002-2006 in the light of its Kyoto Protocol commitments and it ran concurrently with the EU-ETS-phase I between the years of 2005-2007.Unlike the current EU-ETS’s mandatory membership reporting system it had 33 voluntary participants from all energy sectors including Oil and Gas and also allowed the companies to trade or sell carbon allowances under the Climate Change Levy programme. Since the UK-ETS included offshore CO2 emissions unlike the EU-ETS-I  it’s impact has continued with the implementation of the ongoing EU-ETS.
The EU ETS and its relevance to Gas Flaring
In terms of the EU ETS the phases relevant for this discussion are the EU-ETS II and the EU.The currently ongoing EU-ETS –II that is expected to run between 2008-2013, includes CO2 emissions arising as a result of gas flaring. However with three years still left in its running phase little has been commented upon in terms of its effectiveness and its perceived effect along with its mechanics are discussed down below. The upcoming EU-ETS-III is expected to run between 2013 till 2020.Many concerns are being shown at this point by the main players of the Oil and Gas industry, who are truly concerned about the rising costs of conducting business in a maturing UKCS, which can act as potential deterrents to attracting investments from foreign countries.
UK’s Implementation of the EU-ETS in terms of Gas Flaring prevention and Control
The UK implemented the EU ETS through the Greenhouse Gas Emission Trading Regulations 2005.The reason the EU-ETS-1 did not include Gas Flaring in its agenda was the ambiguity regarding the definition of plants in the ETS Directiveand the UK Greenhouse Gas Emission Trading Regulations stayed silent therefore upon whether gas flaring came with in the ambit of GHG emissions from 20 MW thermal input combustion installations. In the second phase of the EU-ETS the flaring of gas was included with in the definition of combustion installation . This was accordingly noted by the NAP and the relevant EU Commissions Communication CS/2006/5055/ which stated that “in the second trading period, all Member States should therefore […] include also combustion processes involving […] flaring (offshore)”. This in effect clarified the inclusion of gas
Flaring as an EU-ETS concern.
The regulatory role of the ETS in the prevention and control of Gas Flaring in the UKCS
In a regulatory context , the current regime as it now stands in terms of the prevention and control of Gas Flaring in the UK (based on the EU-ETS phase II) is largely compliance and enforcement driven requiring certain mandatory actions to be taken out by the operators. Under the GHG Emissions Trading Scheme Regulations 2005 the Operators will be given enforcement notices , a failure to comply with which is a statutory offence , punishable with fiscal penalties. Another promising step towards enforcing social-corporate responsibility is the publication of the names of operators who have faced a civil penalty under the Regulations. This naming and shaming approach is hoped to create more transparency with in the process and a much better informed public and consumer base. In addition to the above the allocation process is hoped to become more transparent by the introduction of the independent control mechanism under Article 17 of the Directive guaranteeing an unbiased and fair allocation of the permits by the companies.
The salient features of the ongoing EU-ETS, which are specifically relevant to gas flaring, include the following.
- The EU-ETS measurement and reporting tiers envisage that in terms of flare gas measurement offshore installations should mandatorily meet Tier 2 (+/- 12.5% uncertainty) during Phase II of the ongoing EU ETS.
- Operators are expected to have submitted proposals as to how they intend to deal with these gas flaring reductions and DECC has already shown its intention to apply a strict reporting and enforcement regime upon operators whose improvement plans which actually meet these tier targets and those who submit unverified reports .
- Operators are required to report via a UK Registry Account which allows them to manage their allowance in terms trade, transfer and surrender and submit adequate data to the EU ETS Registry which will monitor the annual flare volumes, allowance transfers and verified emissions etc of the Operators.
The DECC itself has recently made quite a few efforts to bring about legislation which supported regulatory compliance with the carbon budgets and targets established under the Bill to reduce greenhouse gas emissions in the UK.This appeared in the form of the Climate Change Act 2008 and The Energy Act 2008 and the Planning Act 2008.More relevant to gas flaring is the perceived role of The Climate Change Act 2008, which sets emissions reduction targets in a statutory form and provides for carbon budgeting all the way up to 2050.Budgetary allocations to meet these targets have been brought about accordingly and the act also creates a new reporting framework and an independent advisory body dealing with carbon budgeting. Domestically while the ETS is expected to remain at the forefront of emissions schemes, the Act also paves the way for many more trading arrangements, which can be made at the domestic level to support the decrease in GHG emissions.
