Contributed By Bech-Bruun
The system of petroleum ownership is governed by the Subsoil Act, pursuant to which the Danish state owns all petroleum deposits in Denmark’s subsoil, onshore and offshore (territorial waters, exclusive economic zone and continental shelf).
Until 1981, the system of petroleum ownership was the government granting a sole concession to explore and exploit all raw materials on the Danish territory. In 1962, shipowner A.P. Moeller was granted the sole concession for 50 years. The joint venture, the Danish Underground Consortium (DUC), collaborates on the production of petroleum from the area covered by the sole concession. Until recently, DUC consisted of the companies A.P. Moeller and Maersk Oil (with a 31.2% ownership interest), Shell (36.8% ownership interest), Chevron (12% ownership interest) and Nordsøfonden (20% ownership interest).
In March 2018, all of A.P. Moeller–Maersk A/S’s oil and gas activities, including the participation in DUC, were transferred to Total SA. In January 2019, Chevron’s ownership shares in DUC were transferred to Total, and in April 2019, Shell’s oil and gas activities in the Danish North Sea, including its ownership shares in DUC, were transferred to Altinex AS (part of the Noreco group). DUC now consists of Total (43.2%), Noreco (36.8%) and Nordsøfonden (20%).
In 1981, the procedure under the Subsoil Act for granting the rights to explore and produce petroleum was amended. Up until now, the procedures for granting petroleum licences have depended on the location of the area where the petroleum activities are to be carried out as described in 2.2 Issuing Upstream Licences/Obtaining Petroleum Rights.
On 3 December 2020, the Danish government and a broad majority of the Danish Parliament entered into a political agreement regarding the future oil and gas exploration in the Danish North Sea (the North Sea Agreement 2020). The North Sea Agreement 2020 implies that oil and gas exploration pursuant to all existing licences and any potential future licences must end by 2050. Further, the then-ongoing licensing round (the eighth licensing round) was cancelled and there will be no licensing rounds announced in future. Two licensing schemes with limited scope (mini licensing rounds and the neighbouring block procedure) will be applicable up until 2050 to ensure stability in the oil and gas sector. The Danish Subsoil Act is expected to be amended during 2021 in order to implement the North Sea Agreement 2020.
Petroleum activities are, inter alia, governed by energy law, property law, tax law, environmental law, and health and safety law.
The Minister for Climate, Energy and Utilities (www.kefm.dk) is the regulatory authority in the energy sector. The minister is responsible for developing and implementing the government’s energy and climate policies and is authorised to provide the detailed regulation within the statutory framework applicable to the energy sector and is granted certain decision-making powers pursuant to the statutory framework, including the granting of petroleum licences.
The powers vested in the Minister for Climate, Energy and Utilities pursuant to the statutory framework in the Subsoil Act are, to a large extent, exercised by the Danish Energy Agency (www.ens.dk). The authority to grant petroleum licences is, however, not delegated to the Danish Energy Agency. The Danish Energy Agency, for example, approves whether a licence to explore and/or produce petroleum may be transferred.
Downstream petroleum activities are mainly regulated by the Pipeline Act and the Natural Gas Supply Act. On behalf of the Danish state, the Minister for Climate, Energy and Utilities is the sole owner of the Danish gas transmission system operator (TSO), Energinet (www.energinet.dk), and is authorised to make decisions about all aspects of the affairs of Energinet pursuant to the Act on Energinet.
Fiscal matters in relation to petroleum activities are under the jurisdiction of the Minister for Taxation (www.skm.dk) and are mainly regulated by the Act on Hydrocarbon Taxes and the Corporation Tax Act.
Environmental requirements applicable to offshore oil and gas installations are found in several regulations, including the Subsoil Act, the Environmental Impact Assessment Act (EIA Act) and the Marine Environment Protection Act. The Danish Energy Agency is responsible for the environmental impact assessment (EIA) procedures following applications for permission to construct offshore oil and gas installations. The Environmental Protection Agency (www.mst.dk), under the Ministry of Environment and Food (www.mfvm.dk), is responsible for supervising emissions and discharges to the marine environment from offshore oil and gas installations.
Health and safety conditions on offshore oil and gas installations are governed by the Offshore Safety Act. Supervision of health and safety aspects of offshore installations is carried out by the Working Environment Authority (www.at.dk), which is an authority under the Ministry of Employment (www.bm.dk).
The principal petroleum laws and regulations mentioned above are further described in 1.4 Principal Petroleum Law(s) and Regulations.
Nordsøfonden (the Danish North Sea Fund) is the Danish petroleum entity that undertakes the Danish state’s participation in petroleum licences granted pursuant to the Subsoil Act.
From 1984, the then fully state-owned company DONG E&P A/S represented the state in petroleum licences by holding ownership shares in the licences granted. Since 2005, Nordsøfonden has represented the Danish state by holding 20% of the ownership shares in any petroleum licence granted and furthermore, since 9 July 2012, holding 20% of the ownership shares in the sole concession held by DUC.
The responsibility as the state participant was transferred to Nordsøfonden in consequence of DONG Energy A/S being partly privatised and agreements regarding extension of the sole concession held by DUC were concluded.
Nordsøfonden is a public fund managed by the independent state-owned company Nordsøenheden. Both Nordsøfonden and Nordsøenheden are established and regulated pursuant to the Act on Nordsøenheden and Nordsøfonden. The Minister for Industry, Business and Financial Affairs supervises the activities performed by Nordsøfonden and Nordsøenheden and lays down the articles of association for both entities.
State participation in petroleum licences is further described in 2.5 National Oil or Gas Companies.
The principal petroleum laws and regulations consist of the following.
