JVs vital to delivering the UAE’s energy transition

For businesses seeking to be involved, thought must be given at the outset to how JVs are structured and will be administered, with share transfers, governance, and disputes all areas requiring careful consideration.

The international and national context

At the end of last year, the UAE hosted COP28 and secured agreement that provides for the transition away from fossil fuels in energy systems, the “phase-down” of unabated coal power, and the “phasing out” of “inefficient fossil fuel subsidies that do not address energy poverty or just transitions, as soon as possible”, laying the ground for a swift, just and equitable transition, underpinned by deep emissions cuts and scaled-up finance.

As part of the COP28 agreement, nations committed to a tripling of renewable power capacity and a doubling of energy efficiency by 2030.

Consistent with those aims, last year the UAE’s national energy strategy was updated to triple renewable energy capacity to 14 GW by 2030 and raise the percentage of clean energy in the total energy mix to 30% by 2031. As part of its national hydrogen strategy 2050, the UAE also aims to enhance the UAE’s position as one of the largest producers of hydrogen by 2031.

As with other countries in the region, the UAE is pragmatic – it knows that even in the swiftest energy transition scenario, the world will still need oil and gas in the near future as the energy transition takes place.  The UAE has and continues to deploy industrial-scale carbon capture technologies to reduce CO2 emissions by separating CO2 from oil and gas processes before it is released into the atmosphere and storing the captured carbon, typically underground.

Having achieved a nearly 70% increase in the total renewable capacity between 2022 and 2023, the UAE is well on the way to achieving its ambitions.

The role for JVs in the UAE’s energy transition

However, the scale of the investment needed to deliver the objectives the UAE has set in relatively short timescales, coupled with the fast pace of evolving technology in the clean energy space, mean that JVs will be an important vehicle for delivering clean energy and cleantech projects and, ultimately, the energy transition the UAE hopes to affect.

In this context, those stakeholders responsible for delivering these projects, be it developer JVs or EPC contractor JVs, will need to think carefully about how JVs are structured and administered to ensure successful project delivery.

Pinsent Masons has explored the multitude of considerations for JVs previously in a special report – these remain applicable to those involved in delivering the energy transition now.

Structuring, share transfers, governance, and disputes are four of the important considerations for JVs, as we explain in more detail below.

Structuring of JVs

The legal status adopted by the JV, in terms of whether they are incorporated or unincorporated and if incorporated, which jurisdiction suits the participants, is an important consideration – in the UAE, there are both ‘onshore’ and ‘offshore’ options.

Another important question is whether the JV should be integrated or non-integrated. This is an issue which arises for unincorporated JVs and whether the parties pre-agree the risk percentages of the project.

The degree to which JV parties should be jointly and severally liable also needs to be determined. This is often a common requirement from the client, to maximise chances of recovery. However, JV parties need to consider the implications to balance sheets and security.

Share transfers

Share transfers are one of the most common issues in JVs but can often be overlooked. It is important to agree in advance the JV contract mechanisms relating to share transfer.

Done well, share transfer mechanisms allow for greater certainty between JV partners; are beneficial when looking to resolve deadlock or dispute situations; can assist a JV partner to exit on agreed conditions; and provide a way for a JV to seek funding from new investors or for a new investor to take over shares from an exiting investor.

Governance

The governance structure that is adopted by a JV is essential for the smooth running of the relationship and for the success of the project.

It is estimated that around a third of construction JVs end in dispute between the parties. Many of these disputes relate to a party’s failure to understand or comply with their obligations in the JV agreement (JVA) or its poor administration.

Whilst parties have significant flexibility when approaching governance, the four pillars of a good governance framework outlined by the UK’s Infrastructure and Projects Authority provides guiding principles, which are equally applicable to Middle East projects. These are:

• Accountability: clear allocation of responsibilities and objectives between the parties;
• Authority: ensuring the parties are aware which party has decision-making authority in certain circumstances. This is particularly important where entities have not worked together before and there may be different technical specialities or governance policies;
• Alignment: between the entities in relation to both project and corporate strategy / objectives. Such clarity means that JV parties can effectively cooperate and collaborate with one another;
• Disclosure: this is essential for stakeholders to meet its own objectives and be comfortable with the terms of the JV.

Disputes

Tensions can develop between JV parties over time and due to change in management and decision makers. Whilst parties should endeavour to have regular, meaningful and consistent communications to avoid disputes as part of a robust governance framework, it is also important to have clearly drafted and agreed dispute resolution provisions.

Issues such as the governing law of the agreement are important in terms of interpreting, construing and enforcing obligations under the JVA. The choice of dispute resolution forum is also important – the UAE offers the choice of onshore UAE courts, ‘offshore’ courts in the DIFC or ADGM, as well as arbitration.

With regard to arbitration provisions, which are common in the region, important considerations are: rules of the arbitration; whether or not to opt for institutional or ad hoc arbitration; and the choice of seat.

A new approach to JVs

JVs are an intrinsic part of the oil and gas industry, whose participants are a core driver for the energy transition in the UAE and wider Middle East region. The push to achieve a ‘net zero’ carbon outcome for the oil and gas industry and the energy transition more generally will require a new approach to JVs which will likely include many enterprises which are not currently a part of the oil and gas industry. 

This, together with the scale and timescales for development in the UAE and wider region, means that the issues around structuring and governing JVs will continue to be an important component to the achievement of net zero. As such, the structure and allocation of risk between JV participating parties is, and will remain, an important consideration of these projects as we move towards 2030 and beyond.

Co-written by Amy Roberts of Pinsent Masons.