France: The Oil & Gas Law Review Edition 2 - France Chapter

Last Updated: 19 January 2015
Article by Yves Lepage

I INTRODUCTION

Located in more than 60 fields mainly in the Paris region and in the south west (Aquitaine Basin), French hydrocarbon deposits produced 790 tonnes of oil and 0.3 tonnes of oil equivalent (Mtoe) of natural gas in 2013, representing roughly 2 per cent of France's annual consumption.

Major recent developments in the French E&P sector involve the continuing debate around shale gas which started with the French parliament's ban on the use of hydraulic fracturing in 2011. Other adjustments include an extensive reshaping of the French New Mining Code currently in force (NMC), which was announced in 2012, but remains under review and is expected to enter into force in 2015 at the earliest; and the publication of a Decree No. 2014-479 dated 14 May 2014 extending the French state's control of foreign investments in certain strategic sectors, now including energy.

II LEGAL AND REGULATORY FRAMEWORK

i Domestic oil and gas regulation

Established in 1810 and revised in 2006, the NMC serves as the primary regulatory framework regarding oil and gas licensing, though publication of a new code is expected in 2015.

Pursuant to Article L. 111-1 of the NMC, the exploration and production of gaseous or liquid hydrocarbons reserves are submitted to the legal regime applicable to the development of mines. The legal regimes for both oil and gas are therefore identical with respect to the issuance of mining titles, the rights granted to the holders of such titles, the completion of works and the control measures applicable.

Other pieces of the legal and regulatory framework applying to hydrocarbons exploration–production activities include environmental provisions (Article L. 161- 1 of the NMC, cross-referencing the Environmental Code and the Estate Code) and decommissioning procedures (Articles L. 163-1 et seq. of the NMC).

In France, the operation of LNG terminals does not fall within production activities and the relevant regulation applying to LNG facilities is included in the French Energy Code which notably imposes certain public service obligations to the operators to guarantee the continuity and security of gas supply, and also provide for a tariff setting mechanism monitored by the Energy Regulatory Commission.

ii Treaties

France is a signatory to, and has duly ratified the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the 1965 International Convention on the Settlement of Investment Disputes between States and nationals of other States, the 1994 Energy Charter Treaty and the 2004 Convention for the Protection of the Marine Environment and the Coastal Region of the Mediterranean (formerly known as the Barcelona Convention).

France is also a party to more than 120 bilateral tax treaties.

iii Regulatory authorities

The minister responsible for mines (currently, the Minister of Ecology, Sustainable Development and Energy) is the relevant French governmental authority responsible for the hydrocarbon sector. Pursuant to Article L. 171-1 of the NMC, a 'police in charge of the mines' controls and monitors all exploration and production works. Article 24 of Decree No. 2006-649 dated 2 June 2006 (as amended from time to time, the 2006- 649 Decree) specifically entrusts the prefects (i.e., the French state's representatives in a department or region) with the performance of such tasks at a local level.

Within the Ministry for Mines, the Department of Energy and Climate (DGEC) is responsible for defining and implementing the French energy policy. Within the DGEC, the Hydrocarbons Exploration-Production Bureau (BEPH) manages and promotes the French mining (hydrocarbon) sector. As such, the BEPH is associated with the award and renewal process of exploration (research) and exploitation permits. Within the DGEC, the Geological and Mining Research Bureau (BRGM), is a public industrial and commercial institution, acting under the joint supervision of the Ministry for Higher Education and Research and the Ministry for Ecology, Sustainable Development and Energy, in charge of collecting, classifying and keeping data on the French subsurface. Disputes related to the mining sector, including breaches of the provisions of the NMC are settled before the French administrative or civil courts. Criminal offences are settled before the criminal courts. Certain disputes involving the midstream and downstream sectors may be submitted to a specific dispute resolution forum for the energy sector within the Energy Regulatory Commission.

III LICENSING

i Exploration

Article L. 121-1 of the NMC identifies three exploration regimes, depending on whether the landowner is conducting or consented to the exploration works, the administration authorised the exploration works to be carried out without the consent of the landowner, or exploration works are carried out following the issuance of an exclusive exploration permit.

The landowner prospecting its own property may freely dispose of the proceeds of its exploration works, without requiring any authorisation from an administrative authority, which derives from his right of normal use of the land. However, should the land fall within the scope of a concession, a state exploitation, or an exclusive exploration permit, the rights of the landowner will be trumped by the rights of the holders of such titles or permits.

The administrative authorisation without the consent of the landowner entitles the prospector to collect the proceeds of its exploration works, despite the landowner conducting exploration on the land, or contemplating the same. This authorisation does not grant the prospector any exclusivity on the land within the scope of the authorisation, as two prospectors may conduct exploration works on the same land. In practice, exploration works are rarely conducted under such regime, and are usually undertaken either with the consent of the landowner or under an exclusive exploration permit (H permit).

The holder of an H permit is vested with an exclusive right to undertake exploration works within the area defined in the permit, and may freely dispose of the products that might be extracted as a result of these exploration works. This is the most favourable regime for a prospector, due to its exclusivity and preferential status over the other two regimes.