The Subsoil Act provides the framework for petroleum licences and regulation of petroleum activities in general. The Minister for Climate, Energy and Utilities has, through the Danish Energy Agency, issued detailed regulations pursuant to the Subsoil Act, including a model licence, a model joint operating agreement (JOA) and a number of executive orders.
In 2019, the Subsoil Act was amended to include a decision of the Danish government not to award any new licences for onshore exploration and exploitation. The Subsoil Act is expected amended on 1 January 2022 to implement the political decision to end oil and gas exploration in the Danish North Sea by 2050 pursuant to the North Sea Agreement 2020. See also 1.1 System of Petroleum Ownership.
The Pipeline Act regulates the establishment and use of a pipeline for the transportation of crude oil and condensate that is brought from the Danish continental shelf in the North Sea to the Danish mainland, Jutland.
Act on Nordsøenheden and Nordsøfonden
The Act on Nordsøenheden and Nordsøfonden provides the statutory framework for Nordsøfonden, and mainly governs the objectives and activities of the independent state-owned company Nordsøenheden.
Gas Supply Act
The Gas Supply Act regulates transmission, distribution, supply and storage of gas, including LNG.
Act on Energinet
The Act on Energinet regulates the organisation, tasks and responsibilities, etc of Energinet.
Offshore Safety Act
The Offshore Safety Act governs health and safety conditions on offshore installations and implements parts of the Offshore Safety Directive (2013/30/EU). The Act provides a general framework under which the companies involved in offshore oil and gas activities are to handle health and safety issues themselves.
It will no longer be possible for private investors to obtain the right to explore and exploit petroleum by hydrocarbon licences in Denmark. With the North Sea Agreement 2020, the Danish government and a broad majority of the Danish Parliament decided to stop the granting of licences for exploration and production of petroleum. No licensing rounds will be announced in future, and it will not be possible to apply for licences under the open-door procedure.
The North Sea Agreement 2020 further implies that exploitation under all existing licences must end by 2050. For licensees that are significantly affected by this end date, it will be possible to enter into negotiations regarding a voluntary agreement on amendments to the licences. To ensure stable conditions for the utilisation of existing licences, two licensing schemes will be upheld (mini licensing rounds and the neighbouring block procedure).
The licences granted confer 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 therein.
A licence to explore and/or produce petroleum entitles the licensee to the ownership of the petroleum produced as a result of the explorations. 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 holding 20% of the ownership shares in the licences through Nordsøfonden, as described in 1.3 National Oil or Gas Company and 2.5 National Oil or Gas Companies.
A licence for exploration and production of petroleum does not hinder the granting of licences for certain other activities in the licence area – eg, exploration and production of raw materials.
The Minister for Climate, Energy and Utilities is the granting authority following the approval of a special committee set up by the Danish Parliament.
With the North Sea Agreement 2020, the Danish government and a broad majority of the Danish Parliament decided to stop the granting of licences for exploration and production of petroleum with the exception of licences granted in mini licensing rounds and the neighbouring block procedure.
Consequently, no licensing rounds will be announced in future, and it will not be possible to apply for licences under the open-door procedure.
Since 1984, licences have been granted in the North Sea west of 6°15’ E (Central Graben) following licensing rounds held by the Minister for Climate, Energy and Utilities. A total of eight licensing rounds have been announced. The eight licensing round was cancelled as part of the North Sea Agreement 2020.
Under the open-door procedure, applications for licences in the areas not offered for licensing through licensing rounds could be submitted to the Danish Energy Agency. Since 2018, licences could not be granted for onshore areas or internal waters under the open-door procedure.
Mini Licensing Rounds
Where a licensing round is not opened, but the minister receives an application for a licence to a specific area, and the minister wishes to consider this application, the minister announces the receipt of the application. The announcement is made in the Danish Official Gazette and in the Official Journal of the European Union, including a deadline for other interested parties to submit their application for a licence to the area concerned.
Applications will be considered on the basis of the applicant’s technical competencies and financial capacity, and on the basis of the exploration activities that the applicant intends to carry out, or the way in which the applicant intends to carry out production in the area comprised by the application (proposed work programme). The requirement of technical competence can be met by agreements with third parties that have such technical capacity or, for instance, through the operator of the licence.
The minister may also attach importance to the amount an applicant is prepared to pay for the granting of a licence, any lack of efficiency on the part of the applicant or the applicant’s non-performance of obligations under licences previously granted and other relevant, objective and non-discriminatory criteria.
The minister is authorised to refrain from granting licences following mini licensing rounds.
Neighbouring Block Procedure
The minister can grant a licence for a neighbouring block if geological or production reasons apply. The neighbouring block procedure may apply 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.
In all existing licences, the companies participating in the licence share the economic risk and pay expenses according to the JOA. The JOA must be approved by the Danish Energy Agency.
Fees will typically be charged in connection with processing of applications and issuance of petroleum licences. A fee of DKK25,000 is to be paid no later than on submission of the application. Upon issuance of the licence, an additional fee of DKK100,000 is to be paid by the companies participating in the licence as a whole no later than on the issuance of the licence.
There are several fiscal and financial obligations that apply to a licence, including the following.
The terms in the petroleum licences granted may stipulate that the licensee must 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 must be paid to the state (profit share).
The licences granted in recent years do not include terms regarding payment of royalties or profit shares, but they do include terms regarding area rental.
The state has a 20% ownership share in the licences granted through Nordsøfonden’s participation in the licence, which will have to pay its proportionate share and will thus not be granted a carried interest.
