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Understanding the Libyan Oil & Gas Production Sharing Agreement Framework
This is the second of three articles Clyde & Co aims to publish on the legal and regulatory framework affecting the oil and gas industry in Libya. This second article will outline and analyse the material terms of the Exploration and Production Sharing Agreements (EPSAs) that govern the relationships between International Oil Companies (IOCs) and the Libyan National Oil Company (NOC). It will also raise the issue of the review of these contracts which reports suggest will be carried out by the Libyan Government in the near future.
The Libyan Oil Regime: Background
In the previous Clyde & Co article we set out the current legal framework governing the oil and gas industry in Libya. In short, Libyas key petroleum legislation is the Petroleum Law No. 25 of 1955, which came into force the same year that saw the first Libyan concessions awarded. In 1974 the Libyan Government introduced the first EPSAs. Numerous versions of the EPSA have been released since its inception with the latest being EPSA-IV, introduced for the first time in conjunction with Libyas first post-sanctions licensing round in January 2005.
The principal difference between EPSA IV and its predecessor EPSA III is that winners of EPSA-IV contract bidding rounds are determined largely based on how high a share of production and the size of signature bonus each IOC is willing to offer the NOC. As a consequence, EPSA-IVs feature significantly higher production shares for the NOC than EPSA-III contracts. This method of determining bid winners is relatively unusual because, normally, the national oil companys production share is pre-determined in a model contract or is determined during the negotiations. Commentators have noted that the average overall NOC take for EPSA-IV blocks is around 88%, which is considered as one of the highest in the world.
IOCs are required to pay two types of bonuses to the NOC, a signature bonus and a production bonus: a signature bonus is payable as part of the EPSA-IV bidding process whilst the production bonus, variable depending on the level of production, is pre-determined.
Ownership of Assets
EPSA-IV contracts do not convey any ownership rights over oil and gas resources to the foreign operating companies. Rather, they are risk-based contracts under which the IOC undertakes to finance and carry out an exploration program at its own risk, and eventually develop the resources if a commercial discovery occurs. If no commercially viable oil or gas deposits are found, exploration costs are borne entirely by the IOC; the acreage is released and can be offered to another party.
Revenue and costs
Under EPSA-IV, the NOC normally takes around 80-90% of the oil and gas production, while the foreign company must recover capital and operating costs and eventually make a profit from the remaining share in production. Under these agreements, the developer bears all exploration and appraisal costs. Development costs are to be shared 50:50 between the NOC and the developer. Operating costs are shared on the basis of the primary production allocation.
While under previous EPSA agreements the IOCs had enjoyed deals based on a fixed margins, thereby insulating them from fluctuations in the market price of oil by receiving a fixed price for every barrel produced, EPSA-IV terms are much more dependent upon market fluctuations which, whilst advantageous during high oil prices, makes future returns more uncertain.
The Libyan Government also has complete control, via the NOC and the Ministry of Finance, over exploration and development plans and budgets (which have to be pre-approved), capital and operational expenditure (which has to be certified to become eligible for reimbursement) and oil exports (for which a quota must be approved and separate loading schedule granted for each cargo).
Under the EPSA IV, disputes between the parties will be dealt with under the Rules of Arbitration of the International Chamber of Commerce (ICC) in Paris. One of the issues that arise out of the existence of such a clause is the feasibility of enforcing an arbitral award against a government entity, given their sovereign status and their ability to influence the decisions of local courts.
For instance, if the NOC refuses to comply with an arbitral award in favour of the IOC arising out of an ICC arbitration in Paris, the IOC may encounter difficulties enforcing the award in Libya given that Libya is not yet a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New York Convention) which is an international convention providing for the mutual enforcement of foreign arbitral awards. Nor is Libya a signatory to the "International Centre for Settlement of Investment Disputes Convention" the primary purpose of which is to provide facilities for conciliation and arbitration of international investment disputes between states and nationals of other states.
