Apache North Sea Ltd v Ineos FPS Ltd

This is the trial of two preliminary issues ordered by Henshaw J on 8 April 2020 and Butcher J on 22 May 2020. Those issues arise in a dispute between the parties as to the proper construction of an agreement for the transportation and processing of hydrocarbons (“the TPA”). The hydrocarbons in question are those produced from the Claimant’s (“Apache’s”) interests in the Forties Field in the North Sea, and they are to be transported through the Forties Pipeline System (“the FPS”) owned and operated by the Defendant (“INEOS”).

Apache’s estimated production profile from the relevant fields is set out in

The first preliminary issue which the Court has been asked to determine (“the First Preliminary Issue”) is:

“On the basis of:

a.

the agreed facts set out in Appendix 1; and

b.

the assumption that the facts alleged by the Defendant which are set out in Appendix 2 are proven at trial,

is INEOS acting unreasonably and/or non-contractually by withholding consent under clause 5.05(a) of the Apache Forties TPA to an amendment to Attachment F unless Apache agrees to increase the base tariff payable?”

The underlined words are an addition I have made which is intended better to capture the issues as presented to the Court. The Appendices in question are appendices to Henshaw J’s order of 8 April 2020, the terms of which I set out below.

If that issue is answered in the negative, the second preliminary issue which the Court is asked to determine (“the Second Preliminary Issue”) is:

If this hearing does not finally dispose of the action, a trial has been fixed for 6 days commencing on 2 November 2020.

This judgment adopts the following structure:

The FPS is a network of pipelines and associated equipment which was originally constructed in the 1970s, to service the interests of BP Plc (“BP”) in the Forties Field in the North Sea. Over time, the output of various other offshore fields have been added to the FPS, which currently transports about 30% of the United Kingdom’s offshore oil to shore.

In 2003, BP sold its interests in the Forties Field to Apache. The fact that, going forward, these interests and the FPS would be in different ownership necessitated the conclusion of the TPA between Apache and a BP entity (BP Exploration Operating

Attachment F was blank when the TPA was signed, but a completed Attachment F was agreed around the date of completion in order, in the parties’ words, “to clarify the intent of the Agreement”.

Apache subsequently acquired interests in two further fields from BP – the Maule Field and the Tonto Field. It entered into TPAs for those fields on 16 June 2012 and 23 April 2013 respectively, and on 23 April 2013, Apache and BPEOC entered into an Umbrella Agreement for all three fields by which they were all made subject to the same terms as the TPA applicable to the Forties Field. In this judgment, I use the abbreviation “the TPA” to refer to the unified terms applicable to all three fields.

On 1 October 2012, Apache and BPEOC agreed a revised Attachment F which sets out estimated production estimates to the end of 2020 (“the 2012 Amendment”), and provided for a revised tariff of £1.20 per barrel for hydrocarbons delivered to the FPS in excess of the values previously notified by Apache in 2008. There is a dispute between the parties as to the reason for the increased tariff:

For the purpose of resolving the preliminary issues, I have proceeded on the basis that INEOS’ formulation is correct, although I would note that in a letter to Apache of 2 April 2012, BPEOC took the position both that there was no Uncommitted Capacity in the system and, in any event, that it was entitled to refuse consent under the TPA even if there was Uncommitted Capacity. It was BPEOC’s position that it was incurring substantial expenditure for which the contractual tariff offered inadequate recompense, such that it was entitled to offer Apache additional firm capacity only at a higher tariff. At that stage, Apache and BPEOC chose to compromise, rather than test, the issues of whether there was Uncommitted Capacity and, if so, what BPEOC’s rights under clause 5.05(a) were, but only for a limited period. The 2012 Amendment provided that:

“For periods after 1 January 2021, Apache shall be entitled to request (a) extensions to Attachment F, (b) FMQs and (c) Additional Quantities and Spot Quantities pursuant to Clauses 5.05 and 5.06 of the TPA”.

Accordingly, I derive no assistance from the 2012 Amendment in determining the parties’ rights and obligations under clauses 5.05(a) of the TPA now that the issue has been put to the test.

In 2017, BPEOC sold the FPS to INEOS. INEOS is part of the INEOS chemicals group which has an interest in the Grangemouth refinery. The TPAs were novated to INEOS, such that the references in them to BPEOC were thereafter to be read as references to INEOS.

On 14 June 2019, Apache wrote to INEOS seeking its agreement to amend Attachment F to provide for estimates of production until 2040. On 1 July, INEOS refused its consent to that request unless Apache agreed to a revision of the contractual tariff. It is INEOS’ case, and for the purposes of deciding the preliminary issues I am required to assume:

There was a dispute between the parties, which was not addressed by the agreed or assumed facts, as to whether the FPS represented the only means of transporting hydrocarbons from the Shipper’s Fields to shore (as Apache contended), or whether it was practicable for production to be shipped afloat to another pipeline system to be brought ashore (as INEOS contended). I am not in a position to resolve this dispute and in any event do not need to do so, as the issues of construction raised before me (in contrast to potential arguments as to the reasonableness of INEOS’ decision on the facts) cannot turn on whether or not there are other acceptable means of bringing Apache’s production ashore if it is unwilling to pay the increased tariff sought by INEOS.

Apache’s argument is essentially as follows:

INEOS’ case in summary is as follows:

As is to be expected, there was no real dispute between the parties as to the principles applicable to the construction of contracts. In particular, the following matters were common ground:

I would add to these observations that the process of construing a clause in a contact in context may involve interpreting wording which, viewed in isolation, might be regarded as wide, in a way which is consistent with, and does not undermine, other, more-focussed, provisions of the contract. As Hoffmann LJ observed in William Sindall Plc v Cambridge County Council [1984] 1 WLR 1016, 1024:

“It is, of course, a principle of construction that words capable of a very wide meaning may have to be given a narrower construction to reconcile them with other parts of the document. This rule is particularly apposite if the effect of general words would otherwise be to nullify what the parties appear to have contemplated as an important element in the transaction”.

