The Regulatory Setup for Oil and Gas Exploration in Iceland & Preparations for the First License Round

The Regulatory Setup for Oil and Gas Exploration in Iceland & Preparations for the First License Round Kristinn Einarsson Hydrocarbon Licensing Coordinator

Topics Regulatory Setup International law of the sea, the continental shelf of Iceland and the hydrocarbons legislation Preparations for the 1 st License Round Historical background of petroleum prospecting in Icelandic waters and recent development Strategic Environmental Assessment (SEA) of the northern part of the Dreki area Governmental decision and preparations for offering exclusive licenses for hydrocarbon exploration and production

Regulatory setup

International Law of the Sea 1982 United Nations Convention on the Law of the Sea Commission on the Limits of the Continental Shelf Article 76 of the Convention: The continental shelf of a coastal State comprises the submerged prolongation of the land territory of the coastal State - the seabed and subsoil of the submarine areas that extend beyond its territorial sea to the outer edge of the continental margin, or to a distance of 200 nautical miles where the outer edge of the continental margin does not extend up to that distance The coastal State may establish the outer limits of its juridical continental shelf wherever the continental margin extends beyond 200 nautical miles by establishing the foot of the continental slope, by meeting the requirements stated for the thickness of sedimentary rocks, by satisfying geomorphological requirements and by meeting distance and depth criteria, or by any combination of these methods

aximum Limits of the Continental Shelf (Source: Iceland GeoSurvey)

Icelandic Continental Shelf

Four party dispute on Hatton Rockall Intersecting continental shelf claims: Red line - Iceland (by regulation No.196/1985) Bergrisi Area Beige line - Faroe Islands Light green line - United Kingdom Yellow line Ireland Discussions are ongoing (UNCLOS only recognizes uncontested claims)

Three areas on the Icelandic continental shelf with potentia for commercial accumulations of oil and gas Northern Dreki licensing round Iceland GeoSurvey 2008

Act on Prospecting, Exploration and Production of Hydrocarbons, No.13/2001 Hydrocarbons found in Icelandic waters belong to the State The National Energy Authority grants licenses for Prospecting (up to 3 years, non-exclusive license, no drilling) Exploration and Production (up to 12 years, max. 16 years for exploration, up to 30 years for production, exclusive license) Exploration licenses normally granted by public notice inviting applications, 90 days deadline, no discrimination, public and objective criteria for selection May also be granted without public notice, e.g. if available on a permanent basis Licensees are supervised by the National Energy Authority regarding exploration and utilization of the resource

Rules No.553/2001 Regulate the non-exclusive prospecting licensing (InSeis Terra 2001, TGS-NOPEC 2002 and Wavefield InSeis 2008) Implemented in accordance with the changes in the Act on Hydrocarbons in 2007, i.e. the National Energy Authority replaces the Ministry of Industry as licensor To be incorporated into a new regulation accompanying the Act, which will also cover exclusive exploration and production licenses 1

1 Preparations for the 1 st license round

Historical background Interest for petroleum exploration in Icelandic waters gets prominent in the public debate (1971-1978) State funded research on the Continental shelf directed by designated commissions (1972 - ) Legislation on the territorial waters, economic zone and continental shelf of Iceland (1979) Agreement with Norway on the Jan Mayen Ridge (1981) Norwegian-Icelandic geopysical surveys of petroleum prospectivity on the Jan Mayen Ridge and subsequent research (1985-1992) Surveys off the coast of North-Iceland (1985) Regulation on the limits of the continental shelf (1985) Disputes on the Hatton Rockall Area (1985) and Icelandic-Danish- Faroese surveys in the area (1987-1989) 1

Development in recent years Working group on petroleum exploration reports on the prospectivity of the continental shelf off North-Iceland (1997-1998) Grynberg Petroleum applies for an exclusive license for petroleum exploration in a large part of the Icelandic continental shelf (1998) Commission on continental shelf and petroleum prospecting issues established (1999) Research and prospecting surveys in sedimentary basins off North- Iceland (1974-2005) Contacts and communication with oil prospecting companies (1999 -) Legislation on hydrocarbons and rules of prospecting (2001) Non-exclusive oil prospecting initiated on the Jan Mayen Ridge with seismic surveys by InSeis Terra (2001) and TGS-NOPEC (2002) Preparations for exclusive E&P licensing initiated (2004) 1

Strategic Environmental Assessment of the northern part of the Dreki Area 1

Strategic vs. Project Environmental Development plan Impact Assessment Possible paths Strategic Plan Wide Uncertainty High Essence of Precision Assessment Possible Low Policymaking Project plan Project execution Narrow Low High Factual Final Project (Source: Icelandic Environment Agency)

Environmental conditions in the Dreki Area 1

Climate Cold oceanic climate Mean temp. < 10 C all year round ca. 5 to 8 C in summer, -2 to 0 C in winter. Temp. range from -15 C to 13 C Yearly precipitation ca. 700 mm. Winter lows give snow up to 25 to 30 cm/day Mean wind speed ca. 10 m/s in winter, but 6 m/s in summer. Over half of obs. < 12 m/s. More windy than in Jan Mayen Frequent fogs in summer, icing during winter 1

and Sea Ice The edge of sea ice has been north and west of the area since the cold period 1965 71 Sea ice increases danger of icing Further info on climate collected by a weather buoy (from November 2007) and will be compared to model calculations Visibility can t, however, be measured by automatic devices 1

Currents Dynamic surface elevation (Mortensen 2004) Currents in the North-Atlantic 1

