The Oil and Gas Law Review, 2nd ed. [The Cyprus Chapter] - Nicolas Th. Papaconstantinou by Nicolas Papaconstantinou

The Oil and Gas Law Review Second Edition Editor Christopher B Strong

Law Business Research

The Oil and Gas Law Review

The Oil and Gas Law Review Reproduced with permission from Law Business Research Ltd. This article was first published in The Oil and Gas Law Review - Edition 2 (published in November 2014 â&#x20AC;&#x201C; editor Christopher Strong). For further information please email Nick.Barette@lbresearch.com

The Oil and Gas Law Review

Second Edition Editor

Christopher B Strong

Law Business Research Ltd

THE LAW REVIEWS THE MERGERS AND ACQUISITIONS REVIEW THE RESTRUCTURING REVIEW THE PRIVATE COMPETITION ENFORCEMENT REVIEW THE DISPUTE RESOLUTION REVIEW THE EMPLOYMENT LAW REVIEW THE PUBLIC COMPETITION ENFORCEMENT REVIEW THE BANKING REGULATION REVIEW THE INTERNATIONAL ARBITRATION REVIEW THE MERGER CONTROL REVIEW THE TECHNOLOGY, MEDIA AND TELECOMMUNICATIONS REVIEW THE INWARD INVESTMENT AND INTERNATIONAL TAXATION REVIEW THE CORPORATE GOVERNANCE REVIEW THE CORPORATE IMMIGRATION REVIEW THE INTERNATIONAL INVESTIGATIONS REVIEW THE PROJECTS AND CONSTRUCTION REVIEW THE INTERNATIONAL CAPITAL MARKETS REVIEW THE REAL ESTATE LAW REVIEW THE PRIVATE EQUITY REVIEW THE ENERGY REGULATION AND MARKETS REVIEW THE INTELLECTUAL PROPERTY REVIEW THE ASSET MANAGEMENT REVIEW

THE PRIVATE WEALTH AND PRIVATE CLIENT REVIEW THE MINING LAW REVIEW THE EXECUTIVE REMUNERATION REVIEW THE ANTI-BRIBERY AND ANTI-CORRUPTION REVIEW THE CARTELS AND LENIENCY REVIEW THE TAX DISPUTES AND LITIGATION REVIEW THE LIFE SCIENCES LAW REVIEW THE INSURANCE AND REINSURANCE LAW REVIEW THE GOVERNMENT PROCUREMENT REVIEW THE DOMINANCE AND MONOPOLIES REVIEW THE AVIATION LAW REVIEW THE FOREIGN INVESTMENT REGULATION REVIEW THE ASSET TRACING AND RECOVERY REVIEW THE INTERNATIONAL INSOLVENCY REVIEW THE OIL AND GAS LAW REVIEW THE FRANCHISE LAW REVIEW THE PRODUCT REGULATION AND LIABILITY REVIEW THE SHIPPING LAW REVIEW THE ACQUISITION AND LEVERAGED FINANCE REVIEW THE PRIVACY, DATA PROTECTION AND CYBERSECURITY LAW REVIEW

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PUBLISHER Gideon Roberton BUSINESS DEVELOPMENT MANAGER Nick Barette SENIOR ACCOUNT MANAGERS Katherine Jablonowska, Thomas Lee, James Spearing ACCOUNT MANAGER Felicity Bown PUBLISHING COORDINATOR Lucy Brewer MARKETING ASSISTANT Dominique Destrée EDITORIAL ASSISTANT Shani Bans HEAD OF PRODUCTION Adam Myers PRODUCTION EDITOR Anna Andreoli SUBEDITOR Timothy Beaver MANAGING DIRECTOR Richard Davey Published in the United Kingdom by Law Business Research Ltd, London 87 Lancaster Road, London, W11 1QQ, UK © 2014 Law Business Research Ltd www.TheLawReviews.co.uk No photocopying: copyright licences do not apply. The information provided in this publication is general and may not apply in a specific situation, nor does it necessarily represent the views of authors’ firms or their clients. Legal advice should always be sought before taking any legal action based on the information provided. The publishers accept no responsibility for any acts or omissions contained herein. Although the information provided is accurate as of November 2014, be advised that this is a developing area. Enquiries concerning reproduction should be sent to Law Business Research, at the address above. Enquiries concerning editorial content should be directed to the Publisher – gideon.roberton@lbresearch.com ISBN 978-1-909830-29-5 Printed in Great Britain by Encompass Print Solutions, Derbyshire Tel: 0844 2480 112

