A Critical Review Of The Inter Agency Memo2

2009

Odujinrin & Adefulu

Church House

1st

Floor

29, Marina, Lagos

A Critical Review of Upstream Provisions

of the InterAgency Memorandum on the

Petroleum Industry Bill

A Crit ical Review of the Inter-Agency Memorandum on the Petroleum Industry Bi l l

1. CONTENTS

2. INTRODUCTION .......................................................................... 3

3. INSTITUTIONAL FRAMEWORK ........................................................ 4

COMMENTS ON THE PROPOSED CHANGES TO THE INSTITUTIONAL

FRAMEWORK ................ . . . ................................................................ 6

4. NNPC LTD. ................................................................................. 6

5. INCORPORATED JOINT VENTURES .................................................. 8

COMMENTS ON THE IJV PROVISIONS ................................................. 10

6. ACREAGE CONTROL & LICENSING ........ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

LICENSES AND LEASES .................................................................... 11

PEL ........................................................................................... 13

PPL ........................................................................................... 13

PETROLEUM MINING LEASE ........................................................... 17

PPL & PML AWARD PROCESS .......................................................... 19

ASSIGNMENTS, MERGERS & ACQUISITIONS ....... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

PRODUCTION SHARING CONTRACTS & OTHER UPSTREAM DEVELOPMENT

CONTRACTS .................................................................................. 20

TREATMENT OF SUBSISTING PRODUCTION SHARING CONTRACTS & RISK

SERVICE CONTRACTS ................................................................... 21

ENVIRONMENTAL PROVISIONS ......................................................... 21

RELINQUISHMENT OF EXISTING LICENSES/LEASES ...... . . . . . . . . . . . . . . . . . . . . . . . . 23

7. GENERAL COMMENTS ................................................................. 24


2. INTRODUCTION

The Petroleum Industry Bi l l , which promises to change the landscape of

Nigeria’s petroleum industry was submitted by the Executive Branch of the

Federal Government to the National Assembly in December 2008. The Bil l ,

which has passed through the f irst and second readings in both houses of the

National Assembly, was referred to the relevant committees and publ ic

hearings have been held by the Senate and the House of Representatives on

the Bi l l .

Various entit ies submitted memoranda to the National Assembly to address

shortcomings of the Bi l l . A memorandum was also submitted by the Executive

Branch of the Federal Government, through the Inter-Agency Team1,

proposing to address some of the deficiencies in the Bi l l . The Memorandum

was in the form of a new draft Petroleum Industry Bi l l . Whilst, there is

technical ly no problem with such a submission, it is at the very least, highly

unusual for the Federal Government to be seeking to amend the provisions of

the Bi l l it original ly sent. The breadth of the proposed revisions is quite

substantial and includes for example broad changes to the f iscal and

institutional frameworks. It is based on the background of the signif icance of

these changes, as wel l as our opinion, that the National Assembly would give

careful consideration to the contents of the Inter-Agency Memorandum, that

this paper has been written.

1 The Inter-Agency Team comprised of Ministry of Petroleum Resources, Ministry of Just ice, Ministry of F inance, Federal Inland Revenue Service, Department of Petroleum Resources, Niger ian Extract ive Industr ies Transparency Init iat ive, Revenue Mobi l isat ion Al locat ion and Fiscal Commiss ion & the Niger ian Nat ional Petroleum Corporat ion.


The paper focuses only on the upstream aspects of the Inter-Agency

Memorandum and the proposed draft Petroleum Industry Bi l l2. The f iscal

aspects would be addressed in another art ic le. It draws comparisons between

the Off ic ial Version & Version IV and also refers to the existing legal

framework.

3. INSTITUTIONAL FRAMEWORK

Under the Off ic ial Version, the upstream petroleum industry is to be governed

by the Minister – responsible for broad pol icy formulation the National

Petroleum Directorate (“NPD”) which was to act as the Secretariat for the

Minister and to be responsible for detai led pol icy formulation. The NPD is also

to be responsible for holding unal located acreage and in consultation with the

Petroleum Inspectorate (the “Inspectorate”) would be responsible for

organizing bid rounds. The Inspectorate is charged with overseeing the

technical aspects of the upstream petroleum industry such as environmental

issues, health and safety and engineering matters. Final ly, the National

Petroleum Assets Management Agency (“NAPAMA”) is to act as a cost

regulator for the upstream industry.

