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Laws, Regulations and Sanctions: Foreign Oil and Gas
This is the third and final article Clyde & Co is publishing on the legal and regulatory framework as it relates to the oil and gas industry in Libya. This article will outline and analyse the laws and regulations that govern the establishment of foreignowned companies in Libya, including the impact on international oil companies (IOCs), as well as address the relevant sanctions which are in place and may affect IOCs.
The Libyan Ministry of Oil has recently announced that they are contemplating improving the terms of the exploration and production contracts for IOCs by way of a new EPSAV (Exploration and Production Sharing Agreement) to replace the tougher EPSAIV in anticipation of a new licensing round that could take place towards the end of 2013.
Brief Overview of Oil and Gas Corporate Structures Available in Libya
Foreign companies and investors wishing to do business in Libya must first set up and register a local entity. For a new foreign entity to establish itself in the Libyan market, it must first either obtain an Investment License by registering at Companies House, or it must obtain a Commercial License from the Ministry of Economy.
There are no special licensing requirements which apply to the oil and gas sector, and so the more common approach of foreign companies is to obtain a Commercial License in order to operate through either a joint venture with a Libyan partner or a branch office.
Joint Venture Company
Decree No. 207 of 2012 dictates that a joint venture with a Libyan partner may be established with a maximum of 49 per cent ownership by the foreign entity (i.e. at least 51% of the shares must be owned by Libyan nationals). Foreign shareholdings may be increased to 60 per cent with the approval of the Ministry of Economy if particular considerations are satisfied. It is not clear, however, on what basis an increase from 49 per cent to 60 per cent would be granted.
The provisions of this decree amend the previous statutory provisions and restrict foreign investment into the country. It would, in theory, be possible to mitigate this by including in a company's articles of association provisions allowing the minority local shareholder to an enhanced share of the dividends, minority shareholder protection and management of the Board, but the Ministry of Economy might not accept such changes to the articles since the articles of associations and memorandums in Libya are standardised.
Decree No. 22 of 2013 was recently issued, granting an extension to joint ventures that were established prior to Decree No. 207 (that is, before July 2012), allowing them to amend their shareholdings to comply with Decree No. 207. The length of this extension is currently unknown.
A key change introduced under Decree No. 22 is the prohibition of the formation of limited liability companies. This may mean that the default option for a foreign investor to set up a company in Libya, is via a Joint Stock Company (JSC).
JSCs are permitted to conduct an array of activities across sectors, ranging from, for example, energy, infrastructure, telecommunications and agriculture industries. There are a few exceptions whereby certain activities are permitted to be undertaken only by Libyan nationals, including retail, land transport services and commercial agency, although these are limited.
Many of the IOCs producing oil in Libya are partners in joint ventures with the National Oil Company (NOC) and other IOCs. Most of these joint ventures are majorityowned by the NOC. For example, Waha Oil Company, which produces 21 per cent of Libya's total oil production, is owned by the NOC, Hess, Conoco Phillips and Marathon Oil Company.
Foreign companies may also operate in Libya through a registered branch of the foreign entity, whether the foreign company has a contract with the government or is operating under a private venture.
Establishing a branch office offers the greatest degree of company control, as a branch office can be 100 per cent owned by a foreign company. A branch office may carry out numerous activities including petroleum activities including exploration, geological and reservoir studies, well drilling activities and constructing offshore platforms.
Generally, IOCs operating in Libya do so by way of a branch office allowing them 100 per cent control of their Libya entity, although it should be noted that a branch is merely a registered office of the foreign company and, as such, offers no ringfence protection: the foreign company is fully liable for all obligations of the branch in Libya. Further, branch registration is typically a complex, arduous process that may take months or even years to complete.
Another option is to open a representative office, though this limits the activities that the foreign entity will be permitted to undertake in Libya. The representative office of a foreign company can only be established for marketing purposes, and it will have no authority to enter into contracts.
Foreign Capital Investment
In addition to the options set out above, foreign companies hoping to establish a business presence in Libya could utilise the Investment Promotion legislation which allows for 100 per cent foreign equity ownership of investment enterprises licensed under the law.