Participants in petroleum licences must provide security in favour of the Danish state for all public-law and private-law obligations incurred vis-à-vis the Danish state and for all liabilities incurred under Section 35 of the Subsoil Act or any other present or future liability regulations. The terms in the licence granted will typically stipulate that each individual participant is to furnish security for the fulfilment of its obligations under the licence within 30 days of the granting of the licence. The amount and nature of such security must be acceptable to the Danish Energy Agency. Generally, the participant must provide a parent-company guarantee, which must be unlimited, irrevocable and without any time limit but does impose a monetary limit. After a specific assessment, the Danish Energy Agency may, in exceptional cases, seek to uncover any options for the participants in a licence to provide other types of security.
Costs for Administrative Case-Handling
Pursuant to an executive order, the licensees must reimburse the expenditures for administrative case-handling, including the expenses incurred in connection with processing of applications by the Danish Energy Agency. The costs are calculated on the basis of the time consumed for performing the work. The specific rules are listed in the Executive Order on Reimbursement of Expenses related to the Authorities’ Administration in connection with Hydrocarbon Activities, etc.
The taxes applicable to income from upstream activities are:
On 1 January 2018, an investment window covering certain types of investments implemented in the period 2017–25 was introduced in the Act on Hydrocarbon Taxes. The investment window entails that the hydrocarbon allowance over a six-year period is raised from 5% to 6.5% a year. In addition, the rate of reducing balance depreciations in the hydrocarbon tax is raised from 15% to 20% and the time of deduction for the two deductions is changed from the date on which the investments are put into use to the date of payment. However, the deduction is subject to the condition that oil prices remain below USD75 per barrel (2017 figures, rising by 2% per annum). If the price is higher, the tax deduction must be repaid. The special scheme for investments made in 2017–25 is stipulated in Chapter 3B of the Act on Hydrocarbon Taxes. The application of the rules in Chapter 3B is optional but binding on the companies that choose to make use of the scheme.
The state has a 20% ownership share in the licences granted through the participation in Nordsøfonden, which cannot be the operator of petroleum licences. But as a shareholder in the licences, Nordsøfonden participates on equal terms and with equal rights and liabilities like the other commercial petroleum companies pursuant to the JOA. Nordsøfonden will have to pay its proportionate share of its ownership share in the licence and thus it will not be granted a carried interest.
Under Nordsøfonden’s articles of association, Nordsøfonden is entitled to make portfolio adjustments with a view to carrying out the objectives of the fund, including making use of its pre-emption rights, sole risk operation rights and rights to acquire neighbouring licences in accordance with the JOA. Such portfolio adjustments must be approved by the Minister for Industry, Business and Financial Affairs.
Nordsøfonden will be entitled to assign, in whole or in part, its rights in and under the JOA and the licence to the state, to a company owned by the state, or to a subsidiary of any such company. The assignee must assume the corresponding obligations that, as of the time of the assignment, were the responsibility of the assignor in its capacity as a party to the JOA.
No requirements apply to upstream operations regarding the use of a minimum of locally sourced goods, services or capital. Denmark is a member of the EU, therefore Danish statutes and regulations must comply with EU regulations; inter alia, rules regarding non-discrimination and free movement of goods, services and capital within the EU.
No local presence is required for foreign private investors.
General labour law applies to upstream operation onshore and offshore. Further, the labour in upstream operations is regulated by collective bargaining agreements between employer organisations, authorities and trade unions. Most petroleum companies are members of the Danish Employers’ Association of the Petrol and Oil Industry.
All foreign nationals – besides citizens in Nordic countries, EU member states, European Economic Area states and Switzerland – must obtain a work permit in order to work in Denmark. Work permits are issued by the Danish Immigration Service pursuant to the Aliens Act.
A licensee must carry out the exploration works as are specified in the work programme. The licences granted will lay down the requirement that the applicant, after the performance of an initial work programme, is to perform additional work obligations during the remaining term of the licence, as a condition for retaining the exclusive right to the whole licence area for the six-year term, which will be the usual term for licences granted.
Notice must promptly be given to the Danish Energy Agency where the licensee makes any hydrocarbon discoveries, and not later than six months after the completion of the drilling activity during which the discovery is made. The licensee must prepare an evaluation programme on the discovery and on further works that are necessary, in accordance with good practice within the oil industry in the North Sea countries, to ascertain whether a hydrocarbon deposit has been demonstrated under conditions such that production is technically feasible and must be considered economically profitable. The evaluation programme shall be subject to the Danish Energy Agency’s approval.
When the terms and conditions in an exploration licence have been met, the licensee is 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. However, as part of the North Sea Agreement 2020, no further extensions will be given for existing licences. Licensees that are significantly affected by the 2050 cut-off date, will be able to enter into negotiations regarding a voluntary agreement on amendments to the licences.
Before production and measures aimed at production are initiated, a plan for the production activities, including the organisation of production and the layout of production installations and any pipelines (production measures, etc) (development plan), must be submitted for the Danish Energy Agency’s approval. Substantial changes and supplements to an approved development plan are subject to the Danish Energy Agency’s approval before being initiated.
Under the JOA, parties that participate in the development under the licences granted must, before submission of a development plan to the Danish Energy Agency, agree on the terms of an abandonment agreement. The abandonment agreement is subject to the Danish Energy Agency’s approval.
These decisions of the Danish Energy Agency cannot be brought before an administrative authority other than the Energy Board of Appeal. Appeals must be submitted to the Energy Board of Appeal within four weeks from the time when the Danish Energy Agency’s decision was announced. The Danish Energy Agency’s decision to approve a production plan may not be utilised until the time for lodging appeals has expired.
Regardless of the procedures following which upstream licences are granted, some key terms and conditions in the licences granted generally recur.