A particular application of this principle is invoked when, on one reading, a general or subsidiary clause in a contract would significantly detract from a benefit apparently conferred by one of the principal clauses. In this context, it is sometimes said that the secondary clause will be construed by reference to the principle of non-derogation from grant: Esso Petroleum Co Ltd v Addison [2003] EWHC 1730 (Comm), [47][49] and Johnston & Sons Ltd v Holland [1988] 1 EGLR 264 (CA).

The need to construe a particular clause in the context of the agreement as a whole is not excluded merely because of some or all of the principal provisions include the drafting reflex “subject to the terms of this agreement”. While the parties will sometimes use language to make it clear that one term is to be qualified by another (e.g. by using language such as “subject to clause 2 below”), these more general words are unlikely to have any appreciable impact on the application of the conventional principles of construction. In a real sense, any contractual provision takes effect subject to the terms of the contract in which it appears.

Finally both parties referred, with contrasting degrees of enthusiasm, to the statement of Jackson LJ in Amey Birmingham Highways Ltd v Birmingham CC [2018] EWCA Civ 264, [93], as to the proper approach to the construction of long-term relational contracts:

“Any relational contract of this character is likely to be of massive length, containing many infelicities and oddities. Both parties should adopt a reasonable approach in accordance with what is obviously the long-term purpose of the contract. They should not be latching onto the infelicities and oddities, in order to disrupt the project and maximise their own gain”.

Even long-term contracts which are properly to be classified as “relational”, are likely nonetheless to be “risk-allocational”. I was not assisted by either party’s attempts to pray-in-aid a particular interpretative approach said to be appropriate to long-term relational contracts. Rather, it is necessary to consider the terms of the TPA, and whether the risks of continuing to operate the FPS after 2020 in return for the contractual tariff was assumed by INEOS at the outset, or whether the TPA allowed this aspect of their original bargain to be re-visited by the parties if Apache continued production after 2020, and required INEOS’ consent to the amendment of Attachment F to do so.

There was a rather greater difference of emphasis in the parties’ submissions on the principles applicable to the construction of contractual consent provisions.

There are a number of decisions addressing consent provisions, many of them landlord and tenant disputes where the landlord’s consent is required to an assignment or sub-letting of the lease or an application by the tenant to apply to change the permitted use of the demised premises. The principles set out in these decisions have

In Ashworth Frazer Ltd v Gloucester City Council [2001] 1 WLR 1280 at [3]-[5], Lord Bingham summarised the applicable principles as follows:

“[3] When a difference is to be resolved between landlord and tenant following the imposition of a condition (an event which need not be separately considered) or a withholding of consent, effect must be given to three overriding principles. The first, as expressed by Balcombe LJ in International Drilling Fluids Ltd v

Two of the authorities referred to by Lord Bingham are worth picking up at this point. The first is the judgment of Lord Denning MR in Bickel, p.524 where he stated:

“The words of the contract are perfectly clear English words: ‘such licence shall not be unreasonably withheld’. When those words come to be applied in any particular case, I do not think the court can, or should, determine by strict rules the grounds on which a landlord may, or may not, reasonably refuse his consent. He is not limited by the contract to any particular grounds. Nor should the courts limit him. Not even under the guise of construing the words .”

The second is the oft-quoted judgment of Balcombe LJ in International Drilling Fluids Ltd where at p.519, the applicable principles were summarised as follows:

“(1)

The purpose of a covenant against assignment without the consent of the landlord, such consent not to be unreasonably withheld, is to protect the lessor from having his premises used or occupied in an undesirable way, or by an undesirable tenant or assignee …

(2)

As a corollary to the first proposition, a landlord is not entitled to refuse his consent to an assignment on grounds which have nothing whatever to do with the relationship of landlord and tenant in regard to the subject matter of the lease … A recent example of a case where the landlord's consent was unreasonably withheld because the refusal was designed to achieve a collateral purpose unconnected with the terms of the lease is Bromley Park Garden Estates Ltd v Moss [1982] 1 WLR 1019.

(3)

The onus of proving that consent has been unreasonably withheld is on the tenant …

(4)

It is not necessary for the landlord to prove that the conclusions which led him to refuse consent were justified, if they were conclusions which might be reached by a reasonable man in the circumstances …

(5)

It may be reasonable for the landlord to refuse his consent to an assignment on the ground of the purpose for which the proposed assignee intends to use the premises, even though that purpose is not forbidden by the lease …

(6)

There is a divergence of authority on the question, in considering whether the landlord's refusal of consent is reasonable, whether it is permissible to have regard to the consequences to the tenant if consent to the proposed assignment is withheld …. . But in my judgment a proper reconciliation of those two streams of authority can be achieved by saying that while a landlord need usually only consider his own relevant interests, there may be cases where there is such a disproportion between the benefit to the landlord and the detriment to the tenant if the landlord withholds his consent to an assignment that it is unreasonable for the landlord to refuse consent.

(7)

Subject to the propositions set out above, it is in each case a question of fact, depending upon all the circumstances, whether the landlord's consent to an assignment is being unreasonably withheld”.

In his first numbered proposition, Balcombe LJ identified the purpose of the covenant under review, from which he derived as a corollary the second numbered proposition: that the landlord cannot refuse consent for reasons which have nothing whatever to do with the relationship of landlord and tenant in regard to the subject matter of the lease. While the second proposition has proved uncontroversial, a number of cases have cautioned against approaching consent provisions by seeking to identify their original purpose, and then determining as a matter of construction that consent can never be withheld save to give effect to that original purpose.

