With North Carolina’s Shale Gas Study Nearly Complete, Legislation to Legalize

April 20, 2012
Practice Groups:
Energy, Infrastructure
and Resources
Oil & Gas
Environmental, Land
and Natural
With North Carolina’s Shale Gas Study
Nearly Complete, Legislation to Legalize
Hydraulic Fracturing is Expected to Move
Forward in 2012
By: Stanford D. Baird and Amy H. Fullbright
Real Estate Land Use,
Planning and Zoning
Overview and Background
Public Policy and
North Carolina is not traditionally thought of as an oil and gas state. However, recent geological
research regarding shale gas deposits and the potential authorization of shale gas extraction
technologies in North Carolina could change that. Legislation enacted last year set in motion a
process that could result in the legalization of horizontal drilling and hydraulic fracturing – gamechanging technologies that have turned shale deposits in other parts of the country into top resource
plays. The North Carolina Department of Environment and Natural Resources (“DENR”) has
preliminarily concluded that hydraulic fracturing and horizontal drilling could properly be authorized
if an adequate regulatory program is established and implemented. As a result of DENR’s
comprehensive study, enabling legislation is expected to go forward in the 2012 legislative session
that begins in May.
Final Shale Gas Study Report Due by May 1
In June 2011, the North Carolina General Assembly enacted Session Law 2011-276 after substantial
debate and opposition from certain citizen groups. The law directed DENR, the Department of
Commerce, and the Department of Justice to “study the issue of oil and gas exploration in the State
and the use of directional and horizontal drilling and hydraulic fracturing for that purpose.” Further,
the law directed DENR and the other agencies to evaluate the potential shale resource in North
Carolina and methods of natural gas extraction, and to conduct an analysis of potential economic
impacts, environmental impacts, social impacts, consumer protection issues, infrastructure issues, as
well as potential oversight and administrative issues related to shale gas development in North
DENR published a proposed outline of the study and held public hearings in late 2011 to solicit input
on the scope of the study. One of the first steps in the study process was DENR’s request for a neutral
third party review of current North Carolina environmental regulations by a group known as State
Review of Oil and Natural Gas Environmental Regulations, Inc. (“STRONGER”). STRONGER is an
entity formed by U.S. EPA and the Interstate Oil and Gas Compact Commission and is a multistakeholder group that reviews and reports on state environmental regulations pertaining to oil and gas
development. STRONGER has conducted reviews of many gas producing states such as
Pennsylvania (2010), Oklahoma (2011), Louisiana (2011), and Arkansas (2012). A STRONGER
committee studied North Carolina’s regulations and issued a review report in February 2012. The
STRONGER committee made no recommendation regarding whether North Carolina should revise its
regulations to permit hydraulic fracturing and horizontal drilling, but noted that:
With North Carolina’s Shale Gas Study Nearly Complete,
Legislation to Legalize Hydraulic Fracturing is Expected to
Move Forward in 2012
“While North Carolina has mature environmental regulatory programs, the programs
have not needed to focus on regulating the impacts of oil and gas development. That may
change depending on decisions made by the state. If North Carolina decides to develop
an oil and gas regulatory program, that program should contain criteria to address oil and
gas related activities, including administrative criteria, technical criteria related to
exploration and production waste management, stormwater management, abandoned
sites, naturally occurring radioactive materials, and hydraulic fracturing.” 1
The STRONGER report may be viewed at: http://portal.ncdenr.org/web/guest/public-input.
DENR took into account the STRONGER recommendations, and after extensive additional research
and review, DENR released its Draft North Carolina Oil and Gas Study Under Session Law 2011-276
on March 16, 2012. The draft report concluded that “After reviewing other studies and experiences in
oil and gas-producing states, DENR believes that hydraulic fracturing can be done safely as long as
the right protections are in place. It will be important to have those measures in place before issuing
permits for hydraulic fracturing in North Carolina’s shale formations.” 2 Following the issuance of the
draft report, additional public hearings were held in Sanford, NC and Chapel Hill, NC. Issuance of the
DENR draft report coincided with a statement from North Carolina Governor Beverly Perdue on
March 14, 2012 in which she said: “From what I saw, fracking can be done safely if you regulate it
and put fees in place to have inspectors on the ground.” 3 This was a dramatic and positive change in
position by the Governor’s Office regarding shale gas development in North Carolina. After taking
into account the public comments received through April 2, DENR will finalize the shale gas study
and make its full report to the General Assembly by May 1, 2012.
While a full review of the draft report is beyond the scope of this alert, copies of the entire draft report
and excerpts of the executive summary and recommendations can be found at:
http://portal.ncdenr.org/web/guest/denr-study. It should be noted in particular that DENR’s estimates
of economic development impacts and estimates of the shale gas resource itself are limited
significantly because they are restricted to the Sanford Sub-basin, which is just a portion of the
potential shale play in North Carolina.
DENR Recommendations in the Draft Study Report
Although DENR concluded in the draft report that hydraulic fracturing can be conducted safely with
an adequate regulatory program in place, the draft report sets forth a long list of recommendations
before the use of hydraulic fracturing goes forward. Specifically, DENR recommended that the state:
Collect baseline data including data regarding groundwater, surface water, and air quality.
Require oil and gas operators to prepare and have a DENR-approved Water Management Plan
and limit water withdrawals to 20% of the 7Q10 stream flow.
Enhance existing oil and gas well construction standards to address the additional pressures of
horizontal drilling and hydraulic fracturing.
STRONGER, North Carolina State Review (February 2012) at 6.
North Carolina Department of Environment and Natural Resources, Draft North Carolina Oil and Gas Study Under
Session Law 2011-276 (March 16, 2012) at 293.
