By Khawar Qureshi

At a time when Abu Dhabi is apparently seriously considering importing coal from the UK to provide much needed power, and Dubai has just introduced an electricity pricing system which penalises business users, it is clear that all is not well on the energy front - even in the GCC region, which is seen by many outsiders as being the energy reservoir of the world.

There are  many legal issues which surround the ownership, extraction, supply, sale and use of energy resources. None of us ever stops to think that the act of switching on a light is the result of many layers of legal agreement - we might however be thinking about our own contract to pay the electricity bill - especially now that the summer heat is upon us and the air-conditioners are constantly droning away.

However, it is helpful to understand some of the essentials of energy production and supply in their legal context, not least because we are all using a resource which is finite, and doing so in a way which is creating irreversible and potentially catastrophic damage to our planet - even there the law is trying to exercise some control - with no success so far.

There are four core issues that lawyers have been dealing with ever since large scale exploitation of oil and gas reserves began after the Second World War.

•  Ownership of energy resources and the right to exploit them
•  Supply of energy resources - transportation and sale
•  Energy security
•  Environmental impact of exploitation of energy resources

Ownership and Exploitation of Hydrocarbon Reserves
State ownership
Whenever an energy industry business is considering whether to explore for and exploit hydrocarbon reserves, it first has to ask itself - whose permission do I need to do this?

Whilst it is accepted in most States that the national authorities of that State have to give permission for exploration/exploitation, that does not necessarily mean that the State owns the reserves as a matter of International Law. International Law is the body of law which applies to States in their relations with each other and establishes what the limits are to the power of a State in its relations with other States.

International Law entitles a State to assert Sovereign rights over resources which are within its legal jurisdiction - that is not the same as ownership! Indeed, in the USA, the State does not lay claim to hydrocarbon resources under land in private ownership.

However, most States do lay claim to ownership of hydrocarbon reserves - even under land in private ownership - whilst in England the saying is that "an Englishman's home is his castle", the fact is that the UK State will lay claim to hydrocarbon reserves which lay beneath the surface. As a result, many States exploit such resources through State companies.

In other cases, the State will enter into contracts with private sector entities - often these agreements will be called production sharing agreements or services contracts. In these cases, the State will expect to receive a return in the form of a share of the produced hydrocarbon or financial benefits such as cash royalties and/or revenue from taxation. In cases where the State grants a concession/license (which may lead to the production sharing agreements or services contracts), a premium is normally paid for the grant of a license and rental payments are normally required for the area which is being exploited.

Licences and Concessions
Given the heavy front-loading costs for exploring/exploitation of hydrocarbon reserves, many license holders enter in "Joint Operating Agreements" - these are joint venture agreements which enable different business involved in the energy sector to share the risk - and the profit - from exploitation of hydrocarbon
reserves.

If a licence/concession is granted then the State will usually impose requirements upon the license-holder to ensure the proper performance of the licenced activities, payment of a return to the State, as well as other matters such as environmental protection.

Most licences are granted over areas known as "blocks". Whilst the boundary of an oil or gas field will be contained within the block, it can often happen that the very act of drilling for deposits causes changes in pressure which causes some "migration" of the deposits outside the block - in the United States this led to what became known as "competitive drilling" whereby wells were drilled at or close to the boundary of a block in order to draw as much oil and gas from deposits in neighbouring areas - whilst this activity was legitimate, (because of a rule of property law known as "the rule of capture") it led to a proliferation of wells and higher costs. A process known as "Unitisation" was developed as a way of trying to apportion more fairly the reserves of a hydrocarbon reservoir between
different licence-holders.

Disputes
When a State grants a licence/concession for exploitation of hydrocarbon reserves, it generally agrees that any dispute between itself and the licence holder will be subject to some form of legal process. Most international corporations try to avoid being subjected to the domestic Courts of the host State. Rightly or wrongly, they sometimes perceive a potential for a lack of impartiality, have problems with understanding the Court process or are uncomfortable with the laws of the Host State. In such cases, depending upon the respective bargaining power of the State and the Business entity,  some aspects of their legal relationship will be governed by a different system of law - very often English Law and they will often agree to refer disputes to International Arbitration.

In recent years, States have entered into agreements with each other called "Bi-Lateral Investment Treaties" ("BITs"). A few weeks ago, Qatar entered into such an agreement with the Netherlands. BITs are meant to provide protection to foreign investors and enable them to make a claim directly to an International Arbitration Tribunal if the State behaves unfairly. A very large number of such cases have been brought against South American States in the past year or so for alleged interference/termination of  Hydrocarbon Licence/Concession agreements.

How hydrocarbons are priced is becoming an increasingly hot topic. Essentially, the law of supply and demand applies, but it is easy to see how supply can be limited by reducing production or vice-versa. 

We have seen the price of crude oil shoot up from $80 a barrel to $135 in a couple of years - and it is predicted to reach $200 soon. We have also seen how the price of natural gas (which used to be burned away in many places because of difficulties in capturing and transporting it) has shot up from 50 cents per mmbtu to more than  $5 per mmbtu in the Gulf region. However, whilst consumers in the user Countries are feeling the effects of the sharp price rises (passed onto the consumers in an even sharper way through increased fuel taxes), most consumers in the major Gulf producing countries such as Qatar and Saudi Arabia are unaffected.

With such steep increases and sharp fluctuations in prices as well as the clamour for supply, it is unsurprising that most contracts for the sale of hydrocarbons are long term. Indeed, contracts for the sale of LNG are agreed on a long term basis and contain very complex formulae for calculation of price - essentially reflecting the price of crude oil.

Nevertheless, with the sharp increases in prices, greater consideration is being given to the re-negotiation of long term LNG supply contracts. Indeed some of these agreements are leading to Price Review Arbitations.

More and more States are also seeking to diversify their energy sources - LNG is being seen as a more secure in this regard. Europe has the infrastructure required for the transportation of LNG and we have seen a massive increase in the number of LNG terminals being built throughout Europe to take LNG - mainly from Qatar.
Energy Security is likely to be an area of increasing activity for States. We know that wars have been fought and many lives have been lost all over the world to safeguard what are perceived to be a State's vital interests in securing its energy needs. This scenario seems unlikely to disappear.

Environmental Impact
Whilst we read every day about Global warming and its effects, we are less informed as to the legal measures being developed to tackle environmental damage.

In many countries, even before any exploration takes place, an environmental impact assessment needs to be carried out. When exploration/exploitation is approved, a fully developed environmental protection programme is often required as a condition for any licence/concession. If damage takes place, the business entity responsible can be held criminally liable and required to pay heavy damages (such as in the case of the Exxon Mobil disaster).

However, few would argue that we are doing all that can be done to tackle the environmental impact of the exploitation of energy resources.

Climate experts say that the only way of doing this effectively is to dramatically reduce our energy consumption - by more efficient use of energy.
In the Gulf region, there is an abundance of solar energy and perhaps we will see GCC States adopting policies similar to those in Spain and Germany for solar energy development.

Nevertheless, legal standards are being developed to try to deal with this issue. The biggest stumbling block so far has been the lack of consensus.

It may not be too long before we have no choice but to act.

There are more and more people who are saying that we are leaving it very late to do so.

Professor Khawar Qureshi QC is Head of Chambers at McNair Chambers and has extensive experience of energy law matters
(www.mcnairchambers.com)