In particular, in Sequent Nominees Ltd v Hautford Ltd [2020] AC 28, the Supreme Court considered a tenant’s challenge to its landlord’s refusal to consent to the tenant’s application to change the permissible use of parts of the demised premises from commercial to residential (the lease requiring the landlord’s consent before such

Lord Briggs JSC’s decision in Sequent Nominees featured prominently in INEOS’ submissions as to the approach which I should adopt on this application, and for that reason it is worth considering the underlying facts of the case in some detail before turning to the judgment. The user covenant in the lease (clause 3(11)) permitted the use of the demised premises for residential, retail and commercial purposes. However, clause 3(19) required the tenant to comply with the provisions and requirements for planning permission (which, for so long as the permitted use of some parts of the demised premises was limited to non-residential use, prohibited the tenant from making residential use of those parts), as well as requiring the landlord’s consent for any application by the tenant to change the permitted use, such consent not to be unreasonably withheld.

The Court of Appeal ([2018] Ch 603]) construed clause 3(11) as granting the tenant the right to use all of the floors of the building for residential purposes ([46]-[48]), and approached the construction of the consent provision accordingly ([51]). Against the background of its construction of clause 3(11), and because it was open to a third party to the lease to apply for planning permission to change the permitted user, the Court of Appeal concluded that the purpose of the consent provision in clause 3(11) could not be to prevent a change in use in order to avoid an increased risk of statutory enfranchisement.

Lord Briggs JSC, who delivered the majority judgment in the Supreme Court (with Lord Carnwath and Lord Hodge JJSC), disagreed. He held at [36] that:

“Looking at the question as a matter of substance, it cannot be said that the Lease, read as a whole, conferred an unqualified right on the tenant to use the whole, or any particular part, of No 51 for residential purposes. Clause 3(11) must be read with clause 3(19), which required the tenant to perform and observe all the provisions and requirements of the planning legislation. Read together, the effect of those two clauses was to permit the tenant to use for residential purposes only such parts of No 51 as were from time to time permitted by the planning regime to be used for residential purposes”.

He also criticised the approach to the clause which had been adopted by the first instance judge and the Court of Appeal, which he described at [35] as seeking:

“to address the question whether the landlord's consent was unreasonably withheld by reference to an over-refined attempt to identify a limited original purpose behind clause 3(19), contrary to Lord Denning MR's dictum in the Bickel case, approved in the Ashworth Frazer case, that it is wrong in principle to address the question ‘under the guise of construing the words’”.

At [33], he stated that the issue of whether the landlord could reasonably refuse consent was not to be approached:

“in any rigid or doctrinaire way, still less solely by reference to the original purposes of the [relevant covenant] which may have been within the contemplation of the parties when the lease was granted. It will in every case be a question of fact and degree measured as at the date upon which the relevant consent is sought …”.

Lady Arden and Lord Wilson JJSC disagreed with the majority on the construction of clause 3(11) of the lease, and consequently on the conclusion on the consent issue. Lady Arden JSC observed at [44]:

“The most relevant circumstances to take into account are the other provisions of the lease, including the lessee's unrestricted right to use the whole of the premises if he wishes to do so for residential purposes. I do not agree that this sub-clause must be read subject to the lessee first obtaining the lessor's consent to a planning application for a change of use (where that is required) or that, as Lord Briggs JSC has concluded, the right to use the premises for residential purposes was limited to those parts for which planning consent had already been obtained. That would involve writing words into the user clause as opposed to treating the lessor's power reasonably to refuse its consent in clause 3(19) as impliedly limited to other aspects of a planning application”.

At [47], she observed:

“On my interpretation of the lease, the power to refuse consent to a planning application was not granted to enable the landlord to cut down the user clause”.

Lord Wilson JSC held that if the landlord was entitled to withhold consent to an application to change the permitted use to residential use, “the provisions of clause 3(11) would be deprived of substantial effect” and that “any permissible withholding of consent in such circumstances would in effect rewrite clause 3(11)” ([61]). He concluded at [62]:

“Like the courts below, I cannot accept that an express grant of permission for residential use can – reasonably – be overridden by the freeholders deployment of an entirely unfocussed provision in relation to applications for planning permission”.

As will be apparent from the paragraph just quoted, Lord Wilson JSC analysed the effect of the condition on the rights he held were afforded by clause 3(11) through the prism of reasonableness, albeit I understand the effect of his conclusion to be that such a condition could never be reasonable for the purposes of clause 3(19), rather than that the condition was not reasonable on the facts of the particular case.

I accept that Lord Briggs JSC’s judgment provides a salutary warning that a court cannot substitute its own judgment for that of the contractual decision-maker, and turn what is essentially an evaluation of fact into an issue of law for the court by concluding that a consent provision was originally included in a contract to serve a particular purpose, and then holding that refusing consent for any other purpose falls outside the consent provision as a matter of construction. It may be that the boundary between law and fact as it was drawn in some of the consent provision authorities may now fall to be re-evaluated. However, Sequent Nominees clearly did not decide that it is no longer necessary to construe a consent provision in the context of the contract as a whole, nor render illegitimate the approach of construing such clauses on

There is one further issue addressed in the authorities which consider consent provisions on which the parties made submissions, and with which I should deal (although it is not determinative of the dispute in this case): how far it is permissible for the consent-provider to impose a condition on its consent which would increase its contractual entitlements. In the landlord and tenant context, it has been held that “it will not normally be reasonable for a landlord to seek to impose a condition which is designed to increase or enhance the rights that he enjoys under the lease”: Phillips LJ in Mount Eden Land Limited v Straudley Investments Limited (1996) 74 P&CR 306, 310-311.

