Tunisia oil and gas report - Freshfields

of Industry and Technology, and the CentralBank. The Ministry of Industry andTechnology is required to seek advice fromthe Hydrocarbons Advisory Committeewhen granting a permit/concession and, ifrequired, for any other hydrocarbonrelatedmatters.National oil and gas companies are keyindustry participants in Tunisia. The mainnational entities are: Entreprise Tunisienned’Activités Pétrolières (ETAP), the stateownedcompany established by legislation in1972 that is responsible for the exploitationand trade of hydrocarbons; SociétéTunisienne d’Electricité et de Gaz (STEG), astate-owned entity that is the exclusivedistributor of gas; and Société Tunisiennedes Industries de Raffinage, a state-ownedoil refinery that also trades refined oil.Licensing regimeThe licensing regime set out in theHydrocarbons Code covers four differenttypes of hydrocarbons rights. These includepreliminary authorisations for limitedseismic and drilling work and then grants ofrights to explore for develop and producehydrocarbons, each as described below.Contractors can either participate inexploration permits and concessionagreements directly as co-holders withETAP or, where ETAP is the party awardedthe permit or agreement, as contractorsengaged by ETAP under a productionsharing contract.• A prospecting authorisation is grantedby the Ministry of Industry andTechnology for a period of one year to oneor more companies for the same area.This authorisation enables the holder(s) toperform preliminary prospecting workwithin the defined area, except forseismic works and drilling wells.• A prospecting permit is granted by theMinistry of Industry and Technology for aperiod of two years (which may beextended for a maximum of 12 months).This permit gives the holder(s) theexclusive right to perform prospectingwork within a defined area, except fordrilling activities that exceed 300 metersin depth and that are not intended solelyfor geological and seismic coring. Theholder of a prospecting permit has apriority right to have its prospectingpermit transformed into an explorationpermit if applied for at least two monthsbefore its expiry.• An exploration permit is granted by theMinistry of Industry and Technology foran initial period of up to five years andmay be renewed twice for a period of fouryears each. A third renewal of a period offour years may be granted if the permitholder discovers oil. The holder of thepermit has the exclusive right to conductexploration activities within the definedblock and the exclusive right toobtain exploitation concessions withinthat block.To be granted an exploration permit, anapplicant must show the necessarytechnical and financial capabilities, have apresence in Tunisia, undertake toimplement an exploration workprogramme (specifying the nature and thesize of the work to be carried out with anestimate of the associated costs) and enterinto a Specific Agreement (ConventionParticulière) with the Tunisian state asdrafted in accordance with a standardmodel approved by Decree No. 2001–1842dated 1 August 2001. This SpecificAgreement and its attachments must beapproved by Decree of the Ministry ofIndustry and Technology and published inthe Official Gazette of the Republic of Tunisia. Itsets out the terms and conditions of therelationship between the Tunisian state,represented by the Ministry of Industryand Technology (referred to in the Tunisian2 Freshfields Bruckhaus Deringer llpTunisiaMarch 2013

