Leïa Khalaf August 13 2012 Understanding the Offshore Petroleum Resources Law Alem & Associates | Energy & Natural Resources - Lebanon Leïa Khalaf Energy & Natural Resources IntroductionScope of applicationPetroleum authorisationsExploration and production agreementsPlan for petroleum production and transportationTaxationRoyalty, cost petroleum and profit oil/gasBlock feeHealth and safetyLocal participationPetroleum Administration AuthorityIntroductionA number of two-dimensional and three-dimensional seismic surveys conducted since 2000 suggest that the Lebanon basin has favourable geological prospects and significant potential for hydrocarbon production (for further details please see "Offshore gas potential exceeds expectations").In order to encourage the exploitation of its potential petroleum resources off the coast, Lebanon enacted the Offshore Petroleum Resources Law (132/2010). It constitutes a milestone in the industry's development and aims to regulate the offshore petroleum sector.Scope of applicationThe law governs "all petroleum activities that are associated with a sub-sea reservoir". This covers petroleum reconnaissance, exploration, appraisal, production and exploitation, as well as the laying of pipelines, the transportation of petroleum and the development of facilities. The cessation of such activities and the decommissioning of facilities also fall within the scope of the law.(1)The law grants exclusive ownership of petroleum resources to the Lebanese state.(2) Such ownership extends to resources found in territorial waters, in the waters of the exclusive economic zone and on the Lebanese continental shelf.The state has the right to carry out or participate in petroleum activities, but may not participate in the first licensing round.(3) Once the existence of promising commercial opportunities has been confirmed, the law makes provision for the establishment of a national oil company.(4)Petroleum authorisationsThe law organises the award, by the state, of petroleum authorisations to one or more contractors. The law defines the term 'contractor' as "any joint stock company that participates in Petroleum Activities through an Exploration and Production Agreement... or a Petroleum Authorization that allows it to work in the petroleum sector".The law provides for different types of authorisation, depending on the activity to be undertaken. A petroleum authorisation is an authorisation granted to one or more contractors to perform petroleum activities as specified in the petroleum authorisation.Reconnaissance authorisations Reconnaissance authorisations are issued for activities that aim to determine the existence of one or more petroleum reservoirs, by means of geological, petrophysical, geophysical, geochemical or geotechnical surveys (or other activities as stipulated by the petroleum rights).(5) Such authorisations are non-exclusive and must be granted for a limited period of no more than three years. Authorisations are to be issued by the minister of energy and water. The resulting data remains the property of the state.Exploration and production authorisationsThe law identifies two phases of petroleum activities: an exploration phase and a production phase. Such phases are authorised by the Council of Ministers under an exploration and production agreement.ExplorationThe law defines 'exploration' as the drilling of wells to explore or assess the content of a reservoir, as well as the operation and use of the facility (as far as possible) for the purpose of exploratory drilling.An exploration phase may be authorised for a limited period not exceeding 10 years. The duration of the phase is stipulated in the exploration and production agreement.ProductionThe law defines 'production' as activities for the extraction of petroleum from the reservoir, including:drilling production wells leading to the reservoir;stanching the reservoir as part of the petroleum activity;developing and improving the resources recovered from the reservoir;improving and treating the extracted substances (except for the destructive distillation, storage and shipment of petroleum); andperforming activities for the planning, preparation, construction, installation, operation and use of facilities for the purpose of production.The production phase may be authorised for a limited period not exceeding 30 years. The production authorisation is granted for a fixed period, based on the quantity of petroleum that may be produced. The duration of each phase is stipulated in the exploration and production agreement.The procedures and necessary documentation for granting such authorisation shall be set out in a decree by the Council of Ministers.Specific authorisationsAccording to Article 31 of the law, specific authorisations for the construction, installation and operation of transportation or storage facilities may be granted by the Council of Ministers.Exploration and production agreementsAn exploration and production agreement is an agreement concluded between the state and at least three pre-qualified contractors. The agreement regulates the relationship between the state and the contractors for the exploration and production of petroleum within a defined block. The Council of Ministers must approve the final text of the agreement. Once approval has been obtained, the selected applicant becomes a contractor.The contractors form an unincorporated joint venture in which each has an indivisible and non-transferable participation interest. Each contractor is jointly and severally liable, to the others and to third parties, in proportion to its part in the proceeds of the petroleum activities, as established in the agreement. The contractors have a joint exclusive right to carry out petroleum activities under the agreement.The agreement defines a contractor's rights and obligations in respect of the state and other contractors. It must stipulate:the coordinates of the awarded block;the allocation of participation interests between the contractors;the term of the agreement and the duration of each of its phases;the minimum work obligations and expenditure commitments for the exploration phase;provisions concerning potential state participation in the agreement;provisions concerning environmental matters;accounting rules and provisions applicable to petroleum activities and the methods of determining profits;provisions relating to dispute resolution and arbitration; andstandard minimum guarantees covering the minimum work obligations for the approval of the plan for development and production, and for cessation