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.
A major law known as the Energy Transition for Green Growth was enacted in France in August 2015. The main provisions of the law relate to the promotion of the use of renewable energy and do not specifically relate to oil and gas despite the law setting the reinforcement of energy independence and diversification of energy mix as identified goals. The 2011 law prohibiting the use of hydraulic fracturing remains in place.
In addition, recent developments in the French exploration and production regulatory framework involve an extensive redrafting of the French New Mining Code (NMC) currently in force, which was first announced in 2012. On 6 September 2017, the Minister for the Ecological and Solidarity Transition announced the introduction of a new legislation providing for the end of the research and exploitation of conventional and non-conventional hydrocarbons (see below).
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, although publication of a new code is expected in the future.
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 and 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 on 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.
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 Environment, Energy and Sea) is the relevant French governmental authority responsible for the hydrocarbon sector. Pursuant to Article L. 171-1 of the NMC, the French regulations regarding mines aim to control and monitor 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, is a public industrial and commercial institution, acting under the joint supervision of the Ministry for Higher Education and Research and the Ministry for Environment, Energy and Sea, 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.
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 its 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 entitles the prospector to collect the proceeds of its exploration works without the consent of the landowner, 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 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 ASSIGNMENTS 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 and 2006-648 Decree, the transferee of a mining title must meet the following technical and financial requirements:
- 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
- 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.
i Royalties on production from onshore deposits
Production of gaseous and liquid hydrocarbons gives rise to the payment of various royalties:
- a royalty due by the holder of the title to the owner of the surface, as provided in the relevant concession agreement. However, this amount has become symbolic and is now barely used;
- a royalty paid to departments or cities and calculated based on each net ton of product extracted by the holders of concessions of mines, lessees or sub-lessees of such concessions, holders of exploitation permits of mines and explorers of oil and combustible gas mines; and
- a progressive royalty paid to the state for onshore operations by holders of a concession covering onshore gaseous or liquid hydrocarbons, at a rate based on the volume of production (Article L. 132-16 of the NMC).
Article L. 132-16 differentiates between recent and old productions in the computation of this progressive royalty. Old productions include all wells in operation before 1 January 1980, through classical means of production. Any other production is deemed a recent production.
With regard to crude oil, the rate per annual tranche of production, in tons, is as follows:
Old production royalty rate (per cent)
Recent production royalty rate (per cent)
|Between 50,000 and 100,000||20||6|
|Between 100,000 and 300,000||30||9|
With regard to gas, the rate per annual tranche of production, in millions of cubic metres, is as follows:
|Production||Old production royalty rate (per cent)||Recent production royalty rate (per cent)|
Under Decree No. 81-373 of 15 April 1981, the progressive royalty is based on the value of the extracted products, its value set at a price corresponding to the price of hydrocarbons of similar quality (determined pursuant to standard practice in the petroleum industry) on the French hydrocarbons market.
ii Royalty on production from offshore deposits
Article L. 132-16-1 of the NMC contains specific provisions with respect to the calculation of the progressive royalty applicable to gaseous or liquid hydrocarbons extracted from offshore deposits. As from 1 January 2014, sales of gaseous or liquid hydrocarbons extracted from offshore deposits are subject to a progressive royalty that is calculated by applying a specific rate to several annual production tranches, all further determined in a decree that has not yet been published.
Article L. 132-16-1, however, provides that, in order to determine the various tranches and associated rates for such royalty, such decree shall take into account the nature of the products, the continent next to the deposits, the depth of the deposits, the minimum financial commitments subscribed by the operator for the exploration and development phase. Fifty per cent of the proceeds deriving from the levy of that royalty will be allocated to the French state and the remaining 50 per cent will be allocated to the French region that is closest to the offshore deposits.
The parliamentary works relating to such new provisions show a clear intention of the French government to further enhance the development of the hydrocarbon resources in French Guiana, still seen as one of the most promising French offshore areas, and to promote economic development in this overseas region bordering Brazil.
iii Other taxes
In addition to the royalty regime, operators are subject to the standard French corporate income tax due on French-source taxable profits at the rate of 33.3 per cent (for the fiscal years open until 31 December 2016 – for the next fiscal years, the rate will decrease gradually to 28 per cent in 2020). A social surtax of 3.3 per cent applies if (1) the company's turnover exceeds €7.63 million and (2) the company's corporate income tax expense exceeds €763,000 (i.e., with a net taxable profit exceeding €2.289 million), giving rise to an effective tax rate of 34.43 per cent. In addition, a temporary 10.7 per cent surtax may also apply to the fiscal year that closed on 30 December 2015 if the company's turnover exceeded €250 million, giving rise to an effective tax rate of 38 per cent.
