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Natural resources
Who holds title over oil reservoirs? To what extent are mineral rights on private and public lands involved? Is there a legal distinction between surface rights and subsurface mineral rights? At what stage does title to extracted oil transfer to the licensee, lessee or contractor?
All oil reservoirs are the property of the Danish state and may only become subject to prospecting, exploration or production by any third party by virtue of a licence granted by the Danish government in accordance with the Subsoil Act. The licence granted confers exclusive rights on the licensee to explore and to produce petroleum within an area defined in the specific licence and under the terms and conditions stipulated in the specific licence.
The licence entitles the licensee to ownership of the petroleum produced as a result of the exploration. The licensee is free to sell the petroleum produced on the market. The Danish state, however, reserves the right to participate as a co-licence holder (joint venture partner) in any licence granted a holding of 20 per cent of the ownership of the licence through the North Sea Fund. The licence does not grant any kind of ownership or other similar legal title over the covered oil reservoirs (until exploited) or the covered licence area.
At present, there is no oil production on land. However, prior to 2018, a number of licences have been issued for onshore exploration activities. The licence areas for onshore exploration comprise private as well as public lands. To the extent necessary, the Danish Energy Agency (DEA) may permit the expropriation of real property for the purpose of activities covered by the Subsoil Act. Further, the DEA may allow short-term surveys to be made on private property to determine whether there is potential for further activities. The property owner must be compensated for any damage or inconvenience suffered as a result of the surveys.
There is no distinction made between surface rights and subsurface mineral rights. However, exploration and exploitation of raw materials such as stone, coal, clay and limestone are covered by the Raw Materials Act and not the Subsoil Act.
What is the general character of oil exploration and production activity conducted in your country? Are areas off-limits to exploration and production?
The Subsoil Act was amended in 2019 whereby exploration and production activities were prohibited onshore and in inner waters.
How are rights to explore and produce granted? What is the procedure for applying to the government for such rights? To what extent are the terms of licences or contracts negotiable?
The government policy for the oil sector is exercised by the Minister for Climate, Energy and Utilities through the DEA.
Exploration and production of oil may only take place pursuant to a licence granted by the Minister for Climate, Energy and Utilities. As a result of the North Sea Agreement of 3 December 2020, exploration and production of oil can only take place under existing licences, since no new licences will be granted (except through the so-called neighbouring block procedures and mini-rounds as described below). Up until 2020, licences for oil exploration and production were granted following a public notice inviting applicants to a licensing round.
The government could also grant licences under an open-door procedure, for example, where an application for a licence has been submitted for a specific area without a prior invitation to the public. Further, the government could grant licences for specific areas through the issuance of a special executive order, which takes effect when a notice concerning the employment of this procedure has been published in the Official Journal of the European Union.
Another procedure is the neighbouring block procedure. This procedure may be used in situations where an accumulation or a potential discovery already licensed extends into an unlicensed area. In these situations, the most commercially viable solution may be to explore the border-straddling accumulation in connection with the already licensed accumulation. The neighbouring block procedure will still be available up until the 2050 cut-off date following the North Sea Agreement. Mini-rounds, where an interested party applies for a concession without the prior notification of a formal licencing round from the DEA, will be available as well.
Pursuant to the Subsoil Act, the Minister for Climate, Energy and Utilities may decide that the state or the state-owned company shall be entitled to purchase up to half of a licensee’s ongoing production of oil. However, such a decision cannot apply to production carried out pursuant to a licence granted after 1 January 1995. In addition, some licences contain provisions on a share of the profits from the activities covered by the licence being payable to the Danish state.
According to the Subsoil Act, the licensees shall reimburse public authority expenditure for administrative case handling, including the incurred expenses in connection with the processing of applications by the DEA. The costs are calculated on the basis of the time consumed for performing the work. The specific rules are listed in Executive Order No. 661 of 1 June 2018 on Reimbursement. The time frame depends on the extent of the work to be carried out in relation to processing the application.