2 For the purposes of this paper, this is referred to as Vers ion IV. The Bi l l submitted to the Nat ional Assembly is referred to as the Off ic ia l Vers ion.


Institutional Framework under the Official Version

Version IV signif icantly changes this framework. Whilst the functions of the

Minister and the NPD do not change signif icantly, Version IV abandons

NAPAMA and places the cost/commercial function within the Inspectorate3.

The Inspectorate would exercise this function in the approval of

“…commercial and cost elements of al l f ield development programmes…”4

The Inspectorate would also be responsible for developing “cost benchmarks

for the evaluation of opportunit ies in the Upstream Petroleum Operations”5

3 This Author has previously argued for the abandonment of NAPAMA as the role of the agency was unclear and was l ikely to add a bureaucrat ic layer to upstream petroleum industry regulat ion. See “Highl ights of Aspects of the Petroleum Industry Bi l l ” a paper presented at the Nigerian Associat ion of Energy Economics Conference in Abuja 2009 – www.oduj inr inadefulu.com/

4 Sect ion 39(2) (a) of Vers ion IV.

5 Sect ion 39(2) (d) of Vers ion IV

Minister

National Petroleum Directorate

Policy Direction

Acreage Holder

Petroleum Inspectorate

Technical Regulator

National Assets Petroleum

Management Agency

Costs/Commercial Regulator


Institutional Framework under Version IV

COMMENTS ON THE PROPOSED CHANGES TO THE INSTITUTIONAL FRAMEWORK

The changes proposed to the upstream institutional framework by Version IV

should help in strengthening the Bi l l . By housing the costs/commercial

function in the Inspectorate, it avoids the problems associated with having

mult iple regulators such as high regulatory costs and excessive bureaucracy.

Addit ional ly, by placing the costs/commercial function in the work

commitment & f ield development process, the ambiguities raised under the

Off ic ial Version as to the extent of this form of regulation have been

minimised.

4. NNPC LTD.

Version IV also proposes the establ ishment of NNPC Ltd to replace the

Nigerian National Petroleum Corporation (“NNPC”). Like its predecessor,

Version IV does not place a posit ive duty on any entity to create the

Minister

National Petroleum Directorate

Policy Direction

Acreage Holder

Inspectorate

Technical & Costs Commercial Regulator


company.6 This is an oversight which should be corrected at the National

Assembly. Version IV also states that ownership of NNPC Ltd. should be

vested solely in the Federal Government of Nigeria. Under the Companies and

Al l ied Matters Act (“CAMA”) which regulates l imited l iabi l ity companies in

Nigeria, each company is required to have at least two shareholders7. It is

suggested therefore, that it would be useful for the Bi l l to name the specif ic

shareholders which it proposes to hold shares in the company or to detai l the

process by which those entit ies are determined.

Version IV copies the asset transfer process under the Off ic ial Version. It

deems the assets and l iabi l i t ies of NNPC to be transferred to NNPC ltd on the

transfer date. It does not provide for a process by which the assets and

l iabi l i t ies of NNPC are identif ied and the documentation for effecting this

transfer. Such a transfer may be deficient and lead to disputes in the future.

It may be useful for the National Assembly to examine the asset transfer

procedure under the Electr ic Power Sector Reform Act (“EPSRA”) for an

example of an effective transfer procedure. The EPSRA in effecting the

transfer of assets and l iabi l i t ies from the National Electr ic Power Authority to

the init ial holding company (now Power Holding Company of Nigeria Plc)

provided as fol lows:

1. The formation of the init ial holding company, who should form it and

the t imeframe within which it should be formed.8

2. The shareholders in the init ial holding company.9

3. Transfer of assets and l iabi l i t ies by a transfer order issued by the

National Counci l on Privatisation.10

6 It only states that i f the company has not been created after 3 months of the passage of the Act, the government should cause its creat ion.

