Karbal & Co

Libyan Investment Law: Before and After, Political developments and Economic Policies

Libyan Investment Law: Before and After, Political developments and Economic Policies

It has been proven that political development is a prerequisite for economic development. In other words, to stabilize a national economy, economic growth must be accompanied by political maturity. Political maturity in turn will attract external capital which will stimulate the country’s development. The Soviet Union in the later stages of its life provides an example. In the late 1980s, Mr. Gorbachev unveiled his reform program, known as “Perestroika” which literally means “restructuring”. Perestroika was declared without establishing a new political system that would go hand in hand with the economic restructuring to ensure social justice and equality of opportunities. Rather, the old the Soviet political structure was maintained with its overwhelming level of bureaucracy and lack of transparency. Perestroika simply did not incorporate these basic tenets of good governance as it was concerned primarily with liberalizing the market. As a result, the Soviet political system failed to create a comfortable atmosphere for investments. Further, this is arguably, the very same reason which led to the failure of the entire Soviet experience. Simply stated, a country must be politically stable where its laws and decisions are clearly defined and integrated in order to succeed economically. In addition, it should have an independent, mature judicial system that responds and deals competently with the foreign investors complaints while safeguarding people’s rights.

The mere availability of capital, infrastructure and investment opportunities does not guarantee stability. Actually, a country must provide tangible guarantees that ensure maintenance of investor’s rights. Further, the announcement of the formulation of investment laws and its implementation, as well as the designation of certain areas of free trade, does not indicate the establishment of an investment environment or ensure the rights of the investor identified by the laws.

Libya Topped the Third World Countries:
In 1975, a comparative economic study was issued by the Organization of Economic Cooperation and Development (OECD), an organization comprising the USA, Australia and developed European countries. The study addressed the gap of economic growth between rich and poor nations and raised the issue of whether it was possible for this gap to be closed? The study’s main concern was: how many years would it take for Third World countries to catch up with the developed countries? The study’s authors chose to list the most developed nations of the Third World as well as those that came in at the lowest levels, including several Arab countries such as Libya, Saudi Arabia, Tunisia, Iraq and Syria. In addition, other counties listed were Singapore, Malaysia and China. The countries were rated on the basis of their economic growth between the years of 1965 and 1974. Libya topped the list of the Third World countries, with a growth rate of 11.8%, followed by Saudi Arabia, with a growth rate of 11.6% , Singapore 7.6%, Israel 5.0%, Iraq 4.4%,Turkey 4.0%, while the economic growth of Malaysia and China was at 3.8%.

The study concluded that if the Third World countries maintain their achieved economic growth during the previous period, they will be considered as a part of the 2 developed countries after a certain number of years. The study concluded that Libya needed only two years to catch up with developed nations. The Kingdom of Saudi Arabia needed 14 years, Singapore needed 22 years, Israel needed 37 years, Iraq needed 223 years, Turkey needed 675 years, Malaysia needed 2293 years, while China was in need of 2900 years to catch up with developing countries.

Interestingly, the study conducted by the OECD in 1975 predicted 22 years for the arrival of Singapore to the ranks of developed countries. This prediction proved credible when the world declared in 1997, the admission of Singapore to the advanced nations. Libya was not as fortunate.

Instead of maintaining the fiscal policies that would have continued the level of its economic growth, at that time, , the Libyan government decided to cancel the free economic system by abolishing all business licenses. Further measures by the Libyan government were to allow the government to control the commercial and industrial activities, while preventing the private sector from practicing it’s commercial and industrial professions. As a result of the state run economy, the atmosphere encouraged lackadaisical business practices and the institutionalization of bribery, as well as the constant looting of public funds. Instead of announcing the arrival of Libya to the level of the first world countries, Libya sank into a deep abyss of political, administrative and economic corruption.

After many years of self-imposed economic isolationism, the former Libyan regime decided to open up to the outside world by announcing a wide array of investment opportunities in various fields. The response was well received from both Arab and foreign investors alike. Free Zones were identified, and laws enacted that guaranteed the bulk of the investor benefits, including tax exemption and the transfer of profits abroad.

However, as with the Soviet experience, the former regime was intentionally not concerned with establishment of a free political and economic system that ensures equal opportunities, fair competition, and reduced corruption. Rather, the regime used the economic openness as an opportunity to give close cronies the right to receive all the capital and business opportunities coming from abroad, and using them for their own personal interests. Administrative corruption became rampant and public funds were used unlawfully. These circumstances are from where the resentment of political oppression and economic deprivation led to the explosion that turned into the popular revolution that brought down the former regime.

