Greece, Israel, Montenegro licensing rounds: Comparative ...

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Greece, Israel, Montenegro licensing rounds: Comparative analysis of legal and regulatory framework

Alexandra Begni – Legal Counsel

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East Mediterranean Energy Law Forum|Athens, December 8th, 2017

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1.Energean at a glance

2.The area we operate – key characteristics

3.Introduction

4.Greece, Israel, Montenegro – key terms

5.Conclusion

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Energean at a glance

233mmboe 2C resources +

37mmboe 2P reserves*

389Full-time employees(not including subcontractors & sailors)

15active wells (11 producing)

4countries

9E&P licences

Assets with 36 year production

history and excellent HSE track record

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Introduction

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Energy and Resources Law

A “Lex Mercatoria”

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Petroleum exploration and production activities present

complex legal, technical, economic, financial, political and

environmental problems.

Key elements of the energy and resources law

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Complexity

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Geological and commercial risk

The risk of political events / change of government

A change in the regulatory regime

The renegotiation of contracts / Unilateral change

The expropriation of property in oil reserves.

Key elements of the energy and resources law

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Sovereign Risk

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Greece - Energean Portfolio

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Greece - The Upstream Sector

• Recent transformation of Greek upstream sector largely due to Greek State’s

commitment to increase domestic production and attract investments

• Attractive fiscal regime based on a concession scheme

• Stable regulatory and geopolitical environment

• Strong interest from the Majors - Total’s and Repsol’s recent entrance in the

country, Exxon’s and Total’s interest for south of Crete

• Israel, Greece and Cyprus agreement for the construction of the East Med

pipeline highlights Greece potential to become one of Europe’s key energy hubs

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Overview

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Recent Key Developments


New Legal Framework – L 4001/2011Aug

2011

Open Door Licensing Round

•3 blocks offered (Ioannina, West Patraikos and Katakolo)

•Energean signed 2 blocks as operator in May 2014

Jan

2012

Hellenic Hydrocarbon Resource Management Company S.A.

•Re-established as the hydrocarbon legislative body in Greece

Feb

2012

Offshore Licensing Round

•20 blocks in Western Greece and South of Crete

•One awarded, one under evaluation and for one a preferred bidder has

been announced

Jul

2014

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International Onshore Tender

•Three blocks in Western Greece (Arta-Preveza, Aitoloakarnania and NW

Peloponnese)

•Energean awarded one block as operator in March 2017

Nov

2014

International Offshore Tender

•Two blocks in Western and Southern Greece

•Publication in the official EU Journal

Dec

2017

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Greece - Exploration and production regulations

Hydrocarbons Law governs

▪ Prospecting

– The attempt to locate hydrocarbons in a specific area by an appropriate

method other than drilling

▪ Exploration

– The discovery of hydrocarbon deposits by any appropriate method including

drilling

▪ Exploitation

– The extraction of hydrocarbons, any treatment which is necessary to make

them marketable and their storage and transportation to the loading

installations for further disposal excluding refining

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Greece - Tendering Process

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The process for the tender: Chapter A, Article 2.17 of Hydrocarbons Law

▪ An invitation to tender

▪ An application of express of interest

▪ Open Door Invitation of areas that are available on a permanent basis or have

been the subject of a previous procedure which has not resulted in the signing

of a lease agreement or a production sharing agreement or has been

abandoned by the contractor

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Access to data - Fee up to 1,5 million EUR

Rights of foreign investors (non-EU nationals)

Farm-in /farm-out Agreements

Labour mobility

Greece - Hydrocarbons Law Executive Summary

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Greece – Hydrocarbons Fiscal Regime

Special Income Tax at a rate of 20% plus a

5% regional tax

Royalties

Bonuses

Depreciation Tax

Surface Fees

As defined in the respective lease

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Israel - The Upstream Sector

Participating Companies

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Overview


• Israel’s upstream potential received global recognition following the giant deep-water

gas discoveries of Tamar and Leviathan in 2009 - 2010

• Israel’s share of the Mediterranean covers a large part of Levantine basin one of the

most prospective exploration areas in the world

•Fiscal terms have been altered in 2011 allowing for c.30-35% of company take

•Significant investment is expected following 2015 regulatory efforts to open the market

to other entrants besides Noble Energy and Delek Group

• Israel has the potential to be a major gas exporter upon Leviathan’s start-up

•The Israeli market was the fastest growing market (+14.5% YoY) in the World in 2016

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A period of important discoveries commences

•Tamar in 2009

•Leviathan in 2010

•Tanin in 2011

•Shimshon in 2012

•Karish in 2013

•Tamar SW in 2013

2009

Israeli Antitrust Authority investigates industry practices

•Noble Energy and Delek Group are forced to open the market to

other participants

2011

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Approval of the Natural Gas Framework

•Article 52 enacted , facilitating the development of gas discoveries

•Legislative change to open up the Israeli upstream market

Dec

2015

Leviathan Final Investment DecisionFeb

2017

First Bid round officially closedNov

2017

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Bidding rounds

Two processes for a license to be granted

1. Licence application

2. Competitive bidding process

Israel - Exploration Activity

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Israel - Overview of Hydrocarbons Law

Petroleum Law

Governs both onshore and offshore activities

Natural gas law

Governs natural gas infrastructure

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Israel - Overview of Petroleum Law

Preliminary Permit/Exploration Stage→ up to

18 months

Licence/Exploration Stage → 3 + 4 years

Lease/Production → 30 years up to 50 years

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Israeli - EEZ

Health Safety And Environmental Regulations

The Marine Bill

The Israeli EEZ in the Mediterranean Sea is

divided by the Israeli Ministry of Energy into 69

exploration areas or blocks.

