Abdelly & Associés. Key legislation and regulatory structure. Introduction

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1 Abdelly & Associés Introduction s current proven reserves are approximately 838m barrels, of which 51 per cent is oil and 49 per cent is gas. Approximately two-thirds of s proven gas reserves are located offshore. In 2011, oil production in averaged 68,028bpd down on This decrease in oil production is thought to be predominately due to disruptions caused by the n revolution of early Approximately 76 per cent of s oil production comes from the following concessions in the southern and eastern parts of the country: El Borma, Ashtart, Sidi el Kilani, Ouedna, Adam and Didon; the remaining oil is produced from 29 other smaller concessions. As at 1 January 2012, was the 11th largest producer of natural gas in Africa. In 2010, commercial gas production in was approximately 2,154ktep the majority of which originated from the Miskar (offshore) and Franig fields, being the country s two major gas fields. BG Group, which holds a 100 per cent interest in the Miskar field, is the largest producer of gas in and supplies over 60 per cent of s domestic gas production. Key legislation and regulatory structure The key legislation includes the Hydrocarbons Code as set out in law of 17 August 1999 and amended subsequently (the Hydrocarbons Code). A technical commission appointed by the Ministry of Industry and Technology is, at the time of writing, working on some reforms of the Hydrocarbons Code to be submitted to parliament. However, there is no current indication on the timing of the production or implementation of these reforms. The Ministry of Industry and Technology is the authority in responsible for supervising the hydrocarbons sector and granting prospection authorisations, exploration permits and exploitation concessions. Its powers are set out in the Hydrocarbons Code. The Ministry of Industry and Technology also supervises the General Department of Energy, which manages requests for permits/concessions granted by the Ministry of Industry and Technology, such as extensions to subperiods, and relinquishments of contract areas. In addition, a Hydrocarbons Advisory Committee exists, comprising representatives from all ministries that are likely to be involved in the granting of title to hydrocarbon permits and/or concessions, including the Ministry of Interior, the Prime Ministry, the Ministry of Finances, the Ministry of National Defence, the Ministry 1

2 of Industry and Technology, and the Central Bank. The Ministry of Industry and Technology is required to seek advice from the Hydrocarbons Advisory Committee when granting a permit/concession and, if required, for any other hydrocarbonrelated matters. National oil and gas companies are key industry participants in. The main national entities are: Entreprise Tunisienne d Activités Pétrolières (ETAP), the stateowned company established by legislation in 1972 that is responsible for the exploitation and trade of hydrocarbons; Société Tunisienne d Electricité et de Gaz (STEG), a state-owned entity that is the exclusive distributor of gas; and Société Tunisienne des Industries de Raffinage, a state-owned oil refinery that also trades refined oil. Licensing regime The licensing regime set out in the Hydrocarbons Code covers four different types of hydrocarbons rights. These include preliminary authorisations for limited seismic and drilling work and then grants of rights to explore for develop and produce hydrocarbons, each as described below. Contractors can either participate in exploration permits and concession agreements directly as co-holders with ETAP or, where ETAP is the party awarded the permit or agreement, as contractors engaged by ETAP under a production sharing contract. A prospecting authorisation is granted by the Ministry of Industry and Technology for a period of one year to one or more companies for the same area. This authorisation enables the holder(s) to perform preliminary prospecting work within the defined area, except for seismic works and drilling wells. 2 A prospecting permit is granted by the Ministry of Industry and Technology for a period of two years (which may be extended for a maximum of 12 months). This permit gives the holder(s) the exclusive right to perform prospecting work within a defined area, except for drilling activities that exceed 300 meters in depth and that are not intended solely for geological and seismic coring. The holder of a prospecting permit has a priority right to have its prospecting permit transformed into an exploration permit if applied for at least two months before its expiry. An exploration permit is granted by the Ministry of Industry and Technology for an initial period of up to five years and may be renewed twice for a period of four years each. A third renewal of a period of four years may be granted if the permit holder discovers oil. The holder of the permit has the exclusive right to conduct exploration activities within the defined block and the exclusive right to obtain exploitation concessions within that block. To be granted an exploration permit, an applicant must show the necessary technical and financial capabilities, have a presence in, undertake to implement an exploration work programme (specifying the nature and the size of the work to be carried out with an estimate of the associated costs) and enter into a Specific Agreement (Convention Particulière) with the n state as drafted in accordance with a standard model approved by Decree No dated 1 August This Specific Agreement and its attachments must be approved by Decree of the Ministry of Industry and Technology and published in the Official Gazette of the Republic of. It sets out the terms and conditions of the relationship between the n state, represented by the Ministry of Industry and Technology (referred to in the n

