Does the Egyptian petroleum exploration and exploitation agreements contain any provision governing the cases of unitization?

Unitization in the Egyptian legal system is subject to the following provisions:

Article III (e) of the Egyptian petroleum exploration and exploitation agreements stipulated that:
“If, upon application by Contractor it is recognized by EGPC that crude oil or gas is being drained from the exploration block under this agreement into a development block on an adjoining concession area held by contractor, the block being drained shall be considered as participating in the commercial production of the development block in question and the block being drained shall be converted into a development lease with the ensuing allocation of costs and production (calculated from the effective date of the date such drainage occurs, whichever is later) between the two concession areas. The allocation of such costs and production under each concession agreement shall be in the same portion that the recoverable reserves in the drained geological structure underlying each concession area bears to the total recoverable reserves of such structure underlying both concession areas. The production allocated to a concession area shall be priced according to the concession agreement covering that concession area”, and

Article 45 of the Executive Regulation, issued by the Minister of Industry No. 758 of 1972, of the Mines and Quarries Law No. 66 of 1953, stipulated that:
“If it is proved that the producing layer extends into areas of more than one exploiting party, then EGPC may ask the concessionaires to agree among themselves on carrying out joint efforts toward achieving the best exploitation of this layer in accordance with the observed and recognized principles of the oil Industry, considering that the said layer represents one oilfield. If the Parties to the relation fail to reach agreement within six months from the date they are notified thereof by EGPC, therefore EGPC shall set the rules it considers to be realizing this purpose, which rules shall be binding to all parties to the relation. In any case, a prior approval from EGPC shall be obtained for any agreement to be reached in this respect between the parties to the relation.”

Analysis of the effectiveness of the aforementioned  provisions:
The provision of Article III (e) cannot be considered unitization provision as understood by the international petroleum industry. However, it could be considered unitization-related, since it only deal with the merger of two adjacent blocks, one of them being drained for development purposes to be under the control of the same contractor.

Notwithstanding the provision of the Executive Regulation, one case remains ungoverned under such provisions; that is if the adjacent area has not been granted to any party. In such case, EGPC shall have the right to:

  1. Consider the adjoining area as a development lease and announce a bid round requesting proposals for it, which will take long time for such development lease to join in the production.
  2. Grant the adjoining area to the holder of the first area, where the reservoir has been discovered, as a development lease by a direct order, for the reasons of necessity and emergency and in such case EGPC may request extra unusual benefits from said holder and will need only to amend the law of the first area.

The unitization case that is not subject to the framework of Egyptian concession agreements and the entirety of the Egyptian law – which is in dire and urgent need of treatment – is the case in which the reservoir happens to extend across the borders of another State. In such case the Egyptian Government must take action with the other State government.
We believe that Egypt will face this situation soon with the State of Israel for Leviathan structure in the east of the Mediterranean as shown in the following map A

On August 2010, The U.S Geological Survey Bureau (USGS) issued its report on the prospected natural gas in the Eastern Mediterranean. The report concluded that an estimated 122 trillion cubic feet of undiscovered natural gas, technically recoverable are in the Levant Basin Province located in the Eastern Mediterranean region.

On January 2009, Israel announced the discovery of natural gas offshore the Tamar field, which is located approximately 80 kilometers west of Haifa city within the Levant Basin. The Tamar 1 well contains 8.3 trillion cubic feet and can supply between 50 to 80% of Israel’s demand of natural gas.

On March 2009 Israel announced a new discovery offshore the Dalit well, located about 60 kilometers off the coast of Hadera, a town south of Haifa. Dalit deposit proved to contain 247 billion cubic feet of natural gas.

On December 2010 Israel, made another announcement, declaring the finding of the largest offshore natural gas discovery in its history, which is the Leviathan field. The field contains at least 16 trillion cubic feet, and is situated about 156 kilometers from Israel’s Northern Coast.

The abovementioned data and the USGS report prove the existence of natural gas along the Egyptian borders with Israel. Another evidence confirming the existence of natural gas at such area is the number of Israeli gas fields near the Egyptian land border and inside the Egyptian waters as shown in maps.

In this situation, Egypt has the right to take all appropriate legal procedures according to Egyptian law since the Israeli action represents an invasion of the sovereignty of Egyptian land and sea according to the international law.

The problem with Israel will eventually rise in the case of offshore fields, because until today, Egyptian demarcation of its maritime borders with Israel is ambiguous at best. Not to mention that Israel refused to sign the United Nation Convention on the Law of the Sea of 1982.

The relationship between Egypt and Israel is governed by the Peace Treaty of 1979 that was signed by the two States. Subject to Article VII of the Treaty, disputes arising out of the application or interpretation of  the Treaty shall be resolved by negotiations. Any dispute that cannot be settled by negotiations shall be resolved by conciliation or submitted to arbitration.

Accordingly, Egypt must inform the State of Israel that Israeli petroleum activity is invading Egyptian land and waters and negotiations should be in order. In case of the failure of diplomatic solution, Egypt must raise an arbitration claim.

In the case of settlement of the dispute relating to such offshore fields, the two States must sign a Joint Development Agreement to develop and exploit these fields.
The same problem facing Israel will be encountered by Egypt soon, but this time on the southern borders with Sudan. The Sudanese government from 2009 started to re-announce that Halaib Triangle, which includes Shalatine area are Sudanese Lands and Sudan will not relinquish such areas.

By Essam Taha – Attorney at Law, Petroleum Agreements Expert – Member of the AIPN

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