Greenland, the world's largest island, is one of the areas in the world where oil and gas resources have been least explored. This is largely owing to the extreme natural conditions, remote location, sensitivity towards environmental issues and hence high exploration costs.
Greenland is a semi-independent part of Denmark. It became an integral part of the Danish Realm in 1953. It joined the European Community (now the EU) with Denmark in 1973, but withdrew in 1985. Greenland was, following a referendum, granted self-government (home-rule) in 1979 by the Danish parliament. In 2008, another referendum regarding Greenland's autonomy was held. Based on the results of the referendum (although non-binding) and the adoption of the Greenland Self-Government Act,2 Greenland has had self-government from 21 June 2009. Although Denmark exercises control over several policy areas on behalf of Greenland, including foreign affairs, security and financial policy (in consultation with Greenland's self-rule government), Greenland itself owns and has disposal rights over oil and gas resources in Greenland.
Greenland has considerable potential hydrocarbon resources and a supportive political and legal framework; however, Greenland continues to struggle to sustain a thriving oil and gas industry. Despite several exploration licences having been issued, there is currently no active oil or gas production in Greenland.
Oil and gas licensing in Greenland started in the early 2000s, with licensing rounds in 2002, 2004, 2006, 2010 and 2012–13. In addition, Greenland has offered separate open-door procedures in the Jameson Land, South West Greenland and most recently the Disko-Nuussuaq area, which is open for applications until 31 December 2018. Currently, one licensing round is being conducted for the Davis Strait, while a licensing round for Baffin Bay ended in December 2017 without any bids.
Exclusive exploration and exploitation licences for hydrocarbons have been issued to various international oil companies. Each licence is issued for a defined geographical area and time period. Licensees include Capricorn Greenland Exploration, PA Resources, ConocoPhillips Global, Maersk Oil Kalaallit Nunaat, Shell Greenland, ENI Denmark, Statoil Greenland, Chevron, BP Exploration Operating Company, DONG E&P Grønland and Greenland Gas and Oil. However, during the last year, several of the major players have surrendered some or all of their licences.
Certain non-exclusive prospecting licences have also been issued. Licensees include TGS-NOPEC Geophysical Company, Statoil Greenland, GX Technology, Capricorn Greenland Exploration, ConocoPhilips, Norwegian University of Science and Technology, EMGS, Shell Greenland, DONG E&P Grønland, GDF Suez and Cambridge Arctic Shelf Programme.
As is evident, various international oil companies from Europe and North America have been granted oil and gas licences in Greenland. With the declining investigation activities in the global oil and gas industry and the past years' dramatic fluctuations and decrease in oil prices, fewer deposits of hydrocarbons may be found commercially attractive, consequently affecting Greenland's economic situation and future economic self-reliance.
II LEGAL AND REGULATORY FRAMEWORK
Greenland exercises its own control over licensing for oil and gas exploration and production, under the authority of the Ministry of Mineral Resources.
i Domestic oil and gas legislation
The origin of Greenland's regulation of natural resources, including oil and gas, is the Danish Subsoil Act and the current regulation is found in the Mineral Resources Act3 (the Act) entering into force on 1 January 2010. Subsequent changes regarding, for example, the relevant authorities, appeals and the transfer of certain rights and obligations to the government of Greenland entered into force on 1 January 2013 with additional changes to obligations regarding public hearings of environmental impact assessments (EIA) and social sustainability assessments (SSA) entering into force on 1 July 2014. Most recently, the Act was amended in the fall of 2016 with, among others, changes to and improvements of the rules on small-scale mineral licences, which are becoming increasingly popular.4
The Act transfers the former joint Greenlandic and Danish responsibility for the natural resources in Greenland to the sole responsibility of Greenland. The Act is a framework act laying down the main principles of the administration of the mineral resources and subsoil activities. Within this framework, Greenland's government is entitled to lay down specific provisions in, for example, model licences.
The general authority for hydrocarbons is the Ministry of Mineral Resources (MMR); however the responsibility for social aspects (e.g., SIA) remains with the Ministry of Labour, Industry and Trade (MILT). Environmental aspects are handled by the Environmental Agency for Mineral Resources Activities (EAMRA) and the day-to-day aspects of the industry as well as licence applications are handled by the Mineral Licence and Safety Authority (MLSA). The Department of Geology under the MMR is responsible for geological matters. In general, licences for hydrocarbons are granted by the government.5
The aim of the Act, and as such the responsibility of the government and of the established authorities is to ensure that performance of activities required under the Act are carried out in accordance with acknowledged best international practices under similar conditions. Complaints about decisions made by the MLSA or the EAMRA may be brought before the government within a six-week time limit from the date of notification.