The future for UKCS Gas Flaring-In EU terms
At the EU level itself many proposals are in the pipeline to facilitate future Phase III plans to cut down gas flaring and related GHG emissions. Currently for Phase III of the EU-ETS the UK in line with the European Commission requirements is collecting data about installations, which cause combustions and gas flaring over 20MV to bring them under the ambit of the EU-ETS, and such data is expected to be brought in by the 30th of April 2010.In the future during Phase III it is intended that the EU will centralize these operations without allowing any more National Allocation Plans, and although the allocation methods are still ambiguous, due reserves are made for new entrants in order to avoid stifling new investment in the Oil and Gas industry. Auctioning is hoped to be the preferred method of allocation and by 2020 it is being said that none of these permits will be issued free of charge. Until further information is given out it is still vague whether gas flaring will be a part of these plans as it is unknown whether “Oil and Gas Installations” are expected to be “Power Sectors” with in the definitions provided in the advance paper work for the EU-ETS EU.The upcoming CCS (Carbon Capture and Storage) policy is expected to allow credit to be given for C02 captured and stored by operators and applies only to operators who have plants where gas flaring and compression are likely.
Some conclusions on the effectiveness of the EU-ETS
In the light of the above, it would only be fair to assume a more futuristic estimation as to how the UKCS, given the current state of the EU-ETS-II and the aftermath of EU-ETS-I, would respond to the same in terms of gas flaring. An Economic analysis of the same would suggest that the scarcity of Carbon permits being created now in the market would limit the amount of GHG emissions through combustion installations. The fact that the era of “grandfathering” i.e. giving out free allowances is over and these allowances have to be actually bought by the flare producing operators , is indicative of the possible technological efforts coming from the oil and gas industry to reduce the incidence of both deliberate and accidental gas flaring. Based on this viewpoint one can only estimate how the EU ETS will impact flaring as Phase II ends but it is hoped that as the price of carbon increases there will be a more prudent and responsible attitude to GHG emissions from the industrial base. The optimism of this view however stands to be tested by the over all facts and calculations which will come into light by the end of 2012.Many sceptics, particularly with in the Open-Europe group have disregarded any solid role of the EU ETS in achieving a decrease in carbon emissions particularly after Phase I. This view is shared by Neuhoff, K. et al who believe that the fact that some free permits are still being given out in the second phase of the EU-ETS is an on going recipe for policy failure and a blatant indication of the fact that the lessons from the first phase have not been implemented properly. In addition to this it has been argued by the Carbon Trustthat allowing new entrants leniency through free allocations might provide an impetus for fresh investment activities in the UKCS but unfairly punishes the current Oil and Gas businesses that have made vast efforts to decrease their Carbon Output. Critics cite the same reasons for the perceived failure of EU-ETS II as that of the Phase I as arising from the biased allocation of carbon permits favouring Co2 intensive operators, which ultimately led to windfall profits for many Oil and Gas businesses. Ian Bailey has criticised the entire allocation system as the reason for the subsequent confusion and distortion, which ailed the EU ETS scheme in Phase I and believes it will continue until it is realised that,
“A system, whose success essentially depends on the stringency of its overall cap, must either delegate this decision to an independent authority or give it the necessary powers to enforce scarcity and determine equitable allocation criteria. Second, a scheme, which decentralises important decisions regarding its design, can only function if its members are sufficiently homogeneous and committed to ensuring its efficiency. This is probably not true of the EU ETS”.
However as discussed above in this paper, it is possible to hope that the EU Plan of centralisation of the decision making power for allocations in Phase III will hopefully remove this problem in the future in interests of better control of GHG emissions through prevention and monitoring of UKCS Gas Flaring.
It has been observed in this paper that from a regulatory point of view the UK ETS approach has always been focused on the downstream industry and has been largely voluntary. The EU-ETS has had a more mandatory and upstream quality to it and thus the current Phase III of the EU-ETS comes across as imposing many mandatory reporting requirements upon the industries of the member states. These requirements have been transposed with in UK law and have been criticized by many as inducing a compliance driven regulatory climate, which requires more paperwork than effective steps on behalf of Oil and Gas businesses.
Last but not the least it should also be noted that the UKCS is a mature province and so are its industry players. This mandates the need for a regime is needed which does not punish foreign and local investors with compliance costs but a more downstream consumer focused framework which discourages over usage of carbon inducing fuels. The truth of the matter remains that the UKCS needs to attract more investment and is facing a lot of competition from the Gulf of Mexico and West Africa as hydrocarbon investment destinations. The major industries players in the UKCS have already chosen to divert their investment plans elsewhere and have chosen to divestment their current North Sea projects to smaller energy companies. The UK energy policy-makers while reviewing the arrangement for the EU-ETS phase III might need another look at the potential “FDI” suicide the UKCS Oil and Gas sector might be facing in terms of an over-zealous subscription to its EU and Kyoto obligations.