3 Hydrocarbon Code as the Granting Authority) and the permit holder during the exploration and exploitation concession periods. Under the n Hydrocarbons Code, an exploration permit will not be granted unless the applicant is acting in association with ETAP. Therefore, every company must agree to be associated with ETAP from the outset of exploration activities. ETAP and its future associates must enter into a joint venture agreement (Contrat d Association), setting out the nature of ETAP s participation, and the terms and conditions that will apply to it. The Contrat d Association and any addendum to it is subject to approval by the Granting Authority. Under the Association Regime, the associate of ETAP bears the cost and risk of carrying out the prospecting and exploration activities. However, in certain cases, ETAP may opt to contribute to the cost of such activities subject to approval by the Granting Authority. Where exploration activities lead to a commercial discovery, the holder of a valid exploration permit may, under the terms of the Specific Agreement, apply for an exploitation concession. An exploitation concession may be granted by an order of the Minister of Industry and Technology, which must be published in the Official Gazette. ETAP has an option to acquire an interest in any exploitation concession, up to a maximum percentage interest, in principle 50 per cent, set out in the relevant Specific Agreement. If ETAP chooses to exercise its option to acquire an interest in the concession under the Specific Agreement, it must reimburse its associate(s) for its share of the costs incurred up to the date of notification of ETAP s participation. In addition to the Association Regime described above, the Hydrocarbons Code also provides for a production sharing agreement (PSA) as the basis for carrying out petroleum activities. According to Article 97 of the Hydrocarbons Code, ETAP in its capacity as holder of an exploration permit can enter into a PSA with a company (or group of companies) that will act as contractor. In case of a commercial discovery, ETAP as holder of the exploration permit will then be awarded an exploitation concession. Under the PSA Regime, the contractor carries out the exploration and exploitation activities and bears all costs and risks on behalf of and under the control of ETAP. National oil company/state participation As indicated above, under the Hydrocarbons Code, an exploration permit will not be granted unless the applicant is acting in association with ETAP or as a contractor under the PSA Regime. Under the Association Regime, ETAP has an option to acquire a participation in any exploitation concession granted as a result of a commercial discovery under an exploration permit. Under the PSA Regime, ETAP has an entitlement to a share of hydrocarbon production. Fiscal regime The fiscal regime applicable to E&P companies operating in is governed in particular by the Hydrocarbons Code. Taxes applicable to the upstream oil and gas sector are set out below. Registration fee payment of a fixed fee for the registration of the Specific Agreements, Contrats d Association, PSAs, and any related agreements (20 TND per page, approx $13). Royalty (Article of the n Hydrocarbons Code) a royalty proportional to the quantity of hydrocarbons produced by the holder of an exploitation concession is payable 3

