Public Contracts between state and companies concerning exploration & production activities: The Case of Cyprus

Eastern Macedonia & Thrace Institute of Technology
Dept. of Petroleum & Natural Gas Engineering
M.Sc. in Oil & Gas Technology
Course Assignment for Oil & Gas Contract Law:
"Public Contracts between state and companies
concerning exploration & production activities"
Team Members:
A. Mitsis, E. Michailidi, F. Zachopoulos
Kavala, December 2014

Table of Contents
Type chapter title (level 1)................................................................................................ 1
Type chapter title (level 2)............................................................................................. 2
Type chapter title (level 3)......................................................................................... 3
Type chapter title (level 1)................................................................................................ 4
Type chapter title (level 2)............................................................................................. 5
Type chapter title (level 3)......................................................................................... 6

Oil & Gas Contract
Law Course
Assignment
PUBLIC CONTRACTS BETWEEN STATE AND
COMPANIES CONCERNING EXPLORATION &
PRODUCTION ACTIVITIES
A.Mitsis E.Michailidi F.Zachopoulos | Introduction 4
1. Introduction to the Cypriot
legal system
The island of Cyprus became a British colony when Turkey occupied and then ceded
Cyprus to the English Government. Cyprus was under British rule from 1878 until
1960.
As a result of British rule, the English legal system was introduced in Cyprus
and many laws were enacted in an effort to import the doctrines of common law and
equity into Cyprus. The adoption of the Criminal Code, the Contract Law and the
Civil Wrongs Law constitute clear examples of this effort. In addition, practical and
wide considerations advocated the preservation of the English legal system after 1960,
when Cyprus became independent.
Cyprus inherited many elements of its legal system from the United Kingdom,
However, since 2004, Cyprus has been a full member of the European Union and as a
result European Law supersedes Cyprus Law in case of any conflict. The Republic of
Cyprus is also a signatory to many international treaties and conventions.
The laws applicable are the following:
 The Constitution of the Republic of Cyprus
 The laws retained in force by virtue of Article 188 of the Constitution
 The principles of Common Law and Equity
 The Laws enacted by the House of Representatives.
Following the accession of The Republic of Cyprus to the European Union in
2004, the Constitution was amended so that European law has supremacy over the
Constitution and national legislation.

Oil & Gas Contract
Law Course
Assignment
The Courts of the Republic of Cyprus are organized as shown in the following
diagram (Fig.1).
Fig. 1 Cy p riot Legal Sy stem Diagram

Oil & Gas Contract
Law Course
Assignment
2. Oil & Natural Gas Regulatory
Framework in Cyprus
2.1. Introduction
In 2011, Cyprus confirmed significant offshore reserves of approximately seven
trillion cubic feet of natural gas. These reserves found in Cyprus’s Exclusive
Economic Zone (EEZ) gave rise to an ambitious energy strategy.
2.2. Legal Framework
The legal framework for Oil and Gas in Cyprus is an amalgamation of
European Union Law and International Law. As a Member State of the European
Union (‘EU’), since 2004 and a signatory to the United Nations Convention on the
Law of the Sea (UNCLOS) since 1988, Cyprus needs to abide with all the respective
obligations prescribed both in EU and International level. Following the regulations
stipulated in UNCLOS regarding the delimitation of maritime boundaries, the
Republic of Cyprus in 2004 passed a law defining and regulating its Exclusive
Economic Zone (‘EEZ’), with The Contiguous Zone Law 2004 and The Declaration
of the EEZ Law 2004. These provide that “the Republic has sovereign rights for the
purposes of exploring and exploiting, conserving and managing the natural resources
of the waters superjacent to the seabed and of the sea bed and its subsoil”.
Furthermore, the exploration or exploitation of the non-living resources in the EEZ is
subject to the permission of the Council Of Ministers or any other competent
authority as designated by law.
Delimitation Agreements:
Cyprus established its maritime border with Egypt in 2003 and with Lebanon in 2007.
Cyprus and Israel defined their maritime border in 2010 and in August 2011, the US-
based firm Noble Energy entered into a production-sharing agreement with the
Cypriot government regarding the block’s commercial development. Cyprus and
Israel defined their maritime border in 2010 and in August 2011, the US-based firm

