Legal Framework for the UAE's Upstream Oil Sector
Climate, Energy & Utilities Focus
The oil sector is vital to the United Arab Emirates ("UAE"), significantly contributing to the national economy and global energy supply.
Law Update: Issue 372 - Climate, Energy & Utilities Focus
Yanal Abul FailatSenior Associate,Corporate Commercial
The oil sector is vital to the United Arab Emirates ("UAE"), significantly contributing to the national economy and global energy supply. As of 2023, the UAE ranks as the seventh-largest holder of proven crude oil reserves globally, with approximately 333 billion barrels. The sector is evolving rapidly, driven by ambitious energy strategies such as the Energy Strategy 2050 and the Net Zero 2050 Initiative, which focus on sustainability, diversification, and global cooperation.
As of 2023, oil accounts for about 70% of the UAE's energy consumption, with the federal government aiming to increase crude oil production capacity to five million barrels per day by 2027, up from 4.5 million barrels per day. The Abu Dhabi National Oil Company ("ADNOC") spearheads these developments, overseeing a range of activities from exploration to marketing.
From 2017 to 2022, the UAE exported an average of 2.6 million barrels of crude oil per day, primarily to the Asia-Pacific region. Key grades such as Murban and Upper Zakum have become staples in the international market. ADNOC collaborates extensively with international firms such as BP, Shell, and ExxonMobil, often through joint ventures that promote technological advancements and investment in the sector.
This article offers an overview of the UAE's legal framework for oil exploration and production, detailing the regulatory mechanisms, licensing structures, and compliance obligations that govern the sector.
Constitutional Basis for Resource ControlThe legal foundation for the UAE's oil sector lies in Article 23 of the UAE Constitution, which grants each emirate ownership and control over its natural resources. As a result, the regulation of oil activities is primarily handled at the emirate level. Each emirate is responsible for issuing licences, managing concessions, and ensuring that oil operations within its jurisdiction align with both local and federal legal requirements.
While each emirate exercises control over its resources, federal laws provide overarching guidance, particularly in areas such as environmental regulation, taxation, and trading in petroleum products. The balance between federal oversight and emirate autonomy creates a unique regulatory structure, with emirate-specific laws serving as the primary mechanism for managing the oil sector.
Abu Dhabi, which is home to most of the UAE's oil reserves, has its regulatory framework. Abu Dhabi Law No. 1 of 1988 established ADNOC and grants it significant powers to manage the emirate's oil resources. Additional regulations, such as Abu Dhabi Law No. 6 of 2006 on Gas Ownership, reinforce the emirate's control over its gas reserves, which are critical to the UAE's energy strategy.
Concession-Based System The UAE primarily utilises a concession-based system for granting exploration and production rights, effectively attracting foreign investment while ensuring that ultimate control remains with the emirates. Concessions are typically issued through contractual agreements between an emirate's government or its national oil companies and international oil companies ("IOCs").
The terms of such contractual licences vary among the emirates and even within each emirate, influenced by factors such as the grant date, the scale and importance of the development, and the extent of foreign involvement.
The approach to granting rights varies by emirate. In Abu Dhabi, Dubai, and Sharjah, rights are typically granted through oil exploration and production concessions, while Ras Al Khaimah utilises production-sharing contracts. Although relatively rare, technical service agreements have also been employed, as seen in Dubai.
Securing rights usually involves direct negotiations with the relevant regulatory body or through competitive licensing rounds, as observed in Abu Dhabi and Ras Al Khaimah.
Furthermore, in addition to obtaining authorisations from the regulatory body of the respective emirate, concessions or contractual agreements typically include the principal authorisations required for petroleum operations. These authorisations may be included directly within the contractual licences or as part of the approval process.
Across all emirates, exploration licences are typically awarded for five to ten years, with renewal options based on performance and development milestones. Once commercial production is achieved, production licences may be extended for 20 to 40 years, often with provisions for renegotiation or extension.
