This article was featured in our 2023 Energy Arbitration Report, which is part of a series of industry-focused arbitration reports edited by Jus Connect and Jus Mundi.
This issue explores the energy industry, encompassing information on electricity & renewables, based on data available on Jus Mundi and Jus Connect as of September 2023. Discover updated insights into energy arbitration and exclusive statistics & rankings, as well as in-depth global and regional perspectives on energy projects, disputes, & arbitration from leading lawyers, arbitrators, experts, arbitral institutions, and in-house counsel.
THE AUTHORS:
Yanal Abul Failat, Senior Associate at Al Tamimi & Company
Chelsea Pollard, Associate at Al Tamimi & Company
The foundational legal framework for oil and gas exploration and production in Oman is the Oil and Gas Law, which was issued by Royal Decree No. 8/2011 (“Petroleum Law”), which regulates the activities related to surveying, exploring, developing, and exploiting petroleum resources in Oman and defines the rights and obligations of the Government of the Sultanate of Oman (“Government”) and exploration and production oil and gas companies. The Petroleum Law requires a concession agreement, typically in the form of an exploration and production sharing agreement (“EPSA”), to be concluded between the Government and the concessionaire(s) (“Contractor”) for carrying out these activities. The EPSA grants the Contractor the exclusive right to explore and produce oil and gas in a specified area, subject to certain terms and conditions.
An EPSA is the chief title document to an upstream project in Oman and can become a source for disputes between the Contractor and the Government. They are long-term and complex agreements involving technical issues and numerous regulatory frameworks. As such, they may give rise to various types of disputes, which can be resolved through different methods, depending on the terms of the specific ESPA and Omani law. This article will provide an overview of the main types of disputes under EPSAs in Oman. This article explores the predominant kinds of EPSA disputes that may emerge in this intricate domain of the Omani oil and gas sector and how they are resolved.
Exploration and Production Sharing Agreements
Within the framework of EPSAs, the Government retains the title to the petroleum but bestows upon the Contractor the exclusive privilege to explore, produce, and partake in the resulting profits. Initially, EPSAs are typically awarded for a short exploration period, often spanning three years. Should the Contractor meet their minimum work obligations, they can extend the exploration term by three additional years. Moreover, the term can be extended once the Contractor declares commerciality; at this point, the production phase kicks in, usually lasting for 15 years, with the right to extend for a further five years if petroleum production continues after the production phase.
The EPSA lays down definite work obligations and chronologies for the Contractor. A notable instance would be the stipulated period within which a declaration of commerciality should be made post-exploration. Similarly, the Government and the Contractor harmonise their understanding of the EPSA regarding the mechanisms to share profits, striving for an equitable division of revenues. This often encompasses formulas addressing cost recovery and the distribution of profits. Furthermore, the EPSA delineates the government take, encompassing royalties, taxes, and other fiscal responsibilities.
The Dispute Landscape
One type of dispute that may arise under EPSAs in Oman is related to the Contractor’s operations in the exploration and production areas. These disputes may involve allegations of environmental damage, disputes over project assets, or issues regarding abandonment and decommissioning. For example, the Government may claim that the Contractor has caused pollution or failed to protect the environment and seek compensation or termination of the EPSA. Alternatively, the Contractor may dispute the condition or maintenance of the assets they have to transfer to the Government at the end of the EPSA or their liability for future abandonment or decommissioning costs. These disputes may require evidence of the existence or non-existence of environmental damage, the condition and maintenance of the assets, or the proper abandonment of the existing wells.
Similarly, another source of disputes under EPSAs is compliance with the minimum work obligations and the HSE requirements. These obligations and requirements are imposed on a Contractor to ensure that it conducts the exploration and production activities in accordance with the best international industry practices and Omani laws and regulations. Disputes may arise over the performance and measurement of the minimum work obligations, such as the drilling of wells, the acquisition of seismic data, and the implementation of Enhanced Oil Recovery (“EOR”) techniques.
Conflicts may also arise over compliance with the HSE standards, such as the prevention and mitigation of environmental damage, the use of materials, equipment, and techniques, and the protection of the workforce.
Another type of dispute that may arise under EPSAs in Oman is related to the cost recovery mechanism. Under this mechanism, the Contractor is entitled to recover its exploration and production costs from a portion of the petroleum produced before sharing the remaining production with the Government. However, conflicts may arise over which costs are recoverable, out of which production, and when. For example, the Government may conduct audits and reverse some of the costs the Contractor has already recovered, or the Contractor may challenge the Government’s interpretation of the EPSA terms on cost recovery. These disputes may affect the amount of profit production that each of the Government and the Contractor parties can take and sell, and it may lead to overlifting disputes, where one party claims that the other has lifted more than its entitlement. These disputes may involve issues of burden of proof, limitation periods, and contractual interpretation.
