The statutory legal framework for the Faroese natural gas sector is the Hydrocarbon Activities Act.
As a part of the Danish Common Community - consisting of Denmark, Greenland and the Faroe Islands - the Faroe Islands are an integral part of the Danish Constitution and the Danish legal system. However, in 1948, the Danish parliament passed the Faroese Home Rule Act and the Faroe Islands were given a special, self-governed status within the Danish Common Community. The Home Rule Act constitutes the legal framework for the mandate and the conduct of the Faroese home-rule authorities, including the Faroese parliament and the Faroese government, and includes detailed rules for the gradual assumption by the Faroese of responsibility for a number of policy areas.
In December 1992, an agreement was made between the Danish government and the Faroese government for the Faroese home-rule authorities to take over the rights to natural resources in the subsoil and bedrock in and around the Faroe Islands. From then on it has been the Faroe Islands that, independent of Denmark, have had the legislative and administrative authority over the exploration and production of hydrocarbons. In 1993, a Hydrocarbon Planning Commission was appointed by the Faroese government. The work of the Commission resulted in the passing of the Act of 21 October 1993 on Preliminary Surveys. Another four years passed before the draft bill on the Hydrocarbon Activities Act was submitted to the Faroese parliament. On 16 March 1998, the Faroese parliament passed the Hydrocarbon Activities Act.
The Hydrocarbon Activities Act provides the framework, whereas adaptations and more detailed regulation are issued by the Minister of Trade and Industry. Pursuant to the Hydrocarbon Activities Act, the government has established:
- the Executive Order of 8 March 2001 on reimbursement of expenses in connection with hydrocarbon activities;
- the Executive Order of 8 March 2001 on health, safety and the environment during the exploration phase of hydrocarbon activities; and
- the Executive Order of 20 November 2003 on geological and geophysical matters in connection with approval of deep drilling.
Pursuant to the Hydrocarbon Activities Act, prior to inviting applications, the areas to be offered for licensing and the general terms and conditions of the offered licences must be fixed in a parliamentary act. The explanatory notes to the parliamentary act must include an assessment of the possible impact of the hydrocarbon activities in respect of, inter alia, the fishing industry, the environment and the economy. The parliamentary acts of the first, second and third rounds were passed by the Faroese parliament on 8 February 2000, 17 May 2004 and 28 May 2008, respectively. A bill for a parliamentary act governing the fourth licensing round was passed in 2017.
In 2010, an amendment to the Hydrocarbon Activities Act was passed by parliament establishing the possibility to apply for a licence for exploration and production of hydrocarbons through an open-door procedure. In accordance with the open-door procedure, companies may apply for a licence within the areas composed of the first, second, third and fourth licensing rounds without prior invitation for applications. The Faroese authorities make such applications public, and other companies are invited to apply for the licence within 90 days. In May 2015, it was announced that the open-door procedure will be closed until the fourth licensing round has been held. Hence, the open-door application procedure is currently open. Taxation of petroleum activities is governed by the Act of 21 April 1999 on the taxation of revenue relating to hydrocarbon activities with later amendments (Act of 7 March 2000) and the Parliamentary Act of 14 February 2000 on assessment, collection, audit, etc, in connection with taxation of income derived from hydrocarbon activities. The area of taxation has been taken over by the Faroese authorities.
The government grants licences with the exclusive right for exploration and production of hydrocarbons within a defined area and subject to specific terms and conditions. Separate licences may not be granted for exploration and production, respectively. Prior to the granting of the licences, the government invites applications in a publicly announced licensing round.
The granted licence comprises the right to produce hydrocarbons in the defined area if discoveries are made in the exploration period. A licence may be issued with a view to exploration for a term of up to 12 years, which may be prolonged for up to two years at a time. The total term of exploration may not exceed 16 years. Thereafter, the licensee may be entitled to an extension of the licence with a view to production for a period to be fixed in the licence, which may not exceed 30 years.
It is not possible to lease mineral rights from the state. Leasing or farming of mineral rights from a concessionaire is subject to a case-by-case approval by the Minister of Trade and Industry.
There is no regulation governing when, where or how much natural gas may be produced.
The Hydrocarbon Activities Act stipulates that the licensee must obtain a specific environmental permit or approval before undertaking any particular operation. Moreover, it can be required that the licensee, prior to the granting of the licence, has to submit an environmental impact assessment of the contemplated activities. Rules as to the approval are specified in executive orders established pursuant to the Marine Environmental Act (2005). The Marine Environmental Act is administered by the Minister of the Interior through the Faroese Environmental Agency. The affected public authorities and organisations must be given an opportunity to express their opinion on the environmental impact assessment prior to the approval of activities.
Further, the Hydrocarbon Activities Act stipulates that production activities and drilling activities may only take place following prior approval by the government (the Faroese Earth and Energy Directorate) of the equipment, programme and mode of operation. The Executive Order of 8 March 2001 on health, safety and the environment contains further regulation of drilling activities during the exploration phase of hydrocarbon activities. The Faroese Earth and Energy Directorate monitors production and drilling activities. Furthermore, according to Part 9 of the Hydrocarbon Activities Act it is possible to issue fines if a party does not comply with certain provisions in the Act.
As of now, there is no production of natural gas in the Faroe Islands. As such, there is no specific regulation regarding different production methods. Further, unconventional production methods are not relevant in the Faroe Islands.
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