The Oil and Gas Law Review: Greenland

Introduction

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 became an integral part of the Danish Realm in 1953. Along with Denmark, Greenland was an EU member from 1973 on; however, following a referendum in 1985, Greenland left the union and has not been a member since.

Greenland was, following a referendum, granted self-government (self-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 awarded, 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 and South West Greenland area. Additionally, licensing rounds have been conducted for the Disko-Nuussuaq area (2016), Baffin Bay (2017) and Davis Strait (2018). However, no licences have been granted in the latest licensing rounds, but two licences were granted in 2019.3 Considering these circumstances, on 31 January 2020, the government of Greenland adopted an oil strategy for the period 2020–2024.4 The plan includes, inter alia, a plan for open-door procedures and licensing rounds in the coming years.

Certain non-exclusive prospecting licences and exclusive exploration and exploitation licences for hydrocarbons have been granted to, inter alia, various international oil companies. Each licence is granted for a defined geographical area and time period. However, during the past years, several of the major players have surrendered some or all of their licences.5

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' 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.

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 Act6 (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 entering into force on 1 July 2014. Most recently, the Act was amended in the autumn of 20187 and in the autumn of 2019.8 Further amendments to the Act was planned to be adopted through 2020; however, because of the situation with the covid-19 pandemic, the relevant minister has decided to postpone these amendments.9 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.

ii Regulation

The general authority for hydrocarbons is the Ministry of Mineral Resources (MMR), including the responsibility for social impact assessments (SIA). Environmental aspects are handled by the Environmental Agency for Mineral Resources Activities (EAMRA) under the Ministry of Environment and Nature, and the day-to-day aspects of the industry as well as licence applications are handled by the Mineral Licence and Safety Authority (MLSA). In general, licences for hydrocarbons are granted by the government.10

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.

iii Treaties

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.

Licensing

An overview of the licensing possibilities for hydrocarbons (oil and gas) is set out below.

The licensing generally takes place on standard 'model terms'. These 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 granted. 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.

i Hydrocarbons

A licence for hydrocarbons may be obtained through one of the following procedures:

  1. 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;
  2. a licensing round whereby the Greenlandic self-government offers a specified geographical area for licensing based on specific licensing terms;
  3. 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
  4. 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 that 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).

Under the open-door procedures in 2020 and the licensing rounds in 2021, the fee for the submission of an application is 50,000 Danish kroner and 200,000 Danish 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 Danish 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 to select among equally qualified applicants.

Production restrictions

Under the Act and the standard terms for hydrocarbon prospecting licences (dated 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 government from applying these or similar production restrictions in the granting of a licence on a case-by-case basis.

Assignments of interests

Under the standard terms for hydrocarbon prospecting licences (dated 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 2021 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.

Tax

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, insofar as this exception follows from the mineral resources licence.

The corporate tax rate is 25 per cent for both Greenlandic and foreign companies from 1 January 2020. On top of the corporate tax, there is a 'surcharge' of 6 per cent of the corporate tax payable; consequently, the effective corporate tax rate is 26.5 per cent. Licensees to oil and mineral licences are exempt from the 6 per cent surcharge according to current practice.

Further, licensees must pay certain fees and surplus royalties to the government pursuant to the Mineral Resources Act. The model licence terms for upcoming rounds in Baffin Bay contain surplus royalty levels of 3.75 per cent, 8.75 per cent, and 15 per cent at 35 per cent, 45 per cent, and 55 per cent internal rates of return, respectively.11 However, the royalty levels are likely to differ between licences and should therefore be scrutinised.

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.

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 because of 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 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 an 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 MMR.

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, 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 this 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 damage.

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 the risks to the extent possible. The authorities will set up an emergency committee with the task of coordinating the actions of the authorities in the event 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 the 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 the 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 liability or the provision of other (financial) security. As regards offshore activities, membership of OPOL is mandatory for the operator of the activities.

Foreign investment considerations

i Establishment

As a starting point, licences 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,12 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 Projects13 (the Large-Scale Act).

iii Anti-corruption

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,14 setting out detailed measures against money laundering.

Current developments

On 31 January 2020, the Greenland government adopted a new oil and gas strategy for the period 2020–2024.15 The main focus of the strategy is to promote oil and gas exploration in Greenland. To pursue this focus, several tracks have been identified, including: (1) opening of new licence areas (both onshore and offshore); and (2) adaptation of competitive framework conditions, including reduced taxes under a new 'first-mover' scheme to apply during the strategy period.