Several other specific taxes regarding consumption also apply, such as the domestic consumption tax on petroleum products (Article 265 of the Customs Code), the domestic consumption tax on natural gas (Article 266 of the Customs Code) and VAT on oil products (Article 298 of the General Tax Code). Those taxes are mainly governed by European law (Directive 2003/96/EC dated 27 October 2003 restructuring the Community framework for the taxation of energy products and electricity).
VII ENVIRONMENTAL IMPACT AND DECOMMISSIONING
As mentioned above, operators must comply with the environmental provisions specified under Article L. 161-1 of the NMC, which set forth general environmental objectives that shall be fulfilled, and cross references various sections of the Environmental Code and the Estate Code for further details.
As provided under Articles L. 163-1 et seq. of the NMC, decommissioning occurs when a particular infrastructure ceases to be used for the purpose of exploitation and applies to all installations and related works at the end of a specific work programme; and all installations and related works that have not been subject to a specific decommissioning procedure at the expiry of the exploitation period.
The mining title holder shall file a declaration of cessation of works no less than six months prior to the termination of the exploration or development works (Article 43 of the 2006-649 Decree) and inform the authorities as to how it intends to comply with the requirements of Article L. 161-1 of the NMC. This provision relates to safety and the environment, remediation of any nuisance triggered as a result of said activities or its prevention, and if necessary arrangements for a possible restarting of the activity.
Following those declarations, the administrative authority may prescribe appropriate additional measures in the event that the proposed measures are deemed inadequate, as well as the time frame for implementation of such measures. Pursuant to Article L. 163-7 of the NMC, in the event of a failure by the explorer or developer to satisfactorily implement the prescribed measures, the administrative authority may carry out or request a third party to carry these measures at the expense of the explorer or developer.
Upon satisfaction of the measures that have either been proposed by the explorer or the developer or prescribed by the administrative authority, a specific notification to that effect will be sent to the explorer or the developer.
VIII FOREIGN INVESTMENT CONSIDERATIONS
French law does not contain any nationality requirement in connection with bids for exclusive exploration permits or concessions or in connection with a transfer of interests in a permit or concession.
However, Decree No. 2014-479 dated 14 May 2014, which modified Article R. 153-2 of the French Monetary and Financial Code (CMF), subjects certain foreign (i.e., non-EU) investors to prior approval of the Minister of Economy for certain types of investments. This applies where an activity is essential to guarantee the interests of the state with regard to public policy and security or national defence, including the supply of electricity, gas, hydrocarbons or other sources of energy.
Such foreign investment will fall within this approval requirement if it consists of (1) the acquisition of a controlling interest in a French company whose main activity is subject to Decree No. 2014-479, (2) the acquisition of all or part of a branch of activity of the French company or (3) the acquisition of more than 33.33 per cent of the shares of such French company.
Strictly speaking, the acquisition of interest in a French company holding one or more mining title or titles for the purposes of carrying out exploration-production works only should not trigger the application of the above-mentioned provisions that restrict the prior approval procedure to any such companies involved in activities that are essential to guarantee the country's public policy, public safety or national defence interests, such as the integrity, security and continuity of supply of gas and hydrocarbons. If in doubt, Article R. 153-7 of the CMF expressly provides that the Minister for Economy may be asked to determine within two months whether a specific investment may fall within the scope of Decree No. 2014-479.
IX CURRENT DEVELOPMENTS
A reform of the NMC has been anticipated for several years. In January 2017, the National Assembly approved new provisions of the NMC in order to conform the NMC to new environmental constraints. The new provisions remain to be adopted by the Senate in order to be enforceable.
