A thumbnail guide to oil exploration and production in Italy

Natural resources

Who holds title over oil reservoirs? To what extent are mineral rights on private and public lands involved? Is there a legal distinction between surface rights and subsurface mineral rights? At what stage does title to extracted oil transfer to the licensee, lessee or contractor?

Whereas landowners are, as a general rule, free to develop the subsurface according to their own private and economic needs, Italian civil law lays down an exception for mines (including oilfields) and excavations that are state property and cannot be transferred. This inalienability rule is not dependent on whether the oilfields are located on private or public land.

As a consequence, the development and operation of subsurface and surface mineral rights can only be granted by authorisation (prospecting and exploration activities) or concession (production) issued by the Italian state (through the Ministry). As a result, title to extracted oil is transferred at the time the specific oil company is granted the public concession and has started oil production.

What is the general character of oil exploration and production activity conducted in your country? Are areas off-limits to exploration and production?

In Italy, oil exploration and production activities are carried out onshore and offshore. The share of onshore production remains consistently higher than that of offshore production. The Basilicata region is the most important area for oil extraction; Sicily ranks second.

As at 31 March 2023, Italy had 38 exploration permits and 184 production concessions in effect. These activities are mainly onshore.

Exploration and production activities are prohibited in those areas expressly qualified as unsuitable by the Plan for the Sustainable Energy Transition of Eligible Areas (PiTESAI). 

In 2010, following the Deepwater Horizon oil spill in the Gulf of Mexico, the Italian government implemented some measures (Legislative Decree No. 128/2010) aimed at protecting the environment and the ecosystem. Such measures prohibited offshore oil research and exploration within the boundaries of coastal and marine protected areas. The 2010 provisions banned offshore research and exploration within 12 nautical miles of the outer perimeter of the above-mentioned protected areas. However, through Legislative Decree No. 83/2012, with the aim to foster the oil sector, the government provided that the duration of the offshore exploration concessions within the above-mentioned 12 nautical miles – granted before 2013 – could continue.

How are rights to explore and produce granted? What is the procedure for applying to the government for such rights? To what extent are the terms of licences or contracts negotiable?

Oil exploration and production is regulated by state legislation with some secondary technical regulation issued by the Ministry. Further, the regions are increasingly using their granted regulatory powers to adopt independent regional regulation; in particular, to issue some procedural rules.

The existing regulation provides for three different phases in the oil-extracting business: prospecting, exploration and production activities.

All prospecting activities (geophysical surveys) must be authorised by the Ministry.

The exploration of an area (including drilling activities) is subject to prior authorisation (exploration permit) of the Ministry, following a competitive tender procedure. The procedure to obtain an exploration permit starts once a specific application is made by the operator. Such an application, the cost of which is negligible, must be submitted along with a specific ‘work programme’ as well as relevant estimation costs and a timeline for completion.

Since the operator has no title to the area, production activities can only be carried out on the basis of a concession issued to the holders of an exploration permit who made a discovery capable of economic development.

All applications must be filed with the General Directorate for Mineral Resources and Energy of the Ministry of Environment and Energy Security (UNMIG), which shall (1) verify whether the area where the prospecting, exploration or production activities are expected to be carried out, falls within the areas qualified by the PiTESAI as 'suitable' and (2) examine the prospecting, exploration and production programmes of the operators as a condition to the granting of the permit or concession. Therefore, the timing for the granting of a permit or concession mostly depends on the relevant exploration and production programme. In any case, the terms and conditions of the mining title are not negotiable by operators; nevertheless, it is common practice that operators informally liaise with the Ministry in order to submit a suitable application in line with the Ministry’s expectations.

If an exploration permit or a production concession is granted jointly to several titleholders, they are considered jointly liable towards the public administration and third parties for their obligations arising out of the relevant mining title. In addition, they are also bound to appoint a legal representative for all their relationships with the public administration and third parties.