The Future of Investment in Libya:
After the victory of the Libyan people over the old regime, the new Libyan leaders have started to reinstate the country to the ranks of the stable, politically sophisticated, constitutional countries. Due to the fact that Libya is still one of the Third World countries which is rich in natural resources, utilization of foreign expertise is essential for its success. Foreign expertise along with their advanced technologies will be needed to help Libya exploit and market its natural resources as well as develop its infrastructure. Such capital and expertise shall be welcomed by the Libyans to operate within a well defined framework of cooperation and mutual benefits.

As there is a current debate in Libya about how to attract foreign capital and technical expertise, there must be better administrative effort than just legislation. Clear rules must be established for integration and how to regulate the economic relationship between the country and foreign capital. All rules must take inconsideration the legal rights of the foreign investors. Also needed are laws that demonstrate the procedures for open tendering, to ensure the highest degree of transparency. 

In conclusion, the relationship between a country that invites foreign capital and foreign investors should be based on transparency and the highest level of common interests for both parties. 

Dr. Mohamed Karbal
Attorney at Law/New York, Dubai, Libya
Managing Partner

Libya’s new Financial Regulatory Agency: Can it boost trading on the Libyan Stock Market?

Libya’s new Financial Regulatory Agency: Can it boost trading on the Libyan Stock Market?

By Dr. Mohamed Karbal, Managing Partner at KARBAL & CO, and Nabilah Karbal, Associate at KARBAL & CO

 Libya’s aim to diversify its economic activity by strengthening its financial sector and encouraging investments may prove a success, as the creation of a new financial regulatory agency may restore investor confidence and increase liquidity on the Libyan Stock Market (LSM).

History of the Libyan Stock Market

Created in 2006, the LSM has seen a relative amount of success.1 However, due to the revolution and other factors, the number of companies listed has declined over the years since its creation.2 Concerns have been raised about the illiquidity of the LSM, and investors’ interest in trading securities.3
In December 2013, Libya’s Economic Minister Mustafa Abufanas announced the creation of a financial regulatory agency which would regulate Libya’s entire financial sector, excluding the banking industry which is governed by the Bank of Libya.4

A Financial Regulatory Agency may increase liquidity on the Libyan Stock Market
Importance of Market Liquidity Liquidity is crucial for a stock market.5 Liquidity can be defined as an asset’s ability to be traded on a market.6 An asset’s ability to be traded is determined in part by market demand, which is created by the existence of buyers and sellers on a market.7 If the demand is low, a market may be deemed illiquid, resulting in higher risks assumed by buyers and sellers of a security traded on the market.8 Market illiquidity therefore signifies the difficulty in selling a security.9
In contrast, higher liquidity will increase trading on the stock market and reduce volatile price fluctuations.10 To increase liquidity, risks must be “quantifiable” and investors must be confident about making transactions on the stock market.11 Lowered risks, such as political instability, may in fact increase liquidity, as investors will be more confident about investing.

The role of a Regulatory Agency in boosting Investor Confidence

The importance of a nation’s financial regulatory agency is unquestionable. At the wake of the Stock Market Crash of 1929, the Securities Exchange Act of 1934 created the Securities and Exchange Commission (SEC), the U.S’ main federal regulatory agency that oversees its securities industry. The SEC regulates the sale of securities to protect investors by promoting market transparency, while attempting to foster market integrity and financial stability.12
Just as the Financial Markets Authority of New Zealand was established after the 2008 Financial Crisis,13 the existence of a regulatory agency to enforce securities laws may increase investor confidence in the LSM. With more investors confident and willing to trade on the Libyan stock market, liquidity of the Libyan stock market will increase.

