ISRAEL'S GAS DEVELOPMENT: LEGAL CONSIDERATIONS AND CORPORATE SOCIAL RESPONSIBILITY IN A NEW FRONTIER PROJECT--A UNITED STATES OPERATOR'S COUNSEL PERSPECTIVE

• Jurisdiction: Derecho Internacional

International Mining and Oil & Gas Law, Development, and Investment
(Apr 2011)
CHAPTER 20A
ISRAEL'S GAS DEVELOPMENT: LEGAL CONSIDERATIONS AND CORPORATE SOCIAL RESPONSIBILITY IN A NEW FRONTIER PROJECT--A UNITED STATES OPERATOR'S COUNSEL PERSPECTIVE
Arnold J. Johnson
Noble Energy, Inc.
Houston, Texas

ARNOLD J. (ARNE) JOHNSON is Senior Vice President, General Counsel and Secretary of Noble Energy, Inc. He joined Noble in January 2001 as Associate General Counsel and Assistant Secretary, was elected Vice President, General Counsel and Secretary on February 1, 2004 and to his current position on July 22, 2008. Before that, he served as Senior Counsel for BP America, Inc. from October 2000 to January 2001. From March 1989 through September 2000, Mr. Johnson held several positions as an attorney for Vastar Resources, Inc. and ARCO, most recently as Assistant General Counsel of Vastar from 1997 through 2000. He joined ARCO in 1980 and served in positions of increasing responsibility until 1989. Mr. Johnson earned his juris doctorate from Creighton University in 1980, and is a member of the Texas, Colorado and Nebraska bar associations. He has served as chair of several professional organizations, including the Louisiana Mineral Law Institute from 2001 to 2009, the Oil, Gas and Energy Resources Law Section of the State Bar of Texas from 2006 to 2007 and the Oil, Gas and Mineral Law Section of the Houston Bar Association from 1994 to 1995. Mr. Johnson is also a Sustaining Life Fellow of the Texas Bar Foundation. He has authored and presented various articles on ethics and other legal topics involving the oil and gas industry.

CHAPTER 1

A United States Operator's Counsel Perspective

Arnold J. Johnson

Senior Vice President, General Counsel & Secretary

Noble Energy, Inc.

Houston, Texas

SYNOPSIS

§ 1.01. Introduction.

§ 1.02. Israel's Oil and Gas Industry in the Spotlight.

[1] Mari-B Field.

[2] Tamar and Dalit Projects.

[3] The Leviathan Discovery.

§ 1.03. Challenges and Considerations in Project Execution.

[1] Anatomy of a New Frontier Project.

[a] Company Organization.

[b] Project Components.

[2] Reflections on the U.S. Operational and Legal Framework.

[a] Ownership and Jurisdiction.

[b] Oil and Gas Lease Structure.

[3] Evaluating Project Entry.

[a] Business Opportunity.

[b] Risk Management.

[4] Contracting and Procurement.

[a] Operating Agreement.

[b] Farmout Agreement.

[c] Drilling Contract.

[d] Rig Sharing Agreement.

[e] Master Service Contract.

[f] Fabrication Agreement.

[g] Seismic Agreements.

[h] Purchase Order.

[i] Production Sales Contract.

[5] Corporate Social Responsibility.

[a] Definition.

[b] Driving Factors.

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[c] Examples.

[d] Policy Considerations.

[6] Legal and Regulatory Compliance.

[a] Compliance Programs.

[b] The Foreign Corrupt Practices Act of 1977.

[c] The United Kingdom Bribery Act of 2010.

[d] The Sarbanes-Oxley Act of 2002.

[e] The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

[f] Information Management.

§ 1.04. Ethics and Professionalism in the Global Environment.

[1] Ethics and the American Bar Association Model Rules.

[a] Providing Competent and Diligent Representation.

[b] Scope of Representation and Allocation of Authority Between Client and Lawyer.

[c] The Lawyer as Advisor.

[d] Communication.

[e] The Organization as Client.

[f] Truthfulness.

[2] The Professionalism Movement.

[a] Rambo Lawyering.

[b] Document Preparation.

[c] Respecting Opposing Counsel.

§ 1.05. Summary.

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§ 1.01. Introduction.¹

Recent significant exploration discoveries shine the world's energy spotlight on two diverse countries in different hemispheres and continents: Brazil and Israel. For most Latin American lawyers, Brazil's story is well-known and unfolding, as Petrobras' 2009 Jupiter discovery has brought renewed international investment to a country with a history of oil production and an established infrastructure. Israel's tale is more enigmatic, as a country that was, until recently, a new frontier with no oil or gas reserves or infrastructure is now one step closer to energy independence and even possible export. The country is at a

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remarkable point in its history, as the Biblical land of milk and honey has become the modern-day land of milk, honey and natural gas.²

Projects of the magnitude of those underway in Brazil and Israel cannot be undertaken without extensive support from legal counsel. By any measure, the number of areas of law that are impacted are astounding. This portends both opportunities and challenges for lawyers inside and outside of each country.