ACKNOWLEDGEMENTS

The publisher acknowledges and thanks the following law firms for their learned assistance throughout the preparation of this book: AB & DAVID BENNETT JONES LLP BM MORRISON PARTNERS CGA – COUTO, GRAÇA & ASSOCIADOS CMS CAMERON MCKENNA CUATRECASAS, GONÇALVES PEREIRA HOGAN LOVELLS BSTL, SC HOLLAND & KNIGHT KVALE ADVOKATFIRMA DA LÓPEZ & ASSOCIATES LAW FIRM LOYENS & LOEFF NV M&P BERNITSAS LAW OFFICES MATTOS FILHO, VEIGA FILHO, MARREY JR E QUIROGA ADVOGADOS MENA ASSOCIATES IN ASSOCIATION WITH AMERELLER LEGAL CONSULTANTS MINTER ELLISON ORRICK, HERRINGTON & SUTCLIFFE PAPADOPOULOS, LYCOURGOS & CO LLC PILLSBURY WINTHROP SHAW PITTMAN LLP RPS GROUP LTD

Acknowledgements

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CONTENTS

Editor’s Preface

��vii Christopher B Strong

Chapter 1

AUSTRALIA ��1 Sam MacGibbon, Paul Wentworth and Sam Jaffray

Chapter 2

AZERBAIJAN ��23 Aykhan I Asadov

Chapter 3

BRAZIL ��33 Giovani Loss, Felipe Rodrigues Caldas Feres and Nilton Mattos

Chapter 4

CANADA ��44 Donald E Greenfield, Vivek T A Warrier, Darcy Moch, Wally Braul, Milos Barutciski, Simon Foxcroft, Vasilis F L Pappas and Kim Kapesi-Miller

Chapter 5

COLOMBIA ��59 José V Zapata L

Chapter 6

CYPRUS ��71 Nicolas Papaconstantinou

Chapter 7

ECUADOR ��80 Ariel López, Daniela Buraye and Paulette Toro

Chapter 8

EGYPT ��91 Reham Eissa and Ahmed Haggag

Chapter 9

FRANCE ��102 Yves Lepage, Olivier Mélédo and Tanguy Bardet

iii

Contents

Chapter 10

GHANA ��111 Ferdinand Adadzi and Nana Serwah Godson-Amamoo

Chapter 11

GREECE ��125 Yannis Kourniotis and Ioanna Lamprinaki

Chapter 12

IRAQ ��135 Christopher B Strong

Chapter 13

IRAQI KURDISTAN ��147 Daniel Heintel and Dahlia Zamel

Chapter 14

IRELAND ��161 James Massey

Chapter 15

ISRAEL ��179 Shiri Shaham, Simon Weintraub, Noam Meir and Josh Hersch

Chapter 16

ITALY ��189 Roberto Leccese

Chapter 17

MALAYSIA ��201 Faizah Jamaludin and Fariz Abdul Aziz

Chapter 18

MEXICO ��211 Carlos Ramos Miranda and Miguel Ángel Mateo Simón

Chapter 19

MOZAMBIQUE ��221 Pedro Couto, Jorge Graça, Paulo Ferreira, Márcio Paulo and Gisela Graça

