21 May 2012

THE LEGAL FRAMEWORK CONCERNING ABU DHABI OIL CONCESSIONS – OPPORTUNITIES AND CHALLENGES

Authored by: Michael Webb

THE LEGAL FRAMEWORK CONCERNING ABU DHABI OIL CONCESSIONS – OPPORTUNITIES AND CHALLENGES

In brief 

  • The ADCO and ADMA-OPCO concessions are due for renewal in 2014 and 2018 respectively. The onshore ADCO concession (and potentially also the offshore ADMA –OPCO concession) may be opened up to new participants, creating an opportunity both for new entrants and for international oil companies with an established presence in Abu Dhabi who wish to enhance their existing portfolio of interests.
  • An income tax of between 55% and 85% is payable on oil, depending on various factors, including the terms of the individual concession agreements, with rates and other fiscal terms negotiated by the Supreme Petroleum Council on behalf of the Government of Abu Dhabi. This may give rise to uncertainty, not least over the precise nature of the tax.
  • Lawyers should beware of the danger of trying to interpret UAE or Abu Dhabi law on the basis of an English translation. Experience has shown that many such translations can be unreliable.

Of the seven Emirates making up the United Arab Emirates (UAE), the Emirate of Abu Dhabi, containing the UAE capital, holds the vast majority of the hydrocarbon reserves located within the UAE. Each Emirate of the UAE has rights under the UAE Constitution to the natural resources (including oil and gas) within its borders. Consequently, Abu Dhabi pursues its own policies regarding the development of petroleum resources.
 
Abu Dhabi does not have comprehensive petroleum legislation governing the granting of exploration and production rights. However, certain aspects of the petroleum industry are covered by specific legislation, including the Abu Dhabi Tax Decree 1965 (as amended), Law No. (12) of 1973 – The Petroleum Ports Law (as amended), Law No. (4) of 1976 On the Ownership of Gas by the Emirate of Abu Dhabi and Law No. (8) of 1978 Regarding the Preservation of Petroleum Resources. Other general laws, both federal and local, in force in Abu Dhabi are also relevant to petroleum projects in Abu Dhabi.
 
The legal framework for the development of petroleum resources in Abu Dhabi is supplemented by the terms of individually negotiated concessions. These concessions have, in the case of the major concessions, been granted to operating companies which are majority owned by the Abu Dhabi Government-controlled Abu Dhabi National Oil Company (ADNOC) with minority interests in such operating companies held by international oil companies. The Ruler of Abu Dhabi awarded two major concessions in the 1930s and 1950s, covering all onshore and offshore exploration and production in the Emirate. Many terms of these concessions (particularly their fiscal terms) have been gradually amended over the years to provide for an increased return for Abu Dhabi. These concessions, as amended, remain in force today.
 
The Abu Dhabi Company for Onshore Oil Operations (ADCO) concession covers petroleum exploration and production activities onshore and in the shallow coastal waters of Abu Dhabi. The international shareholders in ADCO are BP (9.5%), Royal Dutch Shell (9.5%), Total (9.5%), ExxonMobil (9.5%) and Partex (2%). The Abu Dhabi Marine Operating Company (ADMA-OPCO) concession covers petroleum operations in the Umm Shaif and Zakum offshore fields. The international shareholders in ADMA-OPCO are presently BP (14.67%), Total (13.33%) and JODCO (12%). The Zakum Development Company (ZADCO) concession covers petroleum operations in the Upper Zakum, Umm Al-Dalkah and Satah offshore fields. The international shareholders in ZADCO are presently ExxonMobil (28%) and JODCO (12%). These three concessions, in which the Abu Dhabi Government, through ADNOC, holds a 60% interest, account for the vast majority of Abu Dhabi’s current oil production.
 
The ADCO and ADMA-OPCO concessions are due for renewal in 2014 and 2018 respectively. The existing international oil company participants in ADCO and ADMA-OPCO are understood to have been approached by ADNOC regarding proposals for renewal of those concessions, but it was announced by ADNOC earlier this year that the ADCO concession may be opened up to new participants through a system of public tender by pre-screened applicants, so a major opportunity could emerge, both for new entrants and for international oil companies with an established presence in Abu Dhabi who wish to enhance their existing portfolio of interests. There is also speculation that the existing major concessions may be broken up into smaller concessions, with each such concession being operated by one major international oil company, rather than the present large consortium structure, which may not optimise the deployment of proprietary technology.
 
Income tax is payable on oil activities in accordance with the Abu Dhabi Income Tax Decree of 1965 (as amended). The tax rate ranges between 55 and 85 per cent depending on the product that generates the taxable income and on the terms of the individual concession agreements, with rates and other fiscal terms negotiated by the Supreme Petroleum Council on behalf of the Government of Abu Dhabi. This can give rise to uncertainty, not least over the precise nature of the tax: for instance, is it a ‘tax’ in the conventional sense, or is it a payment for the right to do business? This can have important implications for companies operating in a number of different tax jurisdictions.
 
There is a general requirement under UAE companies law that all entities must be majority owned by UAE nationals or wholly-owned UAE entities, although there are important exceptions. A new Commercial Companies Law is expected soon, to update the 1984 law. A 1998 amendment to the 1984 law permits companies operating in the oil sector (among others) to ‘contract out’ of most of the provisions of the 1984 law, but the amendment is often not well understood or effectively used.
 
The UAE has ratified both the New York Convention and the ICSID Convention in relation to the recognition of foreign arbitral awards, although there are only limited instances where these conventions have been successfully relied upon to enforce arbitral awards in the UAE. The ability to enforce its rights will clearly be a key concern for any existing participant or new entrant.
 
Finally, although not an issue specific to the oil sector, lawyers should beware of the danger of trying to interpret UAE or Abu Dhabi law on the basis of an English translation. Experience has shown that many such translations can be unreliable.