Highest wave 98%, 1 yr og 100 yr Wave height in the Dreki Area is less than at the west-coast of Norway 98% 1 yr 100 yr 2

Sampling stations of IMRI 2

Inter-annual changes in biomass of zoo-plankton north of Iceland Biomass (log (drywt.+1)) Log (g dw/m 2 +1) 0.8 0.4 0.0 1960 1970 1980 1990 2000 year (Source: Ástþór Gíslason) 2

Sampling of benthic species (Source: Sigmar Steingrímsson) 2

Distribution of herring in May 2006 75 0 0 70 65 0 Herring May 2006 0 62 30 20 10 0 10 20 30 40 (Source: Ásta Guðmundsdóttir) 2

Main conclusions of the SEA Great variability in biomass and consequently in habitats The area is important feeding ground for pelagic fish, especially herring, and possibly for whales On-site current measurements needed (started 2007) Need for registration and mapping of delicate habitats of benthic species (started in 2008) No information on demersal fish in the area (to be investigated in 2009) More data on oceanography and biology needed (remedies already initiated, e.g. multi-beam mapping) Types, origin and seasonal distribution of bird life should be studied as possible in the area 2

Strategic Environmental Assessment finalization The main chapters translated into English and the SEA closed in June 2007 by presenting it for Norwegian authorities Completed in autumn 2007 by considering all responses, deciding on necessary further research and answering questions of concern Final discussions with Norway in February 2008 2

Example of new data (bottom mapping) (Source: Icelandic Marine Research Institute)

Decision by the Government of Iceland On December 18, 2007, the Government of Iceland decided to offer exclusive licenses for exploration and production of hydrocarbons in the northern part of the Dreki area Tentative starting date of the licensing round is January 15, 2009 Tentative deadline for applications is 15 April, 2009 2

Parliamentary committee hearing Progress report on the preparations for the licensing round was given at a hearing by the Parliamentary Committee on Industry & Energy in February 2008 The committee was both interested in the progress and positive towards the goals as set by the Government 2

Bathymetric map and limits of the northern Dreki Area and the Jan Mayen Agreement Area Jan Mayen JM Agreement Area Water depths in the northern Dreki Area mostly range from 1000 to 2000 m Within the Jan Mayen Agreement Area each party has the right to participate with a 25% share in the exploration and production of hydrocarbons The Norwegian part of the Jan Mayen ridge has not yet been opened for prospecting nor for the exploration or production of hydrocarbons Northern Dreki A rea Iceland GeoSurvey2008

Meetings with Norway Two meetings with Norwegian officials in February 2008 On the results of the SEA, with positive outcome and no outstanding issues On unitization principles pursuant to the 1981 agreement and on the practical implementation of the 25% share in licenses by Norway - discussions on a draft of a supplementary agreement are still in progress 3

Getting out with the message Announcement of the licensing round and of the possibilities in Icelandic waters: Participation in the APPEX 2008 Conference & Exhibition in London, March 2008 Hosting the Iceland Exploration Conference in Reykjavik, September 4-5, 2008 Sponsorship of AAPG European Region Conference in Oslo, October 2008 (brochure) Participation in the PETEX 2008 Exhibition in London, November 2008 Invited lecture at the PESGB and the UK Dept. for Business Prospect Fair in London, December 2008 General outreach to exploration managers 3

Ongoing work to be done before January 2009 Minor modifications of the Hydrocarbon Act shaping a regulation, model license and tender specifications Decisions (new bill) on taxes and revenues, as well as minor adjustments of safety, health and environmental legislation (e.g. on jurisdiction) Further analysis of hydrocarbon potential, preparing for evaluation of proposals and negotiations with oil companies Overview, systematizing, and secure database of existing data, getting ready for new data General information and outreach services 3

Taxes and revenues Recommendations on principles and guidelines for the taxation of petroleum exploration and production in Iceland have been approved by the Government General corporate income tax will be 15%, no special deduction rules An additional progressive processing tax, which will be replaced by a progressive special income tax when the gains from a petroleum resource have reached 20%, with special deduction rules 3

Progressive processing tax Dependent on the annual petroleum production from a resource and taking into account the price of petroleum on the world market, taken while gains are below Million barrels oil equivalent < 50 50-100 101-200 nil 2½ 20% of total costs > 200 7½ Tax % 5

Progressive special income tax Replaces the progressive processing tax when the gains reach 20% of total costs Deduction rules to be more beneficient than those for the general corporate income tax Gains % 20.0-25.0 25.0-30.0 >30.0 Tax % 20 25 40

Reference block system & datum Blocks are 20 wide (E-W) and 15 high (N-S), area ~400 km² The label of each block starts with IS, followed by the lat. degree N and the long. degree W, followed by a slash (/), and finally a number from 01 to 12, ordered from W to E and then from N to S, e.g. IS6709/08 Similar to the Norwegian block system As all of the continental shelf of Iceland is located to the west of Greenwich, there is no addition of an E or W to the label All data will be presented in WGS-84 datum and UTM Zone 29 projection 3

Example: Block IS6709/08

Iceland Energy Resources Portal GIS based web portal in development (Orkustofnun, Iceland GeoSurvey Flashmap interface (Gagarin Softwarehouse) linked to shapefiles

Thanks for your attention ain Sources: Reports and work by the staff members of Iceland GeoSurvey, Icelandic Marine Research Institute, Icelandic eteorological Office, Icelandic Environment Agency and the Icelandic Maritime Administration are gratefully acknowledged