Andrews Kurth Middle East Newsletter The Driving Force For Your International Business July 2014
STRAIGHT TALK IS GOOD BUSINESS. Welcome to the July 2014 issue of the Andrews Kurth Middle East Newsletter. In this edition, we explore some themes that emerged during our latest intelligent energy law seminar in Aberdeen and from our attendance at the OGIB Denmark event, hosted by Offshore Energy Denmark in Esbjerg in June. We also look at developments in the Red Sea with Saudi Aramco and feature a focus on Abu Dhabi, including an examination of market entry strategies for foreign companies. The Middle East as a whole continues to present a series of opportunities and challenges to the global energy industry. The market potential is undeniable with more than $3 trillion of projects underway or planned in the six Gulf Cooperation Council countries, Iran and Iraq and an increasing demand for advanced technology and know-how evident in all territories. However, geopolitical factors continue to throw up unexpected developments. In Iraq, the recent gains by ISIS create new uncertainty although the south of the country remains unaffected and Iraqi Kurdistan continues to move towards what some observers believe will be an independent future. Some commentators believe that one positive development to arise from the current situation will be the acceleration of Iran s rehabilitation as the country is working more closely with the US authorities than ever before. There is also considerable cooperation developing between Iraqi Kurdistan and Turkey, with the former looking for a reliable export route for its oil and Turkey keen to gain a secure energy supply. No doubt these issues will be amongst those discussed during the focus on the region at this year s ONS in Stavanger in August, where a number of significant regional players will be presenting during the conference sponsored by Saudi Aramco. The team from Andrews Kurth Middle East looks forward to participating in this year s 40th anniversary edition of ONS. In the meantime, I hope that 2014 is proving to be a successful year for you and your team and we look forward to supporting you with intelligent energy law solutions across the Middle East. Best regards, Hugh Fraser, Office Managing Partner, Dubai
Abu Dhabi Oil and Gas Market Continues to Draw Foreign Investment Andrews Kurth Middle East Newsletter July 2014 Around $700 billion of energy projects are currently underway or planned in the United Arab Emirates, according to MEED, with Abu Dhabi occupying a dominant position within this sizeable market. The question of who will win the bidding for Abu Dhabi s historic onshore oil concession is currently the subject of enormous interest across the industry, as the outcome will shape a significant element of the country s energy landscape for decades. The expiry of the 75-year-old concession in January this year saw a number of major oil companies lose their stake in the Abu Dhabi Company for Onshore Oil Operations (ADCO), which operates the onshore Bu Hasa, Bab, Asab, Sahil and Shah oil fields. The Abu Dhabi National Oil Company (ADNOC) held the controlling 60% stake and has held a 100% stake since January. The ADCO concession is the largest in the country with the capacity to produce about 1.5 million barrels daily. The United Arab Emirates plans to increase its output capacity to 3.5 million barrels a day by 2017, from its current estimated maximum output capacity of around 2.85 million barrels a day. ADNOC s recommendation on which parties should hold the new concession requires approval by the Supreme Petroleum Council, the emirate s highest oil policy body. Hugh Fraser, Managing Partner of Andrews Kurth's Dubai office, said: The award of the new concessions will have far-reaching consequences. At stake is one of the few major oil-producing areas in the Gulf where international companies are still allowed to hold an equity interest. As Saudi Arabia, Kuwait and other Gulf countries nationalised their oil industries over the years, Abu Dhabi has remained as one of the few in the region to allow foreign holdings in its oil industry. The ADCO concession is the largest in the country so the new concession holders will be under pressure to maximise production as part of the UAE s drive to meet its higher output targets. But the ADCO fields represent only part of the energy picture in the UAE, where the scale of requirements and investment continues to attract international interest. Looking at Abu Dhabi s current and planned capital expenditure programme there are a host of projects valued in excess of $10 billion, including the Zadco Upper Zakum artificial islands field development, ADCO onshore field development programmes, ADMA-OPCO offshore field developments and the Shah/Bab sour gas field developments, said Fraser. Abu Dhabi will play host to more than 60,000 oil and gas professionals later this year for the 30 th Abu Dhabi International Petroleum Exhibition and Conference (ADIPEC), which runs from 10 to 13 November. Andrews Kurth is proud to be an associate sponsor of ADIPEC in 2014 and will be hosting an Intelligent Energy Law seminar at the event on the morning of 11 November looking at the growing demand for advanced technology across the region and the legal and commercial issues surrounding this. Further details of this seminar will follow in the next issue of our newsletter. A past performance or prior result is no guarantee of a similar future result in another case or matter. Andrews Kurth is responsible for the content of this website. Andrews Kurth, the Andrews Kurth logo and Straight Talk Is Good Business are registered service marks of Andrews Kurth LLP. Andrews Kurth LLP is a Texas limited liability partnership. Andrews Kurth (UK) LLP is authorized and regulated by the Solicitors Regulation Authority of England and Wales. Andrews Kurth (Middle East) JLT is registered and licensed as a Free Zone company under the rules and regulations of DMCCA. Attorney Advertising.
