The United Arab Emirates (the UAE) produced an average of 3 million barrels of crude oil per day in 2018, maintaining its position as the fourth-ranked OPEC member in terms of crude oil production.2 Ninety-five per cent of the UAE's proven oil reserves are based in the emirate of Abu Dhabi (Abu Dhabi),3 one of the seven emirates of the UAE, and Abu Dhabi's production accounts for almost all, if not all, of the oil exported from the UAE.
The UAE's first oil concession was granted on 11 January 1939. This agreement covered the entirety of Abu Dhabi, both onshore and offshore. The agreement was followed by similar agreements in respect of the other emirates of the UAE. Those subsequent agreements were, however, relinquished after the Second World War, as were the offshore rights in Abu Dhabi. Abu Dhabi entered into its second oil concession agreement on 9 March 1953, which covered its offshore areas.4 After a number of amendments, relinquishments and extensions, Abu Dhabi's original onshore concession expired on 10 January 2014, 75 years after its initial grant. Between 2015 and 2017, interests in a new onshore concession were granted to Total (10 per cent), BP (10 per cent), CNPC (8 per cent), Inpex Corporation (5 per cent), GS Energy (3 per cent) and CEFC (4 per cent), with Abu Dhabi National Oil Company (ADNOC) retaining a 60 per cent interest.
The expiry of Abu Dhabi's original principal offshore concession occurred in 2018. Upon its expiry, the concession area was divided into three areas, and interests totalling 40 per cent were granted to international oil companies, with ADNOC retaining a 60 per cent interest in each new concession area. The international oil companies that were granted participating interests are:
- in Um Shaif and Nasr: Total (20 per cent), PetroChina (10 per cent) and Eni (10 per cent);
- in Lower Zakum: PetroChina (10 per cent), Inpex (10 per cent), a consortium led by ONGC Videsh (10 per cent), Total (5 per cent) and ENI (5 per cent); and
- in Satah Al Razboot (SARB) and Umm Lulu: Cepsa (20 per cent) and OMV (20 per cent).
In 2018, the Abu Dhabi government announced a public competitive bidding round for additional blocks. Blocks were awarded to:
- a consortium led by Italy's Eni and Thailand's PTT Exploration and Production Public Company Limited;
- Occidental Petroleum;
- Inpex Corporation of Japan; and
- a consortium of two Indian oil companies, Bharat Petroleum Corporation Limited and Indian Oil Corporation Limited.
These grants mark the continuation of a trend that has seen the increasing participation both of the international national oil companies of Asian oil importing nations and of oil companies in which an Abu Dhabi government-owned entity has a preexisting ownership interest or joint venture. A further competitive bidding round was announced by ADNOC in May 2019.
In addition, ADNOC has focused on its midstream and downstream operations. In midstream, it brought in institutional investors to inject US$4.9 billion in ADNOC's crude pipeline infrastructure and has announced that it is building the world's largest single underground project for oil storage, with a capacity of 42 million barrels of crude oil, in the emirate of Fujairah on the eastern coast of the UAE. In addition, ADNOC has announced a strategic investment in global storage terminal owner and operator VTTI BV alongside, among others, Vitol.
In the downsteam sector, Eni and OMV have acquired 20 per cent and 15 per cent shares respectively in ADNOC Refining, which refines in excess of 922,000 barrels per day of crude and condensate at its Ruwais and Abu Dhabi-based refineries.
This chapter provides an overview of the legal regime in Abu Dhabi as it relates to oil and gas investment.
II LEGAL AND REGULATORY FRAMEWORK
i Constitutional framework
Article 23 of the Constitution of the UAE provides that the natural resources and wealth in each emirate are the public property of that emirate and that the 'community' must preserve and use those resources and that wealth for the public good and in the interests of the national economy.
Accordingly, subject to the constitution of the UAE, the laws of Abu Dhabi are the principal source of regulation applicable to the oil and gas industry in the emirate.