In 1972 Denmark acceded to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. It was confirmed that the Convention would apply to Greenland as of 10 February 1976. Further, judicial decisions enforceable in Denmark, based on, for example, conventions to which Denmark is a party, are also recognised as enforceable by the courts in Greenland.
There are no significant trade or bilateral investment treaties entered into by Greenland, however, Greenland is a member of the World Trade Organization and its rules apply to Greenland.
Greenland has entered into double taxation agreements with Denmark, the Faroe Islands, Iceland and Norway.
Further, bilateral agreements on the exchange of information have been made between Greenland and several other countries.
An overview of the licensing possibilities for hydrocarbons (oil and gas) is set out below.
The licensing generally takes place on standard 'model terms'. Such terms may be amended according to the requirements for the licence in question.
Hence, the focus here is on the requirements set out in the Act as these requirements establish the framework for the terms of the licences issued. In general, any interested party may apply for a licence for prospecting, exploration or exploitation within a specific geographical area. During the application process for exploration or exploitation, the MLSA will, in particular, attach importance to the technical and financial capabilities of the applicant as well as how the applicant intends to carry out the exploration or exploitation or both, as set out in more detail below.
A licence for hydrocarbons may be obtained through one of the following procedures:
- an open-door procedure by which a certain geographical area, within a specified period of time as determined by the Greenlandic self-government, is open for applications for licences;
- a licensing round whereby the Greenlandic self-government offers a specified geographical area for licensing based on specific licensing terms;
- a 'specific licensing round' if an application for a licence for an area has been handed in outside of a licensing round and the government is of the opinion that the application should be considered; and
- a 'neighbouring procedure' whereby a licensee based on geological or exploitation considerations is granted a licence to an adjoining geographical area.
Regardless of the specific procedure of licensing, any licence for prospecting, exploration or exploitation of hydrocarbons is granted through an application process operated by the MLSA. Any licence will be granted in accordance with the Act and will be based on the terms and conditions published in connection with the licence procedure in question. Any licence will be subject to the payment of fees and charges stated in the licensing documentation. Certain fees and charges may be changed during the term of the licence.
Irrespective of the procedure used, a prospecting licence may be granted for a period of up to five years with the possibility of extensions. A prospecting licence is non-exclusive, and, therefore, several different licences for prospecting may cover the same geographical area.
In respect of licences for exploration, such licences are usually granted for up to 10 years with the possibility of extensions of up to three years at a time. Licences for exploration are normally exclusive for the area covered by the licence. In general, the terms of an exploration licence will set out the obligations on the licensee to explore the area as well as obligations in respect of areas that must be relinquished during the term of the licence.
A licensee holding a licence for exploration of a specific geographical area has a right to obtain a licence for exploitation in such area provided that the licence terms of the exploration licence have been fulfilled.
Licences for exploitation are normally granted for a period of 30 years. A 'stand-alone' exploitation licence may be granted for a period of up to 10 years with the possibility of multiple extensions; each extension may be granted for a period of up to three years.
The aggregate period of (extended) exploitation licences may not exceed 50 years.
ii Restrictions on foreign participation, capital requirements and legal immunity
Any licence for exploitation of hydrocarbons may only be granted to a public limited company domiciled in Greenland (see below). Such licensed company may only carry out the activities set out in the licence and may not be subjected to joint taxation, unless joint taxation is mandatory. Furthermore, licensed companies must trade on arm's-length terms and not be more thinly capitalised than the rest of the group of companies to which the company holding the licence belongs. However, the licensed company's loan capital may exceed the shareholders' equity by up to a ratio of 2:1.
Any licence issued under the Act enjoys immunity from legal prosecution.
iii General requirements for licensees
Licences under the Act will generally include: (1) terms on the fees and charges payable to the Greenland self-government during the licence period; (2) that a company fully owned by the Greenland self-government is entitled to join in the licence on specified terms; (3) that the licensee to a certain extent may be required to employ local labour (see below); (4) that the licensee may be obligated to process exploited minerals in Greenland; and (5) that a licensee may be required to conduct surveys and prepare and implement plans to ensure that exploration and exploitation of the mineral resources in question are socially and environmentally sustainable.