Licences for exploration of petroleum are in general granted for a period of six years. The licence period may be extended by up to four years at a time for the purpose of further explorations. The total licence period for explorations may only exceed ten years in exceptional cases.
When the terms and conditions in 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.
Minimum Work Programme
Under the work programme covering the exploration activities of a licence, the licensee must, as a minimum, have acquired in the licence granted a specified amount of new 2D/3D seismic data not later than on a deadline specified in the licence granted.
The licensee must drill one exploration well and must commence drilling the well not later than on a deadline specified in the licence granted.
The wells must be drilled in conformity with any guidelines laid down by the Danish Energy Agency in connection with the approval of each individual drilling programme.
Security deposits are generally not required for work commitments or otherwise. However, pursuant to the model licence, the Danish Energy Agency may require additional security in any form, if necessary.
Relinquishment of rights under a licence during the exploration period applies to the entire licence area. Where the licence has been extended in respect of one or more areas for the purpose of production, the licensee may relinquish the right to any such area upon one year’s notice.
Where any part of the work programme or in prolongations to the licence granted is not performed, the licensee must pay to the Treasury an amount equal to the cost of performance of the obligations unless this is exempted by the Danish Energy Agency.
Liability and Risk
Under the Subsoil Act, a licensee is liable to pay damages for any loss, damage or injury caused by the activities carried out under the licence granted, even though such loss, damage or injury was caused accidentally. The general prerequisites for imposing liability under Danish law must be fulfilled. The licensee’s liability for damages must be covered by insurance.
When a licence is granted to several parties jointly, the parties are jointly and severally liable for any damages claimed under the Subsoil Act. All existing licences granted, both offshore and onshore, consist of joint ventures. The companies participating in a licence share the economic risk and pay expenses according to the JOA.
The Danish Energy Agency must approve any transfer of the licence or interests therein to third parties or between co-licensees, whether the transfer is direct or indirect.
A written application for the Danish Energy Agency’s approval of the proposed transfer must be submitted to the Danish Energy Agency. The application must include information on the commercial and financial terms for the transfer, as well as information regarding the new licensee’s technical competencies and financial capacity.
The duration of the Danish Energy Agency’s consideration of the transfer application differs from case to case and can be several months. The licensee must reimburse the Danish Energy Agency for the costs related to the processing of such an application; see 2.3 Typical Fiscal Terms under Upstream Licences/Leases.
The JOA regulates the transfer of the operator’s rights and responsibilities. The operator’s rights cannot be assigned without the written consent of the other licensees and the Danish Energy Agency.
Further, the JOA will lay down pre-emptive rights for transfer of licence interests.
As of May 2020, there are no legal or regulatory restrictions on production rates set out in the Subsoil Act.
There is one upstream pipeline for the transportation of oil from the North Sea to the onshore processing facilities in Frederica on the Danish mainland, Jutland. The ownership and use of the pipeline are regulated within the framework of the Pipeline Act.
The pipeline and associated pumping and terminal facilities for the transportation of crude oil and condensate are owned and operated by a subsidiary of Ørsted. Under the Pipeline Act, licensees that produce oil on the continental shelf of the North Sea are required to be connected to the pipeline system, but exemptions can be granted if the connection is uneconomical or inexpedient. Conditions on connection to the pipeline, transportation and any separation are based on agreement between the owner of the pipeline and the users of the pipeline (the licensees). Crude oil and condensate not intended for refining or sale in Denmark can be brought ashore by ship pursuant to the Merchant Shipping Act, the Act on Safety at Sea and other statutory regulations.
Ørsted further owns the upstream natural gas transportation pipeline network. It transports natural gas from the North Sea to the onshore processing facilities in Nybro on the Danish mainland, Jutland. Ownership and use of this pipeline network are regulated within the framework of the Gas Supply Act.
The upstream oil pipeline and separation facilities in connection thereto and the upstream natural gas transportation pipeline network must be divested from Ørsted to the Danish gas TSO, Energinet, in response to the agreement on the stock market listing of Ørsted (formerly DONG Energy A/S) in 2015.
Transmission, distribution, supply and storage of natural gas, including LNG, are regulated within the framework of the Gas Supply Act.
Energinet owns and operates the natural gas transmission network in Denmark. Energinet is also the owner of two underground natural gas storage facilities: one in Jutland (Lille Torup) and one on Zealand (Stenlille).
By a political agreement from 2017 regarding the future organisation of gas distribution, it was decided that the geographically divided natural gas distribution networks should be consolidated by transferring them to Energinet. Energinet has since then transferred the ownership and operation of the distribution network to its subsidiary, Evida. During 2020, Energinet sold all of its shares in Evida to the Danish Ministry of Finance. The transaction was approved by the competition authorities and the parliament’s finance committee in December 2020. As a result, the Danish state now owns the gas distribution network in Denmark.
The rules applicable to the use of the transmission network are set out in the latest version of Energinet’s Rules for Gas Transport (RfG). The RfG constitutes the framework of terms agreed among Energinet and the distribution system operators. Energinet will enter into individual contracts with shippers on the basis of the regulated terms. The rules applicable for the use of the two storage facilities in Denmark are set out in the latest version of Gas Storage Denmark′s Rules for Gas Storage. Both the RfG and the Rules for Gas Storage must be notified to the Danish Utility Regulator.
Against payment, anyone is entitled to access the transmission system, the distribution systems and LNG facilities if such access is technically and economically necessary to enable efficient system access, storage and line pack facilities, and other help functions (the system).
