dr bayo adaralegbe fciarb (uk); fei(uk); fcis(uk); ll.m, ph.d (dundee) partner & head, energy...
TRANSCRIPT
Dr Bayo Adaralegbe FCIArb (UK); FEI(UK); FCIS(UK); LL.M, Ph.D (Dundee)
Partner & Head, Energy GroupBabalakin & Co
Outline of Presentation Various influences that shape the contractual
framework of oil and gas activities Various international petroleum development
agreements in use; how they evolved and their conceptual differences
Various petroleum development agreements in use in Nigeria; the policies that shape their evolution, the statutory framework that provides a basis for them, and their conceptual differences
Changes to expect under the current reform processes in Nigeria’s petroleum industry-the Nigerian Content Act and the PIB
Influences that Shape Contractual Framework of Petroleum Development Petroleum exploration and production activities
influence petroleum development contract formsThese activities are borne out of fact that
‘crude’ oil and ‘natural’ gas resources lie far below the Earth’s surface and therefore not easily accessible, unlike other natural resources
because hydrocarbon resources increase human life expectancy they are very significant in modern world and therefore affect their development
Extractive Nature of Resources as an Influence Petroleum development activities require oil and
gas resources to be first searched for through readings that are far from precise
If at all found, these resources have to be converted from ‘primary’ state to ‘secondary’ state for consumption by end user
Extractive Nature of Resources as an Influence Extractive nature of oil and gas therefore results in
different phases:Exploration (seeking these natural resources
based on data reading)Production (getting them off the ground after
finding them)Transportation (moving them out of in situ state) Processing (converting them from a natural state
to a secondary state where they can be used)Disposal (making them available to end user)
Effect of Resources on Modern Life as an Influence Hydrocarbon resources mainly responsible for
cooking, cooling, lighting, heating and transportation, apart from so many other uses
Referred to as ‘lifeblood’ of industrialisation for this reason
Such significance causes players from industrialised countries to dominate petroleum development activities globally, even though developing countries hold greater reserves
Effect of Resources on Modern Life as an Influence Such significance also causes host countries to
play direct role in development of petroleum activities for nationalistic and for economic reasons
This has resulted in an international political economy that has in turn had an effect on petroleum development arrangements
Contractual Framework of Petroleum Development ActivitiesThree main types of contract forms:
Upstream/ Exploration and Production contracts ‘Petroleum Development Agreements’ ‘International Petroleum Agreements’
Field/Service contracts at exploration phase of activity
Contracts from production phase into midstream phase
Upstream/E and P Contracts International law vests ownership of natural
resources in sovereign state where it lies (UNGA Resolution 1803 of 1962)
Municipal laws of virtually all sovereign states vest ownership in sovereign state with notable exception of the US(s.44(3) of Nigerian Const)
Sovereign states therefore have to grant mining/mineral rights, typically to IOCs from industrialised countries for petroleum development
Participation Arrangements Single mineral right holder rare due to capital and
technology intensity of activities; third parties allowed to acquire participating/working interests in mineral rights through Operating Agreements(JOAs)
Necessitates appointment of one of JOA members as operator since they cannot all operate collectively
Farm outs also allowed for assignment of part of mineral right or participating interest for performance of obligation
Unitization agreement used for joint development where field straddles area belonging to more than one holders
Field/Service Contracts at Exploration Phase A number of field/services contracts required
at exploration phase:Seismic SurveyRig ContractorRig Services Contractors Supply of equipment
Contracts from Production to Midstream Phase
A number of contracts also required from production to midstream phase
FPSOCrude oil liftingCrude oil transport Crude oil sale Decommissioning of well
Contracts from Production to Midstream Phase In specific case of gas development:Gas gathering and processingGas balancingEPC agreement for construction of infrastructure Gas transportation
Pipeline transportation LNG transportation
Gas sales
Model Contracts Developed by various petroleum bodies and
covering all phasesAvoid time spent on negotiations Reduce transaction costsSeek to achieve common standard in
international industry thereby improving general efficiency
Model contracts said to require no more than 20% adaptation to peculiar situations
Professional Bodies that have Produced Model Contracts Association of International Petroleum
Negotiators(AIPN)Canadian Association of Petroleum Landmen(CAPL)American Association of Landmen (AAPL)Leading Oil and Gas Industry Competiveness
LOGIC(formerly Cost Reduction Initiative in the New Era, CRINE)
United Kingdom Offshore Operators Association(UKOOA)
Rocky Mountain Mineral Law Foundation(RMMLF)
Professional Bodies that have Produced Model Contracts
Petroleum Joint Venture Association(PJVA)Petroleum Equipment Supplies Association (PESA)International Association of Drilling Contractors (IADC)Petroleum Services Association of Canada(PSAC)Petroleum Accountants Society of Canada(PASC)Council of Petroleum Accountants Societies (COPAS)International Association of Geophysical
Contractors(IAGC)
Petroleum Development Arrangements and how they Evolved Country where petroleum development originated
and international political economy shape typesPetroleum development agreements began in
form of one paragraph Concession that granted mining/mineral rights over large areas and for long durations in the USA where land owners owned natural resources
Developing countries that at that time where under colonial rule, were influenced by this practice and granted concessions in return for royalty and tax when they began to find oil
Petroleum Development Arrangements and how they Evolved After many of these countries came out of colonial
rule UNGA Resolution 1803 of 1962 on ‘Permanent Sovereignty over Natural Resources’ was issued
This led to nationalistic tendencies of these courtiers IOCs from developed countries were