I accept INEOS’ submission that the mere fact that through the imposition of a condition, the consent-provider may acquire an entitlement to something it did not previously have does not automatically render the condition illegitimate. In particular, a condition may have this effect but otherwise be legitimate where it provides a mechanism for addressing a legitimate concern on the part of the consent-provider in relation to the consequences of providing consent, with the result that the benefit obtained is compensatory or mitigatory in nature. In Sargeant v Macepark (Whittlebury) Limited [2004] EWHC 1333 (Ch), Lewison J observed at [48]:

“When considering the reasonableness of conditions, it seems to me that if the landlord would have been entitled to refuse consent on some particular ground, a condition neutralising the landlord's concern will ordinarily be reasonable. The most common example would be a case in which the landlord would be entitled to refuse consent to an assignment to a financially weak assignee, but in fact grants consent on condition that the assignee's obligations are guaranteed or that the assignee puts up a rent.”

Another authority on which INEOS placed significant reliance was Barclays Bank Plc v UniCredit Bank AG [2014] 2 All ER (Comm) 115. This was also a case in which the condition imposed was essentially compensatory in nature. The counterparty sought the bank’s consent to the early termination of a swap agreement, the contract providing “such consent to be determined … in a commercially reasonable manner”. The bank was only willing to grant its consent on condition that it receive a payment representing the net value of the swap to it had it run its full term. Longmore LJ held that the amount demanded – which seemed “to be a rough and ready assessment of its loss of profit” – was not commercially unreasonable ([23]).

These cases demonstrate that it may well be legitimate for the consent-provider to impose a condition intended to protect or compensate for a benefit it enjoyed under the contract which the course for which consent is sought would impair. However, that is obviously very different from imposing a condition which would impair a right which the party seeking consent enjoys under the contract.

The terms of the TPA which featured in argument are set out in the attached schedule. The parties’ rival submissions raised a number of overlapping issues as to the proper meaning and effect of the TPA, which I address below.

It was a significant feature of Mr Allen QC’s (counsel for Apache) argument that the TPA was a “life of field” agreement, by which he meant that the TPAs had no fixed duration, but continued for so long as hydrocarbons are produced from the Shipper’s Fields unless one of the express termination provisions was exercised.

There were a number of provisions of the TPA which supported Mr Allen QC’s argument that it was an agreement of indefinite duration, rather than one in which the principal provisions only extended to production up until the end of 2020, absent further agreement. In particular:

In support of its argument that the TPA was not a “life-of-field” agreement, at least in the sense that Apache’s rights and obligations did not automatically continue for the life of the field, INEOS points to the language of clause 5.01 and the terms of Attachment F, the effect of which it says was to limit certain of Apache’s rights and obligations to the period to the end of 2020. I now consider these provisions.

Clause 5 of the TPA is concerned with “Quantities”, and in particular, the quantities which Apache can tender for delivery to the FPS on any one day “during the Contract Year in question”. Clause 5.01 imposes two daily limits:

It is through the mechanism of the FMQ that INEOS submits the TPA imposes a time limit on certain of Apache’s rights and obligations, such that they do not continue after 2020 absent INEOS’ consent to an appropriate amendment to Attachment F. INEOS’ argument, as further developed in supplemental submissions filed at the Court’s request after the hearing, was as follows:

The suggestion that this elaborate regime is given contractual effect through the use of the term FMQ and Attachment F is surprising:

INEOS submits that the time limit for which it contends arises from the provision in clause 5.01 that “the FMQ for each Quarter …. shall not exceed the maximum specified in respect of that Quarter in Attachment F in force at that time”, which is said to have the effect that if Attachment F does not address the Contract Year in question, the FMQ is zero. However:

INEOS recognised in its supplemental submissions that its argument that Apache’s entitlement to tender hydrocarbons under clause 5.01 of the TPA ended at the end of 2020 absent agreement to a revised Attachment F would be seriously undermined if

Clause 2.01(a) of the TPA, which defines Apache’s obligation to tender Shipper’s Pipeline Liquids for transportation through the FPS, provides as follows:

“Subject to the terms and conditions herein contained, the Shipper undertakes to tender for delivery at the Transfer Point its total production of Shipper’s Pipeline Liquids”.

(emphasis added). The definition of Shipper’s Pipeline Liquids includes a requirement that they are liquids which “subject to the terms of this Agreement, the Shipper is entitled to have transported and processed under the terms of this Agreement”.

INEOS argued that Apache has no contractual entitlement to transport hydrocarbons in excess of the FMQ on the FPS, and that it was therefore free to transport any such hydrocarbons by any means open to it. It must follow on INEOS’ argument that this is the case in the period up to 2020, in respect of amounts in excess of the FMQ on any particular Day, as well as for the period after 2020 if no revision to Attachment F is agreed.

However, this argument faces the immediate difficulty that clause 5.06 of the TPA treats Additional and Spot Quantities, which are not subject to an FMQ or Attachment F, as falling within the definition of Shipper’s Pipeline Liquids (because the clause addresses the position where “the Shipper wishes to deliver … quantities of Shipper’s Pipeline Liquids in excess of the FMQ”). This is also true of clauses 6.01 and 9.04(a).

That suggestion becomes all the more surprising when regard is had to the fact that the TPA does make express provision for Apache to be able to make alternative transportation arrangements for Shipper’s Pipeline Liquids, but in very limited circumstances.

Clause 5.05(d) addresses “Shipper’s Pipeline Liquids” from “a previously undeveloped hydrocarbon accumulation”. For that specific class of hydrocarbons, the TPA provides as follows:

“If … the daily quantity of such Shipper’s Pipeline Liquids for such an accumulation together with the existing Shipper’s Pipeline Liquids for any Quarter would exceed the Production Profile for that Quarter given in Attachment F, then the following arrangements shall apply:

(i)

Shipper shall seek a change to the Production Profile in Attachment F for such increased quantities in accordance with clause 5.05(a).