The Potential Powers and Influence of Libya’s Financial Regulatory Agency

Although the structure and powers of financial regulatory agencies differ per country, many of the characteristics of the agencies remain consistent throughout various jurisdictions. In practice, regulatory agencies are granted independence to act within their scope of power, which includes enforcement and often legislative powers.
Regulatory agencies are granted enforcement powers to enforce legislation enacted by the legislative or executive, rule-making power of a state. In the US, the SEC is instilled with the power to investigate potential violations and bring civil action against those who violate securities laws.14 An example is securities fraud, which is defined as illegal activities committed during the sale of securities, with the most notorious being insider trading.15 The SEC can further sanction violators with civil monetary penalties.16
The threat of civil suits brought by the SEC and criminal suits brought by the Department of Justice deter actors in the securities industry from committing securities fraud. Enforcement powers therefore permit the regulatory agency to protect investors.
For certain regulatory agencies, the scope of independence encompasses a rule-making power, which allows the agency to elaborate preexisting laws by enacting regulations needed to further their mission.17
The powers of the Libyan financial regulatory agency remains to be seen, however enforcement and investigatory powers of the financial regulatory agency can restore investor confidence, as its role would aim to ensure market integrity and transparency on the LSM.

The need for updated legislation to restore public confidence in the Stock Market

With Libya’s return to privatization and its growing private sector, legislation is needed to properly regulate the industry and restore investor confidence.
After the Enron and WorldCom scandals in the U.S, Sarbanes-Oxley was enacted to restore public confidence by imposing corporate governance rules and requirements for outside auditors.18 Similarly, Dodd Frank was enacted in 2010 after the 2008 financial crisis to restore institutional investor confidence through several of its provisions.
Libya’s investment laws regulate several industries, and have been in effect prior to the revolution.20 At present, the LSM is governed mainly by Law 11 enacted in 2010, which establishes the basic framework for regulating the stock market and its listed companies.21 The articles of the Law 11 mimic certain elements of U.S securities regulation, such as the thirty-day period for the approval by the SEC of an issuer’s registration statement, periodic reporting, liability of an for misstatements on the IPO registration statement, and requirements of outside auditors for issuers’ financial statements.22 The Exchange’s Regulation has been enforced in Libya, as several companies that were listed on the LSM prior to the revolution were not initially listed in the 2012 re-opening of the stock market due to not meeting regulatory standards.23 The basic regulatory structure exists. However, updated legislation may further investor confidence and consequently boost the LSM liquidity.

Potential Success of the Libyan Stock Market after certain factors are addressed

The creation of a regulatory agency is merely the beginning. Certain factors must be addressed in order to ensure the stability of the Libyan Stock Market.
Need for Economic and Political stability
In developing countries such a Libya, economic and political instability increases the likelihood of volatility, which signifies the possibility of extreme price fluctuation.24 Although market volatility may yield higher returns, fear of instability can reduce market demand.25 At present, security in Libya is the biggest factor influencing investor demand. Promoting security and economic stability could decrease the likelihood of extreme market volatility.

. . . And if the factors are addressed?
Ranked the second highest HDI in Africa, the standard of living in Libya for its small population is considered above the continents’ average.26 With the highest oil supply in Africa, and being major global supplier of sweet crude, Libya has potential to be an economic powerhouse.27 Libya’s potential economic strength has thus important implications on the success of its capital markets, as the increase of its exports and political stability may lead to a boom in its private sector. A strong, more developed economy would indirectly increase liquidity on the LSM.
Whether Libya’s regulatory agency will effectively increase investor confidence remains to be seen. However, its creation has entered the Libyan Stock Market into a new era, which may provide better investor protection and increased market liquidity.

Please see the footnotes for more details.

[1] A. Aljibri, Performance of the Libyan Stock Market, Acta univ. agric. et silvic. Mendel. Brun, 32-36 (2012), available at http://www.mendelu.cz/dok_server/slozka.pl?id=57208;download=104968, (accessed Aug. 4, 2014)

[1] See Id at 32; see also Libyan Stock Exchange says to re-open on March 15, Reuters (Mar. 4, 2012), available at http://www.reuters.com/article/2012/03/04/us-libya-stockmarket-idUSTRE8230T720120304 (accessed Aug. 4, 2014) (At its opening, the LSM listed seven companies, and according to the annual report LSM 2012, twenty-two companies were listed on the LSM in 2010 (including tradable and non-tradable securities). On March 15, 2012, five companies were listed as tradable, which was down from thirteen companies that traded before the revolution)

[1] Ulf Laessing, Seeking cheap stocks, chaos no problem? Try Libya, Reuters (Feb. 22, 2014), available at http://www.reuters.com/article/2014/02/23/us-libya-bourse-idUSBREA1M00820140223 (accessed Aug. 3, 2014)

[1] Libyan Financial Regulator Established, Libya Business News (Jan. 7, 2014), available at http://www.libya-businessnews.com/2014/01/07/libyan-financial-regulator-established/, accessed (Aug. 3, 2014)