Perdue Open to ‘Fracking’ in NC (WRAL television broadcast, March 14, 2012).
With North Carolina’s Shale Gas Study Nearly Complete,
Legislation to Legalize Hydraulic Fracturing is Expected to
Move Forward in 2012
Develop setback requirements and identify areas (such as floodplains) where oil and gas
exploration and production activities should be prohibited.
Develop a state stormwater regulatory program for oil and gas drilling sites.
Develop specific standards for management of oil and gas wastes.
Require full disclosure of hydraulic fracturing chemicals and constituents to regulatory agencies.
With the exception of trade secrets, require public disclosure of hydraulic fracturing chemicals
and constituents.
Prohibit the use of diesel fuel in hydraulic fracturing fluids.
Improve data management capabilities and develop an e-permitting program.
10. Ensure that state agencies, local first responders and industry are prepared to respond to a well
blowout, chemical spill or other emergency.
11. Develop a modern oil and gas regulatory program, taking into consideration the processes
involved in hydraulic fracturing and horizontal drilling technologies, and long-term prevention of
physical or economic waste in developing oil and gas resources.
12. Keep the environmental permitting program for oil and gas activities in DENR where it will
benefit from the expertise of state geological staff and the ability to coordinate air, land and water
quality permitting.
13. Develop a coordinated permitting process.
14. Address the distribution of revenues from oil and gas excise taxes and fees to support the oil and
gas regulatory program, fund environmental initiatives, and support local governments impacted
by the industry.
15. Identify a source of funding for repair of roads damaged by truck traffic and heavy equipment.
16. Clarify the extent of local government regulatory authority over oil and gas exploration and
production activities.
17. Complete additional research on impacts to local governments and local infrastructure.
18. Complete additional research on potential economic impacts.
19. Address the natural gas industry’s liability for environmental contamination caused by
exploration and development, particularly for groundwater contamination.
20. Provide additional public participation opportunities.
Draft Bill Legalizing Hydraulic Fracturing Approved by Senate
On April 18, 2012, the North Carolina Senate Energy Policy Issues Committee approved a draft shale
gas bill entitled the “Clean Energy and Economic Security Act” that would legalize hydraulic
fracturing and horizontal drilling. This draft bill begins the formal debate of shale gas development in
the General Assembly this year. The draft bill is part of the Committee’s report to the General
Assembly for the 2012 legislative session and can be viewed at:
With North Carolina’s Shale Gas Study Nearly Complete,
Legislation to Legalize Hydraulic Fracturing is Expected to
Move Forward in 2012
While the draft bill addresses many of the primary issues raised by the DENR draft report, it leaves
some issues for further consideration. As an initial matter, the bill would make hydraulic fracturing
and horizontal drilling legal by removing the current statutory and regulatory prohibitions on these
practices, but would impose a “moratorium” on the issuance of permits for activities using hydraulic
fracturing or horizontal drilling technology until July 1, 2014. Other legislative alternatives reported
in the press recently suggested that the current legal prohibitions remain in place while DENR
conducts further study and review and then establishes a strict regulatory program. This issue –
whether to repeal the prohibition on hydraulic fracturing now or later after several years of rulemaking
and additional study – will be the threshold issue in the debate of this bill.
Also of significance, the draft bill would create an Oil and Gas Board that would adopt regulations for
oil and gas development activities. The Oil and Gas Board would be directed to develop a shale gas
regulatory program during the moratorium period and adopt rules by December 31, 2013. The Oil and
Gas Board would have nine members, and the Governor, the House Speaker, and the Senate President
Pro Tempore would each appoint three members. DENR would no longer have the authority to adopt
rules associated with gas development, but would enforce the rules established by the Oil and Gas
Board. While the draft bill notes that the new Oil and Gas Board and DENR would have certain
“concurrent authority,” the creation of a new regulatory entity appears to contradict DENR’s
recommendation in its draft report to keep the oil and gas permitting program under DENR’s
The draft bill also addresses the allocation of regulatory authority between the state and local
governments. Stating an intent to establish a uniform system for natural gas development activities,
the draft bill would limit local government authority to regulate such activities. The bill would repeal
and prohibit any local government effort to prohibit or effectively prohibit oil and gas exploration and
development. Further, a process would be established for the Oil and Gas Board to review local
government ordinances for preemption. Local land use and zoning ordinances that are generally
applicable to development, such as set back and buffer requirements, would be presumed valid and not
preempted. These provisions will be of great interest to local governments, which traditionally have
had local land use and zoning authority and have commonly established special use permitting
processes. The fact that shale gas development could have significant local impacts may favor
allocating some regulatory authority to local governments. However, a permitting and approval
process that is uniform and consistent would give industry players the certainty necessary to make
informed business decisions.
Regarding revenue, the draft bill would allow local governments to impose impact fees on oil and gas
wells drilled within a particular jurisdiction. Such impact fee would be a one-time fee with a cap of
$30,000 per well. The draft bill does not include a severance tax or any revenue generation
mechanism for direct revenue to the state. Further consideration of the revenue portions of the draft
bill may include review of potential restrictions on the use of impact fee revenue for site restoration,
environmental cleanup, stormwater management, emergency response, education and training of
inspectors, or other uses.
Building on the legislation from 2011, recent developments move North Carolina significantly closer
to shale gas development. With the DENR shale gas study nearly complete, enabling legislation and
the establishment of a regulatory program for hydraulic fracturing and horizontal drilling would be the
next steps toward the realization of this significant economic development opportunity for North
With North Carolina’s Shale Gas Study Nearly Complete,
Legislation to Legalize Hydraulic Fracturing is Expected to
Move Forward in 2012
Carolina. Without question, substantial issues remain for further consideration and determination
related to these important issues, and we expect these policy discussions to be on-going.