(ii)

And if there is insufficient Uncommitted Capacity in the Forties System for the whole of such Shipper’s Pipeline Liquids from that accumulation and/or the specification by reference to Attachment C for such Shipper’s Pipeline Liquids for that accumulation is not accepted by [INEOS];

(iii)

the Shipper shall be entitled to make alternative transportation arrangements for the Shipper’s Pipeline Liquids for that accumulation or part thereof”.

There are a number of features of this provision which are noteworthy in the context of the present debate:

The other provision which expressly entitles Apache to transport Shipper’s Pipeline Liquids other than through the TPA is the express qualification of the clause 2 obligation in clause 4.05 of the TPA. That is limited to circumstances in which and “to the extent that” INEOS fails to accept Shipper’s Pipeline Liquids into the FPS for reasons of Force Majeure … for any reason not caused by the Shipper”.

In the face of the apparently clear terms of clause 2.01(a), and given that the TPA makes express provision for two limited circumstances in which Apache is entitled to use other means of transporting Shipper’s Pipeline Liquids, I am unable to accept INEOS’ argument that it is implicit in the TPA that Apache is entitled to transport any hydrocarbons in excess of the FMQ by other means.

These are not the only difficulties with INEOS’ argument that Apache is under no contractual obligation to ship Shipper’s Pipeline Liquids above the FMQ in Attachment F through the FPS. Another difficulty is created by clause 3.03(b):

INEOS argues that the implicit limitation for which it contends “is the only sensible way of reading clauses 2.01(a) and 5.01 together” because “Apache cannot be obliged to tender its production under clause 2.01 in circumstances in which clause 5.01 states that it cannot tender those liquids because they would exceed the applicable FMQ”. INEOS suggests that it is possible to test that argument by considering the position where INEOS is unable to consent to a revision to Attachment F because there is “no Uncommitted Capacity in the FPS”.

As to this argument:

In its supplemental submissions, INEOS accepted that the better view is that Apache was obliged to seek INEOS’ approval to a revised Attachment F if it continues production from the Shipper’s Fields after 2020. That was a realistic submission in circumstances in which:

Further, I find that Apache was not entitled to condition any request for an amendment to Attachment F to provide for production after the end of 2020 on INEOS’ agreement to vary the TPA, e.g. by reducing the contractual tariff, amending the “Send or Pay” provisions to Apache’s advantage or by enlarging Apache’s entitlement to make alternative transport arrangements. There is simply nothing in the language of clause 5.05(a) which provides a basis for Apache conditioning its request in this way, and I am unable to accept Ms Tolaney QC’s (counsel for INEOS) submission that Apache could, in appropriate circumstances, condition a request for

For the reasons I have set out above, I have concluded that Apache’s obligation to transport Shipper’s Pipeline Liquids did not cease at the end of 2020 merely because the existing Attachment F did not address the period from the end of 2021 onwards, with the result that if Apache carried on producing Shipper’s Pipeline Liquids, it remained obliged to transport them through the FPS, subject to the two very limited exceptions in the TPA.

INEOS also accepted that, even if no amended Attachment F was agreed, Apache would retain its entitlement to tender Additional and Spot Quantities under clause 5.06, subject to the throughput restrictions created by clause 11, and that the existing contractual tariff would continue to apply to such tenders, because clause 5.06(a) and

Further, even if INEOS does agree to the amendment of Attachment F to reflect the fact that Apache’s production profile for the Shipper’s Fields now extends to 2040, and Apache accepted the condition of an increase in tariff, that would not involve an unqualified contractual commitment by INEOS to continue to operate the FPS for that period in return for payment of the new tariff. The qualification of INEOS’ maintenance obligation in clause 4.02 of the TPA would continue to operate, as would the right of termination under clause 18. In addition, INEOS would retain its right to elect for costs share.

Clause 7.01 sets out a base tariff for “the Services” which is to be escalated over time using the formula in clause 7.02. Clause 7.02 provides for escalation without limit as to time (“from the commencement of each Quarter for application of each Month of the Quarter”). Clause 7.03(b) addresses two contingencies in which the escalation provision might not work – where one of the indices by reference to which escalation is to be conducted ceases to be published or where the weightings of an index change over time – but there are no other provisions which allow for the formula to be revised or adjusted. In particular, there is no re-basing provision of the kind which is sometimes seen in long term supply contracts.

The figure generated by the formula in clauses 7.01 and 7.02 feeds into other express provisions of the TPA:

These provisions assume that the clause 7.01 and 7.02 tariff remains payable unless and until INEOS exercises its right under clause 7.05 to change to a costs-share charging basis, and they are capable of operating as well after 2020 as before. The presence of the clause 7.05 option, together with the qualification of INEOS’ maintenance obligation in clause 4.02, and the right of termination in clause 18, mean that it cannot be said that INEOS might be obliged to continuing operating the TPA after 2020 even if it was no longer economic to do so at the existing tariff. Nor does the fact – as I am asked to assume – that BPEOC originally calculated the tariff on the basis of production continuing to the end of 2020, assist INEOS, in circumstances in which the period of operation of the tariff was not so limited by the TPA, and when there is no suggestion that BP’s calculations were shared with Apache in any event.

However, I accept that if the parties agree to a change in tariff as the price of an amendment to Attachment F, then these provisions can operate perfectly happily on the basis of the newly agreed tariff. Nonetheless, the provisions relating to the tariff in the TPA support the view that this was a central aspect of the parties’ bargain which could only be revisited to a limited extent and in limited circumstances. In particular, it is noteworthy that a change by INEOS to costs sharing gives Apache a right of termination. By contrast, if INEOS is entitled to condition its consent to an amendment to Attachment F on a change in tariff, but Apache is unwilling to agree to such change, Apache has no right to terminate the TPA.

