Legal challenges of Oil and Gas production in Lebanon i

Transcription

1 K O U A T L Y & A S S O C I A T E S A T T O R N E Y S + Legal challenges of Oil and Gas production in Lebanon i National Workshop Lebanese Parliament April 11, 2011 Rayan Kouatly ii Attorney at Law Kouatly and Associates Attorneys

2 Excellencies, Ministers and Deputies, Presidents of the bars, chief judges, Fellow lawyers, Ladies and Gentlemen, I would like to begin with a quick introduction to the Arab Legal Forum which holds and organizes this meeting in collaboration with the Energy Parliamentary Committee. The idea to create this forum is to help promote Arab legal intellectual interactions in all aspects and branches of the law, and to play a leading role by reactivating legal research and the exchange of its results, thus mainly leading to: A- Providing a platform for specialized legal researchers from all around the world to hold regular regional and international legal conferences and meetings, to examine various legal subjects and print research papers and distribute them during international forums. B- Playing a main role as a regional center for legal studies; and propose and update bills. C- Creating a developed and modern database related to main discussion subjects, and making it available for Arab and specialized legal researchers from all around the world, namely by publishing it on the internet, to be an item in any future discussion or research. D- Establishing the foundations for a network of Arab law firms that would collaborate amongst themselves; and setting a list of Arab legal experts. E- Making agreements with some international and regional organizations, universities and chambers of commerce, for the development and supply of highly-specialized short-term training programs. F- Providing a place for shaping new competencies in the Arab world, by creating a program for the exchange of experiences and legal training among law firms of the Arab countries. The choice of oil and gas as a subject of discussion for the first main event during which we are announcing the creation of the forum (a training session on the importance of arbitrations was previously held at the ESA business school, a strategic partner of the forum) was not a random choice, as demand on energy is growing at an alarming rate, and all studies agree that the growth of some emerging market economies (China and India, in particular) and their conversion to industry sectors will be mainly responsible for the multiplication of demands by 8, at least, in the two decades to come. It is also expected that the needs in terms of oil and natural gas will be fulfilled from sources that remain undiscovered or unexploited to this day. Will we be seeing Lebanon on the perpetually-changing world energy map?

3 This may be possible, particularly after the publication of an American geological report that declared the existence of around 122 trillion sq. ft. of gas and immense quantities of oil in the eastern basin of the Mediterranean sea, in an area that spreads from Syria in the north to the borders of the Palestinian- Egyptian frontiers in the south, and from the Arab shores in the east to the Cypriot waters in the west. Any discovery of natural resources of oil or gas, whether on the Lebanese territory or deep in the Exclusive Economic Zone would undoubtedly save Lebanon from the cycle of constant and revolving international financial grants and facilities for which conferences are held periodically. This would be a first step towards a true conversion of the national economy from one that mainly relies on various and random initiatives of the private sector to a convalescent economy that relies on the returns of oil productions and exports, framed by a government plan with a complete and methodological vision. We should be aware that such an accomplishment could not be achieved without obstacles and challenges, some on the internal level, when it comes to preparing the ground for such an economic and social conversion, and some on the external level, when clarifying Lebanon s rights in terms of the expected energy sources. On the internal level Should expectations regarding the potential to extract oil or gas in great industrial quantities and at a relatively low cost (oil production may be below $35 per barrel) be confirmed, then we will need to set a roadmap that would allow us to: Deal with the consequences, such as the creation of thousands of employment opportunities, both specialized in and resulting from extraction, refining, liquefaction, storage, construction and maintenance of oil facilities. This will impose substantive changes to the laws on labor and social security to correspond to this high-risk technical industry. This will also lead to legislative changes regarding the entry of large numbers of qualified foreign workforce, provided that the government does not ignore the need to compel the exploiting and extracting companies to establish training centers for national labor, which would lessen the dependency on the foreign workforce as much as possible. For the sake of comparison, the extraction of oil and gas has resulted, for the population of Louisiana (around 4.4 million people), in 56,000 direct jobs in this industry and 260,000 jobs indirectly related to these industries. Reinforce our arsenal of environmental legislations to avoid disasters similar to the events in the Gulf of Mexico in This accident, the greatest in the history of oil production, spilled around 5 million barrels of crude oil, thus polluting shores twice the length of the Lebanese shore, which led to the collapse of fishing and its industry and resulted in great damages to tourism and marine life. Perhaps it would be appropriate for us to focus on judicial reorganization, by establishing environmental public prosecutions, amending the Penal Code and granting these prosecutions exclusive and unequivocal powers, to prevent all disorders or slacking in applying the rules and procedures.