7 Sect ion 18 of CAMA

8 Sect ion 1 of EPSRA



4. The assets and l iabi l i t ies are identif ied on the audited balance sheets

of the Authority.11

5. Asset transfers to be exempted from stamp duties12.

6. The formation of the init ial holding company to be exempted from

stamp duties.13

5. INCORPORATED JOINT VENTURES

Version IV made notable amendments with respect to incorporated joint

ventures (“IJVs”). Under section 260(3) of Version IV, the National Oi l

Company may appoint a majority of members to the Board of Directors,

where it is the majority shareholder. Under the exist ing part ic ipating joint

venture framework (“PJV”), the joint operating committee (“JOC”) acts to

supervise joint operations under the PJV. The JOC is constituted according to

the interests of the part ies, which inevitably means that NNPC has majority

interest. However, the decisions of the JOC are taken by unanimous

decision14, which effectively serves to protect the minority. Version IV does

not speak to the voting power of the directors, therefore the Art icles of

Associat ion of the Company or any shareholder’s agreement may address this

issue.

Section 260(6) provides for the decision of the board of directors of the IJVs

to comply with the decisions taken in the shareholder’s meetings. This

10 Sect ion 3(4) of EPSRA

11 Sect ion 3(2) &(4) of EPSRA


13 Sect ion 4(a) of EPSRA

14 See Adedolapo Akinrele, Nigeria Oi l and Gas Law, at page 151.


appears to contradict the provisions of CAMA, which place a f iduciary duty on

company directors.15

Section 260(10) provides that NNPC ltd shal l have the r ights to appoint more

than 50% of the management team. This r ight of appointment is not t ied to

the shareholding of the NNPC Ltd in the IJV and there is an addit ional

requirement that 80% of the management of each IJV must be Nigerian.

One of the objectives of creating the IJV structure was to create self-funding

institutions, which would not need to rely on government funds to run their

operations. Section 261(2) which provides that the shares of NNPC Ltd in any

of the IJVs may not be transferrable by way of sale, assignment, mortgage or

pledge, may have a negative impact on the actual isation of this objective. By

including such a restr ict ion in the law, it removes f lexibi l i ty from decision

makers and does not al low them to effectively respond to the facts on the

ground. It signif icantly l imits the f inancing options which may be uti l ised in

seeking operational funds. Version IV further extends those restr ict ions to

other shareholders in the IJVs who may not transfer their shares without the

written consent of NNPC Ltd.16 It does not provide for such consent not to

be unreasonably withheld nor does it provide for a t ime frame within which

the consent must be granted or refused. This would signif icantly hamper

commercial decision making.

Section 263 seeks to protect the shareholders of the IJV from incurring any

addit ional tax l iabi l i t ies provided al l assets are transferred to the IJV at net

book value. It does not offer similar protection in terms of company

15 The duty of a director is to the company and not to the person whose nominee he is. See Orojo, Company Law and Pract ice in Nigeria, at page 310/

16 Sect ion 261(4) of Vers ion IV


registration fees at the Corporate Affairs Commission (“CAC”), which are

l ikely to be signif icant in view of the potential assets of these IJV companies.

Version IV also introduces special provisions with respect to the l iquidation of

the IJVs. It provides for the process by which l iquidation may take place and

for disposal of the assets of the IJV. Of part icular concern is the provision

which requires that al l the assets of the IJV, whether tangible or intangible,

real or personal shal l only be transferred to NNPC Ltd in l iquidation. In view

of the fact that the law provides for a single buyer, there is no room for

competit ion in sel l ing these assets and the shareholders are effectively stuck

with the valuation placed on them by NNPC Ltd. It also places signif icant

pressure on NNPC Ltd. in terms of arranging f inancial commitments for the

acquisit ion (or re-acquisit ion) of such assets, as wel l as effective

appl ication/management of such assets post l iquidation.

COMMENTS ON THE IJV PROVISIONS

It appears that the Inter-Agency team sought to provide extensive

protections for the State in these IJV vehicles. In doing so however, these

provisions appear to create an entity unrecognisable under Nigerian law – a

hybrid if you wil l of the typical state corporation and the l imited l iabi l i ty

company. The provisions appear to entrench rules in favour of the majority

and do not appear to be concerned about minority protections. It is

suggested that a number of these protections are better dealt with within a

Shareholders’ Agreement or the Art ic les of Association of the IJV. This

method would al low for f lexibi l i ty as it is diff icult to amend legislat ion once it

is passed.

