On June 29, 2009, the newly created International Renewable Energy Agency (IRENA) announced that its headquarters would be located in Abu Dhabi’s Masdar City, marking a high point in the Gulf Cooperation Council’s (GCC) embrace of a future in renewable energy.
In late July, the Sultanate of Oman led the GCC further, announcing the creation of a Designated National Authority (DNA) pursuant to its commitment as a ‘non-Annex B’ party to the Kyoto Protocol.
The creation of a DNA is a crucial step that will ultimately allow Oman to host projects, including renewable energy and clean technology projects, that reduce greenhouse gases under the Kyoto Protocol. These projects can provide an additional revenue stream to Oman from emissions credits sales in developing international carbon markets.
The Growing Market for Carbon Allowances
Many experts believe that the environmental and economic costs of climate change will trigger a reordering of financial and industrial resources on a global scale. In order to prevent widespread environmental disruption, regulatory intervention aimed at promoting innovation will be required on national, regional and international levels.
The need for innovation is not limited to the development of new technologies. The drive for creative solutions to global warming has resulted in the creation of new financial products and markets aimed at managing and transferring the risks and costs of global warming. The so-called ‘cap-and-trade’ system is a key element of the Kyoto Protocol, an international agreement implementing the United Nations Framework Convention on Climate Change.
Under Kyoto’s cap-and-trade regime, certain member states (Annex B nations) are limited in the level of carbon or greenhouse gases they emit into the atmosphere. Each member is issued emission allowances, one unit of which corresponds to one ton of greenhouse gas and indexed to the global warming potential of carbon dioxide (CO2). Under Kyoto, emissions allowances are freely tradeable between Annex B members.
Also under Kyoto, non-Annex B members, primarily developing countries free from Kyoto’s carbon emission limits, are permitted to monetise investments in carbon reduction projects by developing projects under the Protocol's Clean Development Mechanism (CDM). Projects under the CDM program are accredited by the CDM Executive Board, an implementing body of the Protocol, and result in reductions in carbon emissions, the implementation of which will earn emissions reduction credits (CERs) which can be sold on the open market to emitters in Annex B member nations.
Projects in Oman developed under the CDM must be approved by both the Oman DNA and comply with requirements established by the CDM Executive Board.
According to the World Bank, the overall carbon market was valued at US$126 billion at the close of 2008, more than double its value in 2007. The secondary market for CERs saw a five-fold increase in both volume and value over the prior year. Despite the uncertainty created by the expiration of the Kyoto Protocol in 2012, project developers are still reviewing and investing in credible projects in certain markets.
Opportunities in Renewable Energy
The Sultanate’s decision to establish a DNA also will present businesses in Oman with new opportunities in the renewable energy space. While wind, biogas, geothermal and wave energy pose strong opportunities for Oman, the greatest promise is held by solar energy. According to the Omani Authority for Electricity Regulations (AER) May 2009 report, Oman is the beneficiary of some of the highest levels of solar density in the world. If harnessed, solar energy could provide for all of Oman’s electricity needs.
Work to achieve this goal is underway. In May, the Public Authority for Electricity and Water (PAEW) of the Sultanate announced a tender for the first large-scale solar power plant in Oman on a build, own and operate basis.
The sale of CERs could facilitate the benefits posed by solar energy by helping finance such projects. According to AER, Oman’s origination of CERs could save anywhere from three to 18 percent of the operational and capital costs of solar and wind grids.
Legal Issues Related to CDMs
Firms seeking to participate in CDMs will face a number of unique legal issues. Specifically, firms will need to comply with CDM rules in order to ensure that CERs are properly issued. CERs must be validated, registered, verified and certified by the proper national and international authorities and independent auditors before issuance. When selling CERs, parties must carefully negotiate and adequately record the agreement, identifying responsibilities, establishing rights and allocating risk with an eye to the unique aspects of the asset and the particular risks that may arise. Risks include the classification of the CER property right in both the host and purchasing country, the tax treatment of CER revenue and the use of national and international emissions reduction registries to track and record CERs.
While it remains to be seen exactly how Oman’s DNA will be implemented, it is clear that any potential CDM projects must adhere to Omani law, as well as CDM rules.
Certainly some time is needed before the details of these policies come into focus, but it is clear that Oman is taking seriously opportunities in renewable energy and that many firms in Oman stand to benefit from this initiative.
Monday, August 24, 2009
Renewable Energy Update: Carbon Finance
Wednesday, August 12, 2009
Labor Law Update: Omanisation Percentages Announced
Earlier this month the Ministry of Manpower issued a Ministerial Decision increasing Omanisation levels for a number of fields for the 2009-2010 period.
The Omanisation target for the engineering sector is set at 50%, with targets of 70% for technicians and 80% in the category of skilled workers.