Requests for access to the system must be addressed to the company owning the system – ie, Energinet – and the distribution, storage or LNG companies concerned. Access must be granted on objective and non-discriminatory conditions, and can only be denied if circumstances specified in the Gas Supply Act apply. Further, a refusal to grant access to the system must be reasoned and can be appealed to the Danish Utility Regulator.
Payment for access to the system is laid down by Energinet, the distribution, storage or LNG companies and must consider the costs of the system operators and a reasonable return on investment. In determining the prices and terms, there must be no discrimination between customers. Payment of storage services is determined through negotiation between the parties. Prices, conditions and the applicable basis must be made publicly available and notified to the Danish Utility Regulator.
As TSO and storage company, Energinet annually publishes its main commercial conditions for access to storage, line pack and other ancillary services. The Danish Utility Regulator supervises the procurement procedures and the main condition for access to storage, line pack and other ancillary services based on objective, transparent and non-discriminatory criteria.
Licences for transmission, distribution and storage activities are granted by the Minister for Climate, Energy and Utilities. The licences granted are for a specifically defined area and for a term of at least 20 years.
The licences may only be granted to applicants that demonstrate having the necessary technical and financial capacity. Licences for transmission activities, specifically, must only be granted to applicants that comply with unbundling requirements in the Gas Supply Act deriving from implementation of the Third Gas Directive. Upon application, the Danish Utility Regulator certifies applicants if they comply with the unbundling requirements.
Licences to carry out activities pursuant to a supply obligation in a natural gas supply area are granted by the Minister for Climate, Energy and Utilities following public licensing rounds. The licences are awarded to the supplier that bids the lowest price for gas supply in an area provided that the supplier has the necessary technical and financial capacity. The licences may only be granted for a period of up to five years.
Licensees must carry out the necessary maintenance, changes and expansion of the relevant transportation pipelines or storage facilities.
The Danish Utility Regulator and the Energy Board of Appeal generally oversee compliance with respect to the applicable energy laws, including supervising prices and licence requirements. Decisions by the Minister for Climate, Energy and Utilities, the Danish Energy Agency and the Danish Utility Regulator may be appealed to the Energy Board of Appeal.
The fiscal terms under downstream licences vary according to which natural gas product they concern.
Most natural gas products are commercial products that the seller offers on the free market. These include storage facility services, as well as line pack and other help functions. They also include natural gas supply from companies not carrying out the activity pursuant to a supply obligation and upstream pipeline network services. The prices and terms for commercial products are determined by negotiations between the parties on the market. The prices and terms for storage facility services, as well as line pack and other help functions, must take into due consideration the costs of the system operators and a reasonable return on investments. The Danish Utility Regulator monitors the level of transparency in wholesale pricing and restrictive practices in the market and must inform the competition authorities of cases of non-compliance with competition law.
Another group of products are mostly purchased by consumers having small-size natural gas consumption (households and small businesses). These products consist of natural gas that is supplied by companies having a supply obligation under the Gas Supply Act. The supply obligation is granted by the Minister for Climate, Energy and Utilities, and exists because some costumers have not exercised their right to choose a supplier on the retail market. The price for natural gas supplied by companies with supply obligations under such existing licences is determined by taking into consideration the relevant costs and prices, and the terms and the applicable basis must be notified to the Danish Utility Regulator.
The price of natural gas supplied by companies with a supply obligation, whose licences are granted following licensing rounds, is based on the offered price with an addition of the transmission price as well as a fixed addition covering other costs (eg, storage costs). The prices for these products are under the supervision of the Danish Utility Regulator.
The prices and terms for Energinet’s transmission services are regulated. Energinet’s transmission prices consist of a capacity element reflecting the level of occupation of the transmission system that the transport in question represents and a variable price element depending on the amount of natural gas transported. Furthermore, the prices consist of a payment for security of supply. The price for storage facilities also consists of a combination of a capacity element and a variable volume-related price element. Prices, conditions and the applicable basis must be notified to the Danish Utility Regulator and will be published. The Danish Utility Regulator may impose changes, if necessary, because of, for example, discriminatory or otherwise unreasonable pricing.
The Danish energy taxation regime consists of three types of taxes:
Companies that carry out transmission, distribution, supply and storage of natural gas, including LNG, pursuant to licences granted under the Gas Supply Act, are subject to a charge under the Act on Gas Charge. CO₂ charges must be paid for the gas liable to a charge under the Act on Gas Charge. Companies covered by the European CO₂ allowance scheme may receive compensation for the CO₂ charge with certain exceptions.
Further, the companies are subject to the general corporation tax for companies in Denmark under the Corporation Tax Act. The rate is 22% based on the income of the company.
Under the Act on Energinet, Energinet is authorised to undertake natural gas transmission and distribution activities and storage activities pursuant to the provisions in the Natural Gas Supply Act. Therefore, Energinet and its wholly owned subsidiaries are authorised to carry out these activities without obtaining a licence. The general rules regarding Energinet’s organisation, tasks and responsibilities, etc, are regulated in the Act on Energinet. The rules regarding Energinet’s rights and obligations with respect to down-stream operations are further regulated in the Gas Supply Act.
Energinet is responsible for the security of supply in the gas market pursuant to the Gas Supply Act.
The local content requirements applicable to downstream operations by private investors to a large extent correspond to the local content requirements applicable to upstream operations. Reference is made to 2.6 Local Content Requirements Applicable to Upstream Operations.
Transmission, distribution and storage companies are prohibited from carrying out activities outside the scope of their respective licences. Effectively, subject to limited exceptions, other activities must be vested in separate legal entities (except for certain other pipeline and storage-related activities subject to individual permission by the minister).
