Uncertainties and risks – but also positive developments

The latest draft regulations dealing with allocation of sea areas for marine resource exploitation and use are of keen interest to the many potential investors in Vietnam's nascent offshore wind power industry, whose applications to survey sea areas have been pending new legislation for over a year.

In this Insight, we analyse important changes to Decree 11 in relation to sea use rights for the surveying and development of offshore wind projects.

Key takeaways

This draft, if approved, would introduce or clarify a number of notable points as compared with the status quo, including:

• Both foreign investors established outside Vietnam and foreign invested companies established in Vietnam will be able to apply for survey rights.
• Offshore wind power project investors will need to obtain a decision on sea area allocation for sea survey rights, as well as for development of an offshore wind power project. This would likely be from the Ministry of Natural Resources and Environment (the MONRE) as the competent licensing authority.
• Sea survey rights will be exclusive in a specific sea area and will last no longer than three years.
• Mortgage, assignment or lease of the right to use an allocated sea area, or contribution of such right as charter capital, would be prohibited.
• A sea survey right holder would not be able to publish or transfer information and results directly related to survey activities to a third party unless it has obtained prior written consent from the competent authority approving the sea survey rights.

Background

In April 2022, MONRE issued the first in a line of draft Decrees to amend Decree 40/2016/ND-CP, dated 15 May 2016, of the Government detailing several provisions of the Law on Natural Resources, Environment of Sea and Island; and Decree 11/2021/ND-CP, dated 10 February 2021, of the Government on allocation of specific sea areas to organisations and individuals for marine resource exploitation and use (Decree 11). The most recent draft was released in mid-June 2023 (the Draft Decree). It contains important changes compared with previous drafts, and is a result of ongoing consultation with industry players who have patiently supported the process. 

Although the Draft Decree is expected to go through at least one further round of review, we expect to see little substantial change on key points.

The need to revamp the sea survey regulations is urgent if the Government is to meet its stated plans to have at least 6GW of power operational by 2030.  Under current law, the only provision that regulates sea survey activities is Article 9.4 of Decree 11, which is neither sufficiently clear nor detailed enough to provide the level of certainty that investors need to secure and exercise sea survey rights, both in terms of procedural requirements and substance of the rights. The MONRE has included various provisions in the Draft Decree with the aim of addressing these issues.

Key changes

Eligible SSR holders

While Decree 11 is not entirely clear as to whether foreign investors and foreign-invested companies established in Vietnam can apply for sea survey rights (SSR), it is express in the Draft Decree that those subjects are eligible to seek and hold such rights. This is important, as many very experienced and capable developers are reluctant to establish legal entities in Vietnam solely to undertake sea survey activities.   

Licensing process to obtain SSR

Investors seeking to acquire SSR for sea survey activities will need to obtain a decision on sea area allocation from the relevant competent authority for sea survey activities. This is similar to the subsequent stage when an offshore wind power project is developed.

Critically, the Draft Decree doesn't make any link between the licensing procedure for sea area allocation for sea survey activities and that for subsequent development activities of an offshore wind power project.  In parallel to the Draft Decree process, the Government is working on a Decree on selection of investors in the power sector, a regulation that is expected to apply to all forms of power sector investment including offshore wind projects. Under that draft regulation, it appears there may be a genuine risk that grant of SSR and sea survey activity won't provide SSR holders with much formal advantage in the subsequent investor selection process for a specific project. 

Authority 

The authority that is responsible for granting decisions on sea area allocation for sea survey activities and for implementation of offshore wind projects is categorised in the Draft Decree as follows:

1. The responsible authority is the MONRE in the following cases:
   1. an investment project in relation to which the investment policy approval is issued by the National Assembly, the Government or the Prime Minister
   2. the proposed allocated sea area exceeds 6 nautical miles from the average lowest low-water line over several years off the coast of the mainland and the largest islands in the island districts (6 nautical miles sea region)
   3. the proposed allocated sea area is within the joint sea region, which is defined as a sea region belonging to two or more provinces, or a sea region comprising one part within 6 nautical miles and another part outside the 6 nautical miles region
   4. foreign investors or foreign invested companies will conduct the sea survey activities or implement the investment projects.
2. The provincial People's Committees (PPCs) are responsible in the remaining cases (ie the proposed or survey sea area is within the 6 nautical miles sea region) and will submit the approvals to the MONRE.

Note that the Draft Decree does not include a definition of an offshore wind power project, but this definition can be found in other draft regulations, such as the draft Decree on selection of investors in the power sector and the draft Circular regulating methods for the calculation of tariff range applicable to solar and wind power projects. The definitions in the latest drafts of those regulations are not entirely consistent but share the idea that an offshore wind power project must be outside the 6 nautical miles sea region.

Grounds for rejection

An application for a decision on sea area allocation may be rejected based on several grounds, eg:

1. if the proposed sea use activities cause harm to Vietnam's marine sovereignty, national interests, maritime security, national defence, marine order and safety; or such activities are prohibited in accordance with Vietnamese law
2. if the proposed sea area is within an area that needs special protection for national defence, protection zone I of historical–cultural relics; strict protection zones and ecological restoration zones of marine protected areas, world heritage areas, biosphere reserves, and national parks; aquatic resources protection zones; wetlands having unique ecosystems, high biodiversity, having the function of maintaining water resources and ecological balance, and being of international and national importance; areas with special-use forests; areas with seagrass and coral reef ecosystems; areas with oil and gas works, equipment and structures at sea and safety zones surrounding these works, except for organisations assigned to manage and carry out activities in these sea areas according to the provisions of the law
3. the proposed sea use activities seriously affect basic survey activities, scientific research, exploration, exploitation and use of marine resources that are being legally conducted in Vietnam's waters; seriously affecting the preservation of historical-cultural relics, scenic spots and cultural heritage
4. the proposed sea use activities involve the use of explosives, toxic chemicals, and other means and equipment capable of causing damage to people, resources and polluting the marine environment, and explosives and toxic chemicals licensed by competent state agencies according to the provisions of the law
5. the information in the application for sea area allocation is inaccurate or the information about the proposed activities is not consistent with the purpose of the sea area allocation request.