of petroleum activities and the decommissioning of a facility.Standard provisions for exploration and production agreements are to be set by a future decree by the Council of Ministers.Plan for petroleum production and transportationStarting productionFollowing the conclusion of the exploration and production agreement, the contractor that conducted the drilling of the exploration wells should inform the minister and the Petroleum Administration Authority (PAA) whether it intends to commence production. The decision must be communicated no later than two years after the last drill.Appraisal of discoveryThe operator(6) must immediately notify the minister of any discovery of petroleum, submitting a copy of the notice to the PAA. It must also perform the necessary tests to appraise the potential of the reservoir for commercial exploitation within six months of discovery. The test data and results must be submitted to the minister.Development and production planIf the contractors decide to develop one or more reservoirs, Article 28 of the law requires that the operator which acts on behalf of the other contractors in managing daily petroleum activities must submit to the minister a plan for development and production.The first part of the plan must comprise a detailed environmental impact assessment. Article 32 of the law provides that the procedures, requirements and conditions relating to this assessment must be set out in a decree, following a proposal by the minister, on the basis of the PAA's opinion and after coordination with the ministries concerned. The second part must describe the development of the reservoir's resources and the economic aspects of the options available.Cessation of operations and decommissioningThe contractors are responsible for cessation of petroleum activities and decommissioning, either at the end of a predetermined timeframe or in the event of the revocation, transfer or cancellation of the petroleum right.TaxationPetroleum activities and petroleum rights are subject to the applicable Lebanese tax laws and regulations. Under an exploration and production agreement, each contractor is considered a taxpayer in respect of its own taxable activities and is subject to Lebanese tax law. Contractors are jointly and severally liable to the state for the obligations related to, or arising out of, petroleum activities, including tax obligations. This creates a regime whereby each contractor is responsible for the other contractors' compliance with their tax obligations.Royalty, cost petroleum and profit oil/gasThe law institutes a sovereign wealth fund in which the proceeds collected by the State, arising out of petroleum activities or petroleum rights, shall be placed.The state, as the exclusive owner of petroleum resources, is entitled to a royalty calculated on the basis of the total petroleum extracted from the reservoirs. The state has the option to receive the royalty in cash or in kind. In all cases, the amount of the royalty due to the state is ultimately determined by the Council of Ministers with reference to the quantities and prices of oil and gas.The law defines cost petroleum as the share of each contractor in the extracted petroleum and profit oil/gas as the share of each contractor and the state in the extracted petroleum, after the deduction of cost petroleum.Block feeThe law provides that contractors must pay a block fee to the state for the block covered by an exploration and production agreement from the first year following the expiry of the exploration phase. The block fee, which is to be determined on the basis of a decree by the Council of Ministers, is to be progressive and calculated by the square kilometre.Health and safetyThe law requires contractors to prepare and publish health and safety plans, including an emergency response plan. Contractors must also ensure that all necessary measures are taken to prevent and reduce harmful effects on persons, property and the environment, and must surround their facilities with safety areas.Local participationThe law gives preference to Lebanese companies and workers in the performance of petroleum activities.Petroleum Administration Authority Article 10 of the law provides for the establishment of an authority to be entrusted with the administration of the petroleum sector.By law, the PAA is granted administrative and financial autonomy, but within the oversight of the relevant minister, whose prerogatives are also defined in the law. Some of the PAA's financial and administrative decisions require ratification by the minister.Most decrees to be issued pursuant to the law must be based on the PAA's recommendations and opinions. The PAA also has extensive responsibility for the preparation of calls for bids and will be the normal oversight authority for drilling and exploration operations. The Council of Ministers has issued a decree regulating the PAA - the first implementing decree pursuant to the law. It deals with the PAA's administrative and financial organisation.The law still requires the Council of Ministers to issue 27 further implementing decrees. Furthermore, the offshore petroleum sector will also be regulated by the Petroleum Activities Regulations. The Council of Ministers approved the General Guidelines for the regulations in January 2012. It decided that the PAA, once established, would make the necessary amendments in line with the approved guidelines. Therefore, the regulations are expected to be issued once the PAA's board is appointed.For further information on this topic please contact Mohamed Y Alem or Leïa Khalaf at Alem & Associates by telephone (+961 1 999 717) or email ([email protected] or [email protected]).Endnotes(1) 'Petroleum activity' is defined to include the planning, preparation, installation and implementation of the activities associated with a sub-sea reservoir. However, the transportation of petroleum in bulk, by vessel or vehicle, is not considered a petroleum activity.(2) Article 4.(3) Denis Guirauden, "Model Exploration & Production Agreement", Lebanon Petroleum Exploration Forum, July 3 2012.(4) Article 6.(5) A 'petroleum right' is defined as a right arising out of a petroleum authorisation, an exploration and production agreement or any other authorisation awarded by the state for the performance of petroleum activities in accordance with the law.(6) The law defines an 'operator' as the company whose appointment is approved by the Council of Ministers in order to execute, on behalf of a contractor, the day-to-day management of petroleum activities.