The Danish Utility Regulator has general supervision over the licensed companies. Therefore, the transmission, distribution and LNG companies, companies with an obligation to supply natural gas with a licence and Energinet must notify the Danish Utility Regulator of the methods used to determine their prices and conditions, the prices, tariffs and conditions, documentation for ownership unbundling, their capital and their financial records, and their economic forecasts. The Danish Utility Regulator has the authority to order changes where they find the prices and/or conditions to be unlawful – for instance, in the case of discriminatory or otherwise unreasonable pricing.
Land rights are obtained by agreement between the investor and landowner. If it is in the public interest, the Danish Energy Agency and the relevant municipality can order a compulsory sale of the necessary rights over land if an agreement regarding the land rights to construct a natural gas transportation or storage facility cannot be reached with the landowner concerned. The licensee must compensate for any damages arising from activities carried out under the licence, even if such damage is accidental, unless the complainant has contributed to the damages by intent or gross negligence.
Third-party access to upstream pipelines that are constructed as part of an oil or gas production project pursuant to a licence granted pursuant to the Subsoil Act is regulated in the Subsoil Act and a related executive order on third-party access. Under this framework, third-party access may be granted following negotiations between the parties.
Third-party access to upstream pipelines that are used for transportation of natural gas from one or more such projects to a final coastal landing terminal is regulated by the Gas Supply Act and a related executive order. Third-party access rights apply to natural gas companies and customers with the right to choose a supplier based in a country that is governed by the Third Gas Directive. Prices and terms for third-party access are to be negotiated between the parties.
Contracts entered by transmission, distribution and storage companies with other companies, including companies within the same group, must be at arm’s length. Trading in natural gas must be organised in separate legal entities that do not carry out other gas-related activities. Ownership unbundling requirements apply to TSOs (Energinet); see also 3.1 Forms of Allowed Private Investment in Midstream/Downstream Operations. Energinet fulfils this requirement, as Energinet is the sole owner and operator of gas transmission systems in Denmark.
Natural gas as a commodity is purchased by end users from natural gas suppliers as a bundled product – namely, natural gas together with the necessary transmission and distribution services – but the end users must enter into two separate contracts for supply and distribution respectively with the relevant company.
Natural gas received, transported and delivered to the Danish gas system under a capacity agreement or storage agreement must, at all times, comply with the Danish gas regulation, the relevant technical specifications and quality specifications. The quality specifications can be found in the Danish Gas Regulation (gasreglementet) and the Rules for Gas Transport (RfG) appendix 1, which also contains delivery specifications on temperature of the gas delivered.
The shipper – ie, the party with access to transportation of natural gas in the transmission system – has the responsibility to ensure that the gas complies with the relevant standards. Energinet must also ensure that the natural gas delivered to the shipper at the Exit Zone or storage point or elsewhere complies with these quality and delivery specifications. Distribution companies are responsible for compliance with the pressure and temperature requirements at the consumers’ consumption sites.
Energinet’s subsidiary, Gas Storage Denmark, is responsible for compliance with the quality and delivery specifications for the gas delivered to the shipper at the storage point.
Denmark has been a net exporter of oil and natural gas since 1997. However, as the Tyra platform in the North Sea was temporarily shut down in 2019, Denmark went from being a self-sufficient exporting country to importing most of the Danish gas consumption. Therefore, Denmark was a net importer of gas throughout 2020.
The pipeline system for transportation of natural gas from the North Sea to Danish shores is owned by Ørsted; see also 3.1 Forms of Allowed Private Investment in Midstream/Downstream Operations. The Danish continental shelf is also connected to the NOGAT B.V. (Northern Offshore Gas Transport) pipeline system via the Tyra West–F3 pipeline and, thus, facilitating export of Danish gas to North West Europe. Further, the Danish gas system is an integral part of the European gas infrastructure; see 6.3 Unique or Interesting Aspects of the Petroleum Industry.
Licences granted pursuant to the Gas Supply Act cannot be directly or indirectly transferred without prior approval of the Minister for Climate, Energy and Utilities.
Companies that are granted downstream licences pursuant to the Gas Supply Act are obligated to own their respective facilities. Therefore, the companies cannot transfer the essential assets and continue their activities based on a lease.
A distribution network owned by a licensee, and stakes in distribution companies that own such networks (distribution shares), may only be surrendered to the state through Energinet.
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. Further, there are, currently, no limitations for foreign companies acquiring interests in any part of the Danish natural gas sector but, with respect to transmission activities, the Third Gas Directive contains certain requirements for the certification procedure and these are implemented in Danish law.
Environmental requirements applicable to offshore oil and gas installations are found in several regulations, including the Subsoil Act, the Marine Environment Protection Act, the Environmental Protection Act and the Environmental Assessment Act.
As mentioned in 1.2 Regulatory Bodies, the Danish Energy Agency is responsible for the environmental procedures following applications for permission to construct offshore oil and gas installations (ie, EIA).
The Environmental Protection Agency under the Ministry of Environment is responsible for supervising emissions and discharges to the marine environment from offshore oil and gas installations. In the onshore upstream sector the local authorities have, along with the Danish Energy Agency, governmental powers with respect to the supervision of, for example, the environment. The local municipalities and emergency preparedness co-ordinators must be involved in zoning regulations and emergency procedures.
Health and safety conditions on offshore oil and gas installations are governed by the Offshore Safety Act. Supervision of health and safety aspects of offshore installations is carried out by the Working Environment Authority, which is an authority under the Ministry of Employment. The Working Environment Authority supervises the compliance of the licensees with the Offshore Safety Act and executive orders issued in pursuance thereof. The Working Environment Authority may conduct control visits on offshore installations without a prior court order and against proper identification. Non-compliance with the requirements in the Offshore Safety Act and executive orders issued in pursuance thereof may result in fines or imprisonment.