This article is focused on Israel and, by design, is a little about a lot. It provides an overview of the activity fueling the country's burgeoning oil and gas industry, and some challenges and considerations in project execution as seen through the eyes of a United States ("U.S.") operator's counsel.³ Through those same eyes it offers perspective on corporate social responsibility, as well as legal ethics and professionalism, in a new frontier project.⁴

§ 1.02. Israel's Oil and Gas Industry in the Spotlight.

[1] Mari-B Field.

Most of today's media focus is on Israel's energy future, although the seeds of the country's success were actually sown over a decade ago when in the late-1990s the Yam Tethys group comprised of a subsidiary of a U.S. company, Noble

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Energy, Inc. ("Noble"), as operator, and its Israeli partners discovered the Mari-B field.⁵ Located approximately twenty miles offshore Tel Aviv, the field was the country's first offshore natural gas production facility and has since evolved to provide a peak deliverability of approximately 600 million cubic feet per day from seven wells that produce from a single platform.

Natural gas sales from the Mari-B field began in 2004 and have increased steadily as Israel's natural gas infrastructure has developed. The country enjoys a robust natural gas market, with the largest natural gas purchaser, The Israel Electric Corporation Limited ("IEC"), converting its power plants to use natural gas as a clean-burning fuel source. A recently signed letter of intent would allow IEC to purchase natural gas to establish a strategic inventory reserve at the field, with the Yam Tethys group providing IEC with injection, storage and withdrawal capabilities for that inventory.

[2] Tamar and Dalit Projects.

Despite the success of the Mari-B field, it was actually two significant exploration discoveries in 2009 that put Israel's energy industry on the map. The first occurred early in the year, when Noble and its Israeli partners announced drilling and flow test results from the first well drilled at the Tamar prospect,⁶

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offshore northern Israel. Another natural gas discovery was announced within a month, this time at the Dalit prospect. Positive results from a second Tamar well increased the original reservoir size estimate and confirmed its high quality and extent.

At the time of its discovery, Tamar was reported to be the second largest natural gas find in the world since January 2008, trailing only Brazil's Jupiter well,⁷ with some industry data suggesting that it was the largest natural gas discovery in 2009. Development plans are underway, with the project sanctioned by its operator in 2010 and submitted to the Israeli government for approval in anticipation of first production in late 2012 or early 2013. The initial phase of the Tamar development is expected to include five subsea wells, production from which will flow to a new offshore platform to be constructed near the existing Mari-B platform. The natural gas would then be delivered to the pipeline that connects the Mari-B field to an onshore terminal at Ashdod.

[3] The Leviathan Discovery.

Tamar would not be the last the world would hear of Israel's offshore natural gas success. On December 29, 2010, Noble and its Israeli partners announced an even larger natural gas discovery at the Leviathan prospect,⁸ situated to the west of Tamar. As a result of its size, the Leviathan natural gas

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field is expected to require two or more appraisal wells to further define its boundaries and determine the best development option.

§ 1.03. Challenges and Considerations in Project Execution.

The excitement over Israel is tempered only by the many challenges that lie ahead. For a U.S. oil and gas operator, those challenges can be summed up by an old Hollywood movie quote: "Toto, I've got a feeling we're not in Kansas anymore."⁹ The scales of the Tamar and Leviathan projects are large, with an incredible amount of work yet to be done within the bounds of legal and operational frameworks that are less defined than those of the U.S.

[1] Anatomy of a New Frontier Project.

The maturation of Israel's oil and gas industry should, over time, draw increased interest from the international community and spawn additional "homegrown" exploration and production companies and related service providers. This means that more Israeli lawyers will have the opportunity to redirect their practices to the exciting world of oil and gas while international practitioners turn their attention to Israel. In anticipation of those opportunities, a brief orientation on a typical U.S. oil and gas company and new frontier project is in order.

[a] Company Organization.

U.S. companies engaged in oil and gas operations around the world are typically publicly traded and overseen by a board of directors and executive management team that represent the face of the company to its shareholders.

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Boards are primarily independent,¹⁰ with much of their work done through committees responsible for governance, compensation, audit and other matters.¹¹ The board's role is one of broad oversight of the company's...