4 either in kind or in cash to the Granting Authority in accordance with the terms of the Specific Agreement. The method of calculating the royalty payable is based on the R ratio (see Petroleum Income Tax below). The royalty rate is divided into seven tiers for oil and nine tiers for gas, which range from 2 per cent to 15 per cent depending on the R value determined. Petroleum Income Tax (Article of the n Hydrocarbons Code) tax is payable on net income from oil and gas produced based on the ratio of accrued net earnings to accrued total expenditures for each exploitation concession (the R ratio). Net income from oil is taxed at a rate of per cent. Net income from gas is taxed at a rate of per cent. A 50 per cent tax rate applies to both oil and gas if ETAP has taken a stake of 40 per cent or more in the relevant concession. Petroleum Annual Tax (Article of the n Hydrocarbons Code) this is a fixed annual tax for every hectare of land included in an exploitation concession equal to the hourly minimum wage of an ordinary worker (ie $1/hectare). This tax is equal to five times the hourly minimum wage of an ordinary worker per hectare for inactive or non-exploited concessions. This tax is payable annually (30 June) during the entire term of a concession. Fixed tax (Article n Hydrocarbons Code) this tax is equal to the hourly minimum wage of an ordinary worker for every full elementary perimeter (an area of 4km2) to which an exploration permit, prospecting permit or exploitation concession has been granted. This tax amounts to approximately $195 per perimeter and does not apply to prospecting authorisations. This tax is a one-off payment that must be paid whenever a new permit/concession is granted, an existing permit/concession is renewed or the area for prospecting/ exploring/exploiting is extended. 4 In addition, under the PSA Regime: a fixed percentage of production (cost oil) is allocated to the contractor for the recovery of costs incurred under the PSA (including, where relevant, costs incurred under a prospecting permit). The percentage is specified in the PSA and is 50 per cent for oil and 55 per cent for gas; the remaining production (profit oil) is shared between ETAP and the contractor according to the terms of the PSA and the Specific Agreement based on the R ratio: for oil, the split varies from per cent for ETAP and per cent for the contractor; for gas, this split varies from per cent for ETAP against per cent for the contractor; and ETAP (as owner of the petroleum assets) is held liable for the payment of the registration fee, royalty, petroleum annual tax and the fixed tax. The contractor is liable for the Petroleum Income Tax, but this is deemed to have been paid when the contractor delivers ETAP its profit oil share. The contractor remains otherwise subject to the general tax regime applicable to entities operating in. Local content requirements The n Hydrocarbons Code has local content requirements specifically set out in Article Under the Code, the permit holder or contractor must hire, as a matter of priority, n employees, as long as this is compatible with the proper accomplishment of its activities. The permit holder or contractor must also train the n personnel in all specialisms as required by his activities, in accordance with a training plan that is subject to Granting Authority approval.

5 For comparable prices, qualities and delivery times for the same product or service, the permit holder or contractor must use, as a matter of priority, materials and equipment made in or n service companies and subcontractors. Transfer of interests Consents The n Hydrocarbons Code permits the total or partial transfer of upstream oil and gas interests if the following conditions are satisfied: the transaction is subject to a transfer agreement (contrat de cession) concluded under n law and approved by the Ministry of Industry and Technology with the assent of the Hydrocarbons Advisory Committee; and the transferee continues to fulfil the conditions under which the concession or permit was awarded. A transfer of interests, rights and obligations in respect of a petroleum asset is subject to an order of the Ministry of Industry and Technology, which is to be published in the Official Gazette. If a change in the share capital structure of the permit holder or contractor leads to a change of control, the transaction requires the approval of the Hydrocarbons Advisory Committee but is not subject to an order of the Ministry of Industry and Technology and need not be published in the Official Gazette. The Hydrocarbons Advisory Committee s main concern is to ascertain the financial capabilities of the new parent company and it may make its approval subject to the provision of a bank guarantee. If a change in the share capital structure does not lead to any change of control, the transaction is subject only to a notification letter to be addressed to the Granting Authority. Taxation According to Article 105 paragraph 2 of the Hydrocarbons Code, any assignment of rights, interests and obligations under a prospecting permit, exploration permit or exploitation concession under the Hydrocarbons Code will not be subject to any tax either existing or to be instituted later on under the common tax regime. Transfers made between affiliated companies must be notified to the Granting Authority. The Granting Authority may require the transferee company (or its parent company) to commit to fulfilling the conditions under which the permit was awarded by providing a parent company guarantee or other form of security. 5

6 Stabilisation/equilibrium and dispute resolution The taxes, levies and duties for which E&P companies are liable are fixed exhaustively, along with the other associated obligations, in the Hydrocarbons Code (Article 100 and following). The principle of stability is further ensured by the Specific Agreements entered into between the E&P companies and the n state, in which the n state guarantees the legal framework and commits never to submit the permit holder or contractor, whether directly or indirectly, to a legal regime that is more restrictive than that governed by the Specific Agreement and its attachments. The parties to a Specific Agreement, Contrat d Association and PSA are free to choose their dispute resolution mechanisms, except that the applicable law and regulations must be that of. In practice, most of those agreements stipulate that: any dispute between the parties shall be subject to arbitration in accordance with the rules and procedures of the International Chamber of Commerce in force at the date of the start of arbitration proceedings; the seat of the arbitration is to be Paris, France; and the language of the arbitration is to be French. freshfields.com is a limited liability partnership registered in England and Wales with registered number OC It is authorised and regulated by the Solicitors Regulation Authority. For regulatory information please refer to Any reference to a partner means a member, or a consultant or employee with equivalent standing and qualifications, of or any of its affiliated firms or entities. This material is for general information only and is not intended to provide legal advice.,, 35653