Before licences are granted to oil and gas production projects assumed to significantly affect the environment, an assessment will be made in accordance with the provisions of the Subsoil Act regarding EIAs. The requirements for an EIA derive from the EIA Directive (2011/92/EU as amended by 2014/52/EU). This means that a company is to submit an application to the Danish Energy Agency for approval of a production plan for oil and gas fields, or the installation of pipelines, together with an EIA and an account of the measures taken to reduce such impact (mitigation list). However, for some projects an EIA is not mandatory, in which case the Danish Energy Agency decides whether an EIA is required for a project.
EIA reports are subject to public consultation. The consultation lasts not less than eight weeks. Once a decision on environmental issues has been made, information about the decision must be published. Appeals regarding the environmental circumstances in the Danish Energy Agency’s decision can be lodged to the Energy Board of Appeal.
Denmark is subject to the rules under the Strategic Environmental Assessment (SEA) Directive (2001/42/EC). The SEA Directive requires that certain plans and programmes, which are likely to have significant effects on the environment, are subject to an environmental assessment. This assessment specifically enables environmental considerations to be integrated in the preparation and adoption of these plans and programmes. As part of the preparations for the seventh licensing round held in 2014, a strategic environmental assessment was carried out in the North Sea area targeted for oil and gas exploration and production, as well as areas targeted for the injection of CO₂ in existing oil and gas fields.
Danish legislation imposes a number of environmental requirements that must be satisfied before the commencement of a petroleum project. The requirements are based on environmental, nature protection and fishing interests as well as considerations relating to the exploitation of other raw materials.
As regard to fishing and shipping interests, agreements concerning oil and gas activities have been concluded with the associations and authorities affected. In addition, an agreement has been concluded between the fisheries’ associations and the trade organisation Oil Gas Denmark on the payment of compensation to Danish fishermen who suffer any damage to or loss of fishing gear and fishing vessels, etc, as a result of offshore oil and gas activities in Danish territory, where the concrete tortfeasor cannot be identified. Licensees must anticipate having to contribute to the financing of this scheme.
Prior to the construction of offshore installations, the Working Environment Authority must approve the overall design and layout of the installation. Further, the licensee must obtain an operating permit and an approval of a health and safety plan that includes plans for staffing, organisation and an emergency plan from the Working Environment Authority prior to the commencement of exploration and production activities.
Under the Executive Order on Oil Tanks, construction of oil pipelines comprising one or several parts having a length exceeding 70 km, and pipeline systems for transportation of oil products of third-party property between oil tanks on land, are subject to a licence granted by the Environmental Protection Agency pursuant to the Environmental Protection Act.
No later than two years before the termination of the licence, or two years before the time when one or more installations, etc, are expected to be abandoned or disused, the licensee must submit a decommissioning plan for the approval of the Danish Energy Agency. The decommissioning plan must set out the procedure for removing the installations, etc, that the state does not wish to take over, in whole or in part. Denmark has officially stated that all offshore constructions must be removed after the facilities have been abandoned. However, some installations may be retained for "other purposes", such as importing and storing natural gas.
The procedure for decommissioning of platforms must comply with relevant rules within the international legal framework. Denmark has ratified all relevant international treaties with regard to decommissioning, such as the Convention on the Continental Shelf, the United Nations Convention for the Law of the Sea (UNCLOS), the Convention for the Protection of the Marine Environment of the North-East Atlantic (OSPAR) and the London Dumping Convention. Decommissioning of platforms is further regulated by the Subsoil Act and Offshore Safety Act. In addition, the licence and the joint operating agreement provide further guidance.
The licence-holders are jointly and severally responsible for carrying out decommissioning in accordance with the pre-approved decommissioning plan. A licensee that has in whole or in part transferred its part of the licence to a new party is secondarily financially liable for the decommissioning obligations of installations that existed at the time of the transfer.
The provided security for each licensee’s obligations under the licence also covers the decommissioning phase. However, pursuant to the model licence, the Danish Energy Agency may require additional security on a case-by-case basis.
As a part of the energy agreement in 2018, the Danish Parliament decided that Denmark should work towards reducing greenhouse gas emissions to net zero in accordance with the Paris Agreement and a target of net zero emissions in the EU and Denmark by 2050. Therefore, the government proposed a Climate Act in the beginning of December 2019, which was passed in the Danish Parliament on 18 June 2020. The main focus of the Climate Act is to increase the usage of green energy sources in order to reduce greenhouse gas emissions by 70% in 2030. The 2030 target was supplemented in May 2021 with a target of a 50–54% emissions reduction by 2025.
The government, with the support of the Parliament, has initiated a number of initiatives in different sectors in order to accommodate the goal set forth in the Climate Act. One of the initiatives involves the petroleum sector. The North Sea Agreement 2020 implies that no hydrocarbon licensing rounds will be announced in future and a stop to all oil and gas production by 2050.
The government entered into an agreement with the parties of parliament in June 2020 regarding a climate agreement for energy and industry containing several initiatives within the energy sector. The agreement contains suggestions for changes of law to accommodate the 70% GHG emission reduction target within the electricity, heating, cooling and biomass sectors.
In addition, the government has introduced a plan to establish two energy islands which will serves as wind power hubs for Denmark and its neighbouring countries. The energy islands will also be a potential setting for the Power to X (PtX) technology, which will allow for a substantial production of hydrogen to be used in the industry and in transport.
Installations for energy production exceeding 20 MW are covered by the European CO₂ allowance scheme.