Intelligent Energy Law Series Continues Andrews Kurth Middle East Newsletter July 2014 The array of opportunities for oilfield service and technology companies equipped with the expertise to maximise oil and gas recovery across the Middle East provided the focus for the most recent of the Andrews Kurth Intelligent Energy Law series of events, held in Aberdeen at the beginning of June. Hugh Fraser, Managing Partner of Andrews Kurth s Dubai office, has spent more than a decade supporting North Sea origin businesses internationalising in the Middle East. During the seminar, hosted by Aberdeen & Grampian Chamber of Commerce, he set out the energy issues across the region, highlighted key projects by country, the industry s growing technology requirements and the legal and commercial issues surrounding entry to the market including the protection and exploitation of intellectual property. It s generally accepted in the industry that without a Middle East presence an oil and gas business cannot claim to be truly international. The scale and volume of projects across the region, in oil and gas and the wider energy sphere, makes it one of the world s most significant markets, said Hugh Fraser. Deep-water areas are coming into focus in the Red Sea and East Mediterranean, creating opportunities for North Sea and Gulf of Mexico know-how, and Oman is a good example of where there has been a real focus on enhanced oil recovery techniques. However, the audience in Aberdeen were advised that new entrants to the market must be committed for the medium to long term if they are to achieve returns. You have to go in with a five-year business plan as a minimum and not expect to be cash positive in year one. Doing business in the region is bureaucratic and the process of registering and licensing a business can be time-consuming, as can vendor registration with the national oil companies. You can realistically spend your first year just getting the paperwork right, said Fraser. The Intelligent Energy Law series will continue in August, when Fraser and Houston-based partner Jeff Dodd attend ONS in Stavanger. The conference, which marks its 40 th anniversary this year, has a strong focus on the Middle East. It will address a range of issues, including how the industry s innovation and technology development will lead to change. Saudi Aramco is the principal conference sponsor and will present alongside ADNOC and Kuwait Energy in a series of afternoon sessions devoted to the region. Jeff Dodd, who chairs Andrews Kurth s Intellectual Property and Technology Transactions group, has extensive experience of intellectual property commercialisation and exploitation strategies and structuring, negotiating and documenting technology acquisition, transfer and commercialisation transactions within the oil and gas sector. Technology requirements across the Middle East include enhanced oil recovery and artificial lift; LNG and GTL; seismic, geology, reservoir characterisation and fluid modelling; unconventional drilling and completions; horizontal drilling and hydraulic fracturing; advanced completions and well intervention; automation, advanced control systems and digital systems; asset integrity management; and carbon capture and storage. The need for nuclear power and renewables, especially solar, waste to energy, desalination and IT security and asset protection technologies is also increasing, said Dodd. Commercial and legal considerations for market entrants include territorial application of patent rights, who owns new IP that arises from work, specialist personnel contracts and restrictive covenants that reflect the increasingly mobile and consultant-heavy workforce, licensing and enhanced technology services agreements and infringement monitoring, defence and indemnities. The governing law of contracts and statutory laws, dispute resolution planning and jurisdiction issues also need to be considered.