On March 29, 2012, K&L Gates LLP held the first annual Developing North Carolina Shale Gas
Conference in Raleigh. The firm has vast experience assisting natural gas producers and has led the
way on important legal issues in Pennsylvania and throughout the Marcellus Shale. As such, we are
uniquely qualified to assist with the environmental, legal, regulatory, and policy issues related to the
potential development of shale gas in North Carolina. For a copy of the conference materials, please
click here.
Stanford D. Baird
Amy H. Fullbright
K&L Gates Alaska Shale Conference
July 31, 2012
Opportunities and Issues Affecting Development of
Alaska Shale Plays.
Please join us on July 31, 2012 at the Anchorage Marriott Downtown for a
complimentary all-day program focused on new opportunities for and challenges
associated with development of shale plays in Alaska. This program will be
relevant to business personnel, in-house counsel and those involved in oil and
gas exploration, production and transportation, whether currently invested in or
considering Alaskan shale opportunities.
At the K&L Gates Alaska Shale Conference you will learn about the tremendous
shale oil and gas opportunities in Alaska, including:
The current resource assessments from state and federal geologists
State and federal oil and gas leasing programs and available acreage
Current exploration activities targeting shale resources
Also at the conference, you will receive a clear-eyed assesment of the potential
challenges facing shale oil and gas development in Alaska, such as:
How do the conflicts and controversies in the lower 48 shale plays pertain to
Alaska development?
What will be the key issues for federal and state regulators concerning Alaska
shale development?
What are the special challenges of developing shale deposits in Alaska?
For additional information or to receive an invitation to this event, please email
Sally Hinkley at sally.hinkley@klgates.com or call 907.777.7649.
Proudly co-sponsored by:
Anchorage Marriott
820 West 7th Avenue
Anchorage, Alaska
Highlighting developments and
issues in the international oil
and gas industry
International arbitration and the efficient
management of complex oil and gas disputes
Complex and costly projects beget complex and costly disputes. In this
article, Ian Meredith and Sean Kelsey of our international disputes practice
Spring 2012
Welcome to the second edition of
explore how the associated call on resources, time and effort can - with
forward planning - be mitigated. But, as they explain, there remain traps for
the unwary.
“OnStream,” K&L Gates’ publication
for UK and European clients and
contacts, highlighting developments
Introduction: managing complex commercial disputes
Multiplicity of parties and/or contracts is characteristic of major international industrial
and issues in the international oil and
and commercial transactions in a global economy. Projects for the location, production,
gas industry.
transport, storage and sale of the world’s essential hydrocarbon resources are prime
exemplars of that general proposition. Disputes are a predictable feature of projects
routinely involving national governments and their executive or commercial agencies,
In this issue:
major multinationals, sophisticated infrastructure, construction and engineering, rafts of
contractors and subcontractors, and an extended string of contracts of sale and sub-sale.
But the precise timing, occurrence and nature of such disputes are unpredictable. One
International arbitration and the
way of seeking to manage the associated cost ‘before the event’ is to make resolution of
efficient management of complex oil
anticipated disputes as efficient as possible, once they arise. Rarely will it be cost-effective
and gas disputes............................. 1
for claims, between a number of parties to the same project, and with the same or related
subject matter, to be pursued by way of multiple proceedings spread across several
Russian legal developments............. 2
jurisdictions, and at the risk of conflicting outcomes.
Shale gas exploration in Poland ....... 4
Issues in complex international arbitration
Conversion or upgrade of offshore
The globalization of the oil and gas industry, and in particular the pre-eminence in that
installations: special considerations.. 6
sector of some of the world’s more politically and legally ‘challenging’ jurisdictions, has lent
significant impetus to international arbitration as the standard choice of dispute resolution
Recent developments...................... 9
New K&L Gates offices open.......... 10
procedure. Arbitration of complex, multi-party, multi-contract oil and gas disputes can pose
a number of issues. In some respects, the litigation model is better suited to the resolution
of such disputes. As long as the relevant courts accept jurisdiction, there may be few
theoretical limits on the joinder of non-parties with a relation to the primary dispute. By
contrast, arbitration is dependent on the consent of each individual party to the specific
dispute resolution process. Tribunals acting under institutional arbitral rules predicated
on the classic model of a bilateral dispute between consenting parties have been unable
to join non-parties, consolidate multiple proceedings, and otherwise accommodate multiparty disputes - or even disputes between the same two parties to multiple contracts with
separate and different dispute resolution clauses.
Continued on page 8
Spring 2012
Russia’s law on foreign investment in
strategic sectors
In this article Georgy Borisov, partner, and Igor Scherbak, associate, of
K&L Gates’ Moscow office examine the regulatory structure and key legal
issues affecting foreign investors seeking to do business within the oil and
gas sector in Russia.
The Law on Foreign Investments in Legal
Foreign Investors and Strategic
Entities of Strategic Importance to the
In terms of the Law there are three types
National Defense and State Security of
of foreign investors: (i) private investors
the Russian Federation No. 57-FZ (the
– companies incorporated outside of
“Law on Foreign Investment in Strategic
Russia, (ii) public investors – foreign states
Sectors” or the “Law”) was adopted in April
or international organizations, as well
2008. The Law was enacted as a result
as entities controlled by these states or
of debates and numerous negotiations
organizations, and (iii) groups of
between the Government, the Presidential
foreign investors.