[1] Nicholas Econodomies, How to Enhance Market Liquidity. In Capital Markets, ed. by R. Schwatz, Irwin Professional (New York: Irwin Professional, 1995), available at http://www.stern.nyu.edu/networks/how.pdf (accessed Aug. 4, 2014)

[1] See Kleopatra Nikolaou, European Central Bank, Liquidity (Risk) Concepts Definitions and Interactions (European Central Bank Working Paper Series No 1108 at 14, 2009) available athttp://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1008.pdf (accessed aug. 4, 2014)

[1] See Sanford J. Grossman and Merton H. Miller, Liquidity and Market Structure, 43 J. Fin.at 1(1988) (Market liquidity is based on the supply and demand of “immediacy,” which is created by the on-going existence of buyers and sellers who are willing to assume the market risk.) available at http://pages.stern.nyu.edu/~lpederse/courses/LAP/papers/InventoryRisk/GrossmanMiller.pdf (accessed Aug. 3, 2014)

[1] See Id; See also GROSSMAN supra. at 619 (When the demand is low, sellers assume higher risks, as the illiquidity signifies that the stock cannot be sold quickly. The risks assumed include higher increased cost and selling the security at a lower price.) 

[1] See Id.

[1] See Econodomies supra. at 2

[1] Governor Kevin Warsh, Speech before the Institute of International Bankers Annual Washington Conference, Washington D.C (Mar. 5, 2007) available at http://www.federalreserve.gov/newsevents/speech/warsh20070305a.htm (accessed Aug. 4, 2014)

[1] U.S Securities and Exchange Commission, 2004-2009 Strategic Plan at 4available athttp://www.sec.gov/about/secstratplan0409.pdf, (accessed Aug. 4, 2014)

[1] Adam Bennet, One financial regulator to rule them all, The New Zealand Herald (April 29, 2010), available at http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10641503 (accessed Aug. 3, 2014)

[1] U.S Securities and Exchange Commission, 2004-2009 Strategic Plan at 35available athttp://www.sec.gov/about/secstratplan0409.pdf, (accessed Aug. 4, 2014)

[1] Id at 6.

[1] Id at 35.

[1] Id.

[1] SEC Chariman William H. Donaldson, Testimony before the House Committee on Financial Services , U.S House of Representative (Apr. 21, 2005) available at http://www.sec.gov/news/testimony/ts042105whd.htm (accessed Aug. 3, 2014).

[1] See H.R Rep. No. 111-517 (Conf. Rep.)

[1] See Aljibri supra at 31.

[1] See Law No. 11 of the Year 2010 for The (Libyan) Stock Market, available athttp://www.saifannaser.com/ar/pdf/49.pdf (accessed Aug. 3, 2014).

[1] See Id.

[1] Libyan Stock Exchange says to re-open on March 15, Reuters (Mar. 4, 2012), available at http://www.reuters.com/article/2012/03/04/us-libya-stockmarket-idUSTRE8230T720120304 (accessed Aug. 4, 2014)

[1] Robert G. Ibotson, Why does market volatility matter?, Insights Yale School of Management, available at http://insights.som.yale.edu/insights/why-does-market-volatility-matter, (accessed Aug. 4, 2014); See Francis X. Diebold & Kamil Yilmaz, Macroeconomic Volatility and Stock Market Volatility Worldwide (National Bureau of Economic Research Working Paper Series 14269 at 7, 2008), http://www.nber.org/papers/w14269, (accessed Aug. 4, 2014) (Macroeconomic volatility in developing countries has a significant effect on the increase in market volatility)

[1] John Wasik, How to deal with emerging markets volatility, Reuters (Feb 10, 2014), available at http://www.reuters.com/article/2014/02/10/us-column-wasik-emr-idUSBREA1919S20140210 (accessed Aug. 4, 2014)

[1] Libya 2012, African Outlook Organization, available at http://www.africaneconomicoutlook.org/fileadmin/uploads/aeo/PDF/Libya%20Full%20PDF%20Country%20Note.pdf (accessed August 4, 2014)

[1] Energy Info. Admin., Country Analysis Briefs – Libya  (2012) available at http://www.eia.gov/countries/analysisbriefs/cabs/Libya/pdf.pdf (accessed Aug. 4, 2014)