A fourth type of dispute that may arise under EPSAs in Oman is related to the rights and obligations of the parties under the EPSA and Omani law. These disputes may involve allegations of breaches of the EPSA obligations by either party, disputes over the approval requirements for assignments or transfers of rights, or disputes over the regulatory decisions of the Ministry of Energy and Minerals (“MEM”). For example, the Government may accuse the Contractor of selling or importing prohibited materials or equipment, not meeting the Omanisation and training requirements, or violating land-related easements. Alternatively, the Contractor may challenge the Government’s enforcement actions, approval of transfers or assignments, or other regulatory decisions by the MEM.
These disputes may involve the application of the Omani laws and regula- tions, as well as the EPSA terms, to the facts of the case.
Enforcing Assignment Rights
Finally, amid the dynamics of joint operating agreements (“JOAs”) entered into between Contractor parties and EPSAs, disputes between the Contractor and the Government may revolve around the enforcement of reassignment rights under JOAs. When assigned, the Contractor’s rights under the EPSA are formalised in the JOA. Failing to obtain the Government’s indispensable approvals could render the Contractor in breach of both the JOA and the EPSA. In scenarios where disagreements arise under a JOA between the Contractor parties, a Contractor party might seek reassignment through mechanisms such as forfeiture or buy-out-related pathways. However, to execute this, the Contractor must meticulously adhere to the EPSA’s assignment protocols. This becomes particularly complex given the contentious space between the Government and the Contractor. Assigning interests in an oil or gas block is under strict regulation in Oman. Any reassignment necessitates an initial endorsement from the MEM and obtaining a No Objection Certificate (“NOC”). Although the MEM requires submissions such as due diligence and evidence of financial soundness, the Government might have heightened scrutiny or additional demands in a dispute backdrop. Further complications ensue when reassignment rights under the JOA become a matter of contention with the Government. The enforceability of an arbitral award stemming from such a dispute becomes paramount. The focal point is often whether the reassignment remedies associated with a specific block are recognised and enforceable. While JOAs traditionally provide for forfeiture or buy-out-related reassignments, their application in an Omani context remains largely untested. The MEM’s position on such contentious assignments is also nebulous. The crux of enforcing reassignment rights, especially amid Government-Contractor disputes, rests on securing a NOC from the MEM, ensuring it acknowledges the assignment, and simultaneously waives any right to an assignment bonus under the EPSA, if applicable.
Other issues that may arise concerning enforcing this right relate to whether the defaulting party must provide consent, whether the Government’s assignment bonus will be applicable, and the documentation required. Most JOAs will include a provision whereby the defaulting party grants the non-defaulting party a power of attorney to act on its behalf in the event of default; however, under Omani law, a power of attorney is generally limited to representation in courts and a resolution of the shareholders, partners, or board of directors is required where the assignment of assets is concerned. For example, under the Commercial Companies Law, issued under Royal Decree No. 9/2018, and its regulations (Ministry of Commerce, Industry, and Investment Promotion Decision No. 146/2021 and Capital Markets Authority Decision No. 27/2021), a written resolution is required for the assignment of assets, unless the constitutional documents of the company stipulate otherwise.
Forum for Dispute Resolution
The resolution of disputes under EPSAs in Oman may depend on the provisions of the EPSA and the applicable law. EPSAs typically provide for arbitration as the primary method of dispute resolution under the rules of the International Chamber of Commerce (ICC) or the Oman Arbitration Centre (OAC), established under Royal Decree No. 26/2018. There has been a trending preference in Oman for the MEM to encourage oil and gas companies to adopt the OAC’s arbitration rules (“OAC Rules”). The current version of the OAC Rules was issued under OAC Decision No. 8/2020 and is currently undergoing revision with the appointment of the Rules Revision Committee appointed in August 2023.
Irrespective of the arbitral institution selected, the seat of arbitration is often Oman. However, some EPSAs may also allow for sole expert determination as an alternative to arbitration, a waterfall dispute clause allowing the parties first to explore mediation, or for appealing arbitration awards to the Omani courts. These provisions may raise issues of enforceability, finality, and waiver of appeal rights. For example, based on current jurisprudence and the absence of reference to expert determination in the Oman Arbitration Act, issued under Royal Decree No. 47/1997, it is unlikely the Omani courts would enforce a decision of an expert. Similarly, there are current concerns with respect to the enforcement of mediation agreements in Oman, where the mediation takes place outside of the court-ordered system. One alternative to these issues is to adopt a med-arb approach whereby the mediator executes the final mediation agreement, turned arbitrator, as a consent award, making it an enforceable arbitral award. Whether the same approach can be translated into expert determination has yet to be tested in the Omani courts.