A prospective licensee for hydrocarbons under the Act is subject to a number of more or less strict criteria.
Particular importance is attached to the technical capabilities of any potential licensee for exploration or exploitation licences – in short, the MLSA considers the expert knowledge of the applicants, their previous experience in exploration or exploitation of hydrocarbons (in general) and their previous experience in exploration or exploitation of hydrocarbons in places with conditions comparable to those of Greenland.
An exploration or exploitation licence will usually place an obligation on the licensee to make very substantial investments prior to the commencement of any commercial activities. Additionally, there are specific requirements regarding the capital or financing of the licensee that must be upheld as set out above. Hence, the financial capability of any potential licensee of hydrocarbons is closely considered. The MLSA generally requires a full parent guarantee as well as an insurance policy to cover any liability arising under the licence applied for. Any licensee of offshore activities must be a member of the Offshore Pollution Liability Association Ltd (OPOL).
The fees for the submission of an application under the 2018 licensing round are 50,000 Danish kroner and 200,000 kroner for the granting of an exploration and exploitation licence or for the extension for exploration purposes. The annual fee for an exploitation licence is 1 million kroner. Further, the licensee must reimburse the MLSA for all costs and expenses incurred in the processing of the application. Additional amounts based on royalties and drilling commitments, etc., will also be payable.
iv Specific technical and financial selection criteria
In the selection of licensees for exploration and exploitation licences, particular importance is attached to the technical and financial capabilities of the applicant, as well as the relevant authorities' assessment of the applicant's former activities in Greenland (if any). If there is more than one applicant for a specific geographic area, particular importance will be attached to the date of the application, the applicant's previous experience from activities in Greenland and possible previous fieldwork carried out by the applicant in the licence's geographic area. Additionally, the applicant's offer to provide training and employment to Greenlandic labour for fieldwork regarding the specific exploration project is considered.
Further, an applicant's past lack of efficiency or instances of non-performance of obligations under previous licences will also be taken into consideration by the MLSA in the assessment. Additionally, other relevant, objective and non-discriminatory criteria may be taken into consideration in order to select among equally qualified applicants.
IV PRODUCTION RESTRICTIONS
Under the Act and the standard terms for hydrocarbon prospecting licences (issued March 2009), there are no restrictions on production entitlements, no restrictions on exports of oil and gas, no requirements for sales of production into the local markets and no laws applicable to price setting related to oil or gas. This does not, however, preclude the the government from applying these or similar production restrictions in the granting of a licence on a case-by-case basis.
V ASSIGNMENTS OF INTERESTS
Under the standard terms for hydrocarbon prospecting licences (issued March 2009), a licence or any part thereof cannot be directly or indirectly transferred to any other party unless the transfer is approved by the government, in accordance with the Act. A similar wording is included in the model licence for the 2018 licensing round. There are no express statutory rights of first refusal or preferential purchase rights upon transfer. A fee is payable on approval of any transfer.
The tax authorities of Greenland consist of two administrative bodies: the Tax Administration and the National Tax Board.
The Greenlandic tax system is quite simple compared to most other developed countries, with only a few tax and fiscal acts.
Companies pay corporate income tax. Companies subject to the Mineral Resources Act may apply for a partial exemption reducing the corporate income tax rate.
Resident companies are subject to tax on their global income. A company is deemed resident if it is incorporated in Greenland. The general tax rate for companies is 30 per cent plus a surcharge of 6 per cent of the tax paid for the income year of 2018. Accordingly, the total effective tax rate is 31.8 per cent for the income year 2018.
There is no specific mineral resources tax act. Accordingly, taxes are payable in accordance with the ordinary tax legislation, namely the Act on Income Taxes. However, companies operating under the Mineral Resources Act (licensees) may apply for an exemption of the surcharge of 6 per cent, thereby lowering the effective corporate tax rate from 31.8 per cent to 30 per cent for the income year 2018. Further, licensees must pay certain fees and surplus royalties to the government pursuant to the Mineral Resources Act.
A licence to mineral resources may include provisions for the payment of an annual fee calculated on the basis of the size of the area covered by the licence (land fee). Further, conditions on payment of a fee calculated on the basis of extracted raw materials, etc. (production fee), or conditions on payment to Greenland of a share of the profits from the activities under the licence (dividend fee) may apply. The fee provisions are set out in the licences.
