Saudi Arabia Focus
Yanal Abul FailatSenior Associate,Corporate Commercial
Energy sources fuel society and the economy and are critical in driving development. However, the widespread energy consumption patterns of certain sectors have the potential to impede economic growth and create unforeseen obstacles. Experts have proposed numerous strategies to regulate energy usage by consuming sectors, such as through energy allocation schemes to mitigate this. The Kingdom of Saudi Arabia (“Saudi Arabia”) has been implementing such a strategy for almost a decade and has, by virtue of Royal Decree No. (M/ 36) dated 23/08/2003 (the “Law of Gas Supplies and Pricing”), been allocating quotas of natural gas and its liquids (i.e., dry gas (sales gas), ethane, propane, butane, pentane, and heavier hydrocarbons (or pentanes and the like), natural gasoline, and any other products from gas plants and from fractionation and sorting plants, such as sulphur) at prices administered by the state to consuming sectors, such as power producers and industrial firms producing glass.
Recently, Saudi Arabia has expanded its energy allocation rules so to cover not just natural gas but all energy products, including crude oil and its derivatives, hydrogen, and electric power. The parameters of this new energy allocation system are defined by the new “Energy Supplies Law”, approved by the Saudi Council of Ministers on 27 December 2022 and enacted by Royal Decree No. (M/80) dated 28 December 2022 (the “Energy Supplies Law”).
The Energy Supplies Law establishes a framework to determine and allocate energy to consumers in various sectors.
The Energy Supplies Law establishes a framework to determine and allocate the type and quantity of energy available to consumers, defined as natural and legal persons who carry out an activity that requires the allocation of one or more energy products in the following sectors: electricity generation, oil refineries, petrochemical production, water desalination, industrial processes, mining, agriculture, construction, telecommunications, transportation, logistics and more.
The Energy Supplies Law establishes an “Energy Allocation Committee”, which is chaired by the representative of the Minister of Energy and with the membership of senior representatives from various ministries and governmental authorities, including the Ministry of Industry and Mineral Resources and the Water and Electricity Regulatory Authority, and two independent field experts appointed by the chairperson of the newly formed Higher Committee for Hydrocarbon Affairs upon the Minister of Energy’s nomination. The Ministry of Energy will act as the secretariat for the committee and provide financial and administrative support.
The Energy Allocation Committee will be responsible for the following:
reviewing and implementing energy allocation regulations;
preparing, amending, and adopting energy allocation criteria proposed by the Ministry of Energy every three years;
improving data collection and information exchange; and
providing periodic reports and required information to the High Committee for Hydrocarbons.
Pursuant to the availability of energy products and the criteria for quota allocation adopted by the Energy Allocation Committee, the Ministry of Energy allocates quotas for energy products to consumers and issues an energy allocation instrument, which sets out the type(s) and quantity of energy allocated to a consumer, and such consumer’s rights and obligations with respect to the same.
Without prejudice to any other applicable licensing requirements under Saudi Arabian laws, the Energy Supplies Law establishes a licensing regime for activities relating to natural gas or hydrogen. A license must be obtained from the Ministry of Energy to engage in natural gas and hydrogen activities, including transportation, processing, retailing, gas purification, assembly, storage, local distribution, import and export, sale, establishment, ownership, and operation of networks. Whilst the detail of such licensing framework and licensing fees will be defined by executive regulation, the Energy Supplies Law establishes the following obligations and restrictions on licensees, namely, licensees must:
take out and maintain liability insurance against third-party claims arising from activities subject to the Energy Supplies Law;
upon the expiration of a license and unless the licence states otherwise, transfer to the state all tangible assets, including networks, pipelines, transport, retail, processing, purification, assembly, storage, distribution, import, export, and sale of natural gas and its liquids, hydrogen production and distribution facilities, and any necessary fixed assets required for operations, in good condition;
obtain an energy allocation instrument from the Ministry of Energy before authorisation to an activity falling within the scope of the Energy Supplies Law is granted by the relevant Ministry; and
not transfer an energy allocation instrument or a licence without the Minister of Energy’s written approval.
As to compliance, the Energy Supplies Law provides that any person who violates any provisions of the Energy Supply Law, the energy allocation regulations, or the executive regulations would face one or more of the following penalties without prejudice to any harsher punishment being imposed under other laws or regulations:
a fine of up to 20 million Saudi riyals (circa USD 5.3 million);
suspension of the license in full or in part for a period not exceeding one year; and/or
revocation of the license.
Further, any person who violates any provisions of an energy allocation instrument would face one or more of the following penalties without prejudice to any harsher punishment being imposed under other laws or regulations:
reduction of allocated energy quantities;
non-renewal or cancellation of the energy allocation instrument; and/or
a fine of up to 20 million Saudi riyals (circa USD 5.3 million).
Under the Energy Supplies Law, a committee comprising legal and technical specialists is established to oversee violations of the law, the energy allocation regulations, the executive regulations, and energy allocation instruments, as well as the imposition of penalties and fines provided for in the law. The committee is reconstituted every three years and must include a specialist in the relevant activities governed by the Energy Supplies Law and a Sharia law expert. Decisions made by the committee must be reasoned, and consumers may contest them in court within sixty days. Further, the Minister of Energy may appoint inspectors from the private and public sectors to monitor and control violations.
The Energy Supplies Law allows licensees granted licenses under the Law of Gas Supplies and Pricing a two-year grace period to transition and comply with the Energy Supplies Law, which may be extended for a further six-year period by the Ministry of Energy. The new law requires such licensees to submit a plan to the Ministry of Energy outlining their approach to transitioning to and complying with the New Energy Supplies Law.
The forthcoming issue of the energy allocation regulations and the executive regulations will permit a full assessment of the impact of the Energy Supplies Law and whether it keeps pace with the best practices relating to energy allocation, but it is clear that the law is a crucial component of Saudi Arabia's efforts to achieve privatisation goals and build a more sustainable and resilient energy system as part of its transition to a low-carbon economy. The Energy Supplies Law aims to improve the structure and performance of the energy sector, achieve national goals, optimise energy use, and provide for structural and organisational developments that can revolutionise the energy sector in Saudi Arabia.
For further information, please contact Yanal Abul Failat.
Published in March 2023