However, in 2014, to favour the exploitation of natural resources within the Italian national territory, foster investment in hydrocarbons and achieve the supply targets as outlined in the National Energy Strategy Plan, the Italian legislature introduced a significant reform in the oil and gas regulatory framework.

Article 38 of Sblocca Italia (Unlock Italy) Decree No. 133/2014, converted into Law No. 164/2014 of 11 November 2014, enabled the government to introduce the ‘single mining title’ for onshore oil exploration and production, in lieu of the exploration and concession titles. This decree specified that all the operators holding an exploration permit or with an application pending at the date of publication of the reform (11 November 2014) had 90 days to choose whether to turn to the new single mining title procedure by filing the relevant application with the competent Ministry of Enterprises and Made in Italy or to stick to the previous standard procedural regime (ie, exploration permit and subsequent production concession). According to the Sblocca Italia Decree, the new authorisation procedure had to be completed within 180 days of the date when the relevant operator had submitted its application. The Ministerial Decree of 25 March 2015, enabled the Ministry of Enterprises and Made in Italy to implement the Sblocca Italia Decree, and clarified that the ‘single mining title’ gives successful applicants title to carry out exploration activities in a given area for a period of six years (which could be extended for two additional three-year periods) and, in the case of hydrocarbons’ discovery, title to obtain a production concession for a period of 30 years (which can be extended for an additional 10-year period).

However, by Decisions Nos. 170/2017 and 198/2017, the Italian Constitutional Court stated that article 38 of the Sblocca Italia Decree is unconstitutional and repealed the Ministerial Decree of 25 March 2015, on the grounds that such decrees did not provide for a sufficient involvement of the regions in the process through which the Ministry of Enterprises and Made in Italy regulates the modalities for the granting of the single mining title.

In line with the above-mentioned decisions, the Ministry, by the Decree dated 9 August 2017, amended the Ministerial Decree of 7 December 2016 on the modalities for the granting and the exercise of the mining titles by deleting any reference to the granting and the exercise of the single mining title. A proper and adequate procedure for the granting of the single mining title is still expected.

Does the government have any right to participate in a licence? If so, is there a maximum participating interest it can obtain and are there any mandatory carry requirements for its interest? What cost-recovery mechanism is in place to recover such carry? Does the government have any right to participate in the operatorship of a licence?

Although there is no specific prohibition on the Italian government participating in a licence, the government is not currently directly participating in any relevant licence or permit. However, the government controls a stake in ENI, the most important Italian oil operator. The stake in ENI is, at present, equal to approximately 30 per cent of the company’s shares (the Ministry of Economy and Finance owns approximately 4.37 per cent of ENI’s corporate capital while the Cassa Depositi e Prestiti, a state-owned joint-stock company, owns 25.96 per cent).

If royalties are paid, what are the royalty rates? Are they fixed? Do they differ between onshore and offshore production? Aside from tax, are there any other payments due to the government? Are any tax stabilisation measures in place?

When developing oil resources, a royalty in favour of the Italian state is due from operators. National Law No. 160 of 12 December 2019 updated the royalties for oil and gas. According to this Law, the current Italian royalty rate for onshore production, both for gas and oil, is 10 per cent (7 per cent royalty rate plus 3 per cent to the social card and economic developing fund), while the royalties for offshore production amount to 10 per cent for gas (7 per cent royalty rate plus 3 per cent environment and safety share) and 7 per cent for oil (4 per cent royalty rate plus 3 per cent environment and safety share). These rates are calculated on the sale value of produced quantities.

In addition, a small rental payment is to be paid to the Italian state, calculated on the basis of the number of square kilometres occupied for the prospecting, exploration and production activities.

What is the customary duration of oil leases, concessions or licences?

A prospecting permit has a duration of one year.

An exploration permit has a duration of six years and can be renewed for two additional three-year periods if the operator complies with the exploration programme approved by the Ministry.

A production concession has a duration of 20 years and can be extended for an additional 10-year period if the operator complies with the production programme approved by the Ministry. If, at the end of the concession, the operator has fully complied with the programme, he or she can apply each time for a five-yearly extension of the concession.

