Libya's economy shifted from exports to oil after independence in 1951. Initial oil concessions evolved into profit-sharing arrangements under EPSA agreements. EPSA IV raised concerns among IOCs about decision-making, local hiring, and profit shares. EPSA V aims to resolve these issues.
I. Libya Prior to the Discovery of Oil
During the twentieth century, Libya enjoyed only nineteen years of peace. Of these, only eight of the first nineteen years of independence were spent reaping the benefits of its oil production.
In 1951, Libya became the first country to gain independence through a United Nations resolution. At the time of independence, Libya was among the poorest countries in the world. In the 1950s, as taught in Libyan elementary schools in the 1960s, the Libyan economy was dependent on three products (i) Esparto, a plant used to make paper currency; (ii) livestock exported to Egypt and Greece; and (iii) scrap metal from machines used in World War II.
After independence and before oil production, the primary source of revenue for the Libyan budget was rent paid by the American and British governments for their military bases on Libyan soil.
After 42 years of rule, Gaddafi was deposed in a revolution during the Arab Spring. However, after his death, he left a legacy of mayhem fueled by a lack of political culture and structured political institutions. The Gaddafi regime's apathy and incoherent economic development strategies left Libya among the least developed oil-producing countries. This historical pattern of political instability and inconsistent economic planning is examined further in our analysis of Libyan investment law and political developments. Furthermore, the Gaddafi regime's brutal response to the February 2011 Libyan uprising caused even more devastation to Libya's already dilapidated infrastructure.
II. The Nature of Libyan Oil Production Contracts
Concession Agreements
The first type of oil and gas exploration/production contract used in Libya was a concession agreement. Under a concession agreement, IOCs were granted the right to explore for, produce, and market minerals within one of the country's plots or concession areas. Typically, Libyan territory was divided into concession areas for oil production. However, the entire country was occasionally treated as a single concession area for oil production. A concession agreement granted an IOC full control over all aspects of oil and gas production, including technical and commercial control.
Petroleum Law No. 25 of 1955 is considered the authoritative legal instrument governing the Libyan oil industry. The Law divided concession areas into small exploration sections, each not exceeding 75,000 square kilometers. In contrast to other Arab countries, both large and small oil companies began exploring the Libyan Desert under the strategy outlined in the aforementioned Law. In effect, the Libyan government enabled many foreign and domestic investors to drill rather than allow a monopoly by one or two investors to control the concession areas.
Libya is not only notorious for being one of the most difficult Middle Eastern countries in which to enact legislation but also for its rigorous negotiation tactics. In 1970, Libya increased its profit share (royalties) in its agreements with the IOCs to 55%, pressuring the IOCs to reduce their share. With the aim of increasing its share of oil royalties under the IOCs and amid threats of nationalization of oil companies, Libya moved from traditional concession agreements to a new contractual relationship based on profit sharing.
The EPSA Family
Under the 1972 oil production participation agreement, Libya became the holder of 51% of the shares in the concession agreements. Companies that refused to adhere to the new rules, such as British Petroleum, were nationalized. Between 1974 and 1979, the Exploration and Production Sharing Agreement (EPSA 1) was introduced. Libya continued to issue new versions of EPSA to attract more investors in the oil industry. EPSA II was introduced in 1979, followed by EPSA III in 1988.
EPSA IV was introduced in 2005, when oil prices were high, making investment in Libya's oil industry attractive. These contractual changes cannot be separated from the broader politics of Libya's oil industry, which continue to shape negotiations between the National Oil Corporation (NOC) and international oil companies. Through EPSA IV, the NOC asserted control by replacing local Libyan partners with IOCs. As a result, the NOC became a decision-maker on all critical aspects of production under the new agreement.
III. Negotiating EPSA V
This section aims to clarify the IOCs' concerns about EPSA IV. By highlighting these concerns, this article examines how the IOCs and the NOC may enter into a fair contract that benefits both parties. It has been reported that EPSA IV resulted from difficult negotiations. Libya was in a stronger position due to the nature of its oil, its strategic location, and high oil prices at the time of negotiations. IOCs that signed EPSA IV accepted low-profit shares and paid substantial signing bonuses. Following the fall of Gaddafi's regime, the NOC considered issuing a new licensing round. The launch of the latest bidding round was suspended due to political unrest in Libya. In future negotiations, it is important to examine the IOCs' concerns regarding EPSA IV to predict the focus of EPSA V negotiations. Similar structural concerns faced by international operators are discussed in detail in our article on oil companies and Libyan investment law. In brief, the IOCs' reservations about the terms of EPSA V may be as follows:
The Management Committee
Article 4 of EPSA IV requires the establishment of a four-member management committee. Each party will appoint two members, and the NOC-appointed member will chair the committee. The committee will make all decisions regarding petroleum operations, including work programs and budgets. Decisions must be unanimous; in the event of a deadlock, the matter shall be referred to the senior management of each party.