The wider context to this growth market is the fact that the global energy industry is changing the way in which it trades in IP and technology. The industry has traditionally invested in technology and innovation which was distributed as equipment or in connection with services. Transactions involving oilfield technology are now becoming international, market-driven acquisition and trading with new participants getting involved. At the same time, we increasingly see a deconstruction of product and service components from IP and technology components. In this respect, oil and gas is becoming like all the other global technology markets, explained Dodd. The industry standard IP value chain comprising the creation, securing, acquisition and monetisation of IP now has many complicating factors. The new market dynamics and techniques for decoupling and trading in oil and gas IP may not yet be as publicised as in other technology markets but they are evident and growing. Energy companies must recognise that the old US and European focus for IP protection is out of date. Companies aspiring to exploit their IP within the Middle East market need to be aware that cross-market collaborations and transactions can create both issues and opportunities in other markets. Companies need to take a 360 of IP strategy and assessment across markets to ensure that they are both protecting and fully realising the opportunities around their technology, said Dodd. A past performance or prior result is no guarantee of a similar future result in another case or matter. Andrews Kurth is responsible for the content of this website. Andrews Kurth, the Andrews Kurth logo and Straight Talk Is Good Business are registered service marks of Andrews Kurth LLP. Andrews Kurth LLP is a Texas limited liability partnership. Andrews Kurth (UK) LLP is authorized and regulated by the Solicitors Regulation Authority of England and Wales. Andrews Kurth (Middle East) JLT is registered and licensed as a Free Zone company under the rules and regulations of DMCCA. Attorney Advertising.
Market Entry Strategies for Abu Dhabi Andrews Kurth Middle East Newsletter July 2014 There are a variety of options open to companies for structuring their businesses to serve the Abu Dhabi energy market including joint participation ventures, appointing commercial agents and establishing a branch or a limited liability company, according to Angela Ewen, head of Andrews Kurth s business registration and licensing team for the Middle East and North Africa. Originally from Scotland, she has been living in Dubai since 1999 and has a breadth of experience both in Scotland and in the Middle East in several sectors, including oil and gas. Angela graduated with a BA in Law and Management from Robert Gordon University in Aberdeen, Scotland. UAE Law recognises the concept of a joint participation venture (JPV) where the foreign player alliances with a local company holding the requisite local trade licence and ADNOC vendor registrations and the local company serves as the client contractor and employer of all relevant personnel engaged in the operations. Angela Ewen said: The JPV model has some attractions during the early stages of a business s evolution in Abu Dhabi but experience suggests that the model will quickly have limitations which will impact on operational needs and legal risk management. The second option is to appoint a registered commercial agent under the UAE Agency Law. Although unregistered agency agreements are allowed in the UAE, current ADNOC policy effectively means that a registered agency with a local Abu Dhabi entity is necessary to do business in this market. The UAE Agency Law is protective of the local agents and key issues which need to be addressed are statutory rights to exclusivity, commission on any sales into the territory and compensation on termination or non-renewal. In practical terms, the local agent must also be 100% owned ultimately by Emirati nationals, must carry the necessary trade licence and must carry the necessary vendor registrations at ADNOC. In many cases, a registered agency will be put in place to allow business activities to commence pending a full company registration and licensing. The third and fourth options are to establish a registered entity in Abu Dhabi which carries its own trade licence and Supreme Petroleum Council (SPC) approval, which can be done either by registering a branch of a foreign company or establishing a limited liability company (LLC). Registration of a branch allows 100% ownership but the engagement of a local service agent will still be required. The registration and licensing process is notoriously cumbersome, expensive and time-consuming. In some cases, the authorities will not allow a branch to be registered unless local manufacturing is a key aspect of the business case, said Ewen. Further problems can arise through the exposure of the home assets of the company used to establish the branch to legal risk in the region and, in some cases, the loss of the UAE s zero corporation tax rate on the UAE profits of the branch, which may end up being taxable in the home jurisdiction of the company. For these reasons, an LLC arrangement tends to be the preferred option for investors in Abu Dhabi. Each LLC established in the UAE must have a UAE national shareholder (either an individual who is a UAE citizen or a company wholly owned by UAE nationals) which holds at least 51% of the shares of the LLC. We have developed a number of mechanisms for safeguarding the rights of the foreign investor shareholder, where they are in a minority shareholding position. In particular, shareholders agreements are deployed for the purposes of giving the foreign shareholder de facto control of the LLC, notwithstanding their minority shareholding position. Other mechanisms such as a call option in relation to the local shareholder s shares and provisions dealing with profit share may be employed,
explained Ewen. Generally, the shareholders are permitted to agree that the profits should be distributed in proportions which deviate from the shareholdings, meaning that the amount of profits to be distributed to the foreign shareholder may exceed their percentage shareholding (in some cases, up to 95%). In practice, the local shareholder does not play an active role in the LLC and simply receives a fee for supporting the foreign investing party. Documentation may also be put in place which will give the foreign shareholder full rights and powers to appoint and remove all managers and directors of the LLC and the local shareholder will agree to take no active role in the management of the LLC, including its finances and bank accounts. The management of the LLC is delegated to a general manager (appointed by the foreign shareholder) pursuant to a power of attorney. The risks associated with the 49/51 structure may be further managed by contractual arrangements with group companies and by holding key assets and cash reserves in a 100% owned related party. Risks associated with transfer pricing for services/equipment supplied from other group companies will generally be regulated by an intercompany services agreement, added Ewen. It takes, on average, between six and 12 months to establish and license an LLC so an interim agency agreement is usually entered into with the local shareholder, enabling the parties to get the business up and running while the LLC is established. Registration of the agency agreement is required, in order to facilitate tendering for government contracts. Employees deployed in country during the agency period would be employed and sponsored through the agent but once the LLC is established, the agency agreement is terminated and the business is conducted by the LLC, without any further need to appoint an agent, said Ewen. A past performance or prior result is no guarantee of a similar future result in another case or matter. Andrews Kurth is responsible for the content of this website. Andrews Kurth, the Andrews Kurth logo and Straight Talk Is Good Business are registered service marks of Andrews Kurth LLP. Andrews Kurth LLP is a Texas limited liability partnership. Andrews Kurth (UK) LLP is authorized and regulated by the Solicitors Regulation Authority of England and Wales. Andrews Kurth (Middle East) JLT is registered and licensed as a Free Zone company under the rules and regulations of DMCCA. Attorney Advertising.