It is also useful to note that in a number of areas, there are gaps in the

provisions, which may be addressed by Shareholders’ Agreements. For

example, if the provisions of Version IV were adopted and passed into law as

is, i t may be necessary for a Shareholders’ Agreement to require NNPC Ltd. to


pay market value as determined by an independent consultant for the assets

transferred in l iquidation.

6. ACREAGE CONTROL & LICENSING

Like the Off ic ial Version of the Bi l l , Version IV vests al l unal located acreages

in the Directorate on behalf of the Federal Government of Nigeria.17 It is

suggested that a body saddled with the responsibi l i ty for detai led pol icy

making should not hold acreage, which is an implementation issue. It would

be more appropriate to vest acreage in the Inspectorate, which in its

regulatory capacity is involved in acreage management.

A National Grid System is introduced to this version under section 270(1).

The system would be used for the definit ion of l icense and lease areas,

rel inquishments etcetera. This is a welcome introduction and would serve to

provide a uniform basis for acreage control and as such should be adopted by

the legislature.

LICENSES AND LEASES

Version IV of the Bi l l provides for three upstream l icenses; the petroleum

exploration l icence (“PEL”), the petroleum prospecting l icence (“PPL”) and

the petroleum mining lease (“PML”). Whilst the PPL & PML were provided for

in the Off ic ial Version, the PEL is introduced in this version. The objective of

its introduction may be to cater for exploration companies, which primari ly

explore for petroleum and sel l data to those which seek to exploit i t .

A major departure from the Off ic ial Version is the recognit ion that PPLs and

PMLs may be in respect of crude oi l and natural gas.18 Section 257(1) of the




Official Version states that: “Every petroleum prospecting l icense or

petroleum mining lease shall c learly state that it shall be in respect of crude

oi l or natural gas but not of both crude oi l and natural gas.” The proposed

amendment is commendable as it was never clear why the government

proposed a dichotomy between products which usual ly can be found together.

The introduction of a differentiat ion between the qual if ications required by

an operator and a non-operator for the purpose of l icensing is also noted and

commended19. The only qual if ication necessary with regard to non-operators

is the means to f inance its obl igations under any l icense. This appears to be

appreciated in the Inter Agency Memorandum.

It should also be noted that Version IV has changed the character of

potential l icensees. Under the Off ic ial Version, l icences or leases may be

granted to two categories of companies- the National Oi l Company and

indigenous oi l companies.20 Version IV provides for l icenses and leases to be

granted to the National Oi l Company21 and to a winning bidder of an acreage

bid round.22 The choice not to l imit l icenses and lessees essential ly to local

19 Sect ion 271(6)(a) & (b) of Vers ion IV

20 Sect ion 257(1) of the Off ic ia l Vers ion. The Off ic ia l Vers ion defines an indigenous oi l company as a company:

a. Engaged in the explorat ion for and product ion of crude oi l and natural gas of which s ixty per cent or more of i ts shares are benef ic ia l ly owned direct ly or indirect ly by Niger ian c i t izens or associat ions of Niger ian c it izens;

b. Which meets the requirements of any guidel ines or regulat ions that may be issued by the Directorate or Inspectorate; and

c. Which is accredited as an indigenous oi l company by the Directorate or Inspectorate.. . Sect ion 467 of the Off ic ia l Vers ion.

21 A grant to NNPC Ltd. is under the condition that i t has completed an open and transparent bid process for potent ia l contractors.

22 Sect ion 271(2)(a) & (b) of Vers ion IV


companies would encourage a wider pool of bidders. It may however be

regarded as discouraging the efforts to bui ld strong local players in the

Nigerian oi l and gas industry.

PEL

The PEL essential ly replaces the oi l exploration l icense (“OEL”) under the

Petroleum Act 1969. It proposes to grant a non-exclusive r ight to carry out

geological, geophysical and geochemical exploration of petroleum.23 It also

al lows for a PEL to cover an area that includes PPLs and PMLs.24 This would

appear to interfere with the exclusive r ights granted to the holder of a PPL

under section 275(a) and the holder of a PML under section 281(1). It is

suggested that this ambiguity needs to be resolved. It is suggested that a

PEL should not be al lowed to cover exist ing PPL or PML areas.