For offshore production, how far seaward does the regulatory regime extend?

Italy applies the criteria set in the Montego Bay Convention on the Law of the Sea 1982 and has sovereign rights in a 200-nautical mile exclusive economic zone with respect to mineral extracting activities and exercises jurisdiction over environmental protection. Further, Italy has sovereign rights over the continental shelf for exploring and exploiting it. The shelf can extend at least 200 nautical miles from the shore and more under specified circumstances.

Italy has ratified several international conventions with Mediterranean states Albania, Greece, Spain, Tunisia and the former Yugoslavia to govern the limits of the territorial sea, the exclusive economic zone and the continental shelf.

Is there a difference between the onshore and offshore regimes? Is there a difference between the regimes governing rights to explore for or produce different hydrocarbons?

Differences exist between onshore and offshore regimes. The administrative procedure for the granting of an onshore mining title, regardless of its nature (exploration permit or production concession), always requires the direct involvement of the relevant regional authorities and other local entities and bodies where the area concerned by the application is located. On the contrary, in relation to the offshore regime, the administrative procedure is more centralised and the main authorities involved are:

• the Ministry of the Environment and Energy Security;
• the Ministry of Defence;
• the Ministry of Transport; and
• the Ministry of Agriculture, Food and Forestry policies.

Such a difference is also reflected in the environmental impact assessment sub-procedure.

The legislative framework regarding exploration and production of hydrocarbons does not provide for different regimes according to the type of activity. The same rules apply for oil as well as for gas or shale gas exploration and production.

Which entities may perform exploration and production activities? Describe any registration requirements. What criteria and procedures apply in selecting such entities?

Any operator from in or outside the European Union may apply for a prospecting or exploration permit and can be granted production concessions. Non-EU operators may be banned from the upstream market where the statutory rules of the country of origin do not allow Italian operators to carry on oil extracting activities (reciprocity rule). In addition, Italy can refuse an operator (regardless of the country of origin) from carrying out oil extracting activities for reasons of public interest.

The applicant must demonstrate that they have sufficient technical and financial capacity and warrant that they will set up an organisation with adequate administrative and technical skills. To this end, the Ministry has implemented a regulation clarifying the meaning of ‘technical and economic capability’ of oil and gas operators establishing that the latter must have net assets of €10 million or, alternatively, corporate capital of €120,000 plus a guarantee from a controlling company or from a bank. In addition, and for the purpose of assessing their technical requisites, operators willing to obtain a mining title must submit further documentation proving their technical capabilities (eg, details of the company and of its internal bodies and staff; report on the main works carried out in the past three years either directly or, in the case of a newco, through a controlling company).

According to the Directorial Decree dated 15 July 2015 (which shall be considered currently valid and effective, except for all references to the single mining title), the companies interested in prospecting, exploration and production activities have the opportunity to go through a pre-qualification process whereby the Ministry of Environment and Energy Security verifies the necessary requirements of the applicant before the presentation of the application. The positive outcome by the Ministry of Environment and Energy Security does not imply the automatic release of any relevant mining title.

Although there is no obligation to do so, prior to filing applications for licences with the Ministry, foreign operators usually incorporate an Italian subsidiary.

To obtain a non-exclusive prospecting permit, the applicant must file a work programme for approval and, in the case of offshore activities, a technical survey of an engineer specifying the environmental risks of the project and the measures adopted to reduce these risks.

The work programme must identify all prospecting activities that will be carried out, the methods and equipment used, the timing and possible recovery works.

The prospecting permit is granted for a specific area.

The applicant must file a technical report including information on the geo-mineral status of the area and the purpose of the exploration, together with the work programme, specifying all activities that will be carried out, the methods and equipment used, the timing, possible recovery works, the development costs and the financial coverage.

