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.
Thursday, July 30, 2009
Loan Agreement Market Disruption Clauses
Doing Business in Oman
We understand that the market disruption clause has recently been invoked by more than one Omani bank in relation to loans to at least one Omani company following the turmoil in the banking sector at the end of last year. Previously this clause had seldom been relied upon by lenders and therefore had not been highly negotiated by borrowers. Lenders have been reluctant to rely on this clause for reputational and competitive reasons - they are nervous about revealing they have to pay more in the interbank market than the LIBOR (London Interbank Offer Rate) and their actual funding costs. The market disruption clause in the Loan Market Association (“LMA”) style loan agreement can be triggered if the cost of obtaining matching funds in the market to fund a loan for lenders with the required percentage of participation (typically varies between 25% and 50%) is in excess of LIBOR. If this clause is triggered, then the interest rate on each lender’s share of the loan for that interest period will be calculated using the actual cost to that lender of funding its share of the loan from whatever source it may reasonably select. This clause will need to be re-triggered for each interest period. When this clause is triggered, the borrower may request that the agent enter into negotiations for up to 30 days with a view to agreeing a substitute basis for determining the interest rate. In reality, this may not assist the borrower, as any substitute basis for determining the interest rate will require all lenders’ consent. Issues of concern for the borrower where this clause has been triggered include:- An increase in the borrower’s funding costs - the actual cost of funds will be payable to all of the lenders;
- The potential breach of certain financial covenants – such as the interest cover ratio – in the loan agreement; and
- If there is any interest rate hedging, this hedging is no longer likely to match the interest rate payable - there are typically no market disruption provisions relating to LIBOR in such hedging arrangements.
- Requesting that the additional interest costs should be ignored in calculating the financial covenants;
- Prepaying the lenders with the highest funding rates - this is likely to require all lenders’ consent and may encourage lenders to quote higher funding rates;
- Selecting shorter interest periods – there tends to be greater liquidity available in the market for shorter interest periods and it would also shorten the period during which this clause would apply; and
- Agreeing a higher interest rate payable under the loan agreement - this is only likely to require consent of a majority of the lenders but all lenders’ consent would be required to effectively bind the lenders from subsequently triggering this clause.
Tuesday, July 28, 2009
Focus On: Maritime Piracy and the Law
A series of spectacular attacks by Somali pirates over the last year has attracted enormous attention to the timeless, and now resurgent, problem of maritime piracy. For a time, the problem seemed limited to the waters off the Horn of Africa, but last month, pirates struck close to Oman in dramatic fashion. Armed with heavy weapons and night-vision capabilities, Somali pirates hijacked the German cargo ship MV Charelle 60 nautical miles off the coast of Sur. This attack was the first instance of Somali pirates seizing a ship outside of their normal area of operations.
The international attention is more than a passing fancy. Maritime piracy has had very real costs for shippers, as well as exporting countries and industries. The world has watched as pirates have hijacked vessels of increasing size and value, including a super-tanker carrying 2 million barrels of oil worth US$100 million. The total economic cost of maritime piracy has been estimated at over US$10 billion.
For a nation like Oman whose fortunes rest in part on a healthy shipping and export sector, security of shipping vessels and cargo is imperative. Perhaps the most significant determinant of security is how the law is used by both governments and private actors to combat and prevent maritime piracy.
International law creates a framework through which coordinated, collective action by states against maritime piracy is possible. Domestic civil law, on the other hand, provides a range of mechanisms through which businesses may protect their interests by taking preventative action.
The International Legal Response
The recent spike in attacks has sparked an unprecedented level of multinational anti-piracy activity; namely, the creation of an anti-piracy armada including ships from more than twenty countries. These joint patrols find legal authorization under the U.N. Convention on the Law of the Sea (the “U.N. Convention”). The United Nations Convention deals with the rights and responsibilities of nations in their use of the world’s oceans. Oman is a signatory to the U.N. Convention and ratified it in Royal Decree 67 of 1989. Recently, the U.N. Security Council has also issued a series of resolutions expanding the legal basis for the use of force on Somali pirates.
The result of this coordination has been, in the words of U.N. Secretary General Ban Ki Moon, “one of the largest anti-piracy flotillas in modern history.”