Transactions Subject to
Preliminary Approval
In order to determine the strategic
The Law lists the transactions which are
importance of legal entities the Law provides
subject to preliminary approval by the
an exhaustive list of 42 activities which are
Governmental Commission. These are the
defined as activities of strategic importance
transactions which result in: (i) acquisition
for national defense and state security.
of the shares (participatory interests) in the
These activities can be grouped into the
charter capital of the strategic entity, and/or
following subcategories: (i) activities related
(ii) obtaining of a control over the strategic
to nuclear industry, nuclear safety, and/
Administration, the Federal Security
Service (FSB), the Federal Anti-Monopoly
Service (FAS), certain ministries (such
as the Ministry of Industry and Energy,
the Ministry of Communications and
Information Technology), major market
players (such as Gazprom and RAO
UES), and others. Since its adoption, the
Law has been playing a significant role
in determining criteria for investments
in Russian strategic entities by foreign
services carried out by entities holding
dominant position on the market, (x) largescale printing and publishing activities.
Thus, a company involved in one or more of
mentioned activities shall be recognized as a
strategic company.
or radioactive materials, (ii) military-related
activities and production of weapons
The term “control” means a possibility for
(including dual purpose aircraft and aviation
the foreign investor to: (i) dispose, directly
equipment), (iii) aviation activities, (iv) space
or indirectly, of more than 50 percent of the
activities, (v) exploration and development
voting shares in a strategic company, (ii)
of subsoil areas of federal significance1,
determine decisions of a strategic company,
(vi) certain activities conducted by natural
including terms of the company’s activities,
charter capital of such entities, as well as
monopolies (the companies which are
(iii) appoint sole executive body of a
determines the process of granting approval
included into the Register of the Subjects
strategic company, or more than 50 percent
for acquisition of shares (participatory
of Natural Monopolies), (vii) extraction
of its collegiate executive body, board of
interests) in legal entities having strategic
of biological resources from waters (e.g.
directors or any other management body,
importance by the special Governmental
fishing), (viii) large-scale television and radio
or (iv) act as the management company for
companies and public institutions.
The Law sets forth restrictions on any type
of control over Russian strategic entities
by foreign public investors, limits amount
of foreign private investors’ share in the
broadcasting, (ix) certain telecommunication
Consequences of noncompliance with the mandatory
provisions of the Law
such strategic entity. It is worth mentioning
the Governmental Commission one of
that with respect to strategic companies
the following decisions could be passed:
operating on the territories of strategic
(i) decision on a prior approval of the
subsoil fields the same criteria apply with
transaction, or (ii) decision on a prior
the exception that the 50-percent thresholds
approval of the transaction subject to
Transactions made by foreign investors in
are reduced to 25 percent.
an agreement with the foreign investor
violation of described requirements and
setting forth its obligations as prescribed
provisions of the Law could be deemed void;
Specifically, the transactions which could
by the Law, or (iii) refusal to approve the
the foreign investor could be suspended
result in establishing control over the
transaction. Nevertheless, this refusal could
from the voting rights granted by the shares
strategic company are as follows: share
be challenged in the Supreme Arbitrazh
and decisions of shareholders’ meetings in
purchase agreements, gift agreements,
Court of the Russian Federation.
which the foreign investor participated could
be invalidated as well.
exchange of the voting shares agreements,
asset management agreements and other
transactions which lead to transfer of the
title to shares (participatory interests) to a
foreign investor.
As to public investors, preliminary approval
is necessary for the transactions resulting
in acquisition of the right to directly or
indirectly dispose of more than 25 percent
of the voting shares (participatory interests)
or the right to appoint the sole executive
Subsequent Notification of a
Purchase of more than 5 percent of shares
Since its adoption the Law has been
(participatory interests) in the charter capital
strongly criticized for creation of excessive
of a strategic company by a foreign investor
administrative barriers to foreign investors
triggers an obligation for such investor to
interested in projects in the territory of the
notify the Federal Anti-Monopoly Service
Russian Federation. Recent amendments
of the relevant transaction no later than 45
made to the Law in November 2011
days from its consummation date.
reflected positive reaction of the Russian
state authorities to criticism and existing
problems in the sector of foreign strategic
body of a strategic entity, and/or any
right to block decisions of the company’s
Provisions of the Law do not apply to those
not ideally drafted, the fact that additional
management. Whether a strategic company
relations with regard to foreign investments
amendments to the Law are currently being
holds a subsoil license for conducting
regulated by other federal laws of the
discussed between the representatives
operations on the strategic subsoil field and
Russian Federation and its international
of business community and Russian
a public foreign investor acquires the right to
treaties. If a foreign investor directly or
state authorities adds more confidence
dispose, directly or indirectly, of more than
indirectly controlled more than 50 percent
in successful settling of differences and
5 percent of the voting shares (participatory
of the voting shares (participatory interests)
improvement of investment climate.
interests) in the charter capital of such
in the charter capital of the strategic entity
entity, preliminary approval will be required
before the proposed transaction, then no
as well. But in either case the Law prohibits
approval is required.
a public foreign investor from acquiring
control over the strategic company.
investments. Though the amendments were
For more information about the issues
covered in this article, please contact
Restrictions related to strategic companies
Georgy Borisov (georgy.borisov@klgates.
holding subsoil licenses for operations on
com) or Igor Scherbak (igor.scherbak@
In order to obtain an approval for the
the strategic subsoil fields may not apply
transaction a foreign investor shall file an
klgates.com) in K&L Gates’ Moscow office.
if the Russian Federation owns, directly
application to the respective authority. The
or indirectly, over 50 percent of the voting
term of the application’s consideration
shares of such strategic company. This
usually amounts to three months (in certain
exception suggests the way to invest in such
cases it could be extended to additional
strategic companies through a joint venture
three months). As a result of consideration
with a Russian state-owned company where
of the foreign investor’s application by
the Russian Federation has control.
