In England and Wales, the Crown has the power to grant licences to third parties to search and bore for oil (under Petroleum (Production) Act 1934). But, that licensing regime does not confer any right to access the oil – which means that the licensee will normally have to acquire the rights to the oil by privately negotiating an agreement for access with the landowner. If no such agreement can be reached, then the licensee can ask the court to grant him access, which the court will do if it considers that granting such a right is in the national interest.

But, what happens if a licensee simply goes ahead and extracts oil without the landowner’s permission? In a recent case, a company bored some 2,000 ft under the land (by drilling sideways from adjoining land). The landowner eventually started proceedings for trespass and claimed damages based on a presumed royalty of 9% of the value of the oil extracted.

The case ended up in the Supreme Court. In its view, there had clearly been a trespass. The only issue therefore was the amount of damages. The starting point is to remember that damages are meant to be compensatory, and thus the basic principle in a trespass case is to assess the loss incurred by the landowner (and not the gains made by the trespasser). In this case, given the provisions of the 1934 Act, the court decided that compensation should be assessed on similar principles to those under compulsory purchase, given that the oil company could have gone to the court for an order requiring access. In practice, such an order would have been made and compensation of under £100 would have been ordered. However, the likelihood is that negotiations would have taken place, and in the court’s view £1,000 would have been the maximum that the oil company could have been expected to agree to. At the end of the day, therefore, the Supreme Court upheld the CA’s award of a mere £1,000 (far less than the £6m that the landowners had been looking for).

The case is obviously of limited application since few clients have oil under their land. But it is a reminder that trespass will apply to any encroachment under the surface of the land. Star Energy v Bocardo [2010] UKSC 35 (access free at www.practicalconveyancing.co.uk). Source: Herbert Smith.