In addition to arbitration, litigation in Oman may also be possible in some cases, especially if the dispute involves the Government or a govern- ment entity. The Administrative Court has jurisdiction over disputes with government entities, and the Civil Code, Royal Decree No. 29/2013, and other laws provide the basis for civil claims against a Contractor. Criminal liability may also arise under the Penal Code, Royal Decree No. 7/2018, for certain EPSA or Petroleum Law violations. However, litigation in Oman may have disadvantages, similar to what happens in other jurisdictions, such as the lack of specialised courts, the requirement of translating all documents into Arabic, which may be burdensome, and the prolonged process resulting from the appealability of court judgements.
Finally, alternative dispute resolution (ADR) methods, such as negotiation and mediation, as discussed above, may also be used to resolve disputes under EPSAs in Oman before or during formal proceedings. Some EPSAs may require the parties to negotiate for a certain period before commencing arbitration. Where the pre-conditions to arbitration have not been fulfilled, this may lead to preliminary challenges at the commencement stage. While such arguments have been relatively untested, the Omani courts will likely treat it as an admissibility issue instead of a jurisdictional one. Nevertheless, while negotiation and mediation may help the parties reach an amicable settlement, which is encouraged under the principles of the Civil Code, any pre-conditions in the dispute resolution clause should be strictly adhered to, and the resulting settlement agreement should be comprehensive, final, and properly documented to avoid further disputes.
Enforceability of Arbitral Awards
The enforceability of arbitral awards arising from disputes under EPSAs is a pivotal aspect of the dispute resolution process. As a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, ratified under Royal Decree No. 36 of 1998, Oman recognises the validity of foreign arbitral awards. Domestic and foreign arbitral awards are enforceable in Oman under the Oman Arbitration Act and the Civil Procedure Law, Royal Decree No. 29 of 2002, respectively.
Similar to other New York Convention signatory jurisdictions, the grounds for non-recognition of foreign arbitral awards and annulment of domestic arbitral awards are limited, and the Omani courts take a pro-arbitral stance when enforcing arbitral awards.
Final Remarks
EPSAs form the backbone of the Omani oil and gas sector, reflecting the nation’s commitment to sustainable and mutually beneficial exploration and production activities. As with any complex contractual framework, the dynamics of EPSAs are susceptible to disagreements, often pivoting on nuanced technical, regulatory, and financial matters. The expansive range of potential disputes – from operational issues and compliance requirements to cost recovery mechanisms and assignment rights – show- cases the intricacies inherent in such long-term, strategic agreements.
Oman’s legislative environment, encompassing the Petroleum Law and various associated decrees, underscores a commitment to clarity, fairness, and a balanced approach to dispute resolution. While arbitration stands out as the predominant method of resolving EPSA-related conflicts, the legal landscape in Oman, complemented by its adherence to international conventions like the New York Convention, ensures that both domestic and foreign arbitral awards are enforced judiciously.
The challenges highlighted in this article signify the need for thorough, well-informed legal counsel and proactive risk management. With the rapidly evolving global energy landscape and increasing pressures on hydrocarbon-based economies, a meticulous understanding of EPSAs and a robust legal infrastructure are essential to navigate the potential pitfalls and capitalise on opportunities in Oman’s oil and gas sector.
ABOUT THE AUTHORS
Yanal Abul Failat is a Senior Associate based in Dubai and a core member of Al Tamimi & Company’s Energy and Resources Practice Group. He principally advises oil and gas companies on both contentious and non-contentious matters, drawing from significant experience in high-stakes disputes, especially within the oil, gas, and broader energy sectors. He has played a pivotal role in numerous energy-related UNCITRAL and LCIA arbitral proceedings, representing governments, exploration and production companies, and oil traders, acting for both claimants and defendants/respondents. He also has experience resisting the enforcement of foreign judgments and arbitral awards in the English courts. Yanal is an English-qualified solicitor advocate with over ten years of experience in London, having worked for a specialist boutique firm representing tier-1 oil and gas companies and an international firm’s corporate practice in the City of London.
Chelsea Pollard worked at an international arbitral institution in Malaysia prior to joining Al Tamimi & Company. She is a member of the construction, energy and dispute resolution groups. Chelsea has been involved in arbitral proceedings in the GCC, including matters under the ICC, QICCA and DIAC arbitration rules and ad hoc matters, and transactions in Oman for sale and purchase agreements, joint operating agreements, and reorganization in industries such as oil and gas and telecommunications. She is an ambassador and ExCo member of Arbitrator Intelligence and a member of the American Bar Association, American Society of International Law, ArbitralWomen, ICC YAF and Society of Construction Law, Gulf.
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