Definition of a “subsoil area of federal
significance” (a “strategic subsoil field”)
is set forth in the Law “On Subsoil”
dated February 21, 1992 and includes
areas with deposits of over: 70 million
tons of recoverable oil or 50 billion cubic
meters of gas, 50 metric tons of gold or
500,000metric tons of copper.
Spring 2012
Poland - barriers to the development of
shale gas exploration and extraction
In this article, Tomasz Dobrowolski of our Warsaw office considers the
potential barriers to the development of shale gas exploration and extraction
in Poland.
In many respects, the developments relating
The concern within the business community
In November 2011 a report (prepared
to the exploration of shale gas in Poland
is hence that the terms of the bill may be
at the Commission’s request by the
are very positive and promising. The strong
politically motivated. If so, this may create
Belgian law firm Philippe and Partners)
determination of the State authorities
business obstacles for developing the sector,
was published which indicated that the
(including the Treasury and Environment
making existing concession holders and
existing European regulatory framework is
Ministry) to create a positive environment
potential investors re-evaluate the business
adequate to the current (still early) phase
for shale gas prospecting is a key factor in
and legal risks associated with investing in
of exploration activities, and discussed its
this. If successful, such efforts, together with
this sector in Poland.
implementation in four countries (Poland,
Poland’s new LNG terminal, planned nuclear
France, Germany and Sweden). In January
power plant project and renewable sources
The new bill may be considered as a new
2012 the European Commission accepted
installations, should improve Poland’s
set of rules for the game, so discussions
the findings of the report as properly
energy mix and hence its energy ‘safety-net’.
on grandfather rights, protection of
reflecting the regulatory environment.
investments and the like are then almost
However, some major issues have yet to be
inevitable. It also appears that some
Despite the reservations by the authors
resolved – issues which have the potential
of the concession holders are, for that
of the report (namely that shale gas
to cause headaches for some concession
reason, sitting on the sidelines and waiting
exploration is still at an early phase of
holders and investors, who are conscious
for further developments before taking
development and has not yet reached
that even the strongest determination of
decisions on their next steps and their
a commercial stage), the Commission’s
the State does not – of itself - directly add
increased financial involvement.
officials were positive regarding
funds for exploration of shale resources.
New Shale Gas Bill
EU Regulation?
One of the external determinants for
The Polish business community is anxiously
exploration development over the past year
awaiting the draft of the so-called “shale gas
has been uncertainty over the European
bill”. This is expected from the Cabinet in
Commission’s intended role and in
approximately 1-2 months. It is expected to
particular whether shale gas exploration
define the role of the State (represented by
and production may be additionally
the Treasury) in future exploitation of shale
regulated at the EU level. If so, the concern
gas deposits in Poland, as well as the role
is that this could translate into even bigger
of the State as a possible recipient of the
legal risks.
proceeds from the sale of gas.
development prospects and this gives
shale gas enthusiasts (in Poland) and its
supporters (in Sweden) the green light to
further promote and develop the process
of shale gas extraction in their territories.
The shale sceptics’ opinion is unlikely
to be affected by the report and one
should expect debate to intensify when
the commercial stage of gas production
comes closer.
As well as the need to draft a financially
reasonable shale gas bill, the Polish
administration should be prepared
to solve some potential conflicts and
uncertainties by eliminating systemic and
legal risks resulting from statutory rules
since the recently adopted Geological
and Mining Law of 2011. Although these
regulations were positively assessed by
the authors of the report, it has some
potential weaknesses.
Interference with existing
New tendering procedures
The new regulations provide that
the tender criteria for award of both
prospecting and extraction concessions
are to be non-discriminatory and are
to give priority to “the best systems of
prospecting for identifying hydrocarbon
deposits, or extracting hydrocarbons
from deposits”. The successful bidder
is to be selected by a tender board
composed of at least three members,
subject to rules of procedure which have
not yet been precisely determined. The
times the volume of conventional gas in
Poland. According to the Chief Geologist
such data would rank Poland as the third
country in Europe in terms of recoverable
natural gas.
Hopefully following that report and in
expectation of new ones based on the
most recent exploration results, the
risks listed earlier in this article can be
eliminated or at least reduced to the
satisfaction of investors, consumers and
local communities.
statutory provisions dealing with the
These new regulations implement the EU
criteria are quite general and this may
For more information about the
Hydrocarbons Directive and introduce
lead to interpretative disputes unless
issues covered in this article, please
the tendering requirement into the Polish
properly supplemented by the proposed
domestic legislation. In doing so, the new
ordinance of the Council of Ministers on
regulations have changed the concession-
tender procedure for a concession for
awarding regime. A key issue is the
prospecting, identifying and extracting
existence of concession holders who had
hydrocarbons from deposits (only its draft
been granted exploratory concessions and
of August 2011 is available now).
contact Tomasz Dobrowolski (tomasz.
dobrowolski@klgates.com) in K&L Gates’
Warsaw office.
invested money in that process without
the obligation to participate in a tender
at any stage. This may lead to problems
with those concession holders who, having
completed the prospecting phase, would
then lose the tender for an extraction
concession. The system is criticised for not
being investor friendly and any consequent
disputes are likely to turn into long, drawnout affairs.
The Polish Geological Institute published a
report on 21 March 2012 on recoverable
reserves of shale gas and shale oil in
Poland. This report – although based on
conservative historical data – indicates that
the likely range of shale gas recoverable
resources in Poland is 346 to 768 billion
cubic meters, which is approximately 5
Spring 2012
Conversion or upgrade of offshore
installations: special considerations
In this article Raja Bose and Ian Fisher examine the special considerations
affecting the decision to convert or upgrade offshore installations and
production facilities.