Given the conclusions I have reached as to the proper construction of the TPA, it is in my view clear that INEOS cannot require an increase in the tariff as a condition of agreeing to the amendment of Attachment F. On the proper construction of the TPA:

Further, for the reasons set out at

Finally, I would note that even in respect of the period before 2020, INEOS’ construction would have unreasonable and unexpected commercial consequences. If, for example, production of Shipper’s Pipeline Liquids extended beyond 2020 only because a Force Majeure event affecting INEOS meant that the FPS could not be used for significant periods before 2020, INEOS would still be entitled to seek an increased tariff as a condition of consenting to the amendment of Attachment F, as it would in respect of changes to the production profile before 2020. While INEOS would no doubt argue that the contractual constraint of “reasonableness” would provide some protection for Apache in this scenario, it seems to me improbable that the parties intended that Apache should be exposed to that risk “with the protection only of a requirement of good faith and rationality” (which is what INEOS contends to be the applicable test), or that the decision must be one which might be reached by a reasonable person in the circumstances.

In these circumstances, it is not necessary for me to consider what kinds of conditions INEOS might legitimately impose on its consent to such an amendment, and what commercial or other interests INEOS might legitimately seek to advance through the imposition of conditions. Nor is it necessary to address Mr Allen QC’s argument that the purpose of INEOS’ power to withhold consent is to “provide protection to INEOS in circumstances where it would be unable, for reasons other than Uncommitted Capacity, to fulfil its clause 2 obligations”. Clause 5.05(a) encompasses a number of different types of request which may fall to be treated differently – an increase in Peak Entitlement, and amendments to Attachment F which might involve increases or reductions in FMQ, both before and after 2020 (although I note that INEOS’ consent is only referred to as being necessary for an “increase”). INEOS might well have different legitimate commercial interests in respect of different requests. Further, INEOS might find itself facing requests from more than one user for additional capacity at the same time, which might itself provide a reasonable basis for not consent to such a request in full even if Uncommitted Capacity was available.

On the proper construction of the TPA, however, what INEOS cannot do is condition its consent on Apache giving up its contractual right to tender Shipper’s Pipeline Liquids for carriage at the contractual tariff for so long as the TPA continues. That is sufficient to resolve the First Preliminary Issue.

Given my findings on the First Preliminary Issue, the Second Preliminary Issue does not arise, and I will deal with it briefly. It falls to be considered on the assumption that it was open to INEOS to make consent to the amendment to Attachment F conditional on the revision of the contractual tariff, and that factors of potential relevance to that decision are (a) the capital expenditure which it is to be assumed that INEOS is undertaking to ensure that the FPS remains operational through to 2040 and (b) the current price INEOS is charging other producers for transporting hydrocarbons on the FPS.

Apache’s explanation as to the potential relevance of these matters was as follows:

“It is anticipated that interrogation of the terms upon which INEOS acquired the FPS and its knowledge at this time will further evidence that INEOS’ conduct in conditioning its consent to an increase in tariff is simply to increase profit, thus demonstrating the unreasonableness of its conduct”.

I do not understand this explanation, nor how the amount INEOS paid for the FPS

The suggestion that the judicial determination of whether INEOS’ decision to impose a condition in 2019 involves a breach of the TPA requires a factual and expert assessment of the deal INEOS did in 2017 lacks reality. Further, the suggestion that the terms of the transfer from BPEOC to INEOS are capable of affecting the substantive rights of the parties to the TPA does not sit easily with the terms on which Apache, INEOS and BPEOC agreed to the novation of the TPA, which were intended to achieve a seamless transfer under which INEOS would stand in BPEOC’s shoes going forward. Paragraph 5(a)(1) of the Novation Deed dated 31 October 2017 provided that INEOS would be bound by the TPA “as if [INEOS] had at all times been a party to the [TP

A] in place of [BPEOC]”. There is, moreover, a certain arbitrariness in Apache’s argument (which would appear to involve different outcomes dependent on whether INEOS had purchased the FPS or simply purchased the shares of BPEOC.

Whatever commercial interest Apache may have in acquiring knowledge of those issues, and whatever forensic play Apache might think it can make of that material in any merits hearing, it will not assist the Judge. Rather it is likely to be the source of hard-fought but ultimately irrelevant satellite issues.

For these reasons, my answers to the Preliminary Issues are as follows:

the thirty six inch (36") nominal diameter submarine pipeline from Forties Platform FC via the Unity Platform to the landfall at the Cruden Bay terminal together with its export riser and associated pig-launching facilities situated on Forties Platform FC;

the Cruden Bay terminal containing, inter alia, relief facilities for the protection of the onshore pipeline, booster pumps and pig-receiving and pig launching facilities;

the onshore pipeline (including the pump stations) from the Cruden Bay terminal to the oil stabilisation, gas recovery and treatment plant located at the Kerse of Kinneil adjacent to the refinery at Grangemouth owned by BP Oil Grangemouth Refinery Limited together with the associated pig-receiving facilities; and

any facilities, owned, rented, leased or otherwise operated or controlled by BP, in addition to those set out above, which are necessary for the transportation of Pipeline Liquids from Forties Platform FC to the aforesaid oil stabilisation, gas recovery and treatment plant located at the Kerse of Kinneil.

are derived from the Shipper's Field(s); and

subject to the terms of this Agreement, the Shipper is entitled to have transported and processed under this Agreement.

Subject to the terms and conditions herein contained:

The Shipper undertakes to tender for delivery at the Transfer Point its total production of Shipper's Pipeline Liquids and undertakes to accept delivery of, or procure the acceptance of delivery of, its entitlement to Forties Blend and Raw Gas at the appropriate Redelivery Points.

BP undertakes to provide the Services by accepting all Shipper's Pipeline Liquids properly tendered for delivery hereunder by the Shipper at the Transfer Point, to transport such Shipper's Pipeline Liquids in conjunction with other Forties System Users' Pipeline Liquids through the Forties Pipeline and to process such Shipper's Pipeline Liquids at the Kerse of Kinneil and to handle within the Forties System the resultant Forties Blend and Raw Gas and to deliver the Forties Blend and Raw Gas at the appropriate Redelivery Points.