PPL

The holder of a PPL is granted an exclusive r ight to carry out petroleum

exploration operations and has the r ight to carry away and dispose of crude

oi l or natural gas won during prospecting operations.25 In terms of duration,

the dist inction between PPLs granted over land & shal low waters and deep

water areas & inland basins is maintained. However the duration with respect

to land and shal low waters is increased to seven years under Version IV26 as

opposed to f ive years under the Off ic ial Version.27 The period of 10 years for

deep water areas and inland basins is maintained. In both areas however,


24 Sect ions 271(3) & 274(3) of Vers ion IV. It should be noted that sect ion 274(3) refers to “petroleum mining l icences” as opposed to “petroleum mining leases”.

2525 Sect ion 275 of Vers ion IV

26 Sect ion 276(a) of Vers ion IV

27 Sect ion 261(a) of the Off ic ia l Version


Version IV breaks down the term of the PPLs. The table below graphical ly

i l lustrates this.

PPL Duration under the Official Version & Version IV

Area Official Version Version IV

Land & Shallow Waters

Not more than 5 years Not more than 7 years consisting of:

1. Init ial period of 3 years

2. Renewal period of 2 years

3. Appraisal period of 2 years

Deep Water Areas & Inland Basin

Not more than 10 years Not more than 10 years consisting of:

1. An init ial period of 5 years

2. Renewal period of 3 years

3. Appraisal of 2 years

MINIMUM WORK COMMITMENTS

Version IV also introduces provisions in relat ion to minimum work

commitments. The main purpose of minimum work obl igations is to maximise

exploratory activity in the l icensed area in a t imely manner.28 This is done by

imposing terms on the l icensee to carry out specif ic work in a specif ied

28 Geoff Hewitt and Adrian Hi l l , “Offshore Licence Operat ions: The Explorat ion Phase”, in Terence Daint ith et al, United Kingdom Oi l and Gas Law (London: Sweet & Maxwell , 2005).


period.29 Section 277(2) imposes an obl igation on the l icensee to commit to

dri l l ing of at least one exploration well to a specif ied minimum depth. Such a

commitment must be supported by a bank guarantee or performance bond

from a reputable international bank30. The work commitment may also be

used as a single bid parameter or as part of the bid parameters in the award

of a PPL. The introduction of a framework for the work commitment process

is laudable, it is suggested however that some of these provisions would need

to be revised to maximize the benefits of the process.

First ly, by specifying the minimum dri l l ing requirements in legislation, it t ies

the hands of the regulators and does not provide for f lexibi l i ty in accordance

with f ield specif ications. Further, the provisions do not expl ic it ly t ie the

completion of the work commitment in the init ial period to the renewal

process; such an expl icit t ie would be useful to provide a clear basis for

l icense renewals. Addit ional ly, whi lst there is a provision for a bank

guarantee or a performance bond for the ful l amount of the committed work,

there are no provisions for a reduction in the value of the guarantee or bond

based on the value of money spent in carrying out the work commitment.31 It

should also be noted that contrary to the spir it of local/Nigerian content, the

performance bonds or bank guarantees must be provided by an international

bank as opposed to a Nigerian bank.

COMMERCIAL DISCOVERY

29 Wi l l iam Onorato & J. Jay Park, “World Petroleum Legis lat ion: Frameworks that Foster Oi l and Gas Development”, 39 Alberta L. Rev. pp. 70 -126. See also Peter Cameron, “The Structure of Petroleum Agreements”, in Nick Beredj ick and Thomas Walde (eds.), Petroleum Investment Pol ic ies in Developing Countr ies, (London: Graham & Trotman, 1988).


31 Such a provis ion may be found within Clauses 6.5 and 6.6 of the Nigerian 2005 Model Production Sharing Contract.


Version IV also makes more detai led provisions with respect to commercial

discoveries and f ield development plans. A commercial discovery is defined as

“...a discovery of crude oi l , tar sands, bitumen, heavy oi ls, extra heavy oi ls,

natural gas or condensates within a petroleum prospecting l icence which can

be economically developed in the opinion of the l icensee, after consideration

of al l relevant economic factors normally appl ied for the evaluation of crude

oi l , natural gas or condensate evaluation or development”.32 Unl ike under the

Petroleum Act, this definit ion does not peg commercial ity to a certain number

of barrels per day33 but makes it subjective based on the l icensee’s

circumstances. This recognises the fact that the commercial ity of a discovery

is signif icantly dependent on the economic condit ion of the holder of the

l icence.