Chapter 20

NETHERLANDS ��236 Roland de Vlam and Rogier Sterk

Chapter 21

NIGERIA ��259 Israel Aye, Laura Alakija, Chigozie Anyanwu and Constance Udensi

Contents

Chapter 22

NORWAY ��274 Yngve Bustnesli

Chapter 23

PORTUGAL ��285 Rui Mayer, Diogo Ortigão Ramos, Ana Isabel Marques and Bruno Neves de Sousa

Chapter 24

RUSSIA ��299 Natalya Morozova and Rob Patterson

Chapter 25

SOUTH AFRICA ��310 Manus Booysen, John Smelcer, Hennie Bester, Jonathan Veeran, Keith Veitch and Garyn Rapson

Chapter 26

SWITZERLAND ��327 Andreas Hünerwadel and Beat Speck

Chapter 27

TURKEY ��339 Jonathan W Blythe, Esin Erkal and Ceren Savașer

Chapter 28

UNITED KINGDOM ��349 Penelope Warne and Norman Wisely

Chapter 29

UNITED STATES: CALIFORNIA ��362 Robert A James

Appendix 1

ABOUT THE AUTHORS ��373

Appendix 2

CONTRIBUTING LAW FIRMS’ CONTACT DETAILS ��397

EDITOR’S PREFACE

It is a privilege to have been able to participate in the second edition of The Oil and Gas Law Review. As with all the titles in this series, this volume is intended to serve as a practical reference for attorneys working in the oil and gas field, whether they are in private practice, in-house at energy companies, in government service or in academia. I would like to thank all of the contributing authors for providing excellent articles describing the legal regime for oil and gas within their respective jurisdictions, together with updates of notable recent developments. The Oil and Gas Law Review is divided into 29 chapters, each covering a different jurisdiction. The authors of the chapters have been chosen on the basis of their demonstrated expertise within their jurisdiction. In selecting the jurisdictions to be covered by this volume, we have tried to ensure that our coverage is as broad as possible, with representation across most of the major producing regions. Some of the most exciting legal developments in the oil and gas space in recent years relate to jurisdictions that have newly opened up to foreign investment, whether through the discovery of new producing basins in regions that previously had no significant oil and gas activity or through legal changes in jurisdictions that had previously been closed to foreign investment. Mexico is a prime example. Although its hydrocarbon industry is well established, since the late 1930s it had been closed to foreign investment and monopolised by state-owned producer PEMEX. All of that changed with the reforms that were passed late in 2013 and implemented over the course of 2014, with a carefully crafted legal regime designed to attract foreign investment while safeguarding the interests of the people of Mexico. For those readers interested in developments in Mexico or industry regulation in general, I would highly recommend the excellent chapter contributed by Carlos Ramos Miranda and Miguel Ángel Mateo Simón. Among the jurisdictions with newly discovered petroleum reserves, I should mention Israel and Mozambique. Hardly on the radar a few years ago, recent offshore discoveries in those jurisdictions promise to be transformational, and each of these jurisdictions continues to develop its legal regime in order to adapt to fast-moving developments. Of particular note is Mozambique’s new Petroleum Law, which came

vii

Editor’s Preface into effect shortly before publication of this volume and will no doubt be of significant interest to practitioners advising clients there. Established jurisdictions have seen significant developments as well. For example, Norway had new tax rates come into effect, while the implementation of the recommendations of the UK’s Wood Review promises to have a significant impact on operators in the UK’s North Sea. On the other hand, Nigeria’s long-awaited Petroleum Industry Bill still awaits passage. Perhaps it can be covered in a future edition of this volume. Developments like those mentioned above are precisely what make international oil and gas law so challenging. We hope that by summarising developments in as many jurisdictions as possible, we can provide a useful resource for practitioners. Christopher B Strong Vinson & Elkins LLP November 2014

