Effective 7 January 2024 Libya's National Oil Corporation ("NOC") declared force majeure on the onshore El-Sharara Oilfield, Libya's largest crude oilfield in terms of production volumes.
According to the official statement issued by NOC, the declaration was instituted by the state-owned oil company operator due to protests over fuel shortages, requests for a southern refinery and improvement in regional conditions causing its closure, resulting in the suspension of crude oil production and halting supplies to the Zawiya refinery and export terminal on the Mediterranean Coast. On 22 January 2024, NOC announced that the force majeure declaration has been revoked and full production will resume from the El-Sharara Oilfield In this article, we look at force majeure and its implications for national oil companies.
El-Sharara Oilfield and oil & gas activities in Libya
The El-Sharara Oilfield is a producing conventional oilfield located onshore approximately 700km southwest of the capital Tripoli in the Sahara Desert. Unverified economic assumptions suggest it holds the largest proven recoverable oil reserves in Africa.
It is operated by the following participants:
- NOC, through the vehicle of Akakus Oil Operations, on behalf of the Government of Libya; and
- the following international oil companies ("IOCs"):
- Equinor;
- OMV;
- Repsol; and
- TotalEnergies.
The primary legislation regulating petroleum exploration and production activities is Law No. 25 of 1955 (the "Petroleum Law"). The Petroleum Law prescribes that all oil and gas in its natural state within the strata shall be the property of the Libyan State and establishes a concession framework model granting the licensing rights for parties for exploration and production of petroleum within Libya. The current model for IOCs to participate in oil and gas operations in Libya is pursuant to an Exploration and Production Sharing Agreement ("EPSAs") or a Development and Production Sharing Agreement ("DPSAs").
Doctrine of force majeure
The doctrine of force majeure, which was a particularly topical consideration for oil and gas operators and contractors in the wake of COVID-19 is treated differently in common law and civil law jurisdictions. The principle of force majeure in common law jurisdictions, including pursuant to English common law, is not a term of art and is a creature of the contract between the parties rather than a rule of law (as distinct from frustration), whereas by contrast, in certain civil law jurisdictions like Libya, the doctrine of force majeure is codified in statute.
In practice, while its form, substance, interpretation, application and outcome can vary greatly between jurisdictions, in contracts unique to the oil and gas industry, there can be a degree of general commonality in the drafting of force majeure clauses that the principle has the objective of providing various forms of relief for the occurrence of unforeseeable event(s) or extraordinary circumstances beyond the reasonable control of the party affected which prevent or delay the performance of a contractual obligation(s).
Force majeure implications for an oil and gas operator
The implications of a state-owned oil and gas company declaring force majeure at a producing oilfield are significant. In the context of this article, while estimates fluctuate, proven oil reserves in the Organization of the Petroleum Exporting Countries ("OPEC") Member Country Libya are estimated to be the ninth largest in the world and approximately 39% of the continent of Africa's total reserves. Based on production volumes, Libya was the third-largest total petroleum liquids producer in Africa after Nigeria and Algeria.
The immediate short-term implication of NOC declaring force majeure at the El-Sharara Oilfield, and more widely state-owned oil and gas companies generally, is financial. Libya produces approximately 1.2 million barrels and the El-Sharara Oilfield has a production capacity of approximately 300,000 barrels of light crude oil per day, accounting for more than a quarter of Libya's total crude output. Libya's crude oil is largely exported to European countries, although it has made recent attempts to diversify its oil export markets with Asia and the Middle East. In 2021, Libya's Central Bank concluded that oil revenues accounted for the country's primary source of economic wealth at an estimated 98% of its total government revenues. Accordingly, the financial significance at a state level for Libya attributable to a suspension of crude production and the associated petroleum liquid revenues, cannot be overstated.
In November 2023, Libya's state oil firm, the NOC, announced its intention to almost double its crude production over the next 3-5 years, which will involve investment of approximately US$ 4 billion per year, which may be particularly challenging to encourage from IOCs considering Libya's continuing political instability. Despite the country's large oil reserves, political conflicts and militia attacks on energy infrastructure have stifled capital investments in the country’s petroleum industry. Libya has been beset by a complicated history of civil, political and military unrest, currently ruled by rival administrations, the internationally recognised Government of National Accord ("GNA") in the western region and the Libyan National Army ("LNA") in the eastern region, of the country.
The recent force majeure declaration by NOC is not the first, being previously declared at both the El-Sharara Oilfield and El-Feel Oilfield. Shutting in wells and suspending or ceasing production of petroleum liquids in a country where the majority of its economic revenue is derived from the oil export markets, has crippling consequences at a state level.
Two weeks after the initial production suspension, Libya's NOC said in a statement on its website on 22nd January 2024 that the force majeure declaration issued in respect of the El-Sharara Oilfield has been revoked and full production has resumed. In practical terms, this means that crude volumes destined for aframax tankers in the Mediterranean Region should continue to be supplied to the Zawiya refinery and export terminal near Tripoli for export.
Brodies Middle East LLP Partner, Josh McFadzen, and colleagues Lucas Owhonda and Marc Penman from Brodies LLP's market leading global Oil & Gas practice, are well placed to advise state- owned and international oil companies seeking advice on force majeure claims, whether in the capacity of an affected party concession operator seeking to invoke relief, revocation of a force majeure notice including by joint venture participants or advice whether extraordinary events or circumstances constitute force majeure for recipients of a force majeure notice.
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