In 2013 Lebanon commenced and concluded the initial pre-qualification licensing round for offshore oil and gas exploration, which was based on a draft model exploration and production agreement (EPA). The model EPA is a major part of the legislative framework governing the extraction and production of natural oil and gas in Lebanon's Exclusive Economic Zone. The model EPA is awaiting approval and ratification by the government, together with other related decrees. Until such time, a hold has been placed on the bidding process.
As the initial unrest surrounding the Lebanese petroleum industry has now been quashed, it is an opportune moment to consider and reflect on key aspects of the legal framework governing petroleum activities in regards to the highly anticipated model EPA, which is yet to be publicly released. This update focuses on the dispute resolution mechanism provided in the draft model EPA and the issues that may arise in the face of divergent interests of the parties involved.
In line with Article 1 of Law 132 2010 – which governs activities relating to offshore petroleum resources – an EPA must be concluded between Lebanon and a minimum of three rights holders that have formed an unincorporated joint venture.
The dispute resolution mechanism under the EPA should be considered accordingly – in particular, with regards to whether the rights holders can individually pursue action against the state.
If an EPA defines the rights holders collectively and inseparably as a 'party', there will be a potential risk that locus standi will be denied to an individual rights holder in the event that it seeks to invoke the EPA's dispute resolution provisions and the remaining parties to the unincorporated joint venture are neither willing nor obliged to participate because, for example, they:
- assess situations differently;
- have different stakes in the unincorporated joint venture;
- have different interests that they wish to protect;
- have specific liabilities or responsibilities deterring them from participating in legal action against the state; or
- have incurred disproportionate losses.
Should the EPA mandate an a priori requirement for joint action, any divergent interests between the rights holders could result in a deadlock, which would impede legal action and the pursuit of related entitlements.
The risk of deadlock in such situations could be avoided by:
- the careful drafting of parallel agreements between the rights holders; or
- the inclusion of specific provisions dealing with potential deadlocks in the right holders' joint operation agreement.
A parallel agreement could thereby specifically set objective criteria agreed on by the rights holders and provide the circumstances in which all rights holders would have to participate in any legal action sought by one member of the unincorporated joint venture against the state. For example, pre-determined dispute resolution and settlement thresholds (financial or otherwise) could be included in the parallel agreement itself. If such objective thresholds were to be met in respect of a particular claim against the state, all rights holders would have to participate in the legal action. The evaluation of whether a particular claim meets the agreed objective thresholds could be determined by an independent third-party assessor.
Due consideration should be given to the inclusion of a loyalty obligation whereby each rights holder commits to taking all available means to defend and pursue the interests of the other rights holders against the state.
In addition to the issue of locus standi for individual rights holders under an EPA, due consideration should be given to the mechanism for electing which of the available avenues for dispute resolution should be taken in the pursuit of any given claim – whether initiated by the state or by the rights holders.
For instance, should the EPA provide for dispute resolution either by arbitration or by expert determination – as is commonly the case in international oil and gas exploration and production agreements – but fail to provide a mechanism for determining which dispute resolution path will take precedence in the case of divergent views between the parties (ie, the state and the rights holders), another risk of deadlock may arise, creating a preliminary issue of conflicting jurisdictions.
Further, should the dispute resolution clause be constructed in such a way as to limit the right to seek resolution in one forum when jurisdiction has already been awarded to another (thereby imposing a mutually exclusive choice of forum mechanism), the choice of forum will be even more crucial due to the independently binding consequences of the parallel dispute resolution paths.
The risk of deadlock in such circumstances is typically avoided by the inclusion of a carve-out clause in the EPA itself. Such a clause could either prioritise one forum over the other – absent any agreement otherwise between the parties – or allocate a default forum according to the nature of the dispute or pre-determined financial thresholds. When increasing the complexity of the dispute resolution mechanism in such a way, extreme care should be taken to ensure that there is no room for ambiguity or the unintentional exclusion of the clause's application in unanticipated circumstances.
As to the choice of dispute resolution forum, the generally accepted approach in the event of a deadlock resulting from a disagreement between parties is to award the choice of forum to the party that served the initial notice of dispute. However, this is not necessarily the rule and is subject to the facts of each case.
In this regard, a simple safeguard to avoid the risk of deadlock in this situation would be for the EPA to confer the right to choose the dispute resolution forum for a particular dispute on the party that issued the initial dispute notice.
Due consideration should be given to the dispute resolution mechanism under an EPA and to ensure that the above situations are accounted for. In doing so, rights holders will significantly reduce their risk of exposure to an otherwise avoidable situation of deadlock in the face of divergent views among the parties to an EPA or unincorporated joint venture.
For further information on this topic please contact Ziad Obeid at Obeid Law Firm by telephone (+961 1 36 37 90) or email (firstname.lastname@example.org). The Obeid Law Firm can be accessed at www.obeidlawfirm.com.
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