The Supreme Petroleum Council
The Supreme Petroleum Council (the SPC) is the supreme body responsible for the petroleum sector in Abu Dhabi. Upon its establishment, the SPC assumed the functions of the board of directors of ADNOC5 and of the former Petroleum Department of the Abu Dhabi government. Accordingly, the SPC has a number of functions:
- the SPC formulates and oversees the implementation of Abu Dhabi's petroleum policy and follows up its implementation across all areas of the petroleum industry to ensure that the goals it sets are accomplished;
- the SPC is expressly authorised to promulgate regulations in the petroleum field that the departments of the government of Abu Dhabi are required to implement and enforce;
- the SPC is responsible for setting the fiscal framework for the oil and gas industry in Abu Dhabi and, through its secretariat, for overseeing royalty and tax assessment and collection; and
- as noted above, the SPC issues decisions as are necessary for the management of oil companies owned by the emirate, in particular, ADNOC.6
The SPC is chaired by the ruler of Abu Dhabi and comprises nine other members, including prominent members of the ruling family, the UAE's Minister of Energy and the current and former Chief Executive Officer of ADNOC. The SPC is supported by a full-time secretariat.
Abu Dhabi Law No. 8 of 1978 regarding the Conservation of Petroleum Resources
The principal legislation governing oil and gas operations in the emirate is Abu Dhabi Law No. 8 of 1978 regarding the Conservation of Petroleum Resources (the Conservation of Petroleum Resources Law). Although this law is drafted in general terms, it imposes high standards on the industry, in particular requiring the use of 'the most efficient scientific techniques' and the use of machinery and materials that conform to international standards, including as regards safety and efficiency.
The Conservation of Petroleum Resources Law covers all stages of upstream petroleum operations. The construction of facilities requires prior consent, including the submission of detailed studies and technical and economic evaluations. All exploration activity requires prior consent and any data obtained must be submitted to the SPC, together with interim and final interpretations of the data.
The law also contains detailed provisions regulating the drilling, completing, reworking and abandonment of wells, including the process for obtaining consent, minimum standards to be met and reporting obligations.
Once producing, an operator must submit monthly production reports for each producing well, including daily production rates, oil-gas ratios, wellhead pressure, sediment and water content and the API gravity of oil produced. Studies must be conducted on reservoir behaviour. Operators must also conduct 'supplementary' oil-recovery operations, including gas, water or steam injection if technically and economically justified to maintain production with the prior consent of the SPC and to file monthly reports in respect of those activities.
The UAE acceded to the New York Arbitration Convention on the Recognition and Enforcement of Foreign Arbitral Awards on 21 August 2006. Abu Dhabi government-owned entities typically require that agreements to which they are party, particularly if the place of performance is within the emirate, are governed by Abu Dhabi law with disputes being subject to arbitration in Abu Dhabi.
The UAE has signed bilateral investment treaties with over 50 countries, including China, France, Germany, Italy, South Korea and the United Kingdom, all of whose international oil companies (IOCs) or national oil companies (NOCs) have invested in the emirate's petroleum sector.
i Crude oil
Crude oil concessions in Abu Dhabi are granted by the SPC, on behalf of the emirate. Although there is no prescribed form or model suite of oil concession agreements in Abu Dhabi, recent concessions have adopted the following structure:
- an interest in the concession in question is granted by the SPC on behalf of the emirate to IOCs or NOCs with the interest being so granted to such companies not exceeding 40 per cent in the aggregate, with the balance being held by ADNOC (or, in more recent concessions, with ADNOC having the option to hold a 60 per cent interest in the production phase of the concession);
- the concession agreement provides that participating oil companies are entitled to lift their participating interest share of crude oil produced from the concession during its term and to export that crude oil from the emirate;
- ADNOC and the other holders of concession rights sign a joint venture agreement, in which they agree to exploit the concession jointly and set out agreed governance structures (more recent concessions have dispensed with joint venture agreements);
- ADNOC and the other holders of concession rights appoint an operating company to operate the concession on their behalf on a non-profit making basis. The operating company is typically a company incorporated for this purpose by the ruler of Abu Dhabi by decree, with the operating company being exempted from the UAE Federal Law No. 2 of 2015 on Commercial Companies (the UAE Federal Commercial Companies Law). Initially, each concession area was operated by a separate operating company owned by the holders of the concession in their respective participating interests. In some of the more recent concessions, however, the SPC and ADNOC have sought greater operating and cost synergies by having one operating company operate more than one concession;7
- IOCs agree to maximise technology transfer to ADNOC and the operating company pursuant to master technology agreements and to provide support to them pursuant to manpower supply agreements; and
- IOCs agree to support various Abu Dhabi institutions, such as the Petroleum Institute and the Masdar Institute, and to assist in the training of UAE nationals.