This cooperation has included many Gulf nations, including Oman. On June 29, Omani naval commanders participated in a conference in Riyadh with representatives from eleven other Arab states in the Gulf and the Red Sea aimed at coordinating a regional response. Out of this meeting came decisions to establish a joint naval task force and strengthen naval forces in the region.
In addition to providing a framework for joint action, international law has helped direct the criminal prosecution of suspected pirates. In the 18th century, it was determined that maritime piracy constituted a universal crime that could be prosecuted in any jurisdiction, regardless of geographic connection to the criminal act, the defendant or the victim. This concept became known as “universal jurisdiction.”
While universal jurisdiction allows any nation to prosecute a maritime pirate, in practice, most nations are loathe to spend time or resources prosecuting and incarcerating pirates from far away lands for crimes widely considered to be beyond the deterrent effect of limited judicial prosecution.
As a result, interested nations have increasingly entered into bilateral agreements on the prosecution of suspected pirates. In recent months, Kenya has signed memorandums of understanding with the U.S., the European Union and Britain to prosecute suspected pirates in Kenya.
The Domestic Legal Response
In Oman, there have been concerns about more pirates crossing into the territorial waters of Oman. Territorial waters, as defined in the U.N. Convention, consist of the coastal waters extending no more than twelve nautical miles from Oman’s coasts. These territorial waters are regarded as the sovereign territory of Oman.
While international law plays a crucial role in organizing the governmental response to piracy, businesses and individuals in Oman may consider a preventative approach by looking to domestic laws to protect their interests.
Specifically, exporting industries and businesses involved in shipping will secure their goods and vessels through contracts with insurers and private security contractors. In that regard, private maritime security companies are considering the establishment of business operations in Oman.
War insurance may be desirable, as may ransom and kidnapping coverage. The Oman Maritime Law (Royal Decree 35 of 1981, as amended) states that certain war risks, which may include piracy, are not included in a policy unless it has been agreed otherwise between the insurer and the insured. Therefore, it would be important for those seeking war insurance coverage for piracy in Oman to clearly agree what events are covered.
Some may seek new physical deterrents to employ onboard their vessels, while others may prefer to hire armed escort vessels to repel would-be pirates.
In instances where shipments have been hijacked, private individuals will need to ensure that the payment of ransom does not run afoul of the law in any jurisdiction in which they operate. While it is not typically illegal to make a ransom payment, it is illegal in many jurisdictions to make payments to parties determined to be involved in acts of terrorism. Given the murky relationships between Somali pirates and terrorist organizations active in Somalia, it must be determined whether any relevant domestic anti-terrorism laws would be implicated in the payment of ransom.
The legal issues created by maritime piracy underscore the need for internationally experienced legal counsel. In under a decade, the 21st century has shown with alarming frequency that domestic concerns, such as instability in Somalia, can give rise to global problems as significant as maritime piracy.
Monday, July 13, 2009
Doing business in Oman FAQ: Bankruptcy
The financial crisis has resulted in many companies encountering difficulties in maintaining profits and even staying solvent. In Oman, courts may declare a company facing financial difficulties as bankrupt or insolvent if (i) its financial state is in disorder; and (ii) it has ceased to discharge its commercial debts. The bankruptcy declaration may be ordered by the court based on the court’s own initiative, upon application by the debtor company, or by one of the company’s creditors. Omani courts often appoint an administrator for managing the debtor’s assets while the bankruptcy application is pending.
Once a company has been declared bankrupt by an Omani court, the company may be liquidated. The court will usually appoint a liquidator for effecting the transfer of the company’s remaining assets. The liquidation is usually effected by way of judicial sale or public auction.
In distributing the assets of a bankrupt company, all expenses of the administrator or liquidator, including compensation, must be paid from assets of the bankrupt company before any distribution is made to creditors. Thereafter, creditors are ranked pursuant to the Law on Recovery of Government Debts [RD 32/94] in the following order of priority:
As a general rule, debt of secured and unsecured private debts is subordinate to debt owed to the government even if the government debt arose later and is not secured. The Government is generally known to give up its priority ranking in favor of employees.
Unlike the bankruptcy law of some countries, the Omani laws for bankruptcy and liquidation are very straightforward. The focus of the law is to protect creditors as much as possible and ensure the insolvent company is liquidated efficiently.