Oil & Gas Contract
Law Course
Assignment
A.Mitsis E.Michailidi F.Zachopoulos | Legal Framework 7
Noble Energy entered into a production-sharing agreement with the Cypriot
government regarding the block’s commercial development.
Domestic Law:
The most significant domestic laws governing the area of hydrocarbon activities are
the Hydrocarbons (Prospecting, Exploration and Exploitation) Law of 2007 (Law No.
4(I)/2007) (Hydrocarbons Law) and the Hydrocarbons (Prospecting, Exploration and
Exploitation) Regulations of 2007 and 2009 (No. 51/2007 and No. 113/2009)
(Hydrocarbons Regulations), which transpose Directive 94/22/EC into domestic law.
Types of Licenses:
The Republic maintains the rights over its resources while it can grant authorizations
to Oil Companies for Prospection, Exploration and Exploitation.
A prospection license is granted for a period not exceeding one year and it involves
all activities related to locating hydrocarbons other than drilling.
An exploration license involves any appropriate method for exploration including
drilling and may be renewed for up to two terms, each term not exceeding two years,
following an application submitted to the Cyprus Council of Ministers, Upon each
renewal of an authorization for exploration, the holder relinquishes at least 25% of the
initial surface of the area that was included in the authorization.
When a hydrocarbons discovery is made, an exploitation license is granted for
a period of 25 years which may be renewed for an additional period of ten years, after
another application to the Council of Ministers.
The above authorizations are subject to different provisions including but not
limited to the requirement of the Minister for any transfer of authorization rights,
abandonment requirements and maintenance requirements.

Oil & Gas Contract
Law Course
Assignment
A.Mitsis E.Michailidi F.Zachopoulos | Legal Framework 8
Process of Application:
Applications are accepted after the publication regarding the commencement of a
licensing round in the Official Gazette of the Republic and/or the Official Journal of
the European Union at least 90 days before the closing date for applications.
The first licensing round was announced on 15 February 2007 and resulted in
the granting of both an exploration license and an exploitation license for Block
number 12 to Noble Energy International.
The discovery of hydrocarbons with an estimated gross resource range of 5–8
trillion cubic feet in Block 12 of the Cypriot EEZ opened up the prospects and
motivated the government to initiate a second licensing round in the beginning of
2012 with twelve more offshore blocks made available for bids. The second licensing
round received a strong and increased interest from a number of worldwide
companies and consortiums and it resulted after negotiations to the award of
exploration licenses for five Blocks.
On 24 January 2013, the Republic of Cyprus signed contracts granting the
exploration licenses for Blocks 2, 3 and 9 in a Consortium led by the Italian ENI and
the South Korean KOGAS. On 6 February 2013, the contracts for the granting of
licenses for the exploration of blocks 10 and 11 were signed with French TOTAL.
Typically, a contract is to be concluded between the Government and the
successful candidate that seeks authorization for the license award to be effective. For
this purpose the Ministry of Commerce, Industry and Tourism (MCIT) has published
a “Model Exploration and Production Sharing Contract” for this purpose in 2007,
with an updated version in February 2012. The Contract would be subject to
negotiations but the general structure including the terms would be the ones of the
Model Production Sharing Contract.

Oil & Gas Contract
Law Course
Assignment
A.Mitsis E.Michailidi F.Zachopoulos | Current situation Synopsis 9
2.3. Current situation Synopsis
At present, Noble Energy holds the license for offshore block 12, while the Republic
has further awarded another four blocks in November 2012 as follows:
 Consortium made of Eni and Kogas (blocks 2 and 3)
 Consortium led by Total with Novatek and GPB Global Resources (block 9)
 Total (block 11)

