UK: Greenland–Hydrocarbon Licensing Opportunities

Last Updated: 15 March 2010
Article by Humphrey Douglas and Aditi Kumar

"Early entrants in frontier basins can become Basin Masters and offer shareholders transformational performance", or so said Dr Mike Watts of Cairn Energy recently in relation to Greenland. A US Geological survey, carried out in 2008, estimated that Greenland may have oil reserves of up to 50 billion barrels.

The regime

Greenland is a self-governing, currently Danish province, which increased its political autonomy following a referendum in 2008. Increasing hydrocarbon revenues are likely to also increase economic independence and may reduce the current Danish block grant.

The Greenland Government passed a new Mineral Resources Act ("Act") which came into force on 1 January 2010. The Act gives exclusive power to the Greenland Government over decisions relating to mineral resources in Greenland (replacing previously joint Greenlandic-Danish administration).

The Bureau of Minerals and Petroleum ("BMP") is the Greenlandic body which will continue to manage mineral resource activities in Greenland, including the administration of licences.

Licensing rounds

In October 2009, the BMP, under the old regime of the Mineral Resources Act 1998, invited companies to apply for hydrocarbon exploration and exploitation licences for the offshore areas in Northwest Greenland (the Baffin Bay Area) and in Northeast Greenland (the Greenland Sea Area) (together "Areas"). The application procedures and standard licence terms issued under the old regime continue under the new Act.

The Areas were selected following completion of a strategic environmental impact assessment to ensure that hydrocarbon activities can be conducted on an environmentally sustainable basis. Additionally, the Areas were subject to preliminary exploration under the Kanumas project by the Kanumas Group which also confirmed the presence of large hydrocarbon deposits.

The Kanumas Group

The Kanumas Group comprises: Statoil Hydro ASA, BP Exploration Operating Company Limited, Esso Exploration Greenland Limited, Chevron East Greenland Exploration A/S, Shell Kanumas A/S, Japan Oil and Gas and Metals National Corporation. The Kanumas Group was granted a preferential bidding right in subsequent licence tenders over the Areas (in recognition of its earlier exploration commitments).

The Baffin Bay Area – timetable

As the Kanumas Group did not exercise its preference right over the Baffin Bay Area, the licensing round for the Baffin Bay Area was subject to an open tender.

The prequalification round for the Baffin Bay Area ended on 1 October 2009 and a deadline for submitting applications for exploration and exploitation licences is set for 1 May 2010. Only prequalified entities, or consortia which include a prequalified operator, can apply for licences.

The prequalification round for the Baffin Bay Area attracted 13 international oil companies.

Oil companies that have missed out on the Baffin Bay Area prequalification round may still be able to participate in the upcoming licensing rounds for the Greenland Sea Area, expected to take place in 2012 and 2013.

The Greenland Sea Area - timetable

The Kanumas Group has stated its intention to exercise its preference right for the Greenland Sea Area tenders, so there will likely be two licensing rounds for the Greenland Sea Area.

The first licensing round will be reserved for groups which include at least one company which is a member (or affiliate) of the Kanumas Group.

The Kanumas Group licensing round is due to commence on 1 January 2012. Applications for prequalification as an operator should be submitted by 1 March 2012 and applications for exploration and exploitation licences should be submitted by 15 December 2012.

The second licensing round will be an ordinary licensing round open to all interested parties for the areas which remain after the completion of the Kanumas Group licensing round. It will open on 15 June 2013 and applicants should submit their applications for prequalification as an operator by 1 July 2013, and the closing date for making applications for exploration and exploitation licences is set for 15 October 2013.

The Greenland Sea Area – licence terms and applications

Licences for the Greenland Sea Area will be granted for a period of up to 16 years with a right to a 30 year extension for areas where production is intended. The Act authorises the Government to order a licensee to initiate exploitation of hydrocarbons within three years of the grant of an exploitation licence.

The Government can make changes to approved plans for exploitation and determine the level of exploitation required. In addition to providing financial information and expertise of prospective licensees, licence applications must also contain:

  • a work programme detailing work considered necessary and which the applicant undertakes to carry out to establish the hydrocarbon potential of the area including a timetable and attaching geological and geophysical maps;
  • the geological basis for selecting the area(s) applied for; and
  • the disclosure of any health, safety and environmental hazards which may relate to the area and how such hazards will be handled by the applicant.

Where relevant, successful licencees will need an ultimate parent guarantee.

NUNAOIL A/S, Greenland's state owned oil company, will hold a 12.5 per cent share of all licences with a carried interest during the exploration phase. This will allow NUNAOIL to exercise all rights under the exploration licence but with its obligations being borne by other licensees.

In addition to certain licence fees, licensees also have to pay royalties to the BMP on any production under a three tier royalty system:

  • royalties will be calculated yearly on the basis of pre-tax net cash flow;
  • if there is any negative cash flow, it will be carried forward to the following year with an uplift;
  • the uplift will be calculated by compounding 21.75 per cent, 29.25 per cent and 36.75 per cent plus an average discount rate published by the Danish Central Bank, time weighed and set off against any positive royalty surplus attributable to the following year; and _ then a surplus royalty of 7.5 per cent, 10 per cent and 12.5 per cent respectively will become payable to the BMP.

Environmental impact

One of the key provisions of the new Act relates to the protection of the environment and social sustainability and requires licence applicants to prepare an environmental impact and a social sustainability assessment.

The Act has also introduced a principle of strict liability in relation to damages caused in connection with operations under a licence, including environmental liability, whereby the party who performs, manages or supervises the performance of an activity covered under the Act is responsible for any environmental damage caused.

Conclusion

Whilst the political and economic consequences of exploiting Greenland's hydrocarbon resources remain to be seen, Greenland's Government is clearly at pains to retain the integrity of its environment, and to encourage an orderly development which recognises the value of investments and relationships already made. It seems likely that, whilst many opportunities remain, now may be the time for oil, gas and services companies to align themselves with operators and plan their pre-qualification for the next licensing rounds. Those with existing licences are also gradually welcoming new partners as was seen by Cairn Energy's recent farming out of a 10 per cent interest in six of its operated blocks offshore Greenland, to Petronas International Corporation Limited.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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