April 20, 2012 Practice Groups: Energy, Infrastructure and Resources Oil & Gas Environmental, Land and Natural Resources 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 Law 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 Carolina. 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: 1. Collect baseline data including data regarding groundwater, surface water, and air quality. 2. 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. 3. Enhance existing oil and gas well construction standards to address the additional pressures of horizontal drilling and hydraulic fracturing. 1 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. 3 Perdue Open to ‘Fracking’ in NC (WRAL television broadcast, March 14, 2012). 2 2 With North Carolina’s Shale Gas Study Nearly Complete, Legislation to Legalize Hydraulic Fracturing is Expected to Move Forward in 2012 4. Develop setback requirements and identify areas (such as floodplains) where oil and gas exploration and production activities should be prohibited. 5. Develop a state stormwater regulatory program for oil and gas drilling sites. 6. Develop specific standards for management of oil and gas wastes. 7. 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. 8. Prohibit the use of diesel fuel in hydraulic fracturing fluids. 9. 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 Committee 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: http://www.ncleg.net/gascripts/DocumentSites/browseDocSite.asp?nID=187 3 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 jurisdiction. 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. Conclusion 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 4 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. Authors: Stanford D. Baird email@example.com +1.919.743.7334 Amy H. Fullbright firstname.lastname@example.org +1.919.743.7352 5 K&L Gates Alaska Shale Conference Tuesday July 31, 2012 Opportunities and Issues Affecting Development of Alaska Shale Plays. Location: 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 email@example.com or call 907.777.7649. Proudly co-sponsored by: Anchorage Marriott Downtown 820 West 7th Avenue Anchorage, Alaska OnStream 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 1 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. Overview The Law on Foreign Investments in Legal Foreign Investors and Strategic Companies 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/ entity. 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 Commission. 2 broadcasting, (ix) certain telecommunication OnStream 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 Transaction Conclusion 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 Exceptions 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. 1 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 3 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. 4 development prospects and this gives OnStream 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 concessions 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. firstname.lastname@example.org) 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. Conclusion 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 5 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. Introduction 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 6 newbuilds, and, in addition, can have OnStream 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 Conclusion 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 (email@example.com) in • Communication with a counterpart is K&L Gates’ Singapore office or Ian Fisher important, and should be reasonable, (firstname.lastname@example.org) 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 7 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’ solutions 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 Conclusion 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 (email@example.com) or expressly provide for multi-party arbitrations case, that the government was a party, Sean Kelsey (firstname.lastname@example.org) (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. 8 OnStream Enforcement 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 passed. 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 9 New K&L Gates offices open in Doha and São Paulo Doha 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. 10 OnStream Freeling (email@example.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, structures; 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 (firstname.lastname@example.org) • 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 11 For further information contact: Georgy Borisov, Moscow David Overstreet, Pittsburgh, PA Matthew Smith, London +7.495.643.1711 and Harrisburg, PA +44.(0)20.7360.8246 email@example.com Pittsburgh +1.412.355.8263 firstname.lastname@example.org Harrisburg +1.717.231.4517 Walter A. Bunt, Pittsburgh, PA email@example.com +1.412.355.8906 firstname.lastname@example.org Paul Tetlow, London +44.(0)20.7360.8101 Michael Pollen, Singapore email@example.com +65.6507.8120 Tomasz Dobrowolski, Warsaw firstname.lastname@example.org +48.22.653.4221 email@example.com R. Timothy Weston, Harrisburg, PA +1.717.231.4504 William M. Reichert, Moscow firstname.lastname@example.org +7.495.643.1712 Mathew Kidwell, London and Dubai email@example.com London +44.(0)20.7360.8141 Craig Wilson, Harrisburg, PA +1.717.231.4509 Dubai +971.4.427.2700 Paul Simpson, Dubai firstname.lastname@example.org +974.4.424.6118 email@example.com firstname.lastname@example.org Rose Zhu, Beijing Sergey J. Milanov, Tokyo +86.10.5817.6110 +81.3.6205.3604 email@example.com firstname.lastname@example.org Anchorage Austin Beijing Berlin Boston Brussels Charleston Charlotte Chicago Dallas Doha Dubai Fort Worth Frankfurt Harrisburg Hong Kong London Los Angeles Miami Milan Moscow Newark New York Orange County Palo Alto Paris Pittsburgh Portland Raleigh 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. 10682 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.