This option has not been widely used, however, and accordingly the advantages and disadvantages in its application to the oil and gas sector have yet to be tested.
Case Study: Mellitah Oil & Gas Company
The Mellitah Oil Company is one of the biggest producers of petroleum in Libya. It operates in Libya through Mellitah Oil & Gas B.V Libyan Branch, which was established in 2008 in accordance with an agreement between the NOC and ENI North Africa. The joint venture company was incorporated in the Netherlands as a limited company.
Libya: International Sanctions
Another issue which a foreign investor needs to pay attention to is that of international sanctions. Despite the fall of the Gaddafi regime, Libya remains subject to sanctions imposed by the US and the EU, among others internationally. In contrast to sanctions regimes in respect of countries such as Iran and Syria, Libyan sanctions are relatively narrow in focus, concentrating on specific entities or individuals, and the supply of weapons and weaponsrelated assistance to Libya. It is important to ensure that all dealings with Libyan individuals and companies comply with both the EU and US sanctions.
In response to the violation of human rights in Libya, the EU imposed sanctions on the country which include an arms embargo, travel ban and assets freeze on the Gaddafi family and certain government officials.
Current EU sanctions in respect of Libya, enacted in Regulation 204/2011 (the Regulation), apply to all nationals of Member States (wherever located), persons located within the territory of the EU (including its airspace and on board vessels under the jurisdiction of a Member State), legal persons incorporated under the law of a Member State and any legal persons in respect of any business done within the EU.
The sanctions comprise three main elements:
The freezing of funds prohibits dealing with funds in a way that would change their amount or ownership without a licence. It also prohibits making funds or economic resources available to persons and entities listed in the annexes, whether directly or indirectly. While providing or receiving services to or from persons or entities listed in the annexes is not strictly prohibited under the Regulation, it is commercially unappealing as making or receiving payments to or from such entities in respect of such services would be illegal.
Furthermore, dealing with these entities would carry a degree of reputational risk as the listed entities have been designated by UNESCO as having been complicit in serious human rights abuses in Libya. Channelling funds indirectly to a listed person or entity via a subsidiary, or entity otherwise controlled by a listed person, creates a risk of breach of sanctions. It is therefore prudent to conduct due diligence as to the beneficial owners of any Libyan counterparty and check that these entities are not listed.
Penalties for breaches of the Regulation are determined by each Member State. In the UK, penalties can include imprisonment of between 3 months and 2 years, a fine, or both.
US sanctions against Libya apply to all US persons and entities wherever located. The sanctions block the property and property interests of specific individuals and entities deemed to have been involved in the commission of human rights abuses in Libya, including certain members of the Gaddafi regime. Since late2011, many of the initial sanctions imposed on Libya or Libyan assets have been lifted, however many still remain in place as opposition to elements or persons targeted as part of the former regime.
The blocking of property and interests in property prohibits transferring, paying, exporting, withdrawing or otherwise dealing in property and interests in property without a licence.
Persons or entities subject to US sanctions are listed in the US Specially Designated Nationals (SDN) list which is published in the Federal Register; and assets which are more than 49 per cent owned by an individual or entity on the SDN list are also blocked. It is, therefore, important to conduct adequate due diligence into the ownership of an asset or entity when dealing with potential Libyan counterparties, and to check any parent companies against the SDN list.
Consequences for breach of sanctions are severe. Civil penalties of up to US$250,000 or twice the amount of the value of the underlying transaction may be imposed on a person who violates, attempts to violate, conspires to violate or causes a violation of these sanctions. Criminal penalties may be imposed upon any person who wilfully commits, wilfully attempts to commit, wilfully conspires to commit or aids in the commission of a violation of Libyan sanctions and can include a fine of up to US$1,000,000, imprisonment for up to 20 years, or both.
If you would like further information concerning item covered in this article please contact George Booth.
The authors acknowledge the contribution of Russell Banfi and Lesia MacCormack.