The SPC expects that the entity that is party to the concession agreements is the parent company of the group or that the parent company guarantees the performance of the obligations of the relevant entity.
Abu Dhabi Law No. 4 of 1974 Regarding the Ownership of Gas by the Emirate of Abu Dhabi (the Gas Law) (1) vests in Abu Dhabi ownership of gas discovered or to be discovered in the emirate; and (2) grants to ADNOC the right to 'exploit and use' all such gas8 either alone or in partnership with others, so long as ADNOC's ownership of any project is at least 51 per cent. Foreign investment in producing the emirate's gas resources, therefore, occurs pursuant to field entry agreements with ADNOC with the joint venture being paid a fee by ADNOC for gas produced by the joint venture. Similarly foreign investment in processing and transporting the emirate's gas resources occurs pursuant to joint ventures, with ADNOC maintaining majority ownership and the joint venture being paid a processing and transportation fee. As in the case of oil concessions, foreign partners are expected to maximise technology transfer to ADNOC and the operating company pursuant to technology support agreements, to provide support to them pursuant to manpower supply agreements and to support various Abu Dhabi institutions, such as the Petroleum Institute and the Masdar Institute, and to assist in the training of UAE nationals.
The exploitation, processing and transportation of the emirate's gas resources remain subject to the jurisdiction of the SPC and any agreements require the prior approval of the SPC.
The Gas Law entitles oil companies operating in the emirate to use gas produced by them for their oil operations, including to generate power, to lift oil from reservoirs, to maintain reservoir pressure and as part of enhanced oil recovery operations. The Gas Law was amended in 2014 to allow ADNOC to charge oil companies for the use of such gas. Subject to the above, the Gas Law requires all oil companies operating in the emirate to deliver to ADNOC gas so produced by them.
In practice, ADNOC directs that gas be delivered to Abu Dhabi Gas Industries Ltd or GASCO, an operating company engaged in the extraction of natural gas liquids from associated and natural gas, whose shareholders are ADNOC (68 per cent), Royal Dutch Shell plc (15 per cent), Total SA (15 per cent) and Partex Gas Corporation (2 per cent).
IV PRODUCTION RESTRICTIONS
The UAE has been a member of OPEC since 1967 and has a history of complying with OPEC production requirements. The UAE is represented at OPEC meetings by the UAE Federal Minister of Energy, who is invariably from Abu Dhabi and a member of the SPC.
Within the emirate, the SPC sets production targets for each field and also determines whether oil is to be exported from the Jebel Dhanna Terminal in Abu Dhabi on the coast of the Arabian Gulf or from the Fujairah Terminal, an export terminal located on the Indian Ocean in the Emirate of Fujairah. The Fujairah Terminal is linked to Abu Dhabi's oil-producing fields by the Abu Dhabi Crude Oil Pipeline, which is capable of transporting 1.5 million barrels per day. The Abu Dhabi Crude Oil Pipeline and the Fujairah Terminal were commissioned in 2012 and are strategically important facilities that allow Abu Dhabi to export its crude oil directly to the Arabian Sea via the emirate of Fujairah, bypassing the Strait of Hormuz, thereby minimising shipping congestion through those straits and saving insurance costs, reducing journey time and allowing loading by very large crude carriers. As noted above, ADNOC has announced that it is building the world's largest single underground project for oil storage, with a capacity of 42 million barrels of crude oil, in the emirate of Fujairah, adding to its existing storage.
V ASSIGNMENTS OF INTERESTS
The assignment of interests in oil and gas concession agreements (or the direct or indirect transfer of shares in a group company that holds interests in concession agreements) requires the prior approval of the SPC and ADNOC, unless the transfer is to a wholly owned affiliate. Any such proposed transfer would require the early involvement of the SPC and ADNOC, particularly if it is proposed that confidential information be shared with proposed transferees. In considering whether to approve any transfer, the SPC and ADNOC are likely to consider the contribution that the proposed transferee could make to the development of the concession in question and the meeting of production requirements, through the deployment of technology and human capital.
The fiscal regime applicable to each oil concession is determined by the SPC upon grant of the concession. Details of each such fiscal regime are not publicly available, but the fiscal regimes typically involve a mixture of royalty and income tax. The SPC is also responsible for overseeing royalty and tax assessment and collection in the emirate.