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Chapter 6

CYPRUS Nicolas Papaconstantinou1

I INTRODUCTION The discovery of hydrocarbons within Cyprusâ&#x20AC;&#x2122;s exclusive economic zone in December 2011 put the Republic of Cyprus on the world energy map and was received with wide enthusiasm. The findings have since been followed by plentiful developments that seek to transform the initial surprise into a well-founded aspiration of becoming a producer and exporter of hydrocarbons. The oil and gas exploration area is of 51,000km2 and is located south of Cyprus. This area has been separated into 13 exploration blocks. To date, six licences and production sharing contracts have been applied for and obtained. The local authorities are considering other applications in order to award licences for the remaining blocks. The recently formed state-owned Cyprus Hydrocarbons Company (KRETYK) has been given the mandate to manage Cyprusâ&#x20AC;&#x2122;s hydrocarbon resources and proceeds. The company also represents Cyprus in production sharing contracts and deals with potential investors in relation to the construction of a liquefaction and export facility. Further discussions between the Cypriot government and relevant entities concerning the infrastructure necessary for the transportation and liquefaction of the gas, are currently ongoing. These point to a period of at least five years until the essential facilities that can enable Cyprus to export on a desirable scale are established.

Nicolas Papaconstantinou is a partner at Papadopoulos, Lycourgos & Co LLC. The author would like to acknowledge the invaluable contribution of his colleagues Yiannis Eliades and Phani Philippou in the preparation of this chapter.

Cyprus II

LEGAL AND REGULATORY FRAMEWORK

The prospecting, exploration and exploitation of hydrocarbons in Cyprus are governed by several national legal instruments. Given that Cyprus is a Member State of the European Union, it additionally follows the Community acquis relating to oil and gas activities. i

Domestic oil and gas legislation

Relevant legislation includes the Law on Regulating the Electricity Market of 2003 No. 122(I)/2003 which establishes the Cyprus Energy Regulatory Authority (CERA). In addition, there are the Laws on Regulating the Natural Gas Market of 20042012, No. 183(I)/2004 (30/04/04), No. 103(I)/2006 (21/07/2006), No. 219(I)/2012 (28/12/2012), No. 199(I)/2007(31/12/2007). These laws were passed in order to bring the internal natural gas market in line with the EU Directive 2003/55/EC. The latter was, however, repealed and replaced with new Directive 2009/73/EC. Cyprus secured several deviations from this due to the fact that it is regarded as an isolated market. The deviations will cease to exist once Cyprus’s internal natural gas market ceases to be isolated. Hydrocarbon (Prospection, Exploration and Exploitation) Law of 2007 (No. 4 (I)/2007). The above incorporates EC Directive 94/22/EC into domestic law. Hydrocarbon (Prospection, Exploration and Exploitation) Regulations of 2007 and 2009 (No. 51/2007 and No. 113/2009). The regulations address the licences that can be obtained and provide guidance on procedural and application matters. ii Regulation Regulatory agencies The Ministry of Commerce, Industry and Tourism – Energy Service (MCIT) is responsible for granting licences for prospection, exploration and exploitation of hydrocarbons as well as overseeing any activities that pertain to these. The Cyprus Energy Regulatory Authority (CERA), following the Natural Gas Law, Law 183/2004 (the Natural Gas Law) is to regulate the natural gas market. The Natural Gas Company (DEFA) – the state-owned company DEFA has been given a wide mandate regarding the natural gas market in Cyprus. DEFA is responsible not only for the import and storage of natural gas in Cyprus but also for its distribution. Regulator’s enforcement powers CERA is responsible for handing out licences regarding the import, storage or gasification of natural gas. However, following the Law on the Regulation of the Natural Gas Market 2004 as amended by Law 199(I)/2007, DEFA, the sole entity responsible for the import and supply of natural gas in the market of Cyprus was established. As a result of this monopoly, the role of CERA as a regulator responsible for issuing licences regarding the above activities is currently suspended. CERA is moreover responsible for examining and regulating the possibility and implementation of an interconnection with another member state. The regulatory authority also has influence over the market, as it should maintain a sustainable balance between supply and demand of gas in the local market. To this