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Israel – Fiscal Regulations

➢ Corporate Income Tax Rate

▪ The CIT for oil right holders is the same with ordinary companiesaccording to Israeli Income Tax Ordinance

▪ 2017 CIT rate: 24%

▪ 2018 onwards CIT rate: 23%

➢ Oil Profits Levy (Sheshinski Levy):

▪ Oil right holders pay the Levy in addition to CIT, according to the OilProfits Taxation Law 5771 – 2011

▪ The levy is progressive -the rate increases with the increase in profits

▪ The levy will apply only after return of 150% on investment.

▪ According to the law, the maximum monthly levy rate may reach up to 46.8%

▪ The Levy is calculated for each asset separately

➢Royalty to the State

▪ According to Petroleum Law, 5712-1952, a leaseholder is

required to pay royalties of 1/8 [12.5%] of the volume of oil

produced to the State.

▪ The leaseholder will pay the market value of the royalties

according to the value of the gas or oil at the “well head” and not

according to selling price to the end customer.

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Israel – Fiscal Regulations

➢ Tax depreciation

▪ Fixed Assets

▪ Provided in Law 5771/2001 – Chapter 7, Clause 20 (Special deduction instead of depreciation)

▪ According to the said law, fixed assets are depreciated with a 10% fixed rate straightline depreciation method or changing rate according to depletion method with a capof 10%, at the choice of the oil right holder.

▪ Fixed assets include: machines, equipment, exploration and development expensesincluding expenses for examinations, geological, geophysical, geochemical andsimilar tests, except for real estate.

▪ Depreciation is commencing at the year production starts

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• Application requirements

• Based on technical capability

• At least 5 years experience as an offshore operator in the past 10 years

• Financial stability/capability

• Purchase of the data package US$ 50,000.00

• Bid Bond US$ 70,000.00

• Bidding items

• Work Program

• 1st 3 year exploration period carries a firm commitment program

• Usually comprises wells/seismic/grav-mag/studies

• Heavily weighted to wells and seismic

• Signature Bonus

• Can bid on up to 8 blocks

• Can only bid within one consortium for any one block (no multiple bids for the same block)

• Operator must have >= 25% equity

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Bidding Round Guidelines

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Montenegro

Block 26Block 30

Rising International Interest in the Region

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Montenegro – The Upstream Sector

• Records indicate oil in Montenegro dates back to 1865 with the first well drilled in 1922

• Offshore and nearshore wells drilled between 1975 and 1991 encountered several hundred feet

of potential gas play within the Tertiary sequence

• The Western offshore Adriatic has been a prolific hydrocarbon producing province for over 50

years for both oil and biogenic gas

– Albania and Italy are also producing from fields analogous to plays identified offshore

Montenegro

• However, the Eastern Adriatic remains substantially underexplored, despite having all the

necessary hydrocarbon generating components in place

• Significant investment expected following recent exploration investment in the country by

Energean, ENI and Novatek

Overview

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Montenegro – The Upstream Sector

Fiscal Regime

Ordinary corporate income tax rate of 54% applies

Tender Application Fee €30,000 -50,000

Fee for the Area Used for Exploration and the Production of Oil and Gas (Usage Fee)

→€300 per Km² for year 1-7 and €3,000 per Km² for year 8 and onwards,

Fees for Produced Oil and Gas (Royalty)

Production in Barrels Royalty Rate for Liquid Hydrocarbons Royalty rate for gas% (1)

Less than 10,000 5% 2%

10,000 to 20,000 7% 2%

20,000 to 30,000 10% 2%

More than 30,000 12% 2%

Proposed royalty rates for hydrocarbons production:

(1) This proposed rate of gas is low since there is no developed gas infrastructure in Montenegro. This is why

the introduction of an environmental pollution fee has been proposed.

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Additional provisions relating to the calculation of the royalty fee are as follows:

➢ Calculating the hydrocarbon value for the fee calculation: market value at predefined norm

prices;

➢ Delivered hydrocarbons will be defined based on quality, and the crude oil definition

should also be included, which is determined by specific pressure and temperature;

➢ Payable on a quarterly basis

➢ The royalty is not subject to tender bidding but is defined by regulation.

➢ Extra Tax on Profits from Upstream Oil and Gas (Extra Tax) Overall tax rate not

exceeding 54%

➢ Corporate Profit Tax for Upstream Companies

Montenegro- Fiscal Regulations (continue)

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Conclusions

PROTECTION OF THE MARINE ENVIRONMENT FROM POLLUTION

TYPE OF CONCESSION AGREEMENT LEASE AS OPPOSED TO PRODUCTION SHARING CONTRACT

HIGH GEOPOLITICAL ROLE IN THE EAST MED

www.energean.com

OfficesUnited Kingdom21, Gloucester Place, London W1U 8HRUKTel: +44 2038593540

Cyprus36, Vyronos str.1506 Nicosia,CyprusTel: +35 722447444

Israel9, Metsada str. B.S.R 3 Tower, 21st floor5120109 Bnei Brak,IsraelTel: +972 3 779 1188

Greece- Athens32, Kifissias Ave.Atrina Center, 17th floor 151 25 MaroussiTel: +30 210 81 74 [email protected]

Greece - Kavala64006 Nea KarvaliP.O Box 8, Kavala GreeceTel: + 30 2510 317201

EgyptBuilding 1 Square 1169 MokararSheraton, HeliopolisCairo, EgyptTel.+202 22696484

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