The main concern with Article 4 of EPSA IV is that the decision-making mechanism is inadequate. For example, if there is no unanimous vote by either the four members of the committee or the senior management of both parties, the issue raised for a vote on the work program or the budget shall not be adopted by the management committee. In effect, such a voting mechanism could pose numerous problems and delay the performance of the contract's obligations.
EPSA V should avoid this deadlock and propose a viable solution. Deadlocks may be resolved by referring the disputed matter to an expert whose opinion is provided by an international consultancy firm appointed by the parties to resolve the issue at hand. Overall, it is advisable to have a detailed, rapid decision-making mechanism to address any problems that may arise.
Force Majeure
To invoke force majeure under Libyan law, as set forth in Article 360 of the Libyan Civil Code and the rulings of the Libyan Supreme Court, three conditions must be met: (i) the event must be beyond the control of the parties, (ii) the event must be unforeseeable at the time the agreement is concluded, and (iii) the performance of the obligation must be impossible. Moreover, Article 22.1 (Excuse of Obligations) of the EPSA agreement excuses a party from its obligations if its nonperformance is attributable to "any unforeseen circumstances and acts beyond the control of such party which render the performance of its obligations impossible." The doctrine of unforeseen events or circumstances requires that an event (i) be exceptional and unpredictable, (ii) be general, and (iii) occur during the performance of the obligation under the contract.
Under Article 360 of the Libyan Civil Code, a court ruling is required to terminate a contract. The article states, "an obligation is extinguished if the debtor establishes that his performance has become impossible by reason of causes beyond his control." Disputes arising from force majeure clauses in oil contracts are frequently resolved through international arbitration under Libyan law.
Training and Employment Strategy
In the mid-1970s, the NOC introduced a program to increase the recruitment of Libyan nationals in the oil and gas industry. The program, called "Libyanization," required the IOCs to train Libyans and identify jobs that Libyan citizens could fill. The IOCs did not wholeheartedly welcome Libyanization for several reasons.
More than 30 years after its introduction, the implementation of the Libyanization policy remains sluggish. In 2009, the NOC announced plans to launch 700 projects, with budgets approved for 550. The NOC Chairman at the time, the late Dr. Shukri Ganem, stated, "We are looking for long-term gains, not short-term ones. We are concerned that most engineering work is done outside the country." He added, "Our graduates are becoming unemployed while we give jobs to people from outside... this is not for Libya's benefit in the long term... We need to build engineering capacity in this country" (The Tripoli Post, 28 February 2009).
Article 5.7 of EPSA IV requires IOCs to hire Libyan nationals to conduct Petroleum Operations in the Contract Area. The IOC may hire non-Libyan nationals for specialized technical positions or key management roles if no Libyan national is capable of performing the tasks. Article 5.7.2 outlines the procedures and timetable for training Libyan personnel. Training and preparing Libyans to hold certain positions within each operational sector may be burdensome for IOCs. IOCs could argue that implementing a training program under Article 5.7.2 of EPSA IV, or under any other contract, is beyond the scope of their investment aims in Libya. In the meantime, such a training program should not be a source of disagreement or complaints among the IOCs, and the NOC should reconsider it. To bring both sides together and agree on the Libyanization program, the NOC should invest in establishing a solid foundation for dedicated Libyan technicians and engineers before enforcing EPSA terms on the employment of Libyan citizens.
Other Areas of Concern
Other areas of concern during EPSA V negotiations may include inserting a stabilization clause, executing work programs, determining the types of operations, and resolving tax issues. Such contractual mechanisms often require expert legal opinions under Libyan law to assess enforceability and regulatory risk.
Originally published on July 20, 2020. The content of this article is intended as a general guide to the subject matter. Specialist advice should be sought for your specific circumstances.