Cyprus end, misuse of a dominant position within the market will be prevented. Following an EU Directive on the matter, assessing the supply and demand in the market includes ensuring smooth market conditions in cases of emergency and unforeseen crises. CERA is also to provide the technical design and operation minimum standards for the connection to the network. This covers other natural gas infrastructure. It should be kept in mind that all public authority decisions can be challenged by means of judicial review and thereby examined by the Supreme Court of Cyprus. iii Treaties European Union legal framework Directive 94/22/EC of 30 May 1994 on the conditions for granting and using authorisations for the prospection, exploration and production of hydrocarbon: identifies the procedure that should be followed for granting licences so as to ensure a transparent modus operandi. It additionally elaborates on time and geographical restrictions of authorisations. Directive 2009/72/EC of 13 July 2009 concerning Common Rules for the Internal Market in Electricity seeks to secure an obstacle-free EU market for the sale of electricity and stipulates the policies that should be followed to ensure a free market where competition flourishes. In that regard, it calls for the furthering of crossborder interconnections that will ultimately guarantee a supply of all energy sources at competitive prices for the benefit of the European consumer. The Directive also tackles the above issue having in mind sustainable climate policy arguments. Directive 2009/73/EC of 13 July 2009 concerning common rules for the internal market in natural gas repeals Directive 2003/55/EC and aims to more efficiently segregate supply and production activities from network operations. Regulation (EC) No. 715/2009 of 13 July 2009 on conditions for access to the natural gas transmission networks rewrites the natural gas transmission and trade rules in order to remove any barriers to competition. Regulation (EU) No. 994/2010 of 20 October 2010 concerning measures to safeguard security of gas supply acts as a vote of confidence to the Unionâ&#x20AC;&#x2122;s ability to maintain a constant supply of gas within the internal gas market. The regulation puts a mechanism in place by which national and community authorities coordinate to deal with emergency situations. The ultimate goal is to prevent a supply disruption for protected customers, which includes households, social services and small enterprises. Commission Decision of 24 August 2012 on amending Annex I to Regulation (EC) No. 715/2009 of the European Parliament and of the Council on conditions for access to the natural gas transmission networks (2012/490/EU). International conventions Cyprus is a party to several international conventions. These include: a the International Arbitration in Commercial Matters Law 1987; b the New York Convention for the Recognition and Enforcement of Foreign Arbitral Awards 1958; c the United Nations Convention on the Law of the Sea (UNCLOS); and

Cyprus d

the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration of 21 June 1985.

Bilateral agreements Cyprus has initiated and concluded several bilateral agreements with neighbouring states. This includes the delimitation of the Exclusive Economic Zone of Cyprus with Egypt, which reflects the median-line principle as encompassed in the UNCLOS 1982 agreement. Cyprus and Egypt have capitalised on their cooperation with a framework agreement expanding on the development of a cross-median line concerning hydrocarbon resources. Other agreements have been signed on a political level with Israel and Lebanon. Cyprus and Egypt have also entered into a framework agreement regarding the development of cross-median line hydrocarbon resources. Double tax treaty network Cyprus has developed an extensive network of double tax agreements with almost 50 countries, ensuring that the same income is not taxed in more than one country. By these treaties, entities registered in Cyprus will not only enjoy tax exemptions within Cyprus but will additionally profit from analogous exemptions within other treaty countries. III LICENSING The licensing regime in relation to hydrocarbon activities in Cyprus is governed by the Hydrocarbons (Prospecting, Exploration and Exploitation) Law 4(I) of 2007, as amended by Laws 126(I)/2013 and 29(I)/2014 (Hydrocarbons Law) and supplemented by the Hydrocarbons (Prospecting, Exploration and Exploitation) Regulations of 2007 and 2009 (Hydrocarbons Regulations). The above specify three types of licences that can be applied for and obtained. These relate to hydrocarbon prospecting, exploration and exploitation. Each licence pertains to a particular exploration block. The legal framework also provides the criteria that need to be fulfilled so that the applicant can be deemed eligible for each licence. It should be underlined that according to Community Law 183(I)/2004, the transmission and distribution of gas without a licence is a criminal offence. There are three types of licences that can be awarded: a Hydrocarbon prospecting licence: this licence grants its holder the right to attempt to locate hydrocarbons in a geographical area by any appropriate method other than drilling. This licence is subject to a statutory maximum of one year.2 b Hydrocarbon exploration licence: the exploration licence can be obtained for up to three years3 and may be renewed for up to two terms, each term not exceeding two years, given that the licensee has satisfied their obligations in relation to a current exploration term. In every renewal of the term of the exploration period, the licensee must surrender at least 25 per cent of the initial surface of the