For over two decades, K&L Gates’
international disputes team has been
identifying the underlying reasons
for cost overruns and delays on large
construction projects, and what can
be done to avoid such problems. This
litigation and arbitration experience also
has been applied to the conversion and/
or upgrade of offshore installations, such
as FPSOs (Floating Production Storage and
Offloading) and other floating and fixed
offshore production facilities as well as
MODUs (Mobile Offshore Drilling Units).
Newbuild projects and conversion/upgrade
projects technically may be very different.
For example, the difference between a
harsh environment jack-up rig and an
FPSO – but the projects are fundamentally
the same. Both project types experience
common issues that can lead to disputes,
such as delays, cost overruns, and claims
for additional work. While disputes do arise
in connection with newbuild projects, the
the existing structure, be it an old tanker
significant time benefits. For example, in
or rig. Repeatedly, we see cases where
relation to FPSOs it is widely quoted that
both the owner and shipyard fail to fully
the project lifespan for a conversion is 14-
appreciate the actual condition of an old
24 months, whereas a newbuild would take
structure until the work is well advanced.
nearly twice as long at 24-30+ months.
There may also be interface and integration
issues with the shipyard being required
There may be other very good commercial
to incorporate new designs and materials
reasons why a conversion/upgrade project
within an existing structure in order to
may be the better option. For example,
permit the new and old to operate together.
in a recent dispute, the owner made the
It is absolutely vital that a proper 3D survey
decision to convert a third generation semi-
of the existing structure be carried out and
submersible into an extreme harsh condition
used as the basis for the new design. We
rig instead of purchasing a newbuild.
also have been involved in a case where
The owner reasoned that, because all the
the party responsible for the basic design
shipyards capable of building a newbuild
failed to carry out such a survey and
at the time were too busy, by the time they
instead used the as-built drawings of the
would have taken delivery of a newbuild,
existing rig (which was by that time more
the day rate would have likely dropped
than 20 years old) as the basis for the new
considerably. Therefore, it made commercial
design. Perhaps unsurprisingly, there were
sense, because they would be able to get
dimensional differences between the old
an upgraded rig operating while the market
as-built drawings and the actual structure,
remained strong and before their competitors
contributing to misalignment between the
could start operating newbuild rigs.
new and existing structure. That contributed
to huge problems on the project, both in
these types of projects complete on time
Reasons why disputes are
more likely with a conversion/
upgrade project.
and on budget. Usually, for commercial
The very nature of conversion/upgrade
conversion/upgrade projects are notorious
for generating disputes. Rarely, if ever, do
reasons, an oilfield operator and contractor
will opt for a conversion/upgrade rather
than a new-build. Conversion/ upgrades
should cost substantially less than
newbuilds, and, in addition, can have
projects contributes to the fact that
disputes are more likely to occur. One
of the most obvious factors contributing
to a potential dispute is the condition of
terms of additional structural work and the
associated delays.
How to minimise prospect of
a dispute
or to achieve a design freeze before
There are steps which can be taken to
commence, there are still steps that can
commencing the construction phase of
avoid a dispute. The most important of
be taken to control that process. Working
a project. On fast track projects there is
these include the following:
with experienced and highly skilled
Another cause of delay and claims
for additional work is a failure to carry
out sufficient front end engineering
lawyers and arbitrators will help guide
often a desire to start construction work as
soon as possible before the basic design
• Have a balanced contract regime
is sufficiently complete. This can lead to a
through realistic and reasonable
situation where the design and construction
contract terms;
work is being carried out in parallel.
• Correctly apply contract terms during
This may not have an immediate impact
the project, in particular the variation
as much of the early construction work
order procedure;
may involve removals from the existing
structure, but eventually it will impact
the overall project. On a recent matter,
we handled the impact of parallel design
and construction work that was not felt
for about 12 months, but by then, caused
significant delay and disputed claims for
additional and varied work.
Many of the problems we see with
When litigation or arbitration does
you through the maze of laws and rules
which govern dispute and arbitration
centres. The disputes team at K&L Gates’
Singapore office have the necessary
experience and expertise to assist clients
in maximising the prospects of success if
such a dispute does arise.
• Employ proper project management.
This involves being proactive and
trying to anticipate issues rather than
For more information on the issues
waiting until issues arise and thereby
covered by this article, please contact
necessitating a response.
Raja Bose (raja.bose@klgates.com) in
• Communication with a counterpart is
K&L Gates’ Singapore office or Ian Fisher
important, and should be reasonable,
(ian.fisher@klgates.com) in K&L Gates’
responsive, and consistent.
London office.
• Seek technical and legal input
disputed claims for varied and additional
and support during the project.
work are those associated with contract
Investing in the expertise of lawyers
administration, rather than that of contract
and consultants while the project
structure or wording being too much in
is ongoing can be extremely cost-
favour of one party. In such cases, the
effective; will help clients better
contract will contain a perfectly adequate
manage risks; and will help clients
variation order mechanism, but either or
avoid expensive litigation or arbitration
both of the parties fail or refuse to operate
should a dispute escalate.
the agreed procedure as intended. Often
we see a shipyard fail to adequately
document the instruction received from the
owner for the additional work. In addition,
too often we see cases where the contract
provides that no additional work should
be carried out before a variation order is
issued by the owner, yet the shipyard starts
work on the understanding or promise that
the owner will issue a variation order in due
course, which then never happens. It is
understandable that a shipyard is keen to
keep the owner, its customer, happy, but
such behaviour usually leads to disputes. It
would be preferable for the shipyard to take
a more robust attitude with the owner and
follow the contractual variation procedure
from the beginning of the project, as closely
as possible.