The UAE, as a member of the Gulf Co-operation Council, applies the Common Customs Law under GCC Customs Union Agreement 2003, which provides for a common 5 per cent tariff on goods imported into a Gulf Co-operation Council member state.
In 2018, value added tax was introduced by the UAE.9 Most costs incurred in the oil and gas industry are likely to be subject to VAT at the standard rate of 5 per cent. However both exports generally and the supply of crude oil and natural gas are zero rated, allowing VAT to be recovered in most cases.
The UAE does not levy export duties.
VII ENVIRONMENTAL IMPACT AND DECOMMISSIONING
i Environmental Protection Law
Environmental protection in the UAE is principally subject to UAE Federal Law No. 24 of 1999 on the Protection and Development of the Environment (the Environmental Protection Law). The UAE Federal Environment Agency is tasked with developing, issuing and revising environmental protection standards in coordination with other relevant bodies and with establishing plans for dealing with environmental emergencies.
The Environmental Protection Law has the following objectives:
- the protection of the environment and the preservation of its quality and natural balance;
- the control of pollution and the avoiding of immediate or long-term damage or adverse impact on the environment resulting from economic development;
- the development of natural resources and the preservation of biological diversity within the UAE;
- the protection of human and animal health; and
- the implementation of the UAE's obligations under international treaties relating to the protection of the environment, the control of pollution and the preservation of natural resources.
Title Two of the Environmental Protection Law deals with the protection of the aquatic environment – both the UAE's coastal waters but also ground and drinking water. Article 18 prohibits the discharge of waste or polluting substances into the environment from onshore or offshore oil and gas fields unless preventative measure are in place and any discharge is treated in accordance with international practices.
Title Two of the Environmental Protection Law prohibits the discharge of oil, hazardous substances, sewage and waste into the marine environment. In the case of the discharge of oil from shipping, the owners of vessels and those operating them are liable for all expenses arising as a result of damage to the environment arising from an oil spill.
Title Three of the Environmental Protection Law deals with the protection of soil and in general terms prohibits any activity that damages the natural properties or otherwise pollutes soil, other than in accordance with implementing regulations.
Title Four of the Environmental Protection Law addresses air pollution and in particular requires that the burning of any type of fuel, including in the production of crude oil, be minimised and kept within prescribed limits. In this regard, it should be noted that the ADNOC group has adopted a no-flaring policy.
Articles 71 and 72 of the Environmental Protection Law impose a 'polluter pays' regime for liability. Article 71 provides that any person who intentionally or negligently causes damage to the environment or to human health as a result of the breach of the provisions of the Environmental Protection Law is responsible for all the costs of treatment or removal of such damage and is liable to pay compensation for loss incurred as a result, including compensation for loss as a result of the permanent or temporary inability to use any such polluted area, for damage to the environment's economic and aesthetic value and for 'rehabilitation' costs.
ii Role of ADNOC Environment, Health and Safety Division
The Environmental Protection Law envisages that its licensing provisions are disapplied in the case of entities that have sufficiently robust systems and programmes to protect the environment and to achieve the purposes of the law.10 Accordingly the UAE and Abu Dhabi government agencies do not have jurisdiction to license the oil and gas activities conducted by ADNOC group companies or others under the authority of the SPC;11 ADNOC is the 'de facto [environmental] regulatory body for the oil and gas industry in Abu Dhabi';12 ADNOC is responsible for both setting standards and monitoring compliance with them.
The ADNOC HSE Code of Practice issued by ADNOC's environment, health and safety division must be complied with by all ADNOC group companies and other companies falling under the jurisdiction of the SPC.13 The ADNOC HSE code of practice reflects, supplements and frequently exceeds the requirements of the Environmental Protection Law. The ADNOC HSE code of practice is supplemented by HSE technical guidance that is not mandatory but the relevant operator will need to demonstrate that any departure from the technical guidance is at least as effective as the approach recommended in the ADNOC HSE technical guidance.
Decommissioning obligations are typically addressed by the relevant concession agreement or otherwise required by the SPC.
VIII FOREIGN INVESTMENT CONSIDERATIONS
Except for nationals of Gulf Cooperation Council states (including companies incorporated in such a state), legal persons may not carry out commercial activities or establish offices within the UAE except:
- by establishing a branch or representative office that requires the foreign company to have a UAE national (or a company wholly owned by UAE nationals) as its agent (often referred to as a sponsor) and by registering the branch or representative office in the foreign companies register at the Federal Ministry of Economy; or
- through a UAE-incorporated subsidiary, 51 per cent of whose shares must generally be held by one or more UAE nationals.14
The SPC and ADNOC also require oil companies that participate in the upstream oil and gas sector to establish a suitably staffed office in the emirate.