Thursday, July 9, 2009
Hot Topic: Nuclear Energy in the GCC
Earlier this month, Oman’s Ministry of Foreign Affairs signed a Memorandum of Understanding (MoU) with the Russian Federal Atomic Energy Agency (Rosatom) that deals with cooperation in the peaceful use of nuclear power. The MoU could lead to Russia and Oman engaging in joint research projects and even building nuclear reactors together.
The MoU details Russia and Oman’s plan to establish a working group to promote Oman’s plans to develop nuclear power. The countries also plan to draft an intergovernmental agreement for cooperation in peaceful nuclear energy. Both countries have stated that they plan to cooperate in the following areas:
Oman has long had plans to diversify its economy and encourage sustainable economic development policies, and the peaceful use of nuclear power fits in with those plans. Cooperation between Oman and Russia on nuclear power can help the Sultanate develop infrastructure, provide employment opportunities and training, and benefit from Russian expertise and technology.
Oman is not the first country in the Middle East to seek nuclear energy development. Bahrain, Jordan, Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates (UAE) and Yemen have all expressed their intention to develop nuclear energy. The UAE has already signed a bilateral agreement with the United States on nuclear cooperation and is also talking with France to cooperate on nuclear energy. In addition, the North African countries of Algeria, Egypt, Libya, Morocco and Tunisia have also expressed interest in nuclear energy.
MENA states have a number of motivations for this interest in nuclear energy, such as powering water desalination plants and air conditioning, diversifying beyond oil, and furthering scientific and economic development. Some countries have even stated that they prefer to sell their oil rather than use it to meet domestic demand, and constructing nuclear reactors would enable them to do that.
Energy demand is growing rapidly in Oman and the GCC, with electricity and desalination demands estimated to increase by about 10 per cent annually by 2015. Recently, a GCC-wide electricity grid was introduced which allows GCC states to share power during peak periods. The GCC electricity grid is designed to address what has been labeled a “power crisis” in the region.
GCC states are looking to nuclear and other alternative energy sources as providing potential solutions to the power crisis. Solar energy is another potential resource, with new projects underway. Earlier this month, Abu Dhabi opened the largest solar power grid in the Middle East and North Africa. Oman is also in the process of developing solar energy projects in response to the growing electricity demand.
Monday, July 6, 2009
Focus on: Litigation in Oman
Summer time is when the Oman Courts almost go into hibernation; very few hearings take place between July 1 and September 30.
However, in many ways it is the most crucial time in Omani litigation, because the Court-appointed experts are often writing their reports to the Courts over these three months.
It is probably true to say that, about 90% of the time, the Omani Courts rubber-stamp and approve the report conclusions reached by the experts who have been appointed by those Courts.
The Courts in Oman choose to appoint experts in most cases, and they frequently turn to local private-sector accountants when monetary compensation is claimed.
In these cases, it is not the Oman Courts that must be persuaded - rather, one must convince the experts appointed by the Courts. Experts meet with the parties separately to hear arguments and receive documents. These meetings are central to determining who wins and loses in Oman Court cases.
Lawyers play an important part in assisting and guiding their clients in meetings with experts. Good preparation is a prerequisite, as is an ability to answer all the enquiries made by the experts in these face-to-face scenarios.
The general rule in Omani law is that an aggrieved party will be compensated for its direct losses, as opposed to indirect losses.
However, there is no clear-cut Omani judicial definition of “direct“ and “indirect“, and it should be borne in mind that most of the experts do not have qualifications in law in any event. Accordingly, it is the lawyers who need to convince the experts whether a specific head of claim should be perceived as direct or indirect.
It should also be remembered that Omani law includes a duty to mitigate one’s losses and, equally, Egyptian case law is highly persuasive to experts and the Courts in Oman.
Wednesday, July 1, 2009
New Law Alert: Taxation
A new income tax law for Oman was issued on 25 May 2009. The new law will apply to a company’s accounting periods which begin on or after 1 January, 2010.
The main highlights of the new income tax law are:
The new tax law includes modifications that are generally favorable to companies doing business in Oman. Companies likely will be particularly interested in the tax reduction for branches of foreign companies, as this was previously a significant drawback for companies in deciding whether to form a branch in the Sultanate.