Deep-Water Knowledge Will Be Key to Saudi Aramco s Red Sea Play Andrews Kurth Middle East Newsletter July 2014 The fast tracking of the Kingdom of Saudi Arabia s (KSA) first major offshore natural gas fields in the Red Sea heralds the start of a massive new energy programme for the Kingdom, which will ultimately create new commercial opportunities for service companies with deep-water experience. State oil company Saudi Aramco has announced $25 billion of capital expenditure to develop oil and gas reserves lying in deep water in the Red Sea, following the discovery of the Ahmar-1 field of non-associated gas approximately 24 kilometres north-west of Duba in the Tabuk Province on the west coast of the Kingdom. A major gas processing facility and a large power plant are scheduled for construction in Duba, which will become the apex of a pipeline network to carry gas south to industrial cities along the Red Sea coast. Deep-water oil and gas production means that companies with extensive operations in Europe's North Sea and the Gulf of Mexico should be well positioned to secure work when future tenders are released, but establishing the right in-country presence will be key to the process. Hugh Fraser, Managing Partner of Andrews Kurth s Dubai office, said: The impact of developing oil and gas assets in the Red Sea will be massive if full-scale production goes ahead. Red Sea oil and gas reserves could add 100 billion barrels of oil equivalent (boe) or 38% to the 267 billion boe of proven reserves currently declared by Saudi Aramco. A significant part of the crude oil currently burnt in Saudi Arabia goes to feed power supply and petrochemical industries that could use much cheaper natural gas if available in sustainable quantities, so there is a clear commercial imperative for Saudi Aramco to pursue these deep-water opportunities. Since the liberalisation of the foreign investment laws in KSA in 2000, the limited liability company (LLC) has become the accepted vehicle for foreign companies wishing to do business in the Kingdom where the Saudi Arabian General Investment Authority (SAGIA) licenses all foreign investment. Foreign investors may wholly own approved foreign investments or a foreign investor and a Saudi national may jointly own them. Andrews Kurth has extensive experience working in KSA and sees a growing interest in the country from clients with North Sea experience. Kerry Calvert, a senior attorney with Andrews Kurth in Dubai, leads much of this work and has almost 20 years of experience working in various jurisdictions across Europe and the Middle East, primarily in the energy sector. She is currently working on four technology transfer-related joint ventures for the Saudi oil and gas industry. The LLC is generally considered the most appropriate corporate form available to foreign companies and is the one that most opt for when seeking to conduct business in Saudi Arabia, explained Kerry Calvert. Since 2001, foreign companies who wish to operate in the country without a Saudi partner can open offices and appoint representatives in order to pursue business with various government departments directly. Although a local partner is no longer mandatory, the Saudi Government strongly favours companies with extensive Saudi participation or investment. Some contracts will require a minimum amount of subcontracting with Saudi companies. The government may favour companies of which a majority is Saudi-owned and companies which use Saudi-manufactured goods and services. A foreign company will generally improve its position by aligning itself closely with Saudi interests, through joint ventures or otherwise, when bidding for a government contract, said Kerry Calvert. The most critical issue for a foreign investor is the ability to obtain the appropriate form of license from SAGIA to enable the LLC to conduct business in KSA. Recent experience has shown that it has become more difficult to satisfy the criteria imposed by SAGIA, and SAGIA will rigidly apply the criteria for grant of any particular category of license. The most