Hydrocarbon Code as the GrantingAuthority) and the permit holder duringthe exploration and exploitation concessionperiods.Under the Tunisian Hydrocarbons Code,an exploration permit will not be grantedunless the applicant is acting inassociation with ETAP. Therefore, everycompany must agree to be associatedwith ETAP from the outset of explorationactivities. ETAP and its future associatesmust enter into a joint venture agreement(Contrat d’Association), setting out thenature of ETAP’s participation, and theterms and conditions that will apply to it.The Contrat d’Association and anyaddendum to it is subject to approval bythe Granting Authority.Under the ‘Association Regime’, theassociate of ETAP bears the cost and riskof carrying out the prospecting andexploration activities. However, in certaincases, ETAP may opt to contribute to thecost of such activities subject to approvalby the Granting Authority.Where exploration activities lead to acommercial discovery, the holder of avalid exploration permit may, under theterms of the Specific Agreement, applyfor an exploitation concession.• An exploitation concession may begranted by an order of the Minister ofIndustry and Technology, which must bepublished in the Official Gazette.ETAP has an option to acquire an interestin any exploitation concession, up to amaximum percentage interest, inprinciple 50 per cent, set out in therelevant Specific Agreement. If ETAPchooses to exercise its option to acquirean interest in the concession under theSpecific Agreement, it must reimburse itsassociate(s) for its share of the costsincurred up to the date of notification ofETAP’s participation.In addition to the Association Regimedescribed above, the Hydrocarbons Code alsoprovides for a production sharing agreement(PSA) as the basis for carrying out petroleumactivities. According to Article 97 of theHydrocarbons Code, ETAP in its capacity asholder of an exploration permit can enterinto a PSA with a company (or group ofcompanies) that will act as ‘contractor’. Incase of a commercial discovery, ETAP asholder of the exploration permit will thenbe awarded an exploitation concession.Under the ‘PSA Regime’, the contractorcarries out the exploration and exploitationactivities and bears all costs and risks onbehalf of and under the control of ETAP.National oil company/state participationAs indicated above, under the HydrocarbonsCode, an exploration permit will not begranted unless the applicant is acting inassociation with ETAP or as a contractorunder the PSA Regime. Under theAssociation Regime, ETAP has an option toacquire a participation in any exploitationconcession granted as a result of acommercial discovery under an explorationpermit. Under the PSA Regime, ETAPhas an entitlement to a share ofhydrocarbon production.Fiscal regimeThe fiscal regime applicable to E&Pcompanies operating in Tunisia is governedin particular by the Hydrocarbons Code.Taxes applicable to the upstream oil and gassector are set out below.• Registration fee – payment of a fixed feefor the registration of the SpecificAgreements, Contrats d’Association, PSAs,and any related agreements (20 TND perpage, approx $13).• Royalty (Article 101.2.1 of the TunisianHydrocarbons Code) – a royaltyproportional to the quantity ofhydrocarbons produced by the holder ofan exploitation concession is payableFreshfields Bruckhaus Deringer llpTunisiaMarch 20133

either in kind or in cash to the GrantingAuthority in accordance with the terms ofthe Specific Agreement. The method ofcalculating the royalty payable is based onthe ‘R’ ratio (see Petroleum Income Taxbelow). The royalty rate is divided intoseven tiers for oil and nine tiers for gas,which range from 2 per cent to 15 per centdepending on the R value determined.• Petroleum Income Tax (Article 101.3 ofthe Tunisian Hydrocarbons Code) – tax ispayable on net income from oil and gasproduced based on the ratio of accruednet earnings to accrued totalexpenditures for each exploitationconcession (the R ratio). Net income fromoil is taxed at a rate of 50–75 per cent.Net income from gas is taxed at a rate of50–65 per cent. A 50 per cent tax rateapplies to both oil and gas if ETAP hastaken a stake of 40 per cent or more inthe relevant concession.• Petroleum Annual Tax (Article 101.1.2 ofthe Tunisian Hydrocarbons Code) – this isa fixed annual tax for every hectare ofland included in an exploitation concessionequal to the hourly minimum wage of anordinary worker (ie $1/hectare). This tax isequal to five times the hourly minimumwage of an ordinary worker per hectarefor inactive or non-exploited concessions.This tax is payable annually (30 June)during the entire term of a concession.• Fixed tax (Article 101.1.1TunisianHydrocarbons Code) – this tax is equal tothe hourly minimum wage of an ordinaryworker for every full elementaryperimeter (an area of 4km2) to which anexploration permit, prospecting permit orexploitation concession has been granted.This tax amounts to approximately$195 per perimeter and does not apply toprospecting authorisations. This tax is aone-off payment that must be paidwhenever a new permit/concession isgranted, an existing permit/concession isrenewed or the area for prospecting/exploring/exploiting is extended.In addition, under the PSA Regime:• a fixed percentage of production (cost oil)is allocated to the contractor for therecovery of costs incurred under the PSA(including, where relevant, costs incurredunder a prospecting permit). Thepercentage is specified in the PSA and is50 per cent for oil and 55 per cent for gas;• the remaining production (profit oil) isshared between ETAP and the contractoraccording to the terms of the PSA and theSpecific Agreement based on the R ratio:—— for oil, the split varies from 65–85 percent for ETAP and 35–15 per cent forthe contractor;—— for gas, this split varies from 55–75per cent for ETAP against 45–25 percent for the contractor; and• ETAP (as owner of the petroleum assets) isheld liable for the payment of theregistration fee, royalty, petroleumannual tax and the fixed tax. Thecontractor is liable for the PetroleumIncome Tax, but this is deemed to havebeen paid when the contractor deliversETAP its profit oil share. The contractorremains otherwise subject to the generaltax regime applicable to entitiesoperating in Tunisia.Local content requirementsThe Tunisian Hydrocarbons Code has localcontent requirements specifically set out inArticle 62.2. Under the Code, the permitholder or contractor must hire, as a matterof priority, Tunisian employees, as long asthis is compatible with the properaccomplishment of its activities.The permit holder or contractor must alsotrain the Tunisian personnel in allspecialisms as required by his activities, inaccordance with a training plan that issubject to Granting Authority approval.4 Freshfields Bruckhaus Deringer llpTunisiaMarch 2013