An H permit is granted for a maximum initial five-year period, after a competitive bidding process. It may be renewed twice, each for an additional minimum three-year period (or, if the initial period was for less than three years, for the same minimum period) and a maximum five-year period, without any requirement to resort to another bidding procedure but subject to the permit holder's compliance with its obligations and a financial commitment at least equal to the commitment assumed during the initial period of validity of the permit.

The application must be submitted to the Minister for Mines, and must include documents identifying the applicant, a technical memorandum, the contemplated work programme, a minimum financial commitment, and cartographic documents. Financial and technical capacities of the applicant, as well as the quality of the studies conducted in the development of the work programme, are key elements to be considered in the application process.

As of 1 January 1 2013, the application for an H permit must be made available to the public by electronic means prior to the issuance of the permit by the administrative authority. Once the application file is received, the Minister will publish a call for competition in both French and European official gazettes. Potential bidders then have 90 days to submit a competing application.

The H permit ensures the prospector that the right to develop the land will not be awarded to a competitor while he or she still holds the exclusive exploration right. Pursuant to Article L. 132-6 of the NMC, upon request and before its expiration, the holder of an H permit can obtain a concession right over the workable deposits discovered pursuant to the exploration works conducted under the permit. This right extends to the perimeter of this permit and the substances mentioned therein, though the area covered by the permit is reduced by half at the first renewal and again at the second renewal. The application for an extension must be filed at least four months prior to the expiry of the mining title with the Ministry responsible for Mines (Article 46 of Decree No. 2006-648 dated 2 June 2006 (as amended from time to time, the 2006- 648 Decree)). The Ministry is required to respond to such renewal request within 15 months from the date of filing. However, if the Ministry does not respond within such period, the mining title shall remain in place. This has been recently confirmed by the highest French administrative court, the Council of State (CE, 17 July 2013, Société Hess Oil France, No. 365671), which ruled that the withdrawal of a mining title requires an explicit decision from the French administration. Therefore, the silence of the Ministry at the end of the 15-month period will not result in the termination of the mining title and the mining title holder may continue to operate as long as no explicit denial has been notified to it.

ii Development and production

Natural gas and oil reserves may only be developed under a concession granted by decree of the Council of State if the developer has sufficient technical and financial capacities. If the developer is not yet the holder of an H permit on the contemplated perimeter, the concession will be subject to a competitive bidding process.

The concession is granted for a maximum 50-year period and may be extended for additional periods of time that may not exceed 25 years each. The concession agreement generates a real estate right, distinct from the property right of the owner of the surface where the reserve is developed, which nevertheless may not be mortgaged. It vests its holder with both the right to develop the reserves and the exclusive right to conduct exploration works within the perimeter of the concession. The concession request must be filed with the Minister for Mines, together with a certificate providing information related to the applicant, a technical memorandum, a description of the development works, cartographic documents and a commitment to fulfil the terms and conditions of the concession.

The application for a concession is publicly disclosed, in accordance with the provisions of the French Environmental Code. The public may be informed through all appropriate means, by public display, local publication or electronic means. A public enquiry may last for 30 days.

IV PRODUCTION RESTRICTIONS

French public service requirements may result in restrictions to oil and gas supplies and sales. In accordance with Article L. 143-1 of the Energy Code, the French government may, for a specified period, impose a control and allocate energy resources in order to remedy an energy shortage or when the French external trade balance is threatened.

National defence requirements, as defined by the Code of Defence, may also trigger the control and allocation of resources.

V ASSIGNMENT OF INTERESTS

Interests in a permit or a concession may be transferred through either the assignment or leasing of mining titles. Pursuant to Articles L. 143-1 et seq. and L. 143-9 et seq. of the NMC, transfers require the prior authorisation of the Minister for Mines (Article 52 of the 2006-648 Decree) but is not subject to competitive bidding or specific publicity. Pursuant to article L. 143-2 of the NMC, the transferee of a mining title must meet the following technical and financial requirements:

a in accordance with Article 4 of the 2006-648 Decree, the prospective transferee must produce its credentials (such as the background of its officers and technical team), its significant mining references and an outline of the human and technical resources budgeted for the performance of the work; and

b in accordance with Article 5 of the 2006-648 Decree, the prospective transferee must also produce balance sheets, income statements and any proposed guarantees.

The 2006-648 Decree specifically allows the attribution of mining titles to several companies, acting jointly and severally (Article 43-3°) which makes the execution of joint operating agreements possible. Similarly, the 2006-648 Decree authorises share deals pursuant to which the control of the mining title holder is be transferred and deals resulting in a third party enjoying all or part of the production. However, transfers of interests, shares or rights to production under such deals require a prior 'non-opposition' from the Minister for Mines, who will essentially consider the financial and technical capabilities of the prospective transferee(s). Under Article 43-4° of the 2006-648 Decree, opposition from the Minister must be notified to the transferor within two months from receipt of the comprehensive file.

The transaction documentation usually includes, as a condition precedent to closing, the approval of the Minister for Mines.

Other events requiring mining title holders to request a 'non-opposition' pursuant to Article 43 of the 2006-648 Decree include material modification of the mining title holder's articles of association and the occurrence of any material event that may result in the mining title holder's technical and financial capacities (as determined at the time the mining title was awarded) being altered.

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