To carry on commercial business in the UAE, companies are also required to obtain a commercial or trade licence from the federal and municipal authorities to carry out their proposed activities. Licences are granted to companies incorporated in the UAE, and to foreign companies operating in the UAE with a local sponsor or agent.
IX CURRENT DEVELOPMENTS
ADNOC announced in May 2019 that it is offering five major exploration blocks in a second competitive bidding round with bids due in the fourth quarter of 2019.
Finally, 2018 and 2019 saw an increased focus by ADNOC on midstream and downstream. We expect that trend to continue, and for ADNOC to increase its overseas investments and oil trading activities.
1 James Comyn and Patricia Tiller are partners at Hunton Andrews Kurth LLP.
2 Oil Market Report' of the International Energy Agency dated 12 July 2019.
4 The Petroleum Concession Agreements of the United Arab Emirates 1939-1981 (Abu Dhabi) by Mana Saeed Al Otaiba (1982) Croom Helm Ltd.
5 ADNOC was formed pursuant to Abu Dhabi Law No. 7 of 1971 Concerning the Establishment of Abu Dhabi National Oil Company to operate in all areas of the oil and gas industry in Abu Dhabi. The ADNOC group's operations cover all aspects of the upstream, midstream and downstream petroleum industry, including crude oil and natural gas exploration, production, refining, processing, distribution, global marketing and the manufacture of petrochemicals.
6 Abu Dhabi Law No. 1 of 1988 Concerning the Establishment of the Supreme Petroleum Council.
7 Article 4 of the UAE Federal Commercial Companies Law exempts, among others, companies in which an emirate holds at least 25 per cent of the shares and that (1) operate in oil exploration, drilling, refining, manufacturing, marketing and transportation, (2) operate in the energy sector more generally or (3) are involved in electricity generation, gas production or water desalination, transmission and distribution, if in each case a special provision to this effect is contained in the memorandum of association or articles of association of the company.
8 Article 2 of Abu Dhabi Law No. 4 of 1974 defines gas to include associated gas, gas within the gas cap of oil reservoirs, non-associated natural gas, including in each case methane, ethane, propane and butane and natural gasoline, pentane and condensate.
9 See Article 45 of UAE Federal Law No. 8 of 2017 on Value Added Tax.
10 See Article 94 of the Environmental Protection Law.
11 Article 2 of Abu Dhabi Law No. 1 of 1988 Concerning the Establishment of the Supreme Petroleum Council provides that the SPC is the supreme authority in charge of the petroleum affairs of the emirate. Article 6 of that law authorises the SPC to issue regulations; ADNOC, acting under the direction of the SPC, in turn acts as environmental regulator of the oil and gas industry in Abu Dhabi.
13 The ADNOC HSE Code of Practice and Technical Guidance must also be complied with by the few independent operators that operate in the upstream oil and gas industry in Abu Dhabi and in which ADNOC has no equity interest – principally Abu Dhabi Oil Co, Ltd (ADOC), a company jointly owned by Cosmo Energy Holdings Co, Ltd and JX Holdings, Inc that has been operating in the territorial waters of the emirate since 1967), Bunduq Oil Producing Company (a company 97 per cent owned by a Japanese consortium through United Petroleum Development Company Limited with the remaining 3 per cent held by BP) and Total Abu Al Bukhoosh or TOTAL ABK (a subsidiary of TOTAL SA). The ADNOC HSE Code of Practice and Technical Guidance are not publicly available.
14 Article 10 of the UAE Federal Commercial Companies Law requires that every company incorporated in the UAE must have one or more UAE national partners (either UAE nationals or companies wholly owned by UAE nationals) whose share in the company must not be less than 51 per cent of its share capital. As noted above, there are a number of exemptions from the UAE Federal Commercial Companies Law, including companies in which a UAE or emirate government-owned entity (such as ADNOC) holds at least 25 per cent of the shares and that operate in oil exploration, drilling, refining, manufacturing, marketing and transmission provided that a provision disapplying the UAE Federal Commercial Companies Law is contained in constitution of the company in question.