BP and the Shipper shall exercise their respective rights and discharge their respective obligations hereunder to the standard of a Reasonable and Prudent Operator.

Effective date

Commencement Date

Termination

This Agreement shall continue in full force and effect until termination upon the earlier of the following occurrences:

Notwithstanding the provisions of Clauses 3.03(a)(i), (ii), (iii) and (iv), either Party shall have the right to terminate this Agreement by giving ninety (90) Days' notice to the other:

Services

to accept Shipper's Pipeline Liquids tendered by the Shipper at the Transfer Point and to transport such Shipper's Pipeline Liquids (which may be in conjunction with the

to process at the Kerse of Kinneil such Shipper's Pipeline Liquids to produce Forties Blend and Raw Gas and to make fit for disposal into the Firth of Forth any water separated from Shipper's Pipeline Liquids;

to store temporarily such Forties Blend in the Dalmeny tank farm; to deliver the said Forties Blend free on board tankships to be provided (or procured to be provided) by any member or members of the Shipper at the Redelivery Point (Forties Blend), or, following agreement between the relevant Parties, to deliver the said Forties Blend free into pipeline at the Kerse of Kinneil approved meters, such meters currently being located at the following flow recording and totalising quantity meters ("FRQs") as specified by BP at the Kerse of Kinneil: FRQ 505, FRQ 506, FRQ 507, FRQ 508, FRQ 509, FRQ 510 and FRQ 511; and

to deliver such Raw Gas to the Shipper at the delivery points for Raw Gas which are currently located at the following flow elements ("FEs") as specified by BP at the Kerse of Kinneil: FE304, FE305, FE313, FE318, FE404, FE405, FE413 and FE418.

Provision of the Forties System

Other Pipeline liquids

Temporary Alternative Arrangements

Firm Maximum Quantity

the FMQ for each Quarter of the Next Contract Year must be the same as was nominated for the corresponding Quarter of the Subsequent Contract Year in the immediately preceding notice; and

the FMQ for each Quarter of the Subsequent Contract Year shall:

subject to the limitations in Clause 5.01(a) to (b), each FMQ and EMQ notified shall be the Shipper's bona fide best estimate of maximum daily production during the relevant Quarter.

Estimated Average Daily Production

For the remainder of the Contract Year on and from the Commencement Date the Shipper's estimated average daily production of Shipper's Pipeline Liquids (on a dry basis) and the completion of Shipper's Pipeline Liquids for each month of that Contract Year shall be as notified by the Shipper at Completion. Thereafter at the same time as notice of the FMQ is given in Clause 5.01(a), the Shipper shall advise BP of the estimated average daily production of Shipper's Pipeline Liquids (on a dry basis) and composition of Shipper's Pipeline Liquids for each Month of the forthcoming Contract Year that it expects to deliver at the Transfer Point. Thereafter, the Shipper shall inform BP of any change to any quantity or quality of the Shipper's Pipeline Liquids prior to the first Day of each Quarter.

If, during the Contract Year in question, the Shipper foresees deviation from the profile in (a) above of more than twenty percent (20%), the Shipper shall notify BP of such an expected deviation.

Monthly nominations information

its best estimate of the daily quantities (including any Additional Quantities) of Shipper's Pipeline Liquids which the Shipper wishes to deliver at the Transfer Point and the composition thereof for the following Month; and

its best estimate of the daily quantities (including any Additional Quantities) of Shipper's Pipeline Liquids which the Shipper wishes to deliver at the Transfer Point and the composition thereof for the forthcoming three (3) Months following the Month referred to in Clause 5.03(a).

Increase to Peak Entitlement and FMQ

If the Shipper requires either to increase the Peak Entitlement specified in Clause 5.01 or amend Attachment F then subject to there being Uncommitted Capacity in the Forties System, BP shall not unreasonably withhold its consent to such increase.

If the Shipper requires within a Contract Year, to increase the FMQ to a new FMQ not exceeding the current Peak Entitlement, then provided always that the Shipper has served a notice at least 30 days prior to the commencement of the Quarter in respect of which the increase is being requested and subject to there being Uncommitted Capacity in the Forties System, BP shall not unreasonably withhold its consent to such increase.

If within a Contract Year the Shipper requires to decrease the FMQ for a Quarter then provided:

If in any Contract Year, the Shipper wishes to deliver Shipper's Pipeline Liquids from a previously undeveloped hydrocarbon accumulation and the daily quantity of such Shipper's Pipeline Liquids for such an accumulation together with the existing Shipper's Pipeline Liquids for any Quarter would exceed the Production Profile for that Quarter given in Attachment F, then the following arrangements shall apply:

Additional and Spot Quantities

If at any time the Shipper wishes to deliver at the Transfer Point quantities of Shipper's Pipeline Liquids in excess of the FMQ determined pursuant to Clause 5.01 for [the period in question] then, subject to Clause 11 (Throughput Restrictions), BP shall not unreasonably withhold consent to a request by the Shipper for the delivery of such additional quantities ("Additional Quantities"). Requests for Additional Quantities shall be made in accordance with the procedure set out in Clause 5.03 and shall be subject to all the relevant terms and conditions of this Agreement.

If at any time the Shipper wishes to deliver on a day at the Transfer Point quantities of Shipper's Pipeline Liquids in excess of the FMQ and any Additional Quantity, BP may at its absolute discretion, consent to a request by the Shipper for the delivery of such incremental quantities ("Spot Quantities") provided always that BP shall be entitled at its absolute discretion to withdraw its consent at any time prior to the delivery of the Spot Quantities in question. In the event that Spot Quantities are delivered pursuant to the terms of this Clause 5.06(b) the same shall be accepted subject to all relevant terms and conditions contained in this Agreement.