Oil & Gas Contract
Law Course
Assignment
A.Mitsis E.Michailidi F.Zachopoulos | Oil & Gas Contract Analysis 10
3. Case of Cyprus: Oil & Gas
Contract Analysis
After the extended study of the Cypriot legal framework, concerning the oil & gas
exploration and exploitation activities, an analysis of an Oil & Gas Contract between
the Republic of Cyprus and a private oil company was conducted. In the present
Chapter, the most significant Articles of the contract are presented and analyzed.
3.1. Oil & Gas Contract Analysis
Article 1
Article 1 describes the words that are not defined herein, but are defined in the law
and regulations pertaining to the prospecting, exploration and exploitation of
hydrocarbons in force at any given time in the Republic.
Articles 2-3
Article 2 and 3 describes the Grand of Rights, the Title to Hydrocarbons and the
Scope the contract.
Articles 4
The Article 4 describes the case of a Joint Operating Agreement which consists of
several entities.
Articles 5
The Article 5 describes the Authorization to Explore, the Contractor’s Exploration
Work Obligations and the Renewal of authorization to explore during the Exploration
Period. The Contractor is, subject to the provisions of this Contract, authorized to
conduct Exploration Operations within the Contract Area during the Exploration
Period. The Contractor shall, during the Exploration Period and subject to the
provisions, carry out the Exploration Work Obligations.

Oil & Gas Contract
Law Course
Assignment
Articles 6
The Article 6 describes the case of Relinquishment. Relinquishment of Exploitation
Area and the Termination of Agreement and Continuing Obligations in respect of
Relinquished Area are the two main paragraphs which are concerned.
Articles 7
According to Article 7, entitled Development and Production Period, the Approval of
a Development and Production Plan, Development and Production Plan, Development
Work Programs and Budgets and the Exploitation License are the main paragraphs to
be examined.
Article 8
The article No 8 describes the right of the contractor to recover its costs of production
the share of profit from the available quantity extraction. Under no circumstances the
rate of the contactor shall not exceed the percentage agreed. Id the cost is not covered
by the production the difference is transferred to the next year.
8.2 From the first day of production the contractor shall be entitled to take a
percentage share of profit hydrocarbons. The rate is related to the costs and revenues
that is the volume of production and the price of oil, and is calculated by numerical
formula. In any case cannot exceed a predetermined limit.
8.3 Calculations for the costs and profits shall be done for each quarter. Within
60 days of the end of each year a final calculation based on actual quantities,
expenditures and prices should be conducted.
Article 9
This article determines that the oil is evaluated according to its quality and the
corresponding market price at that time.

Oil & Gas Contract
Law Course
Assignment
Article 10
The decision making on the price received by the committee in which the contractor
participate. In case of disagreement addressed to external specialized institutions.
The contractor is obliged to submit each year an annual work program with the
corresponding budget which cannot deflect more than 5% without written permission.
In the training of the program the Minister may have opinion.
Article 12
According to article no later than 6 years prior to the anticipated date of
decommissioning the contractor shall, in accordance with applicable law, submit to
the Minister for his approval the relevant Decommissioning Plan including the
estimated expenditures.
For this purpose the contractor must maintain account-bound capital. If the
expenses exceed the budget, the contractor has the obligation to cover them. If the
costs are less, the rest of the reserve belongs to the State.
Article 13
The Article 13 refers to contractor’s general rights and obligations.
Articles 14&15
These articles contain the contractor’s obligation to help country to sell the quantities
accordingly. On the other hand the contractor if requested, in writing, is obliged to
sell to the Republic the portion of its share, of profit oil for the domestic consumption.
Requisition shall be made in exceptional cases such as war etc.
Article 16
In article 16 the contractor must comply with the law and regulations
Article 17

Oil & Gas Contract
Law Course
Assignment
In article 17 the contractor shall have access to date and information (geological,
drilling)
Article 18
The books accounts and audits of the contractor should be in accordance with
provision of applicable companies and taxation legislation.
Article 19
Report the performance of hydrocarbons operation to the Minister.
Article 20
All operating transactions are subjected to control.
Article 21
In article 21 the contractor cannot change the inspection or the leasehold subletting to
other. Any assignment and change of control must be approved by the council.
Article 22
Includes programs which define the time mode of transport and storage of products.
Article 23
The contractor has the right to use of the products of gas to enhancing pumping.
Article24
The contractor shall be the owner of the assets and transfer them upon termination.
Article 25
The contractor has the obligation to give priority not only for the employment of
Cypriot but also the training program in order to contribute to the promotion of
Cyprus to the staffing of operational services. This will be an agreed amount of
money by the start of exploration and respect each year of operation.