2 3

Article 8 Hydrocarbons Regulations. Article 9 Hydrocarbons Regulations.

Cyprus

licensed area. This licence covers gravity, seismic and magnetic surveys, as well as exploration drilling. If hydrocarbons are discovered, then the licensee is entitled to an exploitation licence. Hydrocarbon exploitation licence: granted initially for up to 25 years and can potentially be renewed once for a further 10 years. It covers both exploration and exploitation if commercial hydrocarbons are discovered. Licensing rounds

The invitation for the initial licensing round was announced on 15 February 2007 and was related to the exploration and exploitation licences for Block 12. The first exploration licence for Block 12, which covers an area of 4,600 square kilometres, was granted to Noble Energy International in the first licensing round in October 2008. In October 2013, Noble Energy had placed the resource estimation in the specific gas field in the range of 3.6 to 6tcf. A second bid round was concluded on 11 May 2012 for the 12 remaining offshore blocks. Interest was shown from 15 consortia/companies (a total of 29 different companies), which placed 33 applications for nine blocks. The ENI-KOGAS consortium was given licences for Blocks 2, 3 and 9 in January 2013. The following month, Total E&P obtained licences for Blocks 10 and 11. Both licensees aim to conduct exploratory drilling in 2014. ii

Type of instrument used

The specific conditions and requirements for the exploration and exploitation licences are incorporated in a contract agreement established between the government of Cyprus and the licensees. Such a contract may take the widely used form of a production sharing contract (PSC) or a concession agreement, or both or any other form of the arrangement of those used in the hydrocarbons industry. PSC was first used for the agreement between the government of Cyprus and Noble Energy International with respect to Block 12. A model PSC can be found at the website of the Ministry of Energy, Commerce, Industry and Tourism of the Republic of Cyprus.4 The main clauses of the model PSC include the minimum exploration work programme; cost of oil and gas recovery; transfer â&#x20AC;&#x201C; assignment; change of control; profit percentages; minimum annual training budget; performance guarantee and annual surface fees. iii

Licence limitations

The holder of a licence should ensure that all operations are carried out in a manner that shows respect to the environment and is in line with the current environmental legislation such as the International Convention on Civil Liability for Oil Pollution Damage. Good industry standards provide an attestation to this. Cyprus has followed Directive 2001/42/EC, transposing it into national law. It subsequently performed a strategic environmental assessment (SEA) to bring out and highlight any effects that the

4 www.mcit.gov.cy/mcit/mcit.nsf/all/2300DDB36D859732C22579AA002BDE09/$file/ Model%20PSC.pdf?openelement.

Cyprus activities relating to hydrocarbons might have. Authorised parties are expected to comply with the above SEA. Furthermore it is obligatory, as stipulated by the model contract, for the licensee to ‘remove all equipment, installations, structures, plants, appliances and pipelines from the licensed area’.5 This should be coupled with all necessary site restoration activities in accordance with good international petroleum industry practices and take all necessary measures to prevent hazards to human life, the property of others or the environment’.6 This default position could be varied by the Minister of Energy, Commerce, Industry and Tourism (the Minister), who may also demand the issue of a guarantee for a determined amount or the setting up of a reserve for future abandonment and restoration expenses. IV

PRODUCTION RESTRICTIONS

Restrictions on exports of oil and gas and on production entitlements

There are no restrictions on exports of oil and gas or on production entitlements. However, the annual work programme and development plan for each reservoir are approved by the government and in this context the production needs to be approved. ii