Libyan Construction Law: Contractor Liabilities

Libyan Construction Law: Contractor Liabilities

Prior to the upheaval of the February 2011 revolution, Libya was already contending with various economic problems. Forty years of the Gaddafi regime’s irrational strategic planning and an apathetic mindset left Libya among the least developed countries. Hospitals taking 30 years for completion was common practice. Presently, the Libyan deteriorated infrastructure is in total disarray: housing shortages, dilapidated road networks, and airports stuck in a 40-year time warp, left without modernization since completion. Other neglected sectors included small, unequipped seaports, substandard or nonexistent hospitals and schools. In other words, most of the infrastructure built in the ’60’s and ’70’s was left without any renovation. As a result most if not all, public service facilities needed to be demolished and rebuilt. The New Libya, in its road to modernization, will need massive reconstruction in all aspects of its economy. Fortunately for Libya it has zero debt and a lucrative oil industry to fund the reconstruction. The international financial community believes that with wise, comprehensive planning, Libya will be able to climb out of the economic hole the regime dug for it. An International Monetary Fund (IMF) report stated that in 2012 the Libyan GDP was expected to increase by a record-breaking 122%. It is expected to continue growing at 17% in 2013, and at an average of 7% per year from 2014 to 2017. The Libyan Minister of Economy issued decree no. 207 for year 2012 amending decree no. 103 of 2012 which organizes the legal framework of foreign investment in Libya. Foreign investment is allowed in all economic sectors except certain areas which are strictly limited to Libyan citizens such as the legal profession, accountancy firms, and commercial agencies. For foreign companies, the decree details the form of the legal entities; i.e. limited liability, joint venture, branch of a foreign company and representative offices.

Branch of Foreign Construction Company 

As recognition of the construction industries’ significance to the Libyan reconstruction, the Ministry of Economics’ decree no. 207 of 2012, granted the foreign construction sector the right to open a direct branch. A branch of a foreign construction company means that the shares of the company are totally owned by the mother company. The only restriction is that a manager of Libyan branch, or his deputy, must be a Libyan citizen. As a result the Libyan Government is hoping that it will experience a phenomenal growth in all areas of the construction sector. 

Libyan Law for Contractors and Supervising Architects (or Supervising Engineer): 

The Libyan Civil Transactions Code of 1953 imposes liabilities on both the contractor and the architect. Article 650 of the Civil Code holds the contractor and the architect (or supervising engineer) jointly liable for any minor or major collapse of the building even if the collapse was due to ground defects and/or the building had been approved and accepted by the owner. The contractor and the architect are also jointly liable for major defects affecting the stability and safety of a structure. The guarantee period to be provided by the contractor and the architect lasts for 10 years from the date of completion and handling over to the owner.  However, the architect’s liability could be limited to drawing and design errors under Article 651 of the Civil Transactions Code as long as the architect’s scope of work was only to provide the design and not to supervise the implementation of the design. Any clause exempting the contractor and the architect from their liabilities shall be void. 

In general, the only method of resolving commercial conflicts in Libya is to resort to litigation. It is unfortunate that the Libyan judicial system had suffered during the Gaddafi regime. Many of the judges’ appointments were based on political loyalty while the legal profession was stifled. Lawyers were not permitted to practice law through their own law firms as they were considered employees of the courts. Moreover, the English language and other languages were not a part of the school curriculum which became an obstacle for lawyers to be involved in international disputes. In Libya there is no Arbitration Act as such. However, arbitration measures have been mentioned in general in the 1953 Code of Civil Procedures. Cabinet Resolution no. 333 for year 2012 has granted the Chamber of Commerce and Industry the power to arbitrate commercial disputes occurring between its members. It also required the regional Chambers to establish arbitration and reconciliation councils just for this purpose. It should be noted that, contrary to many other countries in the MENA region, Libya permits a foreign party to a state contract (Public Contract) to choose arbitration as a method for dispute resolution. In other countries of the MENA region, public contracts fall under the jurisdiction of the national courts. This precedent of compromising over the method of dispute resolution shall help in enacting an advanced, comprehensive, and modern system of arbitration in Libya. As for the near future, Libya may utilize mediation in the short run until it is able to establish a comprehensive system of arbitration.