Upon the declaration of a commercial discovery, the l icensee must submit a

f ield development plan to the Inspectorate within 120 days.34 The

development plan must be approved by the Inspectorate within 90 days, i f i t

meets certain criteria.35

32 Sect ion 526 of Vers ion IV. It seems unusual to include tar sands and bitumen in this def in it ion as they have been tradit ional ly treated under the sol id minerals regime in Nigeria.

33 Clause 9, First Schedule to the Petroleum Act


35 The cr i ter ia inc lude- an approved Nat ional Content Plan, an approved environmental management plan, provis ion for rout ine gas f lar ing etcetera. It is not c lear i f the 120 days within which to submit a development plan under sect ion 278(1) would a l low a l icensee to meet a l l these obl igat ions. Before the provis ions are adopted by the legis lature, i t would be necessary to map the t ime i t would take to get those approvals.


RELINQUISHMENT

Relinquishment Provisions under Version IV

Relinquishment

Period

Version IV

Upon expiry of initial

exploration period

50% of original l icense

area

Upon the expiry of

the renewal period

All parcels that are not

part of PMLs, appraisal

areas or signif icant gas

discovery retention

areas

Upon expiration of

the PPL

All acreage that is not

included in PMLs,

appraisal areas or

signif icant gas discovery

retention areas

PETROLEUM MINING LEASE

A PML may be granted to a holder of a PPL who has satisf ied the condit ions

under the PPL, has made a commercial discovery, and has received approval


for the related development plan from the Inspectorate.36 The holder of a PML

shal l have the exclusive r ight to carry out upstream petroleum operations in

the lease area.37 The grant of a PML shal l be on the basis of a f irm

commitment to develop and produce the commercial discovery made in the

lease area or to restart or continue petroleum production.38

Version IV also introduces the Domestic Gas Supply Obligation (“DGSO”) and

requires al l existing and future petroleum mining lessees39 to comply with

their obl igations as prescribed by the Midstream Agency. Any l icensee that

does not comply with the DGSO would be prohibited supplying gas export

operations.40

Under section 283(1), a PML may be granted for not more than twenty years,

but may be renewed for a further period of 10 years, after which the lease

area must be rel inquished to the Directorate.41 A PML which is not in

commercial production within f ive years may be revoked.42 A lease that has




39 This is incorrect from a technical perspect ive as there are no “exist ing petroleum l icensees”. It is suggested that i t be amended to include current holders of o i l mining leases.


41 Sect ion 283(3) of Vers ion IV. This is in contrast to the provis ions of the Off ic ia l Vers ion which provides for the durat ion of twenty years renewable for 20 years at each renewal period. Sect ion 239 of the Off ic ia l Version.

42 Sect ion 283(2) of Vers ion IV. It is not clear who the r ight to revoke rests with. Addit ional ly, the r ight is discret ionary, and there is no requirement to take into cognisance issues such as force majeure or any specia l c i rcumstance, which may affect the abi l i ty to achieve commercia l production. It is therefore strongly recommended for these issues to be taken into considerat ion by the Nat ional Assembly.


been in commercial production which has terminated for a period of one

hundred and eighty days other than reason of force majeure may also be

revoked.43 The lessee is also required to rel inquish al l parcels that are not in

commercial production after ten years of granting the lease.

PPL & PML AWARD PROCESS

The grant of a PPL or PML must be by a bidding process conducted by the

Directorate or by the National Oi l Company.44 Under both versions, such a

bidding process must be conducted in consultat ion with the Inspectorate.

Version IV includes an improvement to the Off ic ial Version by requir ing that

the Minister may only award l icences to winning bidder pursuant to the bid

process.45 It only introduces the criteria for determining a winning bid, which

may be one or a combination of the fol lowing:

1. Signature bonus;

2. Royalty percentage;

3. Work commitment in terms number of wel ls to a specif ied minimum

depth;

4. Work units.46

The introduction of these parameters would strengthen the provisions of the

f inal Petroleum Industry Bi l l i f included.