In the UAE, the regulatory frameworks governing both onshore and offshore operations follow a unified structure. Laws and regulations concerning the exploration and production of unconventional oil and gas resources align with those governing petroleum operations in each emirate. However, variations may arise in fiscal terms and environmental regulations.
A notable distinction in the regulatory landscape is the treatment of natural gas in Abu Dhabi, where the state owns all gas reserves and does not issue specific concessions for their extraction. Instead, international companies can be contracted to develop these reserves.
Transfer of Interests and Changes of Control Government consent is typically required for a contractual licensee to transfer its interest in a contractual licence. The relevant regulatory bodies that must grant consent may vary depending on the jurisdiction and the terms of the licences. Changes of control often also require similar approval.
The process for obtaining approval generally involves applying to the relevant regulatory body or the state-owned company (or both), along with supporting documents outlining the details of the proposed transfer or change of control. The timetable for approval can vary depending on the complexity of the transaction and the efficiency of the regulatory process within the relevant emirate. Costs associated with obtaining approval may include administrative fees and legal expenses.
In some cases, pre-emptive rights may be reserved for the relevant state-owned company, allowing it to acquire the interest being transferred before it is offered to third parties. The contractual licence typically outlines the existence and specifics of such pre-emptive rights.
Government consent is also typically required for a change of operator. The relevant contractual licence will identify specific requirements regarding the operator change. In some cases, it may be unclear whether the operator can be changed. For instance, certain Abu Dhabi concessions designate a specified entity to act as the operator on a no-profit, no-loss basis.
The legal framework for joint ventures in the UAE varies according to the venture's purpose, the legal form and nationality of the partners, and whether it is incorporated or unincorporated. The Federal Decree-Law No. 22 of 2023 on Commercial Companies primarily governs incorporated joint ventures. These ventures can adopt several structures, including corporate forms such as limited liability companies or, less frequently, joint stock companies.
A new entity may be formed specifically for the joint venture, owned entirely or in agreed proportions by the joint venture parties. Alternatively, an incorporated joint venture may be established by acquiring a minority stake in an existing company or through a capital contribution in cash or in kind. It is commonly advised that the joint venture company be set up as a pure holding company, which subsequently establishes operating subsidiaries. This configuration grants co-venturers enhanced flexibility in selecting the joint venture company's jurisdiction; for example, the joint venture could be positioned in one of the UAE's financial free zones, such as the Abu Dhabi Global Market or the Dubai International Financial Centre.
Contractual joint ventures are formed through agreements and are regulated by the general provisions of UAE civil law or common law within the Dubai International Financial Centre or the Abu Dhabi Global Market without constituting a separate legal entity. Notably, there is no statutory framework specifically addressing contractual or unincorporated joint ventures.
In the UAE, while state-owned oil companies have no express legal requirement to participate in contractual licences, they frequently do so. These arrangements do not typically include mandated carry provisions or a uniform approach to operatorship. The regulatory body representing the emirate grants contractual licences to licensees, including the state-owned company, which usually does not hold more than 40 per cent. However, more recent licences are awarded to licensees on a 30 per cent basis, with the state-owned company retaining a 60 per cent step-in right exercisable during the production phase.
The operation of blocks in the UAE varies: some are managed on a non-profit, no-loss basis by an operating company formed by the co-venturers, while others are operated by a subsidiary of the relevant state-owned company, such as ADNOC or the Sharjah National Oil Corporation. In some cases, a single licensee operates specific blocks.
Environmental Regulations Environmental protection is a critical aspect of the legal framework governing oil and gas operations in the UAE. At the federal level, Federal Law No. 24 of 1999 sets the standard for environmental protection, requiring all oil companies to conduct environmental impact assessments before commencing exploration or production activities. This law also imposes stringent pollution controls, particularly concerning offshore operations.
In Abu Dhabi, ADNOC has developed its own Health, Safety, and Environment Code of Practice, which all companies operating in the emirate must adhere to. This code establishes higher standards than the federal law in areas such as pollution control, emissions management, and decommissioning.