common license types for energy-focused LLCs are the service license, industrial license and trade license. A service license will permit the LLC to obtain and execute contracts for the provision of services but does not permit the LLC to engage in the manufacture or sales of products. SAGIA has recently introduced some fairly onerous conditions to the grant of a service license, including what is effectively a 2% performance bond backed by an unconditional and irrevocable bank letter of guarantee in favour of SAGIA as a deterrent against foreign companies leaving the country prematurely with unfilled contract commitments. The 2% will be calculated on the anticipated/projected KSA sales revenues of the LLC and will be reviewed and (if necessary) increased annually. An industrial license will permit the LLC to locally manufacture products, sell them into the local market and to export products. The industrial license will not permit the provision of services. Certain criteria will be required for granting of an industrial license, in particular that the licensee has a factory in KSA for the purposes of manufacturing its products. A trade license will allow the LLC to import its products (and other products) and to sell them in the KSA market. The terms of the trade license will not permit the LLC to manufacture equipment. Overriding policy decisions will come into play in the application for a trade license, whereby SAGIA may wish to encourage local manufacturing and will generally look more favourably on an application to manufacture, particularly in the context of job creation and capital investment in the local economy. Kerry Calvert said: When it comes to the licensing of the LLC, an application to SAGIA will generally be strengthened by placing as much focus as possible on the in-country value to be achieved as a result of the foreign party s investment. Particular emphasis should be placed on local manufacturing, employment of Saudi nationals and capital investment. Saudi Arabia s energy industry has $1.1 trillion of projects underway or planned, according to MEED, and the country s market is therefore one that few service companies can afford to ignore. Enhanced oil recovery, unconventional gas, heavy oil, refining and petrochemicals, renewables and potential deep-water activity are some of the areas where major new opportunities are arising within the country. A past performance or prior result is no guarantee of a similar future result in another case or matter. Andrews Kurth is responsible for the content of this website. Andrews Kurth, the Andrews Kurth logo and Straight Talk Is Good Business are registered service marks of Andrews Kurth LLP. Andrews Kurth LLP is a Texas limited liability partnership. Andrews Kurth (UK) LLP is authorized and regulated by the Solicitors Regulation Authority of England and Wales. Andrews Kurth (Middle East) JLT is registered and licensed as a Free Zone company under the rules and regulations of DMCCA. Attorney Advertising.
STRAIGHT TALK IS GOOD BUSINESS. Featured Team Member Stine Thorup Attorney +971.4.567.0767 stinethorup@andrewskurth.com The OGIB Denmark networking event hosted by Offshore Energy Denmark in Esbjerg in June afforded Andrews Kurth Middle East s newest recruit an opportunity to return to home territory while providing a valuable insight to some of the key themes for the country s oil and gas industry. Many Danish companies are achieving growth in the offshore oil and gas sector and collaborate extensively around the world. This was evident at the OGIB business to business event for the industry that Hugh Fraser and I attended in mid-june, where more than 200 industry representatives from 14 different countries gathered to discuss projects and potential partnerships, said Stine Thorup, who joined Andrews Kurth Middle East as an attorney in June. As well as delegates from the Scandinavian countries, there were attendees from Angola, Brazil, UAE, UK, France, Germany, the Netherlands and the Czech Republic reinforcing the global nature of our industry and the importance of country and region specific expertise. Stine Thorup is from Denmark and gained her bachelor and master of law degrees at the University of Aarhus before passing her Danish bar and law society exams in 2011. She has been based in Dubai since 2010 and has significant experience of issues concerning the operation of corporate entities in the United Arab Emirates, having advised on various aspects of corporate, commercial, compliance and related legal matters. Upcoming Events We are pleased to announce that Andrews Kurth will be attending the following upcoming events. If you have plans to be at any of these conferences, we would be delighted to meet with you. If you would like to meet with us or have any questions, please contact HughFraser@andrewskurth.com. Offshore Northern Seas (ONS 2014) Stavanger, Norway (25-28 August 2014) Energy Industries Council Training Successful Agency Agreements Dubai, United Arab Emirates (1 October 2014) Abu Dhabi International Petroleum Exhibition & Conference (ADIPEC 2014) Abu Dhabi, United Arab Emirates (10-13 November 2014)
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