Stephen Dow, ‘Chapter 15: Energy Law in the United Kingdom’ in Martha M. Roggenkamp, Catherine Redgwell, Inigo Del Guayo and Anita Ronne (eds), Energy Law in the European Union: National, EU and International Regulation (OUP Oxford 2007) 15.26
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Sato Misato, Schleich Joachim, Tuerk Andreas, Kettner Claudia, Walker Neil
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|Table of Abbreviations|
CCS=Carbon Capture and StorageCDM=Carbon Development MechanismUK = United KingdomETS =Emissions Trading SchemeEU=European UnionUKCS=United Kingdom Continental ShelfUK-ETS=UK Emissions Trading SchemeUKOOA=UK Offshore Operators AssociationJI=Joint ImplementationFTPTS =Flare Transfer Pilot Trading SchemeGHG=Green House GasesDEFRA=Department for Environment, Food and Rural Affairs (Now known as Department for Energy and Climate Change (DECC))DTI=Department for Trade and IndustryEA=Environment AgencyOGTIF=Oil and Gas Industry Task ForceLNG=Liquid Natural GasNAP=National Allocation PlanOECD=Organisation for Economic Co-Operation and Development
Table of Legislation
Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC; 2003, OJL 275, 25.10.2003, 32–46.
Directive 2004/101/EC of the European Parliament and of the Council of 27 October 2004 Amending Directive 2003/87/EC Establishing a Scheme for Greenhouse Gas Emission Allowance Trading within the Community, in Respect of the Kyoto Protocol’s project mechanisms, 2004, OJEC 13.11.2004, L 338/18-23.
Proposal 2008/16/EC for a Directive amending Directive 2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading system of the Community
Proposal 2008/17/EC for a Decision on the effort of Member States to reduce their greenhouse gas emissions to meet the Community’s greenhouse gas emission reduction commitments up to 2020
Commission of the European Communities CS/2006/5055/ of the 4th January 2006, no.36.
Council Directive 2003/87/EC ‘establishing a scheme for greenhouse gas emission allowance trading with the community
The Energy Act 2008
The Climate Change Act 2008
Carbon Accounting Regulations 2008
The Energy Act 2008
The Planning Act 2008
The Greenhouse Gas Emissions Trading Scheme Regulations 2005
The Greenhouse Gas Emissions Trading Scheme (Amendment) Regulations 2007
The Greenhouse Gas Emissions Trading Scheme (Amendment No. 2) Regulations 2007
The Greenhouse Gas Emissions Trading Scheme (Miscellaneous Provisions) Regulations 2007
UK Phase 1 National Allocation Plan 2005-2007
UK Phase 2 National Allocation Plan 2008-2012
The Greenhouse Gas Emissions Trading Scheme 2005 (the 2005 Regulations)
The Greenhouse Gas Emissions Data and National Implementation Regulations 200
 F.A. Dratwa; “The EU-Emission Trading Scheme – The Impact on the Flaring of Gas on the UKCS”OGEL 3 (2009), www.ogel.org URL: www.ogel.org/article.asp? Key=2902
 Deliberate gas flaring is when an operator regards some of this gas as irrelevant for his purposes and will generally dispose of this gas through piping and burner arrangements aimed at disposing off surplus combustion. Accidental Gas flaring presents itself as a consequence of infrastructure failure and maintenance shutdowns and along with being a significant health and safety risk it, it is a significant source of GHG (See Joëlle de Sépibus, (2009)
 Judith.D (2006)
 Also known as zero or inert purge, pilotless flaring.
 Ekins and Etheridge (2006)
 For a detailed official audits of the outcomes of this scheme see The UK Emissions Trading Scheme: A New Way to Combat Climate Change National Audit Office, 21 April 2004 and Report appraising years 1-4 of the UK Emissions Trading Scheme DEFRA/Enviros December 2006
 John Wils and Ewan C. Neilson (2007)
 As implemented by the Finance Act 2000
 The DTI’s Second Annual Report on the Implementation of the Energy White Paper, DTI, July 2005
 EU-ETS-I has already run from 2005 till 2007 and addressed CO2 issues only. Gas flaring was not included in it and thus this phase is less relevant for a discussion of gas flaring reduction and here UK’s internal efforts will be discussed. At this point many voluntary, consumer oriented schemes like the FTPTS and OGTIF schemes aimed at downstream business energy consumption rather than energy production. Thus UK’s national efforts at this point were much more relevant to the prevent of GHG’s arising from gas flaring and combustion being of a voluntary and upstream nature was run with in the United Kingdom. For an example of one of these schemes see the FTPTS (Flare Transfer Pilot Trading Scheme) (2002)
 A detailed discussion of the role of the ongoing EU-ETS phase II has been undertaken later in the paper.
 Engels et all (2008) has referred to the EU ETS-I as the ‘learning by doing’ trading phase of the EU ETS (2005–2007) aimed at establishing an administrative framework for trading and the current ongoing phase II as the current ‘Kyoto Commitment’ phase (2008–2012) specifically aimed at completing the reduction targets set by the Kyoto Protocol
 Directive 2009/29/EC, amending Directive 2003/87/EC, 10 puts in place the framework for the post-2012 EU ETS regime.
