Perspectives on Greenland's New Draft Oil and Mineral Strategy

Introduction

The Greenland government has presented a new proposal for its revised oil and mineral strategy for 2014 to 2018. The strategy will have a significant impact on the direction that Greenland will take over the next five years, as well as containing concrete suggestions as to the likely focus areas for supporting the development of the mining and oil industries.

The strategy will also affect how attractive it will be for both existing and potential investors to invest in the Greenland mining and oil industries. The strategy is being considered in Parliament at its spring session for 2014, which started on March 18 2014, and will focus on:

• oil and gas;
• minerals;
• taxes;
• the foundation of GeoSurvey Greenland; and
• sustainable development and infrastructural conditions.

Oil and gas

The government's long-term goal is to focus on maintaining a high level of activity in exploration for oil and gas, in order to increase the possibility of making commercial oil and gas discoveries. To maintain the existing level of activity, it will be necessary to offer new licence areas continuously in order to compensate for the licence blocks that will be returned over time. For this reason, between 2014 and 2018 tenders or 'open door procedures' will be made in the following geologically interesting areas:(1)

• Jameson Land (onshore) and South and Southwest Greenland (offshore) from 2014;
• Disko-Nuussuaq (onshore) from 2016;
• Baffin Bay (offshore) from 2016/2017; and
• Davis Strait west from Nuuk (offshore) in 2018. 

During this period, it is expected that tender rounds will be held with an interval of two to three years. Previously, blocks of 10,000 square kilometres or more were offered, but the government now proposes to offer blocks of 1,000 to 4,000 square kilometres instead. The aim for the smaller blocks is that there be at least one attractive exploration target.

The government also aims to ensure a continuous streamlining of administrative business processes for the handling of licences. During the last strategy period, an IT-based system for the handling of mineral licences was developed. The government plans to develop a similar system for the handling of oil and gas licences during the 2014-2018 strategy period.

Tender conditions
When the candidates are deemed to be equal, the existing three procurement rules – expertise, finance and operating procedures – will be supplemented by two secondary criteria. The secondary criteria are:

• the applicant's willingness and ability to contribute to the continued development of a strategic environmental assessment of the area and to relevant studies within the areas of social sustainability and preparedness; and
• the applicant's policy of social sustainability (illustrating the government's desire that the future development be done in a sustainable manner in relation to the population of Greenland).

Tax model
Tax is another major focus in the coming strategy period, which will be crucial for companies' willingness to invest in the Greenland oil and gas industry. In the coming strategy period, the following tax model (ie, the 'government take' model) for oil and gas will be applied:

• the corporation and dividend tax in force at any time;
• a turnover royalty of 2.5%;
• profit-based royalties of 7.5%, 17.5% and 30%, which will be paid when the accumulated income exceeds the accumulated costs by 35%, 45% and 55%, respectively; and
• participation in the home-rule company Nunaoil A/S, with a share of 6.25%, which is in the exploration phase.

'Government take' refers to the share of the profits from a given project that accrues to the government. In order to establish a competitive tax model, an international benchmark analysis has been worked out. This report compares various countries' government take, which makes it possible to assess the competitiveness of such countries. The result shows that the Greenland government take model is now competitive with those of both Australia and Canada. The benchmark analysis calculations are based on a realistic example of a medium-sized oil field development over a 38-year period, starting in 2013.

Minerals

The development of the number of licences has been steadily increasing in recent years, and the government will try to maintain this development in the coming strategy period.

When a mining company is looking for mineral investments in a country, it is based on an assessment of several parameters. The essential parameters are:

• the geological potential and opportunities;
• legislation;
• economic conditions;
• institutional factors and general conditions; and
• political stability.

In light of this, the overall purpose of the earlier strategy was to build a geological knowledge of attractive geological areas in Greenland, so that it could be used in marketing to potential mining companies.

The new strategy is focused on the minerals that are globally in demand – namely, iron, copper, zinc, rare earth metals and gold – and an expanded exploration for these minerals will be strengthened, with North Greenland's zinc potential as an obvious example. In addition, the stage is set for an opening for exploration north of 81 degrees under special conditions.

One of the other major changes with the new strategy is the taxation of minerals. The government recommends the following tax model for the future:

• for all metals and minerals other than uranium, rare earth metals and gemstones, the corporation and dividend tax in force at any time, plus a turnover royalty of 2.5%, with corporation tax/dividend tax deducted from the calculated royalty;
• for rare earth metals, the corporation and dividend tax in force at any time, plus a turnover royalty of 5% with corporation tax/dividend tax deducted from the calculated royalty;
• for uranium, the corporation and dividend tax in force at any time, plus a turnover royalty of 5%; and
• for gemstones, the corporation and dividend tax in force at any time, plus a turnover royalty of 5.5% and a profit-based royalty on gross profit of 40%, which is taxed at a rate of 15%.

The government aims to double the number of exploration licences and issue extraction licences such that three to five mines can be started within five years.

Foundation of GeoSurvey Greenland

The focus on Greenland's raw materials has increased over the years, and this interest is expected to continue. The government has therefore recommended that a research institution (GeoSurvey Greenland (GSG)) be established in Nuuk to carry out mineral exploration and mine development. GSG will be responsible for carrying out the collection and storage of geological data, which at the present time is handled by the Geological Survey of Denmark and Greenland.

In addition, GSG should be able to provide advice to public authorities, as well as making data and know-how available to authorities and private companies, both in terms of marketing and on commercial terms.

Greenland's employers' association has expressed concern about the establishment of GSG, as it fears that the significant resources, expertise and strong research networks at the Geological Survey of Denmark and Greenland will no longer benefit Greenland once GSG has been established.

Sustainable development and infrastructural conditions

The government wishes to focus on sustainable development in the coming strategy period – environmentally, socially and economically. For this reason, the legislation on environmental protection will change. Furthermore, there will be a greater focus on the financing of infrastructural facilities. However, this may lead to challenges for mining companies – for example, they must be able to provide an energy supply to the extraction locations and air transport to and from the companies' mines and oil rigs. In addition, they must ensure the construction of new ports and the expansion of existing ports, as the majority of all goods in Greenland are transported by ship.

Setting up businesses on geologically interesting areas in Greenland will be costly for mining companies, as it requires significant investment in infrastructure. This may prevent some companies from investing. For this reason, it has been suggested that either institutional investors or a governmental fund should invest in infrastructure, to which companies could pay a fee to use. Another form of financing through which private investors and the government come together in a partnership and finance infrastructure has also been proposed as a solution to the problem.

It is hoped that through these methods, it will become easier for mining companies to obtain financing, which would in turn stimulate investments in Greenland's oil and mining industry. The strategy also identifies the need to conduct further analysis of how planning and synergies between the various mining project needs and the needs of the society can benefit from each other, so that financing would be easier to obtain.

Comment

Previously, it was uncertain which direction Greenland would take after the 2013 election, so investments in the mining industry came to a standstill. The new proposal for an oil and mineral strategy for 2014 to 2018 seeks to clarify the government's intentions and goals for the industry over the next five years, and thereby hopefully boost investment.

This article was originally published in the Energy & Natural Resources Newsletter of the International Law Office - www.internationallawoffice.com.

For further information on this topic please contact Søren Stenderup Jensen or Marlene Hannibal at Plesner by telephone (+45 33 12 11 33), fax (+45 33 12 00 14) or email (ssj@plesner.com or mnh@plesner.com). The Plesner website can be accessed at www.plesner.com.

Endnotes

(1) See www.naalakkersuisut.gl.