ASSIGNMENTS, MERGERS & ACQUISITIONS



45 Sect ion 271(2) of Vers ion IV. Under the Off ic ia l Vers ion, this was not quite c lear.

46 Sect ion 289(2) (a) & (b) of Vers ion IV. It should be noted that there is no def in it ion or descr ipt ion of what const itutes “work units”.


The provisions of Version IV in relat ion to the assignment of l icences/leases

basical ly mirror those of the Off ic ial Version, save for the inclusion of a

provision that any assignment, merger or acquisit ion would be “...subject to a

fee equal to 2% of the fair market value of the transaction...”.47 This

introduction would negatively inf luence the cost of doing business in Nigeria

and would impact on the abi l ity of l icense holders to freely trade their r ights.

It is not clear how “fair market value” would be determined. The si lence on

this matter suggests that this would be based on the discretion of the

Inspectorate. The draft does not propose a mechanism by which the

judgment of the Inspectorate may be chal lenged in this regard. Final ly the

provisions do not take into consideration assignments, mergers and

acquisit ions between related part ies, which may not necessari ly be towards

direct f inancial gain. It is therefore suggested that these issues be taken into

consideration by the National Assembly in considering this draft provision.

PRODUCTION SHARING CONTRACTS & OTHER UPSTREAM DEVELOPMENT

CONTRACTS

Under section 272(1) of Version IV, where a Minister grants a l icence or lease

to the winning bidder of an acreage bid process, such a winner, whether

NNPC Ltd. or any other company, may enter into any contract for exploration,

prospecting, production and development of oi l or gas as the case may be.48

Version IV also creates another set of upstream development contracts by

virtue of the provisions of sections 271(2) (b) and 272(2) (b). Under

271(2)(b), the Minister may, with the approval of the Directorate, grant NNPC

Ltd. a l icense or lease after an open and transparent bid process for potential

contractors has been conducted on the basis of a model contract approved by


48 It is suggested that these provis ions would ent i t le bid winners to enter into product ion shar ing contracts, r isk service contracts and the l ike without a requirement to obtain permiss ion from the Directorate or the Inspectorate.


the Directorate. Section 272(2) (b) describes those model contracts as

production sharing contracts, r isk service contracts, and any other similar

contract. Part VIII of Version IV goes on to provide for the f iscal content of

the contracts entered into by NNPC Ltd.49

The effect of this two t ier structure is that the National Oi l Company is not

required to always compete for acreage awarded to it. This provides it with a

signif icant advantage over other companies and would ult imately hinder the

abi l i ty of the NOC to compete. Additional ly in the posit ion where some of the

shares of the entity has been divested as envisaged by the draft provisions,

this considerable incentive would be in the hands of just a few and not the

national treasury.

TREATMENT OF SUBSISTING PRODUCTION SHARING CONTRACTS & RISK

SERVICE CONTRACTS

Version IV does not appear to specif ical ly address how subsisting PSCs and

RSCs would be treated under this arrangement. These were addressed in the

Off ic ial Version.50 It is necessary to address this issue as a number of

provisions of subsist ing PSCs have a regulatory f lavour, which would be

unsuitable to retain where the holder of the l icense is now a private

company. These comments also apply with respect to any upstream

development contracts that may be signed in the future, it is necessary to

ensure that matters which are strict ly regulatory are not included in such a

contract so as not to arrogate excessive power to the National Oi l Company.

ENVIRONMENTAL PROVISIONS

The Version IV draft improves on the environmental issues related provisions

in the Bi l l . Instead of the requirement for the l icensee/lessee to submit an

49 Sect ions 494-506 of Vers ion IV

50 Sect ion 230(2) of the Off ic ia l Vers ion


environmental programme (“EP”) or an environmental qual ity management

programme (“EQMP”) as required under section 283(1) of the Off ic ial

Version51 it now only requires the submission of only an “environmental

management plan”.52 By focussing on one type of programme or plan as

opposed to two which were indistinguishable, this proposal is preferable to

the original version. However, the contents of the environmental management

plan remain the same, which therefore raises the point as to its similarity

with the provisions requir ing an environmental impact assessment (“EIA”)

under the Environmental Impact Assessment Act. Under these provisions EIAs

would be required with respect to most oi l and gas operations. The provisions

of Version IV do not seek to repeal the Environmental Impact Assessment

Act, nor do they seek to void its appl icabi l i ty to oi l and gas operations. The

effect therefore if these provisions are adopted is that there would be a

dupl ication of efforts by oi l and gas operators. We therefore suggest that

these issues be taken into account.

