The Oil and Gas Law Review: United Arab Emirates - Abu Dhabi
The United Arab Emirates (the UAE) produced an average of 2.86 million barrels of crude oil per day in 2020, maintaining its position as the fourth-ranked OPEC member in terms of crude oil production but marking a decline of production when compared with 2019.2 This decline, however, is expected to be short-lived. The covid-19 pandemic-induced demand shock and a trend towards investment in clean energy are set to slow the expansion of the world's oil production capacity. However, the International Energy Agency expects that producers from the Middle East, including the UAE, will produce oil at or near record highs to meet expected demand.
Ninety-five per cent of the UAE's proven oil reserves are based in the emirate of 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 World War II, 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 now hold participating interests are:
- in Um Shaif and Nasr: Total (20 per cent), Eni (10 per cent), PetroChina (6 per cent) and CNOOC (4 per cent);
- in Lower Zakum: Inpex Corporation of Japan (10 per cent), a consortium led by ONGC Videsh (10 per cent), PetroChina (6 per cent), Total (5 per cent), ENI (5 per cent) and CNOOC (4 per cent); and
- in Satah Al Razboot (SARB) and Umm Lulu: Cepsa (20 per cent) and OMV (20 per cent).
The Abu Dhabi government has since launched further competitive bidding rounds for additional onshore and offshore blocks. Following these biding rounds, concessions have been awarded to:
- a consortium led by wholly owned subsidiaries of Eni and PTT Exploration and Production Public Company Limited;
- Occidental Petroleum;
- a consortium comprising Indian Oil Corporation and Bharat Petroleum Corporation Limited;
- Cosmo Energy Holdings Co., Ltd; and
- most recently, a consortium of four Pakistani companies led by Pakistan Petroleum Limited.
These grants mark the continuation of a trend consistent with ADNOC's 2030 Strategy, which encourages an expanded partnership model and a more active approach to managing its businesses and portfolio of assets. A key focus of ADNOC's new partnerships and co-investments is sharing and the development of technology across the entire value chain and technology-sharing requirements have been a key feature of recent bid rounds.
In addition, ADNOC has focused on its midstream and downstream operations. In June 2020, ADNOC announced that a consortium of investors comprising Global Infrastructure Partners (GIP), Brookfield Asset Management, Singapore's sovereign wealth fund GIC, Ontario Teachers' Pension Plan Board (Ontario Teachers'), NH Investment & Securities and Snam (the Consortium) will invest in select ADNOC gas pipeline assets valued at US$20.7 billion. The investment includes a 49 per cent stake in ADNOC Gas Pipeline Assets LLC, a newly formed subsidiary of ADNOC with lease rights to 38 pipelines. ADNOC is also expanding its capabilities in carbon capture utilisation and storage and entered into a framework agreement with Eni to explore new opportunities for collaboration.
In the downsteam sector, ADNOC and Abu Dhabi Power Corporation (ADPower) announced in 2019 a tender for the Middle East's first high-voltage, direct current sub-sea transmission system that will connect ADNOC's offshore production facilities to ADPower's onshore electricity grid. ADNOC has also committed to invest US$3.5 billion to upgrade its crude oil refining capabilities at its Ruwais refinery.
This chapter provides an overview of the legal regime in Abu Dhabi as it relates to oil and gas investment.
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 Council
The Supreme Council for Financial and Economic Affairs (the Supreme Council) is the supreme body charged with overseeing Abu Dhabi's financial, investment, economic, petroleum and nature resource affairs.5 Formed in December 2020, the Supreme Council assumed the functions of the former Supreme Petroleum Council of Abu Dhabi. Accordingly, the Supreme Council has a number of functions relating to the petroleum industry in Abu Dhabi:
- the Supreme Council lays down and approves public policies and strategies for the regulation of Abu Dhabi's petroleum and natural resources affairs (among others);
- the Supreme Council reviews and approves the annual plans of ADNOC (and other Abu Dhabi government department and owned entities); and
- the Supreme Council 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.
