Greek Upstream Legislation

Global Publication December 11, 2015

The Greek market has historically been very heavily dependent on imports of crude oil and has only introduced gas imports into the domestic energy mix over the course of the last 10 to 15 years. The Greek hydrocarbon code was amended in 2011 with the adoption of Law 2289/2011. Under this law a new national resources management company (the Hellenic Hydrocarbons Resources Management S.A.) was created with responsibility for overseeing and managing all hydrocarbon matters affecting the state. Amongst other things, HHRM’s responsibilities include managing and monitoring all agreements signed by the Greek Government with third parties and collecting and evaluating information concerning Greece’s hydrocarbon capacity and to prepare and conduct tenders to attract investment into the Greek upstream sector and evaluate applications submitted for those tenders.

The following is a brief summary of the key issues for investors to consider when considering acquiring interests in the Greek upstream sector.


Licencing Arrangements – oil and gas interests in Greece are held under either a lease or a production sharing contract arrangement. These concepts are very different. Under a production sharing contract, title to oil and gas production vests with the host state and investors only have a contractual entitlement to a certain proportion of production (by reference to a pre-determined percentage split set forth within the production sharing contract). However, under a lease arrangement (which is equivalent to the type of structure adopted in the US and Europe), oil and gas production belongs to the investors.
Identity of Investors – only those companies incorporated in the EU or those companies incorporated in a country with “reciprocity” to Greece may hold oil and gas interests. It is unclear what the term “reciprocity” means, but the practical impact is that investors should incorporate a local SPV or an SPV incorporated within the EU to be party to oil and gas licensing documents.

Licensing Process (Seismic Surveys) – rights to conduct seismic surveys and perform geological and geophysical operations are granted on the basis of licence applications to the Ministry of Environment, Energy and Climate Change. Licences awarded last for 18 months and are not exclusive (i.e. a number of other oil and gas companies may be awarded licences to conduct seismic surveys and perform geological and geophysical operations over the same area). Applications for licences must include credit support for the amount specified by the Ministry.

Work Program (Seismic Surveys) – upon the grant of a seismic licence, investors are required to submit a detailed work program and, following completion of each separate phase of such work program, each investor is required to submit copies to the Ministry of all data acquired during the phase. In addition, within three months of expiry of the licence each investor is required to submit a detailed report of the seismic operations to the Ministry. Any failure to perform such obligations can result in the revocation of the licence and the forfeiture of the credit support instrument.

Licensing Process (Drilling Operations) – rights to conduct drilling operations and to explore for and exploit hydrocarbons are granted under lease agreements or production sharing contracts which are awarded following open tender processes announced by the Ministry (which announcement shall also include details of the criteria used to rank each of the applications and the importance assigned to each such criteria). Applications for production sharing contracts will also need to include proposals relating to the economic split of production to be shared between the host state and investors and the levels of production bonuses payable).

Licence Term – the duration of the exploration phase of any oil and gas project will be subject to negotiation and agreed within the lease or production sharing contract but, in any event, cannot exceed seven years for onshore areas and eight  years for offshore areas with any exploitation phase, upon declaration of commerciality of a successful discovery, being for 25 years. The exploration phase can be extended by up to 50% of the initial exploration period under certain circumstances (e.g. upon events of force majeure) and the exploitation phase may be extended for up to two further periods of five years upon consent of the host state.

Operational Matters

Cost of Operations – the cost of all operations are borne by the investor (i.e. the host state is carried throughout the funding process despite its possession of a participating interest share in the oil and gas project). This means that if there is no production, the investor bears all of the exploration risk.

Cost Recovery (Production Sharing Contract) – under a production sharing contract structure, upon the commencement of production the costs incurred in funding exploration operations can be recovered up to a certain capped proportion of production each month. The level of this cap is unclear though and is likely to be negotiable (e.g. in Mauritania the cap typically ranges between 50% and 60%). What is also frequently negotiated, and fundamental for investment economics, is the list of categories of expenditures that are recoverable. Obviously, the extent of permitted cost recovery inevitably impacts when oil and gas investments become cash positive for investors.

Operational Control – under a production sharing contract structure, the host state has a right to monitor and check the performance and cost of operations throughout the term of the project (which is in addition to the approval right which the host state has over work programs and budgets whether under a lease arrangement or a production sharing contract). The precise scope of this additional control is unclear although as with production sharing contracts around the world, the extent of host state participation is greater under a production sharing contract than under a lease or licence arrangement.

Relinquishment – the extent to which oil and gas investors are required to relinquish areas within a lease or a production sharing contract is uncertain. The legislation refers to areas being restricted to those where commercially exploitable deposits of hydrocarbons have been discovered. This presumably means in practice that areas outside of the scope of agreed development work programs must be relinquished although there is no time frame by which such relinquishment must occur (although, again, presumably the intention is that upon the implementation of an agreed development work program the relinquishment is effective).

Title to Equipment – upon the expiry of the exploitation phase, title to any equipment acquired by the investors for oil and gas operations shall pass to the host state.
Income / Expenditure

Income Calculation – for the purposes of calculating tax liabilities, any royalties paid to the host state and the host state’s share of production attributable under a production sharing contract are considered income on behalf of the investor.

Sales Price – the sales price for the purposes of determining revenues on which basis tax liabilities are calculated shall be mandated pursuant to Presidential Decree of the host state. This may well be different to the market price obtainable by investors and may fetter the ability of investors to trade freely at competitive sales prices.

Bonuses – upon achieving certain levels of production, certain bonuses will become payable to the host state. These are to be negotiated as part of the bidding process.
Income Tax – investors are subject to income tax charged at 20% and a regional tax charged at 5% of the net taxable income. Additionally, 50% of the exploration expenses incurred for operations under one lease or production sharing contract may be transferred and treated as expenses of operations under another lease or production sharing contract (although this allowable 50% transfer is presumably only applicable under a lease arrangement, as in the context of a production sharing contract taxes are normally chargeable on the profit oil share attributed to the oil and gas company, as expenses will already have been recouped through the cost recovery mechanism).

Decommissioning – investors shall be required to restore the environment and remove any and all installations that were used during the course of the oil and gas project and, upon the issuance of a requisite Presidential Decree, a decommissioning reserve fund may be required in order to satisfy such obligation.

Transfers / Assignments

Transfers – the transfer of oil and gas interests to third parties remains subject to the prior consent of the host state (for which there is no prescribed long stop date for the grant or refusal of approval). However, such a consent requirement does not strictly apply to changes of control whereby less than all the shares in oil and gas companies or their holding companies are transferred (and only applies to corporate takeovers and transfers of 100% of the shares in such companies – although this is likely an ambiguity in the drafting with the host state instead requiring a consent right upon a change in more than 50% of the shares in oil and gas companies or holding companies).

Pre-emption –the transfer of oil and gas interests triggers a pre-emption right exercisable by the host state. The specific terms of the pre-emption right are unclear and it is, therefore, uncertain whether the right to pre-empt constitutes a matching right at a price agreed with a third party buyer or otherwise constitutes a right of first offer and negotiation with the host state.

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