Libyan Oil Contracts: Negotiating the Future Generation of EPSA

Libyan Oil Contracts: Negotiating the Future Generation of EPSA

By Dr. Mohamed Karbal, Managing Partner at Karbal & Co. Libyan Oil Contracts:

Libya Prior to the Discovery of Oil

Libyan Oil Contracts: During the twentieth century, Libya enjoyed only nineteen years of peace. Of only eight of the nineteen years, Libya enjoyed the 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.

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