On 30 April 2019 the Minister of Economic Affairs and Climate Policy (hereinafter: ‘the Minister’) published for consultation purposes (in Dutch only) a draft bill to amend the Dutch Mining Act (hereinafter ‘draft bill’). The draft bill envisages clarification, updating and addition of provisions in the Mining Act regarding abandonment, decommissioning and re-use of mining infrastructure together with providing a financial (tax) incentive for production activities in a time of declining gas reserves and increasing production costs.
There are currently more than 150 mining installations in the Dutch part of the North Sea. According to the Minister the costs for decommissioning and abandonment of mining infrastructure are estimated at, at least, EUR 7 billion, of which two-thirds is estimated for offshore mining infrastructure. The draft bill aims to provide more certainty that licensees will comply with their decommissioning obligations and – if necessary – provide financial security.
At the same time, the Netherlands still heavily rely on natural gas as an important energy source and it is not expected that this will change in the short term. In any case, the government prefers production of natural gas from the Dutch ‘small natural gas fields’ to importing natural gas from abroad. Therefore, the Minister has proposed an increased investment deduction facility to stimulate and maximise remaining gas production activities.
These and some other measures are described in more detail below.
Introducing a compulsory set of decommissioning security agreements
In short, the draft bill introduces an obligation for production licensees to enter into a set of two agreements with respect to decommissioning obligations. This obligation aims to ensure that the addressee of the decommission obligation (the operator), can successfully charge the costs of decommissioning to its co-licensees (parties to the Joint Operating Agreement (‘JOA’)).
This set of contracts will consist of:
- a ‘Decommissioning Security Agreement’ (‘DSA’): to be agreed between the operator and co-licensees. The DSA will arrange the timing for and the form of the financial security to be furnished by the licensees. The amount, timing and form will depend on the ratio between the expected value of the assets and the remaining reserves on the one hand and the expected decommissioning costs on the other hand, and shall be re-assessed annually and adjusted accordingly.
- A ‘Decommissioning Security Monitoring Agreement (‘DSMA’): to be entered into by the respective licensees and EBN. The DSMA allows EBN to monitor the correct execution of the DSA and to inform and advise the Minister on whether or not the financial security provided under the DSA is adequate. If deemed necessary, the Minister may fall back on the statutory authority in the Mining Act to demand financial security from the operator.
These decommissioning security agreements have been developed in cooperation by NOGEPA, EBN and the Ministry of Economic Affairs and will be determined and provided as compulsory by the Minister. They are comparable to security agreements that UK operators need to enter into with the Offshore Petroleum Regulator for Environment and Decommissioning (‘OPRED’).
Direct acquisition of ownership and transfer of 40% to state owned company EBN
Under the Mining Act, Energie Beheer Nederland B.V. (‘EBN’) (the 100% state owned company designated by law as non-licensed partner in E&P activities) acquires 40% of the extracted hydrocarbons from the licensee(s) on the basis of an Agreement of Cooperation (AOC). The acquisition of this percentage interest still requires a legal act of delivery. The issue has been raised, however, how this would work in the face of bankruptcy of the licensee(s) that would render the licensee(s) unable to transfer the percentage interest to EBN.
In order to avoid any potential discussions, the draft bill provides for a statutory transfer of ownership of 40% of the hydrocarbons to EBN at the moment of production, without a legal act of delivery being required. Pursuant to the Mining Act, unrecovered minerals are the property of the State, the draft bill provides that at the moment of production 40% of the hydrocarbons will transfer from the State to EBN and 60% will transfer to the licensee(s), by operation of law.
Investment deduction facility increase from 25% to 40%
One of the key proposed amendments to ensure an attractive investment climate in the Netherlands offshore mining industry, is the amendment of the investment deduction facility (‘investeringsaftrek’) (IDF) for investments in ‘small fields’ as defined in provision 68a of the Mining Act.
In 2018 the Minister already announced in his letter to Parliament that he was planning to replace the ‘conditional’ investment deduction of 25% with a more ‘general’ investment deduction of 40%. In the draft amendment bill the Minister continues to adhere this view and worked out the details of this amendment.
One of the reasons to increase the percentage is to stay competitive in the mining industry, especially in view of similar measures taken by the United Kingdom.
Which IDF changes are proposed in the draft bill?
The Minister commented in its draft bill that when the provision on the IDF enters into force, the provision will be (retrospectively) applicable for the then current tax year. A mining company can take into consideration the date on which the state aid notification is approved by the European Commission, when calculating the IDF.
In the draft Explanatory Memorandum of the draft bill, the Minister anticipates an increase of natural gas production by 22 to 37 bcm if the IDF will increase to 40%. At a gas price of 15 to 20 ct/bcm, this will lead to EUR 180 to 526 million of additional gas profits benefiting the Dutch State.
Other proposed amendments
The draft bill will also align decommissioning obligations and procedures (such as the procedures for submission of a decommissioning plan followed by a closure plan (‘sluitingsplan’) for onshore and offshore mining.
Next to this, an exemption from decommissioning obligations is proposed to allow for extended use of mining infrastructure, e.g. for electrification, transport or storage of hydrogen or CO2. Also, the Minister will keep his authoritive powers (in some cases in cooperation with the Minister of Infrastructure and Environment) during re-use of the mining installation.
The public consultation of the draft bill will close on 1 June 2019. According to the legislative schedule of the Minister dated 4 April 2019, the Minister intends to submit the bill to amend the Mining Act in the fourth quarter of 2019.