expropriated, especially in Latin America, Middle East and North Africa
OPEC was borne out of this nationalism
Petroleum Development Arrangements and how they Evolved Developing countries could still not prevent IOCs
from involvement in their natural resources due to lack of technical, managerial and financial capacity
Hence next best option: state participation emphasizing production, profit and control of countries over their natural resources towards economic development through Better fiscal terms for the sovereign state IndustrializationTechnology transferDevelopment of local content
Petroleum Development Arrangements and how they Evolved Because of this constitution of many countries ,
especially Latin American and Middle East states, prevented foreigners from owning mineral/mining rights
Resulted in new arrangements where developing countries established NOCs vested with mineral/mining rights that were then contracted out to IOCs to develop
Petroleum Development Arrangements and how they Evolved Risk Service Contracts emerged out of this where
developing states engaged IOCs as contractors in respect of mineral/mining rights that they vested in their NOCs or Petroleum Ministries
Under this arrangement IOCs used their own capital expenditure and operating costs to explore for petroleum
IOCs only got reimbursed through a service fee if oil was produced
Sometimes IOCs were allowed to buy back part of oil produced as consideration for service
Petroleum Development Arrangements and how they Evolved Production Sharing Contracts emerged out of
this where developing states engaged IOCs as contractors in respect of mineral/mining rights that they vested in their NOCs or Petroleum Ministries
IOCs also used their capital expenditure and operating costs to explore for petroleum under this arrangement
Under this arrangement IOCs only got reimbursed through a share of the oil produced
Petroleum Development Arrangements and how they Evolved Under this arrangement IOCs
First received ‘cost oil’ to cover costs and expenses limited to a percentage , and thereafter
IOCs and NOCs split the oil produced known as ‘profit oil’ to represent their return on investment
Types of Petroleum Development Arrangements Concessions: used in 60 countriesProduction Sharing Contracts : used in 41
countries Risk Service Contracts: used in 4 countries Participation Agreements?Hybrid?
Petroleum Development Arrangements: How they differ In Risk Service and Production Sharing Contracts
the IOC did not receive any reimbursement for their expenses or any return on their investment if no oil was produced
Hence both arrangements referred to as ‘sole risk’
PSC and Risk Service Contract terms have to correspond, and mirror back terms under original mineral/mining rights of NOC in key areas such as area, duration, revocation , etc
Petroleum Development Arrangements: How they differ In modern practise licences/leases have taken over
from old concessions with significant modificationsOnly limited areas now granted Only shorter durations of between 20-30 years now
grantedSovereign state exercises direct control over
petroleum development activities In terms of which well to drill, when and pace of
operations through a work programme Better fiscal terms in favour of sovereign state Periodic relinquishment of part of area granted
Petroleum Development Arrangements: How they differ Industrialized states use licenses/leases more;
PSCs and Risk Service used more in developing countries
PSCs more popular than Risk Service Contracts that are only common in countries that have a lot of capital at their disposal to pay for services
Some countries use all these arrangements simultaneously
Petroleum Development Arrangements: How they differ Licenses/leases:
Exclusive right granted mineral/mining rights holder to explore for petroleum , and if found, to dispose of in consideration for royalty, rent and tax
In some countries a single license covers exploration and production phases; in others separate licenses for exploration phase; license granted for production phase only allowed when oil is found in commercial quantities
Mining /mineral rights granted conceptually similar to profit a’prendi in common law lease estate
Mining/mineral rights have both public and private law character
Mining/mineral rights vest legal title, but over petroleum resources produced at well head
Sovereign state continues to own natural resources in accordance with international law
Petroleum Development Arrangements: How they differ Production Sharing Contracts
E and P Company undertakes petroleum development activities on behalf of holder of mining/mineral rights, typically NOC
E and P Company is contractor/operator, but not legal owner
Contractor bears sole risk of exploration activities
Petroleum Development Arrangements: How they differ Risk Service Contracts
E and P Company undertakes petroleum development activities on behalf of holder of mining/mineral rights, typically NOC
E and P Company not legal ownerE and P Company bears sole risk of petroleum
development activities
Petroleum Development Arrangements: How they differ Rough conceptual analogy may be made between
petroleum development arrangements and real estate projects:License/lease can compare to legal title holder of landPSC Contractor can compare with property developer
who is compensated with rent of specific floors as who may have some equitable interest in property
Risk Service Contractor may be likened to contractor who develops property and who gets paid off for his services without any legal or equitable interest in the property
Petroleum Development Regime in Nigeria Ownership of petroleum resources in Nigeria
“Notwithstanding the foregoing provision of this section the entire property in…shall vest in the Government of the Federation...”(s.44(3) Const.)
“The entire ownership and control of all petroleum in…shall be vested in the state ”(s. 1(1) Petroleum Act)
Petroleum Development Regime in Nigeria Ownership over what area?Nigeria as a coastal state:
Nigerian state vested with entire ownership and control of all petroleum in all lands (a)in Nigeria(b) under territorial waters of Nigeria(c) that forms part of the Continental Shelf (d) that forms part of the Exclusive Economic Zone of Nigeria(s. 1 of Act)
“...sovereign and exclusive rights with respect to the exploration and exploitation of the natural resources of the sea bed, subsoil and superjacent waters of the Exclusive Zone shall vest in the Federal Republic of Nigeria....” (s2(1) of the EEZ Act