Information

Transportation Tariff

Escalation

Send-or-pay

With effect from the Commencement Date and with respect to each Contract Year of this Agreement thereafter until such time (if any) as the Shipper is required to pay a charge pursuant to Clause 7.05, the Shipper shall be obliged to pay for, whether or not sent, a minimum of sixty five per cent (65%) of the sum of the daily FMQs applicable during such Contract Year pursuant to Clause 5.01, as may be adjusted from time to time pursuant to the terms of this Agreement (herein referred to as the "Tariff Minimum Quantity"), unless the Shipper is able to demonstrate that the reason for not sending said quantity of Shipper's Pipeline Liquids is caused by reservoir failure not foreseeable by a Reasonable and Prudent Operator when submitting notice pursuant to Clause 5.01.

In the event of a throughput restriction or a reduction in capacity in the Forties System or any part thereof or any other circumstances, which is not attributable to any act or default of the Shipper, causing a reduction in or suspension of the provision of the Services to the Shipper, the Shipper shall be obliged to pay for, whether or not sent, a minimum of sixty five per cent (65%) of that quantity of Shipper's Pipeline Liquids for the Contract Year in question which BP is in such circumstances obliged, able and willing to accept and process having regard to Clauses 11.01, 11.02 and 20 and the Tariff Minimum Quantity shall be reduced accordingly.

If the quantity of Shipper's Pipeline Liquids actually delivered in any Contract Year is less than the Tariff Minimum Quantity for such Contract Year (as may have been reduced pursuant to Clause 7.04 (b)) then the difference between the Tariff Minimum Quantity for such Contract Year (as may have been reduced pursuant to Clause 7.04 (b)) and the quantity actually delivered during such Contract Year shall be calculated and known as the "Tariff Shortfall Quantity".

If volumes of Shipper's Pipeline Liquids actually delivered in any Contract Year is less than the Tariff Minimum Quantity, then, in addition to the tariff payable pursuant to Clause 7.01 in respect of the quantity of Shipper's Pipeline Liquids delivered during the Contract Year in question, the Shipper shall pay BP an amount calculated by multiplying the tariff specified in Clause 7.01 applicable for the Fourth Quarter of the Contract Year in question by the Tariff Shortfall Quantity. The additional amount payable shall be termed a "Tariff Shortfall Payment".

BP's operating cost option

With effect from 1st October 2015, or such later date as may be advised in writing by BP to the Shipper, BP shall have the right, upon giving not less than twelve (12) months prior notice in writing to the Shipper, to require the Shipper to pay to BP, in lieu of the tariff and fee referred to in Clause 7.01 that would otherwise have applied, a charge calculated in accordance with Attachment G. The exercise of this option does not imply any obligation on the part of BP to incur capital expenditure in relation to the Forties System.

On receipt of a notice from BP pursuant to Clause 7.05(a) the Shipper shall be entitled to terminate this Agreement. The Shipper may so terminate this Agreement by serving a notice on BP not less than ninety (90) days prior to the date on which BP's notice under Clause 7.05(a) comes into effect and any such Shipper's notice shall take effect on the date specified in such notice, provided that if such date is later than the date set in BP's notice under Clause 7.05(a) (and the operating cost charge for Forties System Users then applies) the Shipper shall continue to receive Services pursuant to this Agreement until the date specified for termination in its notice on payment to BP of the operating costs as calculated in accordance with Attachment G.

Free barrels

A Free Barrel accrues to the Shipper in respect of any Barrel which:

Invoicing and payment of tariffs

Until charges calculated in accordance with Attachment G apply, then promptly following the last Day of each Month BP shall invoice the Shipper in respect of the tariff payable pursuant to Clause 7.01 (including any adjustments pursuant to Clause 8.02) and other operating charges which may arise pursuant to this Agreement in respect of the quantity of Shipper's Pipeline Liquids delivered at the Transfer Point in the Month in question.

Promptly following the last day of each Contract Year BP shall, as appropriate, invoice Shipper in respect of any Tariff Shortfall Payments.

In the event that charges calculated in accordance with Attachment G apply, then promptly following the last day in each Quarter in which the Shipper is required to pay a charge pursuant to Clause 7.05 and Attachment G, BP shall invoice the Shipper for such charge calculated in accordance with said Clause 7.05 and Attachment G (including any adjustments pursuant to Clause 8.02).

Within ten (10) Working Days following the receipt of each invoice the Shipper shall pay to BP the amounts of the invoices (net of credit notes). Such payment shall be made in pounds sterling by telegraphic transfer by the Shipper to BP's account number 00118540 with The Royal Bank of Scotland plc, 30 Bothwell Street, Glasgow G2 6PB (Sort Code 83-37-00), or such other account as may be notified by BP to the Shipper from time to time, quoting the invoice number against which payment is made.

Flow rates

Save as otherwise previously agreed in writing by BP the FMQ, any Additional Quantity, and any Spot Quantity shall represent an absolute number of Barrels of

Save as previously agreed by BP in writing the instantaneous flow rate of Shipper's Pipeline Liquids at the Transfer Point shall not at any time exceed one hundred and ten per cent (110%) of the latest flow rate specified to BP.

Save as previously agreed by BP in writing the instantaneous flow rate of Shipper's Pipeline Liquids at the Transfer Point shall not vary by more than ten per cent (10%) over a continuous period of twenty four (24) hours, from the latest flow rates specified to BP.

Reduction of throughput entitlement

Without prejudice to the provisions of Clause 6.03(a) and (b) and 11.02(a) if at any time the capacity of the Forties System is below the Total User Requirements at the time in question, BP shall, to the extent necessitated by such reduced capacity, reduce for the period of such reduced capacity the entitlement of the Shipper to deliver Shipper's Pipeline Liquids into the Forties System according to the following principles:

Good faith discussions

Shipper's right to terminate