The DEA has issued model licences for all the licensing round (the most recent one being the eighth round model licence that was cancelled), as well as an open-door model licence. The model licences contain terms for the licence. The terms in the model licences are generally non-negotiable.
Does the government have any right to participate in a licence? If so, is there a maximum participating interest it can obtain and are there any mandatory carry requirements for its interest? What cost-recovery mechanism is in place to recover such carry? Does the government have any right to participate in the operatorship of a licence?
Since 2005, the Danish state has been a mandatory participant in any new licences granted pursuant to the Subsoil Act, with a 20 per cent ownership interest owned through the Danish North Sea Fund. The fund is responsible for the state participation in all new licences, which covers open-door licences as well as licences awarded in connection with licensing rounds. The fund shall defray costs and receive income involved in new licences. However, the fund has no right to participate in the operating of a licence and is not ‘carried’ in the exploration phase. The fund only operates in Denmark where the licences are subject to Danish legislation about safety, the environment, employee rights and anti-corruption. In May 2014, an act on adjustments to the fund’s structure was passed by parliament changing the fund from a public authority under the Ministry of Business (currently the Ministry of Industry, Business and Financial Affairs) to an independent state-owned company with its own board of directors. A major objective of the restructuring is to strengthen the fund’s ability in making business decisions.
If royalties are paid, what are the royalty rates? Are they fixed? Do they differ between onshore and offshore production? Aside from tax, are there any other payments due to the government? Are any tax stabilisation measures in place?
Pursuant to the Subsoil Act, it may be stipulated in a licence that the licensee shall pay a periodic charge based on the size of the area covered by the licence (area-rental) or a charge on the volume of raw materials produced (royalty). Moreover, the licence may stipulate that a share of the profit from the activities covered by the licence shall be payable to the state. The more recent licences do not stipulate payment of royalties or a share of the profits to the state, but the state has 20 per cent ownership of the licence through the participation in the licence by the state-owned Danish North Sea Fund. Furthermore, a one-off fee must be paid to the DEA both on submission of the application and upon the issuance of the licence.
In Denmark, tax stabilisation measures apply to the Danish Underground Consortium but other licensees are not subject to any protection in this regard.
What is the customary duration of oil leases, concessions or licences?
Exploration licences are granted for a term of up to six years, which may be extended by up to four years at a time for the purpose of further exploration. The total term of exploration may only exceed 10 years in exceptional cases.
When the terms and conditions of an exploration licence have been met, the licensee shall be entitled to an extension of the licence with a view to production. The licence term may only be extended for those parts of the area that contain commercial accumulations that the licensees plan to exploit, and not by more than 30 years. Licences granted for the purpose of production may be prolonged where warranted by special circumstances. The licences cannot be prolonged to a date after 31 December 2050 due to the North Sea Agreement.
For offshore production, how far seaward does the regulatory regime extend?
The Subsoil Act applies to prospecting, exploration and production of oil in the land territory and territorial sea of Denmark and on the Danish continental shelf.
In accordance with the Act on the Continental Shelf and Certain Pipeline Installations, Danish law applies to installations for exploration and production activities on the continental shelf.
Is there a difference between the onshore and offshore regimes? Is there a difference between the regimes governing rights to explore for or produce different hydrocarbons?
There are no differences between the regimes governing rights to explore or produce different hydrocarbons, which are all governed by the Subsoil Act. Similarly, as a starting point, there are no differences between the onshore and offshore regimes; however, certain guidelines issued by the DEA are targeted specifically towards onshore or offshore activities, respectively.
Until 1 January 2015, the DEA functioned as a one-stop-shop authority for the offshore activities, but from this date, the Danish Working Environment Authority (WEA) has taken over the supervision of health and safety issues related to the working environment on offshore installations and certain offshore vessels.
Regarding onshore activities, the local municipalities and emergency preparedness coordinators must be involved with regard to zoning regulations and emergency procedures.
Which entities may perform exploration and production activities? Describe any registration requirements. What criteria and procedures apply in selecting such entities?
There are no organisational requirements for a licence holder under the Subsoil Act and a licence holder can be any Danish or foreign natural or legal person.