Requirements for sales of production into the local markets

Through the provisions of the model PSC, the government may impose requirements for sales of production into the local markets. However, the market of Cyprus is too small and the discoveries are already too large. iii

Law applicable to price setting

In regard to provisions applicable to price setting, the model PSC provides in general that the arm’s-length principle must be followed. V

ASSIGNMENTS OF INTERESTS

Any licences and rights stemming from them can be assigned or transferred. This, however, is subject to consent from the Council of Ministers of Cyprus. As Regulation 12(1) of the 2007 Regulations stipulates, for such a transfer, a written application must be made to the Minister. The Minister will in turn submit an opinion to the Council of Ministers which will reach a decision. The Council will consider whether the assignee or transferee possesses the adequate know-how, experience and resources to carry out the relevant activities. Possible national security issues will also be examined. Moreover, the Council may decide to impose conditions on the original licence. The Ministry of Energy, Commerce, Industry and Tourism can provide guidance to the relevant application.

5 6

Reg. 16 (1)(a)No.51/2007 and No.113/2009. Ibid. Reg. 16(1)(b).

Cyprus VI TAX Despite it being the first time that Cyprus is deploying the natural resources found within its EEZ, various international energy companies have previously used Cyprus in order to benefit from the favourable taxation as well as the high standard of services that Cyprus has to offer. At the moment there is no tax regime in Cyprus specifically for the oil and gas industry, although the tax authorities will provide such guidance in the future. For the time being, all contractors must abide by the taxation legislation currently in place in Cyprus. This follows the EU VAT Directive as Cyprus is party to the EU Customs Union. The current VAT principal rate is 19 per cent. It should be noted that, as the PSC provides, corporate tax is held to be included within the profit share that belongs to the government. Subsequently, the contractorâ&#x20AC;&#x2122;s share is corporate tax-free. It should be noted that a permanent establishment in Cyprus provides an exemption, as exploration and extraction activities can be carried out free of Cypriot tax. Relevant to taxation matters are also the numerous double taxation treaties mentioned above. VII

ENVIRONMENTAL IMPACT AND DECOMMISSIONING

Environmental impact

Considering the potential impact that oil and gas operations might have on the environment, the legal framework stipulates an assessment of such operations. The relevant Community legislation is Directive 2001/42/ EC, which was transposed into national law by the Assessments of the Effects on the Environment of Certain Plans and/ or Programmes Law 140(I) of 2005. The above require an SEA to be executed so that the effect of hydrocarbon exploration and exploitation activities can be identified at an early stage. The environmental report that was prepared by Maritime Communication Services Inc, Aeoliki Ltd and CSA International Inc, can be located on the website of the Ministry of Energy, Commerce, Industry and Tourism.7 Contractors and subcontractors are required to comply with the findings of the SEA. Hydrocarbon operations are further regulated by the general laws and regulations of Cyprus on environmental protection, health and safety. It is therefore obligatory for every authorised party to conduct the relevant activities in a safe and environmentally acceptable manner and to follow best international industry practices. Contractors are also obliged to carry out a preliminary environmental impact assessment study prior to any exploration operations. This should be supplemented by a full environmental impact assessment study prior to any exploitation work.

7 www.mcit.gov.cy/mcit/mcit.nsf/All/C0FEAAF63F3DB362C22574D600456349?OpenDocument.

Cyprus ii Decommissioning The removal, disposal or reuse of any structures used during the relevant processes is again guided by the terms of the model PSC. The contract requires the authorised party to obtain the approval of the Ministry of Commerce Industry and Tourism before proceeding with decommissioning. In order for that to happen, contractors must put forward a decommissioning plan, together with any expected expenditure at least six years before the expected date of the decommissioning of a block or as soon as possible before the termination of any exploitation area. A consultation period between the parties, where amendments to the suggested plan are submitted, may follow. A reserve fund should be established in order to safeguard the effective completion of any decommissioning activity. The fund should be deposited in a bank account and approved by the Ministry. In the event decommissioning costs prove to be greater than the amount reserved, any such costs are to be covered by the contractor. If costs are lower on the other hand, any excess amount will be payable to the government. VIII FOREIGN INVESTMENT CONSIDERATIONS i Establishment For oil and gas operations in Cyprus investors may choose to either establish a branch of a foreign operation or a local entity. ii