 Andrew Bassett (2009)
 The Greenhouse Gas Emissions Trading Scheme 2005 as amended by the Greenhouse Gas Emissions Trading Scheme (Amendment) Regulations 2007
 Refer to Emission Trading Directive 2003/87/EC, Annex 1 Nr. 2
 Stephen Dow (2007)
 See also European Communities CS/2006/5055/ of the 4th January 2006, Communication from the Commission, which recognized this ambiguity: “Further guidance on allocation plans for the 2008 to 2012 trading period of the EU Emission Trading Scheme” Nr. 34. “With respect to the interpretation of combustion installation in Annex I of the Directive, the Commission notes that some Member States based the first phase national allocation plans on an interpretation which included all combustion processes fulfilling the specified capacity, regardless of whether the combustion process produces energy independently or as an integrated part of another production process. Other Member States applied variants of a more narrow interpretation, excluding some or all combustion processes as integrated parts of another production process.”
 Department for Environment, Food and Rural Affairs, EU Emissions Trading Scheme: Approved Phase II National Allocation Plan 2008-2012 (London 2007)
 Commission of the European Communities CS/2006/5055/ of the 4th January 2006, no.36.
 Ian Bailey (2010) and Peter Zapfel (2005)
 As amended in 2007 and 2009
 Regulation 29 The Greenhouse Gas Emissions Trading Scheme 2005 as amended by The Greenhouse Gas Emissions Trading Scheme (Amendment) Regulations 2007 and 2009
 Regulation 38,Ibid.
 Regulation 39-41, Ibid.
 Regulation 36,Ibid
 Emission Trading Directive 2003/87/EC, Art.17
 Oil and Gas UK (2010) Atmospheric Emissions-Flaring available at https://www.ukooaenvironmentallegislation.co.uk/Contents/Topic_Files/Offshore/Flaring.html and refer to regulations 29, 38,39,41 and 36 of the GHG ETS 2005
 Formerly known as DEFRA
 Ian Bailey (2010)
 This Act is supplemented by the Carbon Accounting Regulations 2009 aimed at the management of a carbon accounting system in line with the ETS requirements to monitor compliance with the EU GHG targets.
 Ian Bailey (2010)
 A cross-national comparison of institutional factors on economic action of companies (exempliﬁed by emission trading)’(2009)
 For example see Proposal 2008/16/EC for a Directive amending Directive 2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading system of the Community and Proposal 2008/17/EC for a Decision on the effort of Member States to reduce their greenhouse gas emissions to meet the Community’s greenhouse gas emission reduction commitments up to 2020
 Directive 2009/29/EC, amending Directive 2003/87/EC, puts in place the framework for the post-2012 EU ETS regime.
 The Regulations which provide the legal basis for the data collection are the Greenhouse Gas Emissions Data and National Implementation Measures Regulations 2009
 According to Article 3 (h) of the Directive 2003/87/EC, new entrants are operators who start a business or extend their capacity during a trading period.
 Oil and Gas UK (2010) Atmospheric Emissions-Flaring available at https://www.ukooaenvironmentallegislation.co.uk/Contents/Topic_Files/Offshore/Flaring.html
 Phase I of the EU ETS
 A.Engels et al. Eur. Env. 18, 276–297 (2008) has raised quite a few objections to this “grandfathering” and has blamed this approach for distorting the ETS’s desired economic effect upon gas flaring and related GHG emissions in the first phase.
 Open Europe 2007
 Neuhoff, K. et al., “Implications of announced phase II national allocation plans for the EU ETS”, Climate Policy 6 (2006)
 Carbon Trust (2007) EU ETS Phase II allocation: implications and lessons Carbon Trust London 2007
 See also the views of Ian Bailey (2010) “The EU Emissions Trading Scheme”: Wiley Interdisciplinary Reviews: Climate Change, Vol: 1 No: 1 Pg: 144-153j-ohn Wiley & Sons, Ltd
 Joëlle de Sépibus, Scarcity and Allocation of Allowances in the EU Emissions Trading Scheme – A Legal Analysis, “NCCR Trade Working Paper”, (<www.nccr- trade.org>) (2009) accessed via https://papers.ssrn.com/sol3/papers.cfm? Abstract_id=1088726
 Ibid page 1.
 See Open-Europe (2007) and Open-Europe (2008) for a better overview of this criticism.
 The case for a “Carbon Tax” has been argued time and again but since the UK has not agreed to being a part of the EU Taxation regime, the emissions trading scheme has emerged as an internalization alternative to the same (See Open-Europe, 2008).