Spring 2012
continued from page 1
enforcement take a different approach to
International arbitration and the
efficient management of complex oil
and gas disputes
such matters from the courts at the seat
of the arbitration. Sarhank is one example
- although the arbitral tribunal had ruled
that the respondents were properly parties
to the arbitration, the New York courts
refused enforcement of the ICC award on
grounds that it was made against a party
Tailored and ‘off-the-peg’
Joinder of non-signatories
Incorporation of ‘umbrella’ or common
to arbitration agreements can be held
dispute resolution clauses can assist the
to be bound by them: for example, by
efficient management of dispute resolution.
application of legal doctrines such as
Resolution of complex disputes ought to
the “group of companies” doctrine. In
be less protracted and more cost effective,
English law, the strict approach to the
and its outcomes more certain if relevant
identification of parties to arbitration
agreements make the same provision. Some
agreements is typified in the Petersen
Issues such as these highlight the
model form agreements commonly used in
Farms case. New York courts have taken
perennial importance of knowing and
the oil and gas sector enable the parties
a similar approach, notably in Sarhank
understanding the approaches to
to cater for complex disputes. The AIPN
v Oracle Corp. Conversely, French law
arbitration in the arbitral seat, and
2012 Model Joint Operating Agreement, for
has for many years recognised a “group
choosing the seat carefully. Appropriate
example, provides that if the parties initiate
of companies” doctrine under which an
tailoring of ‘umbrella’ or common dispute
multiple arbitration proceedings which are
agreement to arbitrate by one company
resolution clauses, and providing for
related by common questions of law or fact
can extend to other companies in the
arbitration in accordance with the rules
and “could result in conflicting awards or
group in certain circumstances. Non-
of an institution which can accommodate
obligations”, then all such proceedings
signatories can also be found party to
issues encountered in complex disputes
may be consolidated into a single arbitral
an arbitration agreement by piercing the
can help to promote efficiency in the
proceeding. The rules of a number of
corporate veil. In the ICC case Bridas v
resolution of disputes when they arise.
leading arbitral institutions now seek to
Turkmenistan, an Argentinean corporation
Underlying these considerations are
address issues characteristic of complex
(which had found and developed the huge
some of the bigger issues in relation to
disputes. The rules of the LCIA, the 2012
Yashlar gas field in Turkmenistan) had
structuring of projects and transactions, to
ICC rules, and the Stockholm Chamber
entered a JVA in relation to the Keimir
take advantage, for example, of appropriate
of Commerce rules variously provide for
oilfields with a production association
investment protections. We will address
joinder of third parties and/or consolidation
formed and owned by the government of
these issues in our next edition.
of proceedings in certain circumstances.
Turkmenistan. The government was not
The Permanent Court of Arbitration in The
a signatory to the arbitration agreement,
Hague administers “Optional Rules for
but Bridas successfully argued (before
Arbitration of Disputes Relating to Natural
the tribunal, and ultimately before the
Resources and/or the Environment”, which
US courts), on the special facts of that
Meredith (ian.meredith@klgates.com) or
expressly provide for multi-party arbitrations
case, that the government was a party,
Sean Kelsey (sean.kelsey@klgates.com)
(albeit only in the narrow circumstances
and secured a US$465 million award of
damages against it.
in K&L Gates’ London office.
of a dispute with more than one party in
In some circumstances, non-signatories
the claimant and/or the respondent camp).
Such examples may form a useful starting
point when considering - in appropriate
context - the practical circumstances to
be addressed in a particular project or
transaction. But parties to international
arbitration need to be aware of a number
of additional issues which may not be as
readily addressed in the drafting of dispute
resolution clauses.
The issue of joinder, and the need to
ensure that an agreement to arbitrate
covers all the parties involved in an
arbitration, can create issues throughout
the dispute process, and into the
enforcement stage. A particular problem
arises when the courts of the country of
that (according to New York law) was not
party to the arbitration agreement. More
recently, in Dallah v Pakistan, courts in
England and France have given conflicting
judgments in relation to enforcement of an
ICC award in those jurisdictions.
For more information about the issues
covered in this article, please contact Ian
Recent Developments
Oil Prices BP Shetland Isles Exploration 2012 UK Budget: Allowances
The worlds biggest oil producer, Saudi
BP recently launched its first deepwater
The Treasury has announced new tax
Arabia, has recently tried to allay fears
probe in the North Uist field west of the
breaks for small and deep water fields
over oil shortages by confirming that they
Shetland Isles after obtaining consent
which is anticipated to generate over
can raise oil output by 25% if required.
from the UK government for exploration.
£40bn worth of investment and is seen as
However, oil prices remain above $120 a
The drilling operation is the first to be
a ‘turning point’ in the UK government’s
barrel representing a 25% increase in price
undertaken by BP since the Macondo
treatment of the oil and gas industry.
since September. The increase is partly
disaster in 2010. The North Uist site is
due to Iran’s threats to disrupt supplies
thought to have significant potential.
in the Gulf and the fear that its nuclear
development programme could lead to
conflict in the region. API Gasoline Campaign The CEO and President of the American
Petroleum Institute, Jack Gerard, has
announced a new API campaign to clarify
facts regarding gasoline prices with the aim
of stimulating reform of US energy policy to
create new jobs and decrease prices.
Currently the majority of US oil and gas
resources cannot be developed and API
Arctic Exploration
There will be a £3bn field allowance for
deep water oil fields (which, in particular,
will benefit fields West of Shetland) and
the tax allowance for smaller fields will
TNK-BP, a Russian joint venture, intends
double to £150m. These changes will take
to spend $4 billion on investment on Arctic
effect after new implementing legislation is
gas and oil fields in the next few years with
a total investment of $12 billion over the
next 30 years. Oil production is anticipated
in 2016 with peak production by around
2020. It is likely that the oil will supply
markets in Asia although it could also be
shipped to Europe. Tanzania Oil Discovery
intends to convince the US administration
The Ophir-BG joint venture has recently
to pass pro-development policies and
announced a 4.5 TCF gas discovery in
implement a more efficient approval
Block 1 offshore Tanzania. This discovery
process for new projects. The API believe
greatly exceeds their pre-drill estimates.