The Act requires each licensee to have the necessary expertise and financial resources. The requirement for expertise can be met by agreements with third parties that have such expertise or, for instance, through the operator of the licence. Each licensee shall provide security for the performance of the obligations under the licence. The requirement of necessary financial resources and security can be met by a bank or parent company guarantee. In 2015, the Subsoil Act was amended to include increased requirements for the licensees’ financial resources in accordance with the Offshore Safety Directive.
Exploration and production activities may only take place by virtue of a licence granted by the Danish government. Before exploration or production activities can commence, a plan for those activities must be approved by the DEA.
All Danish companies, including a subsidiary or a branch, must register with the Danish Business Authority. The costs and time frame depend on the specific case.
What controls does the regulatory body have over operators? Can operatorship be revoked?
The supervision of the operators’ compliance with the regulations and the terms within the licences is vested in the Minister for Climate, Energy and Utilities. The minister is authorised to order operators to comply with the provisions within the regulation, including the Subsoil Act.
As part of the supervision, the minister may require the operators to submit samples, data, technical and economic information, among other things. Further, as part of the supervising capacity, the supervising authority is granted full access to the operators’ company. Non-compliance with the requirements in the Subsoil Act may result in a fine or imprisonment of up to four months.
Moreover, the Danish WEA carries out supervision within the framework of the Offshore Safety Act. If the WEA finds that the operator no longer has sufficient technical and financial capacity to comply with the requirements of the Offshore Safety Act and the Offshore Safety Directive, it will notify the Minister for Climate, Energy and Utilities, who will then notify the licensee. The licensee will assume the responsibilities of the operator from that point and must, as soon as possible, submit the name of a new operator for the minister’s approval.
What is the legal regime for joint ventures?
All existing licences consist of joint ventures. The companies participating in a joint venture share the economic risk and pay expenses according to the joint operating agreement. The joint operating agreement must be approved by the DEA.
The formation and organisation of joint ventures is not governed by any statutory regulation under Danish law.
How does reservoir unitisation apply to domestic and cross-border reservoirs?
The Subsoil Act stipulates that, where an accumulation of oil extends into the areas of several licensees, the relevant licensees shall coordinate exploration and any subsequent production activities. Agreements in this respect are subject to approval by the Minister for Climate, Energy and Utilities.
Further, the Subsoil Act stipulates that where an accumulation of oil extends into the territory of another country and an agreement on the coordination of exploration and production is made with the relevant country, the DEA may order the licensee, whose licence includes the Danish share of the accumulation, to take part in the coordination.
Is there any limit on a party’s liability under a licence, contract or concession?
The Subsoil Act contains rules on strict liability for activities connected with the exploration and production of oil. Under the Act, the licensee must indemnify all claims whatsoever made by any third party against the state as a consequence of the licensee’s activities. The general prerequisites for imposing liability under Danish law must be fulfilled.
The Subsoil Act requires the licensee’s liability for damages to be covered by insurance. If a licence is granted to several parties jointly, the parties are jointly and severally liable to any damages under the Act.
Are parental guarantees or other forms of economic support common practice or a regulatory requirement? Are security deposits required in respect of any work commitment or otherwise?
Each licensee shall provide security for the performance of the obligations under the licence.
If the licensee is a branch or a subsidiary of another company, the model licence requires a parent company guarantee to provide security of necessary financial resources. The terms and conditions of the parent company guarantee are set out by the DEA and the guarantee is usually provided by the ultimate parent company. The guarantee is unlimited, irrevocable and without any time limit but does impose a monetary limit. A model parental guarantee is available on the DEA’s website. In 2015, the DEA increased its requirements for the licensees’ financial resources, including, if relevant, the security provided, based on new provisions of the Subsoil Act and the Offshore Safety Directive.
Security deposits are generally not required for work commitments or otherwise. However, pursuant to the model licence, the DEA may require additional security in any form, if necessary.
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A thumbnail guide to oil exploration and production in Denmark – Lexology