This implies that the open-door procedure was initiated and will be initiated for onshore Disko-Nuussuaq area (1 February 2020), Davis Strait (1 November 2020) and Baffin Bay (1 November 2020), offshore Disko-Nuussuaq area (1 November 2020) and licensing rounds for North East Greenland (offshore) (1 July 2021) and Central East Greenland (offshore) (1 January 2022).

The financial incentives introduced imply that (1) royalties based on the turnover have been removed; (2) the surplus royalty levels have been halved to 3.75 per cent, 8.75 per cent and 15 per cent at 35 per cent, 45 per cent and 55 per cent internal rates of return, respectively; and (3) the right to state participation has be suspended.

On 27 August 2020, the government of Greenland approved a proposal for two initiatives: (1) postponement of the transferred outstanding annual exploration obligations for all mineral exploration licences by one year; and (2) extension of the licence period for all mineral licences by one year, This approval must be seen in the light of the situation with the covid-19 pandemic and the government of Greenland's decision from 2 April 2020, which set exploration obligations for year 2020 to zero.

Greenland's national oil company, Nunaoil, announced in 2018 that it had initiated a comprehensive resource assessment project to identify the areas of Greenland that have the greatest petroleum exploration potential.16 The project is divided into seven assessments units covering a total of 2.4 million km², and the project is estimated to take three and a half years. The results from the first assessment units have been launched and are available at the project's website.17

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. Despite the recent news, it remains to be seen whether any exploration activities will lead to licensees initiating exploitation, whereby oil or gas production will become a reality in Greenland.

Footnotes

1 Michael Meyer is a partner at Gorrissen Federspiel. The author is grateful to his colleagues, legal counsel Jacob Sandholt and attorney Hans Nikolaj Amsinck Boie, for their assistance with this chapter.

2 Act No. 473 of 12 June 2009 on Greenland's Self-Government.

3 A list of hydrocarbon licences in Greenland (dated 28 July 2020) is available here:
www.businessingreenland.gl/~/media/Erhverv/Olie%20og%20gas/List%20of%20hydrocarbon%20licences/
Business%20in%20Greenland%20July%2028%202020.pdf?la=en.

4 See www.businessingreenland.gl/~/media/Erhverv/Olie%20og%20gas/Olie%20og%20%20Gas%20strategi/
Oliestrategi%202019-2024%20DK%20-%2019-12-2019.pdf?la=da. The strategy is described further under IX. In addition, a strategy for the mining sector for the period 2020–2024 has been published: https://govmin.gl/wp-content/uploads/2020/03/Greenlands_Mineral_Strategy_2020-2024.pdf.

5 See footnote 3.

6 Inatsisartut Act No. 7 of 7 December 2009 with subsequent amendments (Consolidated Inatsisartut Act No. 8 of 26 February 2020 on Mineral Resources).

7 Inatsisartut Act No. 16 of 27 November 2018. The amendment act entered into force on 1 January 2019 and concerned changes for reasons of consistency following the introduction of new legislation on hydro power and on municipal administration.

8 Inatsisartut Act No. 39 of 28 November 2019. The amendment act entered into force on 1 January 2020 and removed the requirement that the applicant must delineate 'commercially exploitable deposits', see Section 29(2). Further, the amendment act outlines that a company with an exploitation licence, and exclusively the licensee or licensees, may carry out prospecting and exploration within their exploitation licence, cf. Section 29(4). Finally, the amending act outlines that if the licensee or licensees do not meet the stipulated deadlines, then their licence may be lapsed or revoked by the Government, see Section 30(2).

10 For more information, see www.govmin.gl.

12 Inatsisartut Act No. 27 of 30 October 1992 with subsequent amendments.

13 Inatsisartut Act No. 25 of 18 December 2012.

14 Inatsisartut Act No. 5 of 19 May 2010.

15 The oil strategy is available at www.businessingreenland.gl/~/media/Erhverv/Olie%20og%20gas/
Olie%20og%20%20Gas%20strategi/Oliestrategi%202019-2024%20DK%20-%2019-12-2019.pdf?la=da.

16 See the section on resource assessment on Nunaoil's website, www.nunaoil.gl.

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