Whilst recourse to arbitration provisions under the Libyan Civil and Commercial Code may provide grounds for requesting the enforcement of a foreign award, in principle it is not generally considered a practical option. However, it is hoped that this situation may change under the new Government.
It is worth noting that if the NOC has assets in a New York Convention ratifying state, particularly illiquid assets that would be hard to relocate, then the IOC may well be able to enforce the arbitral award granted in the Paris arbitration proceedings in that ratifying state, under the New York Convention.
One other possible solution to the enforcement problem in Libya is to secure a judgment or arbitral award in a State that is a signatory to the 1983 Convention on Judicial Co-operation between States of the Arab League (the Riyadh Convention)1?. The Riyadh Convention applies to foreign judgments and arbitral awards and consequently an award from an arbitration conducted in a ratifying country to this convention would be the best possible option to enforce an award in Libya. Certain countries which are signatory to the Riyadh Convention have well-established arbitration laws and arbitration centres (for example, the DIFC-LCIA in the Dubai International Financial Centre). Therefore, the IOC may seek to amend the arbitration clause in future EPSAs to provide for arbitration to take place in Dubai. However, as far as we are aware this strategy has never been successfully applied in Libya.
The force majeure provision in the EPSA-IV contract allows for a suspension of performance of obligations whilst force majeure circumstances exist. The model EPSA-IV 2006 states:
Any failure or delay on the part of a Party in the performance of its obligations or duties hereunder shall be excused to the extent attributable to force majeure. Force majeure shall include, without limitation: Acts of God; insurrection; riots; war; and any unforeseen circumstances and acts beyond the control of such Party which render the performance of its obligations impossible.
In the majority of instances, IOCs relied on this clause during the turmoil of 2011.
IOCs may have their investments protected under bilateral investment treaties (BITs) signed between Libya and numerous other nations. As of the date of this article, Libya had entered into 33 BITs with countries such as Jordan, Slovakia, Turkey, Singapore, Italy, Austria, Morocco, Croatia, Portugal, Switzerland, Belgium, Luxembourg and France. There are no BITs with the US or the United Kingdom.
BITs provide certain guarantees to investors of both parties to the treaty. Most importantly, an investment treaty restricts the acts of a contracting party from taking any action to deprive and limit the ownership of investors from the other contracting party. Were such a deprivation to take place, an investor from a contracting party would be entitled to initiate arbitration proceedings.
It has been reported that Libya is holding its own corruption review of the Gaddafi-era oil contracts. In 2011, the National Transitional Council (NTC) announced that it was setting up an NTC Oil Committee with the power to end, amend or renegotiate current contracts if corruption is discovered. The Committee failed to make any significant advances in this area and has since been dissolved. A 15 member energy committee formed of members from the Libyan Congress has now been appointed to investigate corruption, albeit in a more supervisory role than the NTC Committee. The energy committee has pledged to "look at all the contracts that look suspicious."
In March 2013, the Libyan Oil and Gas Minister was reported to have announced that a committee of experts had been set up to prepare a comprehensive draft for a new petroleum law. According to the Minister, the new law will also determine the role of the national oil companies and incorporate that in a unified law that complies with principles of international law applying to the oil and gas sector.
So far the new Libyan authorities have been slow to meet the hopes of IOCs for more preferable terms. The interim government chose to maintain contracts that are based on EPSA-IV terms and the new government looks set to do the same for the near future at least. Indeed, it seems unlikely that anything significant will occur until the new Constitution has been enacted.
For further information please contact the authorsGeorge Booth or Dr.Amir Kordvani
1. The other signatories of the Riyadh Convention include Jordan, Bahrain, Tunisia, Algeria, Djibouti, Saudi Arabia, Sudan, Syria, Somalia, Iraq, Oman, Palestine, Qatar, Kuwait, Lebanon, Morocco, Mauritania, UAE and Yemen.