Decommissioning Obligations New contractual licences typically include detailed provisions for the decommissioning of oil facilities at the end of their operational life. These licences require licensees to establish a decommissioning fund and submit detailed decommissioning plans for approval by the relevant state-owned company or governmental authority. Older licences, however, often lack these provisions, leading to the need for negotiated settlements on decommissioning liabilities.
The general legal obligations regarding decommissioning are grounded in principles of contract law and environmental protection. IOCs are required to carry out decommissioning activities in accordance with best practices, ensuring minimal environmental impact. Non-compliance can lead to severe penalties, including financial liabilities and potential termination of licences.
Royalties Royalty payments are a key feature of the UAE's fiscal regime for oil and gas. The rate and structure of these payments vary across the emirates, but the core principle remains that the state, as the owner of the resource, is entitled to a share of the production or its equivalent value.
In Abu Dhabi, royalty rates are determined as part of the concession agreement, with the emirate typically receiving a fixed percentage of the oil produced. For long-standing concessions, this royalty rate can be as high as 20% to 30%. However, more recent agreements may offer greater flexibility, allowing for lower upfront royalty payments during the exploration and development phases, with higher rates applying once commercial production begins.
In some cases, particularly under newer agreements, royalties may be structured progressively, with higher rates applying as production increases or oil prices rise. Other emirates, such as Ras Al Khaimah, typically employ production-sharing contracts, wherein the IOC shares a portion of the oil produced with the emirate. In these contracts, the IOC is permitted to recover its costs from production (known as "cost oil"), while the remaining production ("profit oil") is split between the IOC and the emirate.
Corporate Taxes and Fiscal Stabilisation The UAE has historically offered a favourable tax regime for oil companies, although taxation varies significantly between emirates. In Abu Dhabi, oil companies are subject to a corporate tax that ranges between 55% and 85%, depending on the terms of the concession. This high rate reflects the strategic importance of oil revenues to the emirate's economy.
Abu Dhabi Law No. 4 of 1974 on Income Tax provides the legal basis for taxing oil companies, although this law specifically applies to companies engaged in oil and gas extraction. Other emirates, such as Dubai and Sharjah, have similar taxation regimes, though the rates are generally lower due to the smaller scale of their oil sectors. Dubai, for example, imposes a 55% tax rate on companies engaged in oil and gas production under Dubai Decree No. 3 of 1967.
To ensure fiscal stability, most concession agreements include tax stabilisation clauses, which protect IOCs from adverse changes in tax laws during the term of the concession. These clauses typically guarantee that the tax rates applicable at the time of signing will remain fixed throughout the concession period, providing a degree of certainty for foreign investors.
The UAE’s energy sector is experiencing significant regulatory changes that directly impact the upstream oil and gas industry, notably:
OPEC Production Quotas: The UAE has extended its OPEC production quotas through 2024, allowing an increase in output by 200,000 barrels per day starting January 2024, which underscores its commitment to enhancing market share in upstream production.
ADNOC Privatisation: ADNOC is partially privatising by offering stakes in its drilling and gas divisions through initial public offerings in 2023 and 2024, attracting foreign investment and introducing new legal considerations for upstream operators.
Increased Production Capacity: The UAE aims to achieve a crude oil production capacity of 5 million barrels per day by 2027, requiring substantial investments in upstream exploration and development projects.
Energy Diversification: The UAE is pursuing a strategy to diversify its energy sources, focusing on both renewable energy and traditional upstream operations, supported by significant financial investments.
Investment in Clean Energy: Ongoing investments in clean energy initiatives, including projects like the Barakah nuclear power plant, illustrate the UAE’s commitment to integrating renewable sources with traditional oil and gas operations, impacting upstream development strategies.
While the UAE’s energy sector is evolving towards diversification and renewable sources, the upstream oil sector remains vital to the economy. As regulatory and policy changes unfold, the contractual licensing regime is expected to evolve alongside the overall regulatory framework, ensuring that the upstream sector continues to adapt and thrive in the context of the energy transition.
For further information,please contact Yanal Abul Failat.
Published in December 2024