Dubai Health insurance

New Mandatory Health Insurance Law in Dubai

A Brief summary 

Starting in January 1, 2014, Dubai’s new mandatory health insurance went into effect. Inspired by legislation in Saudi Arabia, Qatar, and Abu Dhabi, Dubai enacted Law No. 11 of 2013, which set to create a consolidated health care system for the entire Emirate and its population of 3 billion. To whom is the Law applicable? Under the law, all employers in Dubai are required to provide health insurance for their employees. Similar to attempts that have been made in the U.S, the law requires mandatory health insurance for employees of all industries, public and private sectors, including the free zones. Family members and dependents of the employees will also be included in the coverage by 30th of June 2016.What Health Coverage will the Insurance provide? The insurance is set to provide basic health coverage for nationals, residents, and visitors of the Emirate. However, the nationals will receive additional coverage for certain services. Procedures covered will include emergency treatments, visits to a general practitioner, and procedures such as maternity, investigative, and surgical referrals made to specialists. The insurance can be used by insured persons in both public and private hospitals.

Health coverage varies, from 500 to 700 for insurance premiums and has an aggregate limit of 150,000 AED per annum. 1,500 AED will be allocated for medication.

The insurance has begun to be provided by seven insurance companies, and has been made available for those making less than 4,000 AED a month. When will the Insurance Law be implemented?

Deadlines to comply vary depending on the size of the company. Companies will more than 1,000 employees must comply with the law by 31 Oct 2014. Companies with 100-999 employees must implement the law by 31 July 2015, and the law will be compulsory for companies with less than 100 employees by 30 June 2016.

KARBAL &CO is a full-service international law firm with offices in Libya and Dubai that serve the needs of businesses and governments in Libya and the United Arab Emirates. It was founded by Dr. Mohamed Karbal, who served as the first General Counsel for the Abu Dhabi Health Authority. Dr. Karbal drafted legislation and provided legal service for Abu Dhabi and its government hospitals.

Libyan Oil Contracts: Negotiating the Future Generation of EPSA

By Dr. Mohamed Karbal, Managing Partner at Karbal & Co.

Libya Prior to the Discovery of Oil

During the twentieth century, Libya enjoyed only nineteen years of peace. Of only eight of the nineteen years, Libya enjoyed peace and the fruits 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 one of the poorest countries in the world.  The Libyan economy during the 1950s, as taught in Libyan elementary schools in the 1960s, was dependent on three products (i) Esparto, a plant that was used to make paper currency, (ii) livestock exported to Egypt and Greece, and (iii) scrap metal from the machines used in World War II. After its independence and prior to the production of oil, the main source of revenue for the Libyan budget was derived from rent payments paid by the American and British governments for the use of military bases on Libyan soil.  

After 42 years of rule, Gaddafi was removed from power through a revolution that occurred 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 apathetic attitude and incoherent economic development strategies left Libya as one of the least developed oil producing countries. Further, the Gaddafi regime’s obliteration response to the February 2011 Libyan uprising resulted in even more devastation to Libya’s already dilapidated infrastructure.

The Nature of Libyan Oil Production Contracts

Concession Agreement

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, produce and market the minerals located on one of the country’s various plots or concession areas. Normally, Libyan territory would be divided into concession areas for the purpose of oil production. However, the whole country was occasionally considered one concession area for the purpose of oil production. A concession agreement granted an IOC full control, including technical and commercial control, over all aspects of the oil and gas production.

The Petroleum Law No. 25 of 1955 is considered the legal authoritative text for the Libyan oil industry. The Libyan Petroleum Law no. 25 of 1955 divided concession areas into small exploration sections not exceeding 75,000 square kilometers.  In contrast with other Arab countries, both large and small oil companies began exploring the Libyan Desert as a result of the planned strategy provided by the aforementioned law.  In effect, the Libyan government enabled many foreign and domestic investors to drill rather than allow a monopoly of 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 is also known for its rigorous negotiation tactics. In 1970, Libya was able to increase its profit share (royalties) in the IOCs agreements to 55% after pressuring the IOCs to reduce their share.  With the aim to increase its share of royalties under the IOCs oil and with the threat of nationalization of oil companies, Libya was able to move from the traditional concession agreement to a new contractual relationship based on profit sharing. 

The EPSA Family

Under the new setup of participation in the oil production established in 1972, Libya became the holder of 51% of the shares in the concession agreements.  Companies who refused to adhere to the new rules, such as British Petroleum, were nationalized.  Between 1974 and 1979, the introduction of Exploration and Production Sharing Agreement (EPSA 1) was enacted.  Libya continued to issue new versions of EPSA hoping 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 at a time when oil prices were high, making investing in the Libyan oil industry attractive.  Through EPSA IV, the NOC granted itself power by replacing the local Libyan partners to the IOCs. Hence, the NOC became a decision maker in all important aspects of production under the new agreement.