Following the filing of an application by an operator, the Ministry will forward a notice to the European Commission inviting applications, which shall be published in the Official Journal of the European Communities. Other interested entities shall have a period of at least 90 days after the date of publication to submit an application.

In the event of several applications for a specific exploration permit, the Ministry shall grant the title following a competitive tendering procedure, to the programme that is most efficient and innovating and has the least impact on the environment.

A permit shall give rise to an exclusivity right to explore the relevant geographical area, which may not exceed 750 square kilometres.

If the titleholders of an exploration permit discover an oil reservoir during the exploration phase, they may apply for a production concession if the production capacity of the oilfield, based on the geological data and geophysical survey, justifies the technical and economic development of the same. The maximum extension of the production concession is, as a general rule, limited to 150 square kilometres.

The application must include a technical report that provides documentary evidence of the production capacity of the discovered oil wells as well as a development plan that must state the time necessary to carry out the development plan, the investments and further exploration activities, among others.

The granting of new permits and concessions to applicant companies is subject to the existence of all economic guarantees required by law in order to cover potential accidents during the process of prospecting, exploration and production. By a circular dated 9 May 2018 – in line with the provisions of Directorial Decree dated 15 July 2015 – the Ministry confirmed that minimum threshold amounts relating to such economic guarantees requires all applicants comply with them in order to adequately deal with, and react to, any potential accidents that may occur during their activities.

What controls does the regulatory body have over operators? Can operatorship be revoked?

The Ministry of the Environment and Energy Security ensures that operators act in compliance with obligations provided for in the administrative decree granting the relevant mining title or with the instructions, indicated from time to time, by the same Ministry or of the relevant UNMIG section. In the case of a breach, the mining title may be revoked.

What is the legal regime for joint ventures?

Permits and concessions can also be granted to more than one entity, without requiring such entities to create a corporate joint venture. The share of each co-owner is mentioned in the administrative title.

The co-owners are jointly and severally liable towards the Italian authorities and third parties for all duties that may derive from the upstream activities.

The co-owners must appoint an operator that will represent the co-owners in their relationship with public authorities and third parties.

When one of the members of the production concession withdraws from the project, for whatever reason, the other co-owners will subrogate the rights of the withdrawing partner.

Any assignment of the participation interest in a permit or concession requires the prior approval of the Ministry.

How does reservoir unitisation apply to domestic and cross-border reservoirs?

If the technical and financial level of the work programme justifies a joint development, the operators may apply for a reservoir unitisation.

The same rule applies in circumstances where the oilfield extends over the continental shelf of Italy, as well as the territory of another state; in this case the operator must notify UNMIG, which must take the necessary diplomatic steps to agree upon a joint operation of the cross-border oilfield.

The Italian statutory rules also govern different situations in which the operators have conflicting interests, as follows:

• where different operators intend to carry out prospecting activities at the same time, the operator that obtained the permit first is given priority;
• the holder of an exclusive licence (exploration permit or production concession) must grant access to an area to allow permit holders of a neighbouring area to carry out prospecting activities; and
• where an operator is intending to drill a well that may affect another exploration or concession area, the operator must duly inform the affected operator and invite him or her to make observations within a fixed term. If the affected operator does not respond, the addressee is deemed to have agreed to the drilling activities.

Is there any limit on a party’s liability under a licence, contract or concession?

Under Italian law, holders of permits or concessions are fully liable for their activities and must restore all damages deriving from the operation of these activities. In the case of co-ownership of the permit or of the concession, co-owners are jointly and severally liable towards the public administration and third parties for the obligations arising from the operation of the activity related to the concession.

Are parental guarantees or other forms of economic support common practice or a regulatory requirement? Are security deposits required in respect of any work commitment or otherwise?

Companies with net assets lower than €10 million must submit adequate guarantees from a bank or from a controlling company (or from a company of the group to which the applicant belongs) whose net assets are at least €10 million.

If the guarantee is given by a parent company or by a company of the same group, the guarantor shall have to prove its financial capability by means of relevant documents (eg, financial statements).