We note the deletion of provisions relating to the States and Local

Governments being f inancial ly responsible for environmental damage caused

by sabotage.53 Indeed these provisions maybe unconstitutional.

Version IV also provides for f inancial provisions/contributions to be made by

a l icensee or lessee to a remediation fund. This version makes this fund

51 One of the major cr i t ic isms of the structure under the Off ic ia l Vers ion was the fact that the EP & EQMP were not dist inguishable and i t was not c lear under what c ircumstances one would be required over the other.


53 Sect ion 261 of the Off ic ia l Version


subject to audit by the “lessee”54. It maintains the requirement for a l icensee

or lessee to “annual ly assess its environmental l iabi l i ty and increase its

f inancial contribution to the satisfaction of the Inspectorate”.55 This

requirement to annual ly increase a l icensee/lessee’s contribution does not

ref lect real it ies as the assessment of the environmental effects of a

company’s operations, could very well show a decrease in the potential

environmental l iabi l i ty. It may also have the effect of st i f l ing innovation as

there is no incentive to develop better processes or use more

environmental ly-eff ic ient equipment in operations. Addit ional ly, the

provisions remain si lent on the mechanism for reimbursement of the money

paid into the fund when upstream operations end. Final ly, i t may be

suggested that if i t is desirable to retain such an option, it may be useful to

adopt the model uti l ised in relat ion to work commitments and f ield

development programmes, which is to provide a bank guarantee/performance

bond. This way, cash would not be t ied down for a signif icant amount of

t ime, whilst st i l l ensuring that there is a way to fund the remediation of the

environment due to damage caused by the operations of a l icensee/lessee.

Version IV also includes provisions for the payment of gas f lar ing penalt ies.56

RELINQUISHMENT OF EXISTING LICENSES/LEASES

Arguably the most contentious aspects of the provisions of Version IV in the

upstream sector are in relat ion to mandatory rel inquishment of l icense areas.

Under Section 291, existing l icensees & lessees are required to select areas

for which the l icensee or lessee is prepared to make a declaration of

commercial discovery, for which development is underway, in which regular

54 Sect ion 302(1) of Vers ion IV. It should be noted that this provis ion only subjects the fund to audit by the lessee and does not include the l icensee. We suggest that this be amended i f the provis ions are to be adopted.


56 Sect ion 300 of Vers ion IV


commercial production is occurring or for which the l icensee or lessee is

prepared to make a declaration of signif icant gas discovery. Al l such areas

would be converted into PMLs, and any area not so selected must be

rel inquished. These provisions raise questions as to whether it amounts to

compensable expropriat ion. Due to volume constraints, the examination of

this issue is beyond the scope of this art ic le and would be subject to a more

detai led review in a subsequent art ic le.

7. GENERAL COMMENTS

Although there is st i l l room for improvement, the upstream provisions in

Version IV are a signif icant improvement on the Off ic ial Version. They appear

to ref lect a more considered approach to upstream petroleum issues. The

existence of two government sponsored versions of the same Bil l however

creates a number of chal lenges for the National Assembly in organising and

selecting the appropriate provisions for inclusion in the f inal legislat ion. It

also provides a chal lenge for stakeholders in the review of the proposed

legislat ion. It is suggested that for a streamlined and eff ic ient process, it

may be better for the Government to withdraw the Off ic ial Version and to

submit Version IV or a variation of it. There are of course genuine concerns

as to the t ime it would take to pass the Bi l l i f this course is taken,

part icularly in view of the potential abridged legislat ive t imetable due to the

upcoming elections. It is however suggested that such a process would

provide better qual ity legislat ion. In view of the fact that the current

legislat ion has been in place for over forty years, the qual ity of the process

and its product should be of paramount consideration.

A Critical Review Of The Inter Agency Memo2

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