4 Upon examination of this dangerous accident, for which BP was responsible, several legal conclusions can be made: 1) Not to set a ceiling for compensation: The Americans who had determined, in the Oil Pollution Act of 1990, a ceiling for compensation of USD 75 million per accident, unless negligence by the extracting company is proven, were surprised to see that the losses resulting from the removal of pollution effects on the environment exceeded USD 3 billion, which incited them to take legislative measures to raise the ceiling for compensation to USD 10 billion per accident. 2) Remove the obligation to prove negligence when requesting compensation: The negligence of BP was not proven in this accident, and it paid the full compensation amount under direct political pressure from the American President, not under a judicial decision that would probably have limited these compensations. 3) The need to be strict with the incoming companies in terms of their adoption of clear and effective rules of Corporate Governance: The president of BP was forced to step down after he was spotted by the press following a yacht race in another country, while the real race was against the clock to stop the continuing leakage. The rules that the companies would be required to abide by should be rules that ensure precise administrative follow-up on the decisions made, reinforce transparency either between the company and its employees or between the administration and the governmental authorities, ensure independent accounting surveillance, place personal responsibility on executive directors when reports emanating from their departments lack precision, and establish criminal responsibility with heavy consequences for all who manipulate the content of financial reports or who take part in tax evasion. 4) Insurance: BP s accident cost the insurance sector an amount of approximately USD 12 billion, while real losses, according to a recent report from UBS, could exceed USD 30 billion, an amount that neither the Lebanese Treasury nor the Lebanese insurance companies could handle in the event of a similar accident. Hence the need for the Ministry of Economy and Trade to prevent this and propose amendments to laws in terms of strictness of standards and conditions in selecting insurance and reinsurance companies working in Lebanon and verifying their solvability. To conclude on the matter of compensation, it could best to create a fund to be used for the consequences of emergency disasters, with each company working in Lebanon transferring a minor amount of its profits to it, to be placed in the fund as a deposit and recovered at the end of the company s contract, should no event requiring the expenditure of the deposit occur. Now back to the roadmap, it should also: Reinforce legal proceedings: I would like to point out two things: the first is related to the human element, as the technical, specialized and complex nature of energy contracts compels the State to start preparing a generation of jurists specialized in these contracts, by creating an institute where it would receive distinguished young jurists, then it would send them, at its own expense, to train in international law firms, especially since major extraction and exploitation

5 companies make provisions in their budgets that sometimes reach hundreds of millions of dollars in fees and wages for their crews of seasoned and knowledgeable or specialized lawyers who have a significant amount of experience. The second results from the adoption of the new Lebanese law on oil for arbitration as a means to solving conflicts that may arise between the Lebanese government and the oil and gas companies, and the abiding of the companies de jure by the Lebanese law (article 5 of the Lebanese Offshore Petroleum Law and other articles); this requires the reinforcement of the structure of the Lebanese Arbitration Center by creating chambers specialized in the resolution of energy-related conflicts by arbitration courts whose members combine knowledge of the law and the techniques of the conflict in question. Work on establishing a national petroleum company and a national gas company as soon as it is proven that energy can be extracted and refined (for oil) or liquefied (for gas) at a limited cost and in industrial quantities; introduce required legislations that allow mixed partnerships between the public and the private sectors; allow for funding of this sector by specialized bank conglomerates; and create an entity for investments in the energy sector. Work on introducing fiscal amendments and exemptions from customs duties to attract major companies working in this sector, with what this entails in terms of needs to review the treaties on the prevention of double taxation, considering that taxes deducted from the profits of companies sometimes constitute the main income of the countries who have the resources, as they exceed in certain cases 50%; amend laws on transportation (namely land and maritime transportation) and issue laws preventing monopoly and respecting the principles of fair competition. Regarding external legal challenges The greatest challenge is probably to determine Lebanon s unequivocal rights to oil and gas fields, both land and maritime, and to ensure their exploitation free from legal conflicts regarding their proprietorship. What is truly frightening is the advance of drilling technology, as horizontal underground wells are beginning to be drilled, which means that the rights to underground wells of oil and gas located on land or maritime borders (wells that do not acknowledge political borders) will go to whoever drills first, since the driller can horizontally extract all that is below the ground or the sea of the adjacent country! Until geological and seismic surveys are completed in the Lebanese waters (territorial waters and the Exclusive Economic Zone), it is possible that the largest quantity of natural gas (around 24 trillion sq. ft.) is located in the maritime fields of Tamar and Leviathan that will begin their production activity in The first field is located 90 Km and the second 130 Km to the west of the city of Haifa. On the land, a map made by the Israeli Ministry of National Infrastructures indicates that the largest land wells of gas could be located to the south of the Lebanese borders, in the distance between the towns of Adayseh and Ghajar.

6 Back to that American geological report, it becomes clear that the fields could cover all of west Lebanon, from the Western Lebanon Mountains to their south, and from these borders to those of the Exclusive Economic Zone determined by the United Nations Convention on the Law of the Sea, not exceeding 200 nautical miles (370 Km), starting at the baseline from which the width of the territorial sea is calculated. To this day, Israel has not joined this convention which entered into force on November 16, This means that the most important problem lies in Israel s non-acknowledgment of international legal frames, especially with regard to defining and determining territorial waters and Exclusive Economic Zones and the sovereignty of each country on them, which exposes Lebanon s rights to violations. The second important problem lies in finding a mechanism facilitating the resolution of disputes or conflicts between these two countries. In all cases, article 15 of this convention draws territorial water borders for adjacent countries (Lebanon and Israel) or opposite countries (Cyprus and Israel), thus reducing, in principle, and unless a direct agreement is made between the concerned parties, the distance and surface of the territorial waters of each country to a certain intermediate line between them. Due to the omnipresent situation of undeclared war between Lebanon and Israel, combined with Israel s history of violating international law, we are not hopeful of ever reaching a resolution for conflicts related to proprietorship of the wells using international law mechanisms. Allow me to conclude by greeting and thanking the lecturers, as some of them have travelled from as far as Britain, France, Dubai and Qatar, and I wish you productive debates. Thank you i National workshop held at the Lebanese Parliament on 11 April 2011 under the Auspices of Speaker Mr. Nabih Berri. ii Key note speech of Rayan Kouatly, Lebanese Lawyer, specialized in Oil and Gas. Kouatly & Associates Contact: info@kouatlylaw.com /