Tensions in the Middle East continue to occupy oil and gas firms operating within Libya. Reports have suggested that, no matter the outcome of the current conflict, the Libyan National Oil Corporation (NOC) will expect contractual obligations to be kept. Leaders of the NOC have suggested that the NOC intends to enforce pre-existing contractual obligations, asserting that oil contractors left simply because they “panicked”.

More immediately, the recent call by the Libyan government for foreign oil workers to return to Libya puts oil and gas companies in a tough position. Apart from the prospect of sending employees back into a conflict zone, companies must consider whether international sanctions permit a return to business in Libya.

Previously, we examined the test for force majeure applied under Libyan law. Given its strict application by arbitral tribunals and courts, we raised questions that commercial parties should consider before making a force majeure claim. Since then, sanctions have been imposed that impact oil and gas companies working within Libya. The nature of the sanctions raises additional questions that commercial parties working in Libya should consider.

International Sanctions on Libya

On 26 February 2011, the United Nations Security Council adopted financial sanctions against a list of individuals in Libya, including Muammar Gaddafi. These sanctions were strengthened by the Security Council Resolution of 17 March 2011, which extended the asset freeze to further individuals and entities – including the NOC and the Libyan Investment Authority – and gave authority to the Security Council’s Libyan Sanctions Committee to update this list of restricted persons. Given the central role of the NOC to oil and gas operations, these sanctions will impact the ability of some oil and gas firms to perform their obligations.

Member states of the United Nations agree to “accept and carry out decisions of the Security Council”. United Nations sanctions forbid any company under the jurisdiction of a member state (ie the vast majority of legitimate corporations worldwide) to breach these sanctions. The European Union, the United Kingdom and the United States have all adopted sanctions of similar scope.

While these sanction regimes vary in execution and enforcement, they all list the NOC and a number of its subsidiaries. All three sanctions regimes also prevent transactions with the Libyan Central Bank or Libyan registered institutions owned by the Central Bank, though some financial entities have been excluded. These restrictions mean that performance is certainly more difficult. However, the issue is: has performance been made impossible? How do these sanctions impact contractual obligations for oil and gas export?

Potential Force Majeure Claims

As we noted in our previous column, the test for force majeure under Libyan law is strictly interpreted:

… [T]he obligations of the claiming party must be rendered actually and absolutely impossible for the force majeure event to excuse non-performance. If there is any way that a diligent party could have still performed its obligations, then force majeure may be considered inappropriate.

Parties affected by the sanctions and considering force majeure should therefore consider whether or not these sanctions regimes render their obligations “actually and absolutely impossible”. Libyan law suggests that parties consider all possible alternatives. There are instances where sanctions prevented a corporation from fulfilling its contractual duties as it had previously planned, but Libyan law insisted that performance was still required because those sanctions could be circumvented. In particular, international parties should note the following:

  • The application of the sanctions to various branches and subsidiaries outside of the jurisdiction of the ultimate parent company may vary depending on the sanctions regime.
  • The United Kingdom and the United States have procedures in place for companies to request exemptions from the sanctions regime.
  • The United States in particular has carved out general exceptions to the sanctions regime, for instance transactions made through the auspices of the Arab Banking Corporation (the majority of which is owned by the Libyan Central Bank).
  • Some sanctions regimes may exclude from their scope contractual obligations created before the civil war began.

 With this in mind, exceptions to sanctions regimes must be considered by any party prior to seeking to establish a force majeure claim under Libyan law. In particular:

  • Are all subsidiaries and branches restricted by a sanctions regime?
  • Are there any caveats or exceptions under the sanctions regime applying to each subsidiary or branch?
  • Can any other measures be taken that would allow performance under the contract?

Recent experience in disputes arising from the first oil and gas concessions in post-war Iraq further demonstrates that legal and political instability, internal political unrest and regional sub-division can further complicate these issues. Commercial parties and, in particular, international energy companies should be aware of the special challenges that the current conflict, Libyan law and the potential work-arounds to these sanctions regimes pose to any force majeure claim.