The main features of the reform included the following:
- the exploration and exploitation of mines require the prior deliverance of mining titles, which are divided into two categories: exploration titles and exploitation titles;
- the information and consultation procedure for the participation of the public would be enhanced for the issuance of mining titles;
- when the mining title is delivered, the representative of the state in the department may form a special monitoring committee; and
- a High Council of Mines will be formed to foster a strategic dialogue between the parties involved in the exploration and exploitation of subsurface resources.
This reform project did not intend to mitigate or end the ban (provided by the provisions of Law No. 2011-835, dated 13 July 2011) of the use of hydraulic fracturing for the exploration and production of liquid or gaseous hydrocarbons. The French Constitutional Council confirmed in 2013 that this ban was compliant with the French Constitution (Decision 2013-346 QPC, 11 October 2013).
Finally, it should be noted that on 6 September 2017, the Minister for the Ecological and Solidarity Transition presented a draft bill that aims to 'to ensure the coherence of the policy of managing hydrocarbons contained in the French subsoil with the Paris Climate Accord'. In this perspective, the draft provides for the following points:
- an immediate ban on the issuance of new hydrocarbon exploration permits in the country, so that no research or exploitation of gaseous hydrocarbons can be carried out; and
- concessions currently in force cannot be extended for a term expiring beyond 2040.
At the date of drafting of the present chapter, this bill was adopted by the National Assembly but it remains to be adopted by the Senate in order to be enforceable.
i Law No. 2017-1839 of 30 December 2017
Law No. 2017-1839 of 30 December 2017 is aimed at respecting the French carbon neutrality commitment by 2050 announced in the 'Climate Plan' of 7 July 2017 presented by the French minister of energy. It is part of the French energy policy to promote renewable energy and to reduce fossil fuels consumption.
For Nicolas Hulot, the French minister of energy at the date of publication of the law, 'this law ensures the consistency of our law with our climatic commitments made in the Paris agreement. It brings our country in compliance with the objective to fight climate change. Indeed, to stay below the limit of 2°C, we must abandon almost all subsoil fossil fuels. That is allowed by this project of law, which also confirms that France definitely bans the research on, or the operation of, shale gas.'
According to the minister, 'it is a first step toward a fossil fuels detoxification. We are henceforth continuing working to reduce our fossil fuels consumption, in transport, in housing or in electricity production. This law draft brings our partners in the same direction, as illustrated by the commitments made during the One Planet Summit.'
This Law radically changes the legal framework applicable in France, three modifications being noteworthy enough to be mentioned.
Immediate ban of the issuance of new hydrocarbons permits
Under French law, (1) the exploration works are subject to the issuance of an exclusive exploration permit; and (2) the development and production are subject to the issuance of a concession.
Law No. 2017-1839 of 30 December 2017 henceforth provides for the immediate ban of the issuance of (1) new hydrocarbons exploration permits, including for experimental purposes, and (2) new concessions for these substances.
No extension of current permits and concessions beyond 2040
The exploration permits and concessions that have been issued before the entry into force of the new law remain enforceable but cannot be extended beyond 1 January 2040.
An extension of the duration of the permits and concessions is possible beyond 2040 only if the holder of the permit demonstrates that the limitation of the duration to 2040 does not allow the holder to cover its exploration and operational costs in order to reach the economic equilibrium for the operation of the substance identified in the scope of the permit.
Prohibition of shale gas research and operation
The law provides that the research and the operation of oils by hydraulic fracturing or by any other non-conventional method are prohibited.
According to the Law, this interdiction is implemented in accordance with the Charter for the environment of 2004 and the principles of preventive action and of rectification (the principe d'action préventive et de correction) provided for by Article L. 110-1 of the French Environmental Code.
In a nutshell, the Law provides that the research and the operation of coal and all other liquid or gaseous hydrocarbons, notwithstanding the technique used, are progressively terminated in France. The final goal is to reach a definitive cessation of these activities in 2050.
Furthermore, the Law brings the following obligations:
- within one year of the enactment of the Law, the government has to hand over to Parliament a report on the support of companies and workers impacted by the progressive end of hydrocarbons exploration and operational activities and on the regeneration of the impacted territories; and
- before 31 December 2018, the government has to present to Parliament another report assessing the environmental impact of crude and refined oil and natural gas released for consumption in France.
1 Yves Lepage is a partner and Geoffroy Berthon is of counsel at Orrick, Herrington & Sutcliffe.