Duration

The Draft Decree provides that the duration of sea area allocation for sea survey activities will not exceed three years. Upon expiry, the investor must reapply for a new decision on sea area allocation if it wishes to continue survey activities (ie there is no renewal or extension process envisioned). This three-year period is widely seen as insufficient to adequately ensure comprehensive survey activities can be carried out, with a period of up to five years being preferred.  An option to extend, rather than reapply, where good faith efforts are being made to complete surveys, and/or where force majeure circumstances have delayed progress, would be vastly preferable.

Exclusivity

The MONRE has proposed in the Draft Decree that the SSR holder will hold an exclusive right. That means the right to conduct surveys on a specific sea area (as opposed to a sea region that comprises multiple sea areas) will be granted to only one organisation and individual.  

This is a significant change in this Draft Decree compared with the previous draft Decree in April. It indicates that the MONRE has considered the concerns of, and accommodated proposals from, the investor community, noting the commercial disadvantages of having multiple investors conducting survey activities regarding one sea area.   

Overlapping applications

In a sea area where there are more than two sea allocation applications for the purpose of sea survey activities, the competent authorities will assess the applicants based on the following criteria:

• competence and capacity as to finance, human resources, experience in relation to sea survey activities and in relation to activities that are intended to be carried out upon completion of the sea survey (eg development of offshore wind power projects), which may be subject to subjective assessment of the competent authorities;
• a plan for implementation of sea survey activities on such sea area; and
• the social and economic efficiency of the project that is intended to be carried out on completion of the sea survey.

There has been some idea of conducting a tendering process for selecting the SSR holder but that is not mentioned in the Draft Decree.

Mortgage, lease and contribution of charter of the right to allocated sea areas

The Draft Decree expressly prohibits mortgage, assignment and lease of the right to use an allocated sea area and contribution of such right as charter capital (the only exception is for sea area allocated for aquaculture purposes). Failure to comply with this requirement may result in revocation of the allocated sea area. This prohibition applies to both the long-term project use of the sea area and to sea survey activities. 

This is a potentially significant project bankability issue, as it will affect security packages that lenders can hold and could also potentially affect project assets attached to the sea bed. 

Survey data

Within 60 days of completion of sea survey activities, the SSR holder must submit an overall report on the survey results to the competent authorities. It must not publish or transfer information and results directly related to survey activities to a third party unless it has obtained prior written consent from the competent authority approving the SSR. The governmental agencies are entitled to use the survey data for 'State management purposes', though are responsible for protecting trade secrets in accordance with the law.  

The report must follow a statutory form that includes descriptions of raw data, processed data and data analysis, together with descriptions of the products and outcomes obtained from the survey. It is also required that the SSR holder attach materials and images to demonstrate the survey schedule and locations where samples are taken.

It remains unclear what types of data and level of detail of those descriptions, as well as the volume of attachments, the competent authorities will require. It seems likely, however, that sensitive commercial proprietary information will be involved—a matter of grave concern to investors, particularly given the timeline to provide the information is likely to be well in advance of any power purchase agreement execution or even project award. While there may be a reasonable argument that some data about shared industry value should be distributed for overall efficiency purposes (eg bird migration data), the tight timing obligation and failure to differentiate between types of data (eg commercial and environmental) is certainly a concern. This is particularly so given the lack of connection between undertaking sea survey activity and implementing a project. 

Fees

Under Decree 11, the specific sea use rate for each category of sea use purpose is subject to the approval of the MONRE or relevant PPCs, and must fall within a statutory range.

Under the Draft Decree, regarding sea survey and development of offshore wind power projects that both belong to group 6 (as classified in terms of sea use purposes), the sea use fee rate ranges from VND3 million (c. US$128) to VND7.5 million (c. US$320) per hectare per year.

The specific sea use fee for each group with a sea use purpose will be determined and announced by the competent authorities (ie either the MONRE or the provincial PPCs) every five years, based on the sea use fee rate and specific socioeconomic conditions. Specific sea use fee for sea survey activities is equal to 50% of the specific sea use fee applicable to group 6 as approved by the competent authorities.

Investors conducting sea survey activities must pay the sea use fee for the entire sea use term in a lump sum. For development of an offshore wind project, investors must pay the sea use fee for the first year all at once; from the second year, they can choose to pay the sea use fee for such year all at once or by two instalments.

Unresolved issues

As noted, the Draft Decree fails to address a very critical issue—the relationship between the selection of the SSR holder in the survey stage and the selection of the investor to develop the project that is in the same sea area.

The distance between one project to another project is also important in making more efficient use of the sea area. However, this matter is also not addressed in the Draft Decree.

What's next?

The offshore wind industry is likely to need to get comfortable with uncertainties and risks arising from Vietnam's latest draft regulation governing sea survey activity. Key concerns will centre around the lack of any link between the right to survey a site and the right to subsequently develop a project on that site; data transfer obligations; the limited exclusivity period; and uncertainty over how to demarcate project boundaries efficiently and address potential competing interests between developers. Even so, the latest draft contains a number of positive developments, and industry may prefer to 'take a leap of faith' and focus on managing risks, rather than wait for a comprehensive regime to be developed.