In the oil and gas sector, the Omanisation level will remain at 90% for production and operation companies in 2010 and 82% for direct service companies.
For the accounting field, the Omanisation target in 2010 will be 29% for managers, 55% for specialists, and 66% for technicians. For clerical positions the Omanisation level is 100%.
In the industrial sector, the Omanisation target is set at 35%. For banking, the new target is 90%, and for financing and insurance the new targets are set at 45%.
The Ministerial Decision included an August 15 deadline for private companies to submit proposals on how they will achieve the new targets.
In practice, companies seeking to obtain residence and employment visas for foreign employees may have difficulty obtaining Ministry approval if the company is not achieving the Omanisation targets. In addition, the Ministry may impose certain penalties.
Monday, August 10, 2009
Renewable Energy Update: Carbon Credits
Carbon credits create a market for reducing greenhouse emissions by giving a monetary value to the cost of polluting the air, and are openly traded in many countries. Currently, Oman is taking steps to enable the Sultanate to be a potential player in the international market and to promote renewable energy investment in Oman through the establishment of a new governmental authority.
The Oman Ministry of Environment and Climate Affairs announced that it is in the process of setting up a new authority for administering “clean development mechanisms” (“CDMs”) in Oman. CDMs are part of the Kyoto Protocol, which is an international agreement linked to the United Nations Framework Convention on Climate Change. The Kyoto Protocol sets binding targets for the reduction of greenhouse gas emissions. Oman became a member of the Kyoto Protocol in January of 2005.
CDMs are one of the Kyoto Protocol’s three flexibility mechanisms designed to assist countries to meet their greenhouse gas emission reduction targets. CDMs allow an industrialized country with an emission-limitation commitment to implement an emission-reduction project in a developing country. The implementation of a CDM project, e.g., a rural electrification project using solar energy, can earn saleable certified emission reduction credits or carbon credits which can be counted towards meeting Kyoto targets.
A developing country like Oman could host CDM projects that would attract investments from foreign companies seeking to earn carbon credits. These carbon credits can then be sold and traded on the open market.
In Oman, these CDM projects will be regulated by the Designated National Authority (“DNA”). The DNA will determine what CDM projects that it wishes to propose to the CDM Executive Board for accreditation. The process of establishing the DNA also coincides with the overwhelming response generated for the government’s recent solar energy initiatives in the power sector.
In accordance with the substantial national interest in renewable energy, it is hoped that the DNA will develop rules for audit and certification of CDMs so that Omani companies, as well as foreign companies, can fully participate in the creation of CDMs and the chance to sell carbon credits in the open market. Omani companies should be aware that CDMs present a potential revenue source, as carbon credits are traded internationally. The constitution of the DNA is the first step towards the establishment of clear mechanisms for companies to participate in such programs.
Wednesday, August 5, 2009
FAQ: When is a Contract Formed?
When entering into contracts in Oman, complications may arise when the parties begin performing the obligations under a “contract” while the final terms are still being negotiated. What happens under Omani law when a dispute arises over the incomplete “contract”? When does a contract become a contract that is binding on both parties?
In some cases, the Oman Court (or arbitrator, if there is an arbitration clause) will be willing to impute the existence of a contract even when the parties do not have a signed agreement. For example, if an employer in Oman does not sign a written contract with his employee, the Oman Courts would still impute a contractual relationship based on evidence such as pay slips, or transfers made regularly to the employee's bank account by the employer.
In a more standard commercial context where two parties have a substantially negotiated but unsigned agreement, or even a verbal agreement that is never fully formalized in writing, the answer is not as clear. In these cases, the Oman Courts will most likely look to any documentation pertaining to the deal in deciding whether there is a contract. This is in accordance with Oman’s Commercial Code which states that contracts “may be proven by all means of so doing...”, and not only through a signed agreement.
The Oman Courts may recognize the existence of a contract, even though there is no final written agreement signed by both parties. The Court should recognize the contract based on exchange of letters, or on verbal offer and acceptance, or on the mutual trading conduct of the parties.
The ability of an Oman Court to recognize a contract is supported by Article 89 of Egypt’s Civil Code, which states that a contract is created from the moment that two persons have exchanged two concordant intentions. Article 90 of Egypt’s Civil Code adds that an intention may be declared verbally, in writing, or by conduct. The Egyptian Civil Code is the bedrock of Arabic legal justice and is heavily influential in Oman.
Nonetheless, despite the ostensible security afforded by the Egyptian Civil Code, parties seeking to prove the existence of a contract or finalize an agreement should seek legal advice. At a minimum, it is important for the party seeking to prove the existence of a contract to detail in writing to the counterparty, on a contemporaneous basis, those elements which have been agreed upon. In this respect, it is noteworthy that Oman’s Supreme Court has ruled that silence can amount to consent. In other words, uncontested letters can prove vital in dispute resolution scenarios.