Negotiating EPSA V

The aim of this section is to shed light on issues of concern for the IOCs with EPSA IV.  By highlighting the issues of concern, this article will examine how the IOCs and the NOC may enter into a fair contract that will benefit both parties.

It has been reported that EPSA IV was the result of tough 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 signed to EPSA IV agreed to accept low profit shares and paid large signature bonuses.

After the fall of Gaddafi’s regime, the NOC contemplated issuing a new bidding round for licensing.  The attempt to launch the new round of bidding was suspended due to the political unrest in Libya. In any future negations, one has to examine the concerns of the IOCs related to EPSA IV to predict the focus of future negotiations of EPSA V.  In brief, the IOCs reservations on the terms of EPSA V may be as follows:

The Management Committee

Article 4 of EPSA IV calls for establishing a management committee composed of four members.  Each party will appoint two members and one of the members appointed by the NOC shall chair the management committee.  The management committee will rule on all decisions concerning petroleum operations, including work programs and budgets.  The committee’s decision must be unanimous and in the case of a deadlock, the matter at hand shall be referred to the senior management of each of the parties. 

The main concern with Article 4 of EPSA IV is that the mechanism for decision making 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 related to the work program or the budget which was raised for voting shall not be adopted by the management committee.  In effect, such mechanism for voting could pose many problems and delay the performance of the obligations under the contract. 

EPSA V should avoid this deadlock and propose a viable solution. Deadlocks may be solved by referring the disputed matter to an expert.  An expert opinion could be provided by an international consultancy firm appointed by the parties to resolve the issue at hand. Overall, it is advisable to have a detailed and rapid decision mechanism to resolve any issue that may arise. 

Force Majeure

In order to claim force majeure under Libyan law as per 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 absolutely impossible to execute. Moreover, Article 22.1 (Excuse of Obligations) of the EPSA agreement excuses a party from its obligations if its nonperformance is attributed to “any unforeseen circumstances and acts beyond the control of such party which renders the performance of its obligations impossible.”  The doctrine of unforeseen events or circumstances requires that an event must (i) be exceptional and unpredictable, (ii) be of general nature, and (iii) occur during the performance of the obligation under the contract.

One has to seek a court ruling for termination of a contract as per Article 360 of the Libyan Civil Code which states “[a]n obligation is extinguished if the debtor establishes that his performance has become impossible by reason of causes beyond his control.” 

Training and Employment Strategy

In the mid of 1970s, the NOC introduced a program to increase recruitment of Libyan nationals in the oil and gas industry.  The program was labeled “Libyanization” and required the IOCs to train Libyans and identify jobs that could be held by Libyan citizens.  The Libyanization was not whole-heartedly welcomed by the IOCs for many reasons.

Even after more than 30 years since its introduction, the implementation of the Libyanization policy is still sluggish.  In 2009, the NOC announced its plan to launch 700 projects in 2009 alone, of which the budget of 550 projects was approved.  The Chairman of the National Oil Corporation (NOC) at that time, the late Dr. Shukri Ganem stated that “We are looking for long term gains not short term ones. We are concerned that most of the engineering work is done outside the country.”  He also added that “Our graduates are becoming unemployed while we give jobs to people from outside … this is not to the benefit of Libya 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 carry out Petroleum Operations in the Contract Area. The IOC may hire non-Libyan nationals in specialized technical jobs or key management positions if no Libyan national is capable of performing the tasks.   Article 5.7.2 details the procedures and the timetable to train Libyan personnel.

Training and preparing Libyans to hold certain positions within each sector of operations could be considered burdensome by IOCs.  IOCs could argue that implementing a training program under Article 5.7.2 of EPSA IV, or any other contract, is beyond its aims of investment in Libya.  In the meantime, such a training program should not be considered a point of disagreement and complaints by the IOCs should be considered by the NOC.  As a suggestion to bring both sides together and to agree on the Libyanization program, the NOC should invest in providing a solid foundation for dedicated Libyan technicians and engineers prior to enforcing EPSA terms related to employing Libyan citizens.

Other areas of concern

Other areas of concern during the course of negotiations of EPSA V may include inserting a stabilization clause, the execution of work programs, types of operations and issues relating to taxes.