Oil & Gas Contract
Law Course
Assignment
Article 26
The contractor is obliged for purchases, equipment etc, exceeding 50.000€ compiled
annual program as to make procedures and having priority to the Cyprus Market in
equivalent economic conditions.
Article 27
The contractor has the obligation to prepare and submit to the Minister for approval a
plan on proposed Research and Development activities.
Article 28
Indicates the right of contractors to import goods, spare parts etc., but only if it is not
available in the Cyprus Market with the same values.
Article 29
The contractor is obliged to harmonize the tax treatment of the country and the
European Union.
Article 30
The contractor under the Article 30 depends on the progress of work, shall pay the
Republic various amounts annually per square Kilometer, while having adopted bonus
before the start of each face in accordance with the excess production.
Article 31
The Contractors shall pay to the Republic fees and other payments as provided for in
this Contract and in the Law, in accordance with the laws of the Republic.
All payments under this Contract shall be made in Euros, unless otherwise agreed,
and within thirty (30) Calendar Days after the end of the month in which the
obligation to make the payment is incurred.
Any amount not paid in full when due shall bear interest, compounded on a monthly
basis, at a rate per annum equal to one (1) month term, LIBOR (London Interbank
Offer Rate) for Euro deposits, as published in London by the Financial Times current

Oil & Gas Contract
Law Course
Assignment
from day to day, plus five (5) percentage points, on and from the due date for payment
until the amount, together with interest thereon, is paid in full.
If this Contract is terminated for any reason before the end of the third (3rd) Contract
Year, the Contractor shall, on such termination, pay, to the Minister, those fees and
payments which it would have so paid if termination had not occurred until the end of
the third (3rd) Contract Year.
Article 32
32.1 The Contractor shall indemnify and compensate any person, including the
Republic, for any damage or loss which the Contractor may cause, caused by or
resulting from Hydrocarbons Operations.
32.4 The Contractor shall provide the Minister with the certificates proving the
subscription and maintenance of the above-mentioned insurances.
Article 33
This Contract may be terminated by the Minister and the license pertaining to the
Contract Area revoked by the Council of Ministers, without compensation, under
certain occurrences.
Any disruption of production for a period of at least six (6) months, or any repetitive
disruption of production, decided by the Contractor without the Minister's consent
may give rise to the termination of this Contract.
Article 35
This Contract and all Hydrocarbons Operations carried out under this Contract shall
be governed by the legislation in force at any time in the Republic.
Article 36
In the event of any difference or disagreement or dispute between the Republic and
the Contractor the Parties shall first attempt to resolve that dispute amicably through
negotiations which shall not exceed a period of sixty (60) days.
In the event of failure of the Parties to reach an amicable settlement within the
aforesaid period of sixty (60) days, the Parties shall, within ten (10) days, by mutual

Oil & Gas Contract
Law Course
Assignment
agreement, request an expert to provide his expert decision on the dispute. The expert
shall render his decision no later than one hundred and twenty (120) days after his or
her appointment. If the dispute is not resolved through amicable settlement or expert
determination, the dispute shall be submitted to the International Centre for
Settlement of Investment Disputes (ICSID) upon request by one or both Parties.
Article 37
The Parties hereby agree to cooperate in any possible manner to achieve the
objectives of this Contract.
As a condition precedent to the effectiveness of this Contract, upon the Effective
Date, the Contractor shall provide an irrevocable bank guarantee, payable to The
Permanent Secretary, Ministry of Commerce, Industry and Tourism, guaranteeing it’s
Exploration Work Obligations for the Initial Licensing Period.
Article 38
This Contract may be amended or modified only in writing and by mutual agreement
of the Parties and with the approval of the Council of Ministers.

Public Contracts between state and companies concerning exploration & production activities: The Case of Cyprus

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