Natural gas delivered by companies that carry out transmission, distribution, supply and storage of natural gas, including LNG, pursuant to licences granted under the Gas Supply Act are subject to a CO₂ charge under the Act on CO₂ Charge. See 3.5 Income or Profits Tax Regime Applicable to Midstream/Downstream Operations.
No onshore areas are available for petroleum licences. As mentioned in 1.1 System of Petroleum Ownership, the North Sea Agreement 2020 implies a stop for oil and gas production by 2050 and the cancelling of the eighth licensing round, as well as any future licensing rounds for oil and gas exploration and exploitation. Up until now the available licensing area was delimited such that there was at least 15 km to the coastline. Petroleum licences for offshore areas were only subject to approval of the Minister for Climate, Energy and Utilities in accordance with the rules set out in the Subsoil Act. Therefore, no local governmental restrictions applied to offshore oil and gas development.
Onshore oil and gas installations be constructed based on a local development plan of the relevant municipality in accordance with the Planning Act.
The Subsoil Act does not distinguish between unconventional and conventional sectors, and until 2010, five licences were granted to explore the potential of natural gas in shale layers (shale gas) in onshore areas.
In 2012, the granting of new licences for exploration and production of shale gas was suspended by the Minister for Climate, Energy and Utilities to investigate the possibilities of promoting safe and environmentally sound production of shale gas. In the beginning of 2018, the Danish government announced that no more petroleum or gas licences would be granted to the onshore areas of Denmark.
The establishment of LNG facilities may only be carried out subject to a licence granted by the Minister for Climate, Energy and Utilities under the Gas Supply Act.
A licence may only be obtained if the applicant is able to establish that there is a relevant need for an LNG facility. The licence may be conditional on compliance with terms concerning the particulars of the establishment and operation of the LNG facility, including safety and environmental provisions.
There are no special rules or regulations concerning LNG prices and terms of services.
Only one LNG facility is currently in operation in Denmark. The facility is located in the northern part of Jutland. The facility is used in ferry operations and has a capacity of 200 tonnes or 500 cubic metres of LNG. The storage facility will be accompanied by an LNG and LBG production facility in the coming years. The construction of other LNG facilities – inter alia, in Frederikshavn and in Skagen – is under consideration.
Denmark has conducted oil and gas exploitation from the Danish sector of the North Sea since 1972.
In April 2017, the Danish Energy Agency extraordinarily published a revised version of its long-term production forecast from August 2016 due to a reassessed data set. Compared to the original forecast, the expected remaining Danish resources are written down by a total of approximately 4%, mainly attributable to the postponement of the commissioning date for a number of extension projects and new information that has resulted in a revised risk weighting of a number of projects and potentials. When the volumes recoverable by means of new technology and future new discoveries made as a result of ongoing exploration activity and future licensing rounds are included in the assessment, the expected remaining Danish resources are written down by a total of approximately 10%.
The Danish gas system is an integral part of the European gas infrastructure. It is designed to receive gas from the North Sea and through Germany. Denmark also serves as a transit country for natural gas to be passed on to the Swedish market and other European markets via Germany. The Swedish market is dependent on supply from Denmark via the Danish infrastructure. The largest amounts of transit gas are, however, transported from the North Sea to the Central European market via Germany. Natural gas is mainly traded by long-term contracts between producers of natural gas and wholesale customers. Only a small percentage of the total gas consumption in Denmark is based on free trade through Energinet’s Gas Transfer Facility (a virtual gas trading point), where natural gas can be traded bilaterally. To increase and facilitate free trade of natural gas, a gas exchange, Nord Pool Gas, was established in 2008.
Biogas that meets the applicable requirements for technical and safe injection and transportation through the natural gas system (upgraded biogas) can be connected to the natural gas system following a so-called connecting agreement between the owner of the upgrading facility and the network owner. Trading of upgraded biogas is accorded equal treatment to natural gas. Upgraded biogas is eligible for government support.
The Danish government is expected to present a hydrogen strategy in autumn 2021. Denmark has further initiated investigation of whether hydrogen may be transported through old and existing pipelines used for natural gas in order to facilitate and evaluate on the future infrastructure for gas transportation.
The Danish Subsoil Act is expected amended on 1 January 2022 in order to implement the North Sea Agreement 2020. The North Sea Agreement 2020 implies that oil and gas exploration pursuant to all existing licences and any potential future licences must end by 2050. Further, the then-ongoing licensing round (the eighth licensing round) was cancelled and no licensing rounds will be announced in future. See 1.1 System of Petroleum Ownership for more information on the North Sea Agreement 2020.
There are several ongoing initiatives in Denmark in order to accommodate the 70% GHG emission reduction target by 2030. The initiatives include energy islands, the adoption of PtX technologies and adaptations to a more electrified society in general in order to decrease the use of fossil fuels and become a climate neutral society by 2050.
DUC is currently reconstructing the Tyra field. Production from the Tyra field has been shut down during the reconstruction work, which is expected to last until June 2023. The Tyra field is by far the largest producer of natural gas in the Danish North Sea. However, the COVID-19 crisis has challenged the work on the Tyra field due to several subcontractors closing their businesses for an unknown amount of time. This has forced Total, which oversees the renovation, to come up with solutions in order to avoid delays.
In general, in light of COVID-19, offshore platforms have reduced their staff to a minimum and are facing challenges in the delivery of goods to the fields. The industrial organisation Oil Gas Denmark has co-ordinated a task force in order to discuss and ease the impacts of COVID-19 on the industry in general, both in terms of the economy, workers and the working environment, and the management of offshore safety issues.