Capital, labour and content restrictions:

The European internal market framework guides the movement of capital. Therefore, there are no limitations on the entry of foreign capital in Cyprus, other than those limitations stemming from international sanctions, terrorist financing or money laundering legislation. Cyprus is party and signatory to the Schengen Agreement. There are thus no restrictions on the ability of companies to employ Cypriot or EU nationals. For workers that are not EU nationals, it is obligatory that they hold a residence permit or temporary visa that would enable them to work in Cyprus. It is nevertheless stipulated in the model PSC that once operations begin the contractor shall ensure priority employment for Cypriot and EEA personnel and contribute to the training of those personnel in order to allow them access to any position of skilled worker, foreman, executive and manager.8 iii Anti-corruption Cyprus follows a European Council 2003 Framework Decision concerning corruption. The decision targets acts of both active and passive corruption and imposes criminal liability on those responsible.

Article 25.1 of the Model Exploration and Production Sharing Contract.

Cyprus There are also rules related to oil and gas activities passed by the European Parliament in 2011 that seek to shield consumers from abuses in wholesale oil and gas trading. The rules prescribe the independent monitoring of energy trading within the Union with the overall aim of combating anti-competitive practices. This is further reinforced by the European legislation on Energy Market, Integrity and Transparency, which applies to all energy trading activity in the Community and criminalises market manipulation and insider information use. In order to achieve this, the Agency for the Cooperation of Energy Regulations will supply Member States with details of breaches of the aforementioned laws. IX

CURRENT DEVELOPMENTS

It has recently been announced by the Ministry of Energy of Cyprus that a gas drilling period of 12 to 18 months will follow in areas specifically reserved for gas drilling within the EEZ of Cyprus. These areas are Blocks 2, 3 and 9, in which ENI-KOGAS consortium has concessions. Seismic surveys provide reasons for optimism regarding this second round of drilling, enhancing scenarios of liquefying and exporting gas. The government of Cyprus recently formed the National Geostrategic Council and the Energy Council, staffed with experts and academics, who will provide guidance in relation to energy matters.

Appendix 1

ABOUT THE AUTHORS

NICOLAS PAPACONSTANTINOU Papadopoulos, Lycourgos & Co LLC Nicolas Papaconstantinou is a partner in the real estate and energy department at the law office of Papadopoulos, Lycourgos & Co LLC, in Nicosia. He focuses his practice on real estate, wills and succession, energy and related litigation. He also deals with specialised transnational corporate and commercial matters. Mr Papaconstantinou attained a BSc degree with honours in economics and politics at the University of Bath and, following postgraduate study at the London School of Economics, a masterâ&#x20AC;&#x2122;s degree in science in real estate economics and finance. In 2008, he graduated in law (LLB with honours) from City University, London. Drawing on his real estate, economics and finance background, he has added value to clients on several cases in his capacity as an advocate. In 2013, Mr Papaconstantinou obtained a postgraduate diploma (PgDip) in oil and gas law at Aberdeen Business School of Robert Gordon University and he is currently studying towards a master of laws (LLM) in oil and gas law at the same institution. Mr Papaconstantinou is also a certified real estate valuer registered with the Scientific Technical Chamber of Cyprus (ETEK). He was admitted to the Cyprus Bar in 2009.

PAPADOPOULOS, LYCOURGOS & CO LLC 2â&#x20AC;&#x201C;4 Arch. Makarios III Avenue, 7th floor Nicosia 1065 Cyprus Tel: +357 2267 6126 / 2267 3888 Fax: +357 2267 4201 / 2266 7600 www.paplyclaw.com

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