If a company transfers a part of or its entire prospecting or exploration licence, the Act on Income Taxes states that the seller of the licence is not obligated to include the consideration in the taxable income if the seller receives payment in a form where the buyer undertakes the prospecting or exploration expenses. To apply this rule, the selling company must meet certain requirements and if these requirements are met, including that all expenses are deductible as operating expenses for the company bearing the expense, the consideration will not be subject to taxation.
VII ENVIRONMENTAL IMPACT AND DECOMMISSIONING
The Act contains elaborate provisions on the protection of the environment. The provisions aim to prevent, limit and control pollution of and other impact on nature and the environment due to activities carried out pursuant to the Act. It is a general prerequisite that any activities to be carried out under the Act that may result in pollution must be carried out in a place where the danger of pollution is limited to the extent possible. Further, any licensee meeting the obligations under a licence must ensure and promote the use of the best available techniques, including the least-polluting facilities, machinery, equipment, processes, technologies, raw materials, substances and materials and the best possible measures for the reduction of pollution insofar as this is technically, practically and financially feasible.
As regards the more general protection of the environment, the Act sets out that if an activity or a facility is presumed to have a significant negative impact on the environment, a licence or an approval may only be granted on the basis of an assessment of the impact of the activity or facility on the environment and after the public and the authorities, etc., being affected have had an opportunity to express their opinion.
This requires that an environmental impact assessment (EIA) is carried out prior to, for example, exploitation of hydrocarbons. The EIA must be carried out and paid for by the applicant according to the guidelines issued by the authorities. Additionally, the authorities may require that a social impact assessment (SIA) is carried out in the event that an activity under the Act is assumed to have a significant impact on social conditions. This assessment must also be carried out at the cost of the applicant and in accordance with the guidelines set out by the authorities. The authority responsible for the SIA is the MILT.
Environmental damage is defined as: (1) the pollution of the soil, the sea, the sea floor, the subsoil, water or air; (2) pollution of or other negative impact on the climate; (3) pollution of or other significant negative impact on nature, including human beings, fauna or flora; and (4) significant disturbance of nature, including human beings, fauna or flora owing to noise, vibrations, heat, light, etc. The party responsible for environmental damage is stated as the party performing, being in charge of or supervising the performance of an activity under the Act. In this respect note that if the party concerned is a party other than a licensee of the licence relating to the activity, the licensee is jointly and severally liable and responsible for the activity in question.
Based on the licence's strict liability for (also) environmental damage the licensee must pay compensation for such damage. Hence, compensation must be paid for personal injury and loss of dependency; damage to property; other financial losses; reasonable costs of measures to prevent and mitigate pollution and any other negative impact on the environment, climate and nature. The same applies to the restoration of the environment and nature. The amount of compensation payable may under certain circumstances be reduced to a lower amount than the actual amount of damages.
There is special regulation of offshore facilities. The authorities may set out regulations to mitigate the health and safety risks on offshore facilities and it is the obligation of the licensee to identify, assess and reduce such risks to the extent possible. The authorities will set up an emergency committee with the task of coordinating the actions of the authorities in case of accidents or emergencies.
Any licence granted under the Act sets out the obligations of the licensee regarding clean-up and demolition of plants and other facilities established by the licensee as well as the monitoring by the authorities of such activities.
Any application for exploitation must set out a detailed plan with the steps to be taken upon cessation of exploitation activities regarding the plants and other facilities established by the licensee and how the area in question will be left (closure plan). In the event that the licensee intends to leave behind certain facilities that, owing to environmental, health or safety reasons will require maintenance or other measures, the closure plan must include such maintenance and other measures as well as the monitoring thereof. Further, the closure plan must set out how it will be implemented financially. The closure plan must be approved prior to any exploitation activities being commenced and such approval may include the provision of measures regarding environmental protection, health and safety. The licensee may be obliged to provide (financial) security to ensure the fulfilment of the closure plan.
Any suspension of exploitation activities requires prior approval to ensure that the facilities are adequately maintained and monitored during such suspension. Any closure plan must at all times be kept up to date considering the current exploitation activities of the licensee. The licensee must accept that the closure plan, including the financial security provided during the term of the exploitation licence, may require amendment by the authorities owing to developments in the exploitation activities and the general development of society or both.