The Supreme Council is chaired by the ruler of Abu Dhabi. Its other members include prominent members of the ruling family, senior Abu Dhabi government officials, the chief executive officer of ADNOC and the chief executive officer of Mubadala Investment Company. The Supreme Council 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 Supreme Council, 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 American Petroleum Institute (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 Supreme Council 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 2006.6 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, India, 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 Supreme Council, 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 Supreme Council 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 whereby 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 Supreme Council 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.
- 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 Supreme Council 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, as 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 Supreme Council and any agreements require the prior approval of the Supreme Council.
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 produced by them.
In practice, ADNOC directs that gas be delivered to ADNOC Gas Processing (formerly 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).
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.
Within the emirate, the Supreme Council 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 405 km long 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. 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.
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 Supreme Council and ADNOC, unless the transfer is to a wholly owned affiliate. Any such proposed transfer would require the early involvement of the Supreme Council and ADNOC, particularly if it is proposed that confidential information be shared with proposed transferees. In considering whether to approve any transfer, the Supreme Council 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 Supreme Council 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 Supreme Council is also responsible for overseeing royalty and tax assessment and collection in the emirate.
The UAE, as a member of the Gulf Cooperation 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 Cooperation 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.
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 measures 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, 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's 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; ADNOC is responsible for setting environmental standards for the oil and gas industry in Abu Dhabi 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.11 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 Supreme Council.
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 on mainland UAE (i.e., outside one of the free zones) 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;
- through a UAE-incorporated subsidiary, 51 per cent of whose shares must generally be held by one or more UAE nationals;12 or
- with a Foreign Direct Investment License,13 which permits 100 per cent foreign ownership. However, exploration and production of petroleum products appears on the 'Negative List' of sectors that remain subject to the requirement for majority-UAE ownership.
The Supreme Council and ADNOC also require oil companies that participate in the upstream oil and gas sector to establish a suitably staffed office in the emirate (ordinarily a branch or representative office).
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.
ADNOC continues to progress its 2030 strategy with three key objectives:
- more profitable upstream – a focus on increasing production capacity (including exploring and developing unconventional fields) and re-energising mature fields;
- more valuable downstream – expanding petrochemical production and refining capacity; and
- more sustainable and economic gas supply – improving operational efficiencies and ensuring security of gas supply to the UAE.
ADNOC announced in September 2021 that it intended to list the shares of its subsidiary, ADNOC Drilling on the Abu Dhabi bourse and that ADNOC intended to sell a 5 per cent stake in an initial public offering. This follows the successful listing of ADNOC Distribution, the largest operator of petrol stations and convenience stores in the United Arab Emirates, in 2017.
In 2021, ADNOC also announced the discovery of 22 billion stock tank barrels of recoverable unconventional oil resources and 160 trillion standard cubic feet of recoverable unconventional gas resources. The Supreme Council decided not to award an exploration licence for this block. Instead, ADNOC intends to engage with potential partners for unconventional resource licensing opportunities around this geographical area. ADNOC believes that this area contains some of the unconventional resources discovered that have production potential ranking alongside the most prolific North American shale oil plays.
1 James Comyn and Patricia Tiller are partners at Hunton Andrews Kurth LLP.
2 Oil Market Report 2021 of the International Energy Agency.
4 The Petroleum Concession Agreements of the United Arab Emirates 1939–1981 (Abu Dhabi) by Mana Saeed Al Otaiba (1982) Croom Helm Ltd.
5 Law No. 24 of 2020 concerning the Supreme Council for Financial and Economic Affairs.
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 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: (1) 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); (2) 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 (3) 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.
12 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.
13 UAE Federal Decree-Law No. 19 of 2018 on Foreign Direct Investment (the FDI Law) came into force on 30 October 2018, and recognises 100 per cent foreign ownership in mainland UAE for certain sectors and activities set out in a 'Positive List' (confirmed on 17 March 2020 by the UAE Cabinet Resolution No. 16 of 2020). From its inception, the FDI Law established a 'Negative List' of 13 areas or sectors that remain subject to the long-established maximum 49 per cent cap on foreign investor ownership.