For comparable prices, qualities and deliverytimes for the same product or service, thepermit holder or contractor must use, as amatter of priority, materials and equipmentmade in Tunisia or Tunisian servicecompanies and subcontractors.Transfer of interestsConsentsThe Tunisian Hydrocarbons Code permitsthe total or partial transfer of upstream oiland gas interests if the following conditionsare satisfied:• the transaction is subject to a transferagreement (contrat de cession) concludedunder Tunisian law and approved by theMinistry of Industry and Technology withthe assent of the Hydrocarbons AdvisoryCommittee; and• the transferee continues to fulfil theconditions under which the concession orpermit was awarded.A transfer of interests, rights and obligationsin respect of a petroleum asset is subject toan order of the Ministry of Industry andTechnology, which is to be published in theOfficial Gazette.If a change in the share capital structure ofthe permit holder or contractor leads to achange of control, the transaction requiresthe approval of the Hydrocarbons AdvisoryCommittee but is not subject to an order ofthe Ministry of Industry and Technologyand need not be published in the OfficialGazette. The Hydrocarbons AdvisoryCommittee’s main concern is to ascertainthe financial capabilities of the new parentcompany and it may make its approvalsubject to the provision of a bank guarantee.If a change in the share capital structuredoes not lead to any change of control, thetransaction is subject only to a notificationletter to be addressed to theGranting Authority.TaxationAccording to Article 105 paragraph 2 of theHydrocarbons Code, any assignment ofrights, interests and obligations under aprospecting permit, exploration permit orexploitation concession under theHydrocarbons Code will not be subject toany tax either existing or to be institutedlater on under the common tax regime.Transfers made between affiliatedcompanies must be notified to the GrantingAuthority. The Granting Authority mayrequire the transferee company (or itsparent company) to commit to fulfilling theconditions under which the permit wasawarded by providing a parent companyguarantee or other form of security.Freshfields Bruckhaus Deringer llpTunisiaMarch 20135

Stabilisation/equilibrium anddispute resolutionThe taxes, levies and duties for which E&Pcompanies are liable are fixed exhaustively,along with the other associated obligations,in the Hydrocarbons Code (Article 100 andfollowing). The principle of stability isfurther ensured by the Specific Agreementsentered into between the E&P companiesand the Tunisian state, in which theTunisian state guarantees the legalframework and commits never to submit thepermit holder or contractor, whetherdirectly or indirectly, to a legal regime thatis more restrictive than that governed by theSpecific Agreement and its attachments.The parties to a Specific Agreement, Contratd’Association and PSA are free to choose theirdispute resolution mechanisms, except thatthe applicable law and regulations must bethat of Tunisia. In practice, most of thoseagreements stipulate that:• any dispute between the parties shall besubject to arbitration in accordance withthe rules and procedures of theInternational Chamber of Commerce inforce at the date of the start of arbitrationproceedings;• the seat of the arbitration is to be Paris,France; and• the language of the arbitration is tobe French.freshfields.comFreshfields Bruckhaus Deringer llp is a limited liability partnership registered in England and Wales with registered number OC334789. It is authorised and regulated by the Solicitors RegulationAuthority. For regulatory information please refer to www.freshfields.com/support/legalnotice. Any reference to a partner means a member, or a consultant or employee with equivalent standing andqualifications, of Freshfields Bruckhaus Deringer llp or any of its affiliated firms or entities. This material is for general information only and is not intended to provide legal advice.© Freshfields Bruckhaus Deringer llp, March 2013, 35653