2012 UK Budget:
Decommissioning Costs
The UK government is offering more
favourable allowances for decommissioning
costs. After the implementation of the
new Finance Act 2013 the government
will be able to agree the tax relief on
decommissioned assets through contracts
entered into between the government and
companies in the industry.
this would lead to greater supplies of crude
oil and natural gas.
Spring 2012
New K&L Gates offices open in
Doha and São Paulo
K&L Gates has recently established an
At the time of the opening, K&L Gates
For more information on K&L Gates’
office in Doha, Qatar. This is the firm’s
Chairman and Global Managing Partner
Peter J. Kalis commented that “With the
Doha office, please contact Kenneth
second office in the Middle East and 39th
world-wide and opened following the
launch of our Doha office, K&L Gates
issuance of a license by the Qatar Financial
formally enters an exciting and increasingly
Centre (QFC) Authority in August 2011.
diverse legal marketplace which reflects
Qatar has experienced rapid economic
Qatar’s admirable commitment to develop
growth over the last few years. In 2010, it
an advanced and diversified economy on
had the world’s largest per capita Gross
the strength of its energy endowments. Our
Domestic Product, and its economy grew
Doha office is a foundation block of our
by nearly 20 percent. It is the world’s
strategy for the Middle East”.
largest producer and exporter of liquefied
natural gas, with oil and gas accounting
Located in the iconic Tornado Tower,
for more than 50 percent of Qatar’s GDP,
K&L Gates’ Doha office includes a team
85 percent of its exports and 70 percent of
of lawyers with a deep understanding of
Government revenues.
the Qatar market, as well as substantial
Middle East and international experience.
Qatar has become an economic
Supported by colleagues in the Gulf
powerhouse on the strength of these huge
region and throughout the world, the
reserves of natural gas and of oil as well
firm’s Doha lawyers will assist clients
as its purposeful commitment to internal
with their legal and regulatory needs
and external investment and diversification
in such established areas as projects;
of its economy. The new office is headed
energy and infrastructure; banking and
by Kenneth Freeling, whose practice
finance; telecommunications, media and
encompasses the areas of intellectual
technology; real estate and construction;
property, antitrust, complex commercial,
intellectual property, and dispute resolution,
and construction litigation.
among others.
Freeling (kenneth.freeling@klgates.com)
São Paulo
K&L Gates’ 40th office in São Paulo
• On behalf of a major Brazilian oil
represents some of Brazil’s leading
and gas company, the development
companies in sectors such as oil and gas,
of a support vessel fleet for use
energy, petrochemicals, construction and
in deepwater oil and gas development
engineering, transportation infrastructure
under a project finance structure and
and agribusiness. Its lawyers offer distinct
financing the operations of several
capabilities in international finance and
drillships under project finance
capital markets, investment management,
construction and project development, tax,
and arbitration. Representative projects on
which we are advising include:
For more information on K&L Gates’
São Paulo office, please contact Marc
Veilleux (marc.veilleux@klgates.com)
• On behalf of Brazil’s leading
petrochemical group, a revolving trade
credit program aggregating $650
million in commitments to finance
importation of feedstock (naphtha)
and the development of a multibillion
dollar petrochemical plant in the
United States; and
• On behalf of a major Brazilian
construction and engineering
company, a series of first-of-its-kind
transactions with the International
Finance Corporation (IFC), the
Inter-American Development Bank
(IADB), and Corporación Andina
de Fomento (CAF) for the issuance
of reinsurance support to global
insurance companies providing surety
bond support on construction projects
throughout Latin America. Spring 2012
For further information contact:
Georgy Borisov, Moscow
David Overstreet, Pittsburgh, PA
Matthew Smith, London
+7.495.643.1711 and Harrisburg, PA
Pittsburgh +1.412.355.8263
Harrisburg +1.717.231.4517
Walter A. Bunt, Pittsburgh, PA
+1.412.355.8906 walter.bunt@klgates.com
Paul Tetlow, London
Michael Pollen, Singapore
Tomasz Dobrowolski, Warsaw
R. Timothy Weston, Harrisburg, PA
William M. Reichert, Moscow
Mathew Kidwell, London and Dubai william.reichert@klgates.com
London +44.(0)20.7360.8141 Craig Wilson, Harrisburg, PA
Dubai +971.4.427.2700
Paul Simpson, Dubai
Rose Zhu, Beijing
Sergey J. Milanov, Tokyo
Anchorage Austin Beijing Berlin Boston Brussels Charleston Charlotte Chicago Dallas Doha Dubai Fort Worth Frankfurt Harrisburg
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Research Triangle Park San Diego San Francisco São Paulo Seattle Shanghai Singapore Spokane Taipei Tokyo Warsaw Washington, D.C.
This publication is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard
to any particular facts or circumstances without first consulting a lawyer.
©2012 K&L Gates LLP. All Rights Reserved.
K&L Gates includes lawyers practicing out of more than 40 fully integrated offices located in North America, Europe,
Asia, South America, and the Middle East, and represents numerous GLOBAL 500, FORTUNE 100, and FTSE 100
corporations, in addition to growth and middle market companies, entrepreneurs, capital market participants and
public sector entities. For more information about K&L Gates or its locations and registrations, visit www.klgates.com.