Licensees are subject to strict liability for any acts or omissions under the licence causing damage. However, the compensation payable may be reduced or even lapse if the aggrieved party has intentionally or (grossly) negligently contributed to the damage.
The licence terms will usually require the licensee to take out insurance coverage for such liability or the provision of other (financial) security. As regards offshore activities, membership of OPOL is mandatory for the operator of the activities.
VIII FOREIGN INVESTMENT CONSIDERATIONS
Any licence for exploitation of hydrocarbons may only be granted to a public limited company domiciled in Greenland. Accordingly, the other forms of legal establishment (private limited company and branch of a foreign company) are not suitable for oil or gas licensees.
The formation of a public limited company requires one or more founders. The founders must sign a memorandum of association containing the articles of association of the company. Furthermore, the memorandum of association must contain information about, among other things, the rules concerning subscription to the share capital, formation costs, and the valuation of possible assets to be taken over by the new company. There are no residence requirements for the founders of companies in Greenland. A company may have one shareholder only, who may be a foreigner or a foreign entity.
ii Capital, labour and content restrictions
There are no restrictions in Greenland on movement of capital or access to foreign exchange.
According to the Act on the Regulation of the Accession of Labour to Greenland,6 an employer must prove that a vacancy cannot be filled by local workers before hiring foreign (also Danish) labour. The purpose of the act is to ensure the Greenlandic labour forces get priority access to work available in Greenland. However, to promote investment and completion of large-scale projects of particular importance to Greenland's economic development, Greenland has enacted the Act on Construction and Works in relation to Large-Scale Projects7 (the Large-Scale Act).
Procedures in Greenland generally operate in a transparent manner, with limited perceived exposure to or reputation of corruption. In March 2015, the MMR introduced its zero tolerance policy on corruption. In accordance with international recommendations, the MMR stated that it wants to forestall potential corruption risks by implementing a proactive anti-corruption policy. The policy also sets out guidelines applying to all employees of the MMR and its subordinate institutions on how to respond to corruption and the risk of corruption. Zero tolerance applies to conflict of interest, bribery, fraud, extortion and other forms of corruption as detailed in the policy. Greenland has also enacted the Act against Money Laundering,8 setting out detailed measures against money laundering.
IX CURRENT DEVELOPMENTS
There is currently no available information on litigations or arbitrations concerning oil and gas operations in Greenland.
The government of Greenland is currently conducting a licensing round for the Davis Strait, with applications open until 15 December 2018. Additionally, the open-door procedure covering the onshore areas of Disko Island and the Nuussuaq Peninsula in West Greenland is still open for applications until 31 December 2018. These mark the final stage of the 2014–2018 Oil and Mineral Strategy, which the government has decided to see through, although expectations for bids are low. Accordingly, the last finalised licensing round for Baffin Bay finished on 15 December 2017 with no applications. At the time of writing, this leaves the total number of active hydrocarbon licences at 18 down from 29 last summer (with companies such as Cairn, Shell and Maersk handing in licences).9 No information has been published on initiatives for a new oil strategy by the recently formed government after the election in April 2018. Meanwhile, news on positive exploration outcomes remains scarce.
The lack of interest in applications for licences may be ascribed to the recession in the investigation activities in the global oil and gas industry; however, despite the relatively open and transparent political and legal processes for licensing and production, the expenses of operating and harsh conditions in Greenland remain an obstacle to oil and gas production in a market with fluctuating (low) prices. It remains to be seen if any further licences will be issued, and whether any exploration activities will lead to licensees initiating exploitation, whereby oil or gas production will become a reality in Greenland.
1 Michael Meyer is a partner at Gorrissen Federspiel. The author is grateful to his colleagues, attorney Lars Fogh for his contribution to the section on tax, and assistant attorney Hans Nikolaj Amsinck Boie for his assistance with this chapter.
2 Act No. 473 of 12 June 2009 on Greenland's Self-Government.
3 Inatsisartut Act No. 7 of 7 December 2009 with subsequent amendments.
4 Act No. 34 of 28 November 2016. The amendment entered into force on 1 January 2017 and introduced, inter alia, the possibility to grant a small-scale licence for areas otherwise subject to exclusivity rights provided, however, that the exclusivity rights holder consents hereto.
6 Act No. 27 of 30 October 1992 with subsequent amendments.
7 Inatsisartut Act No. 25 of 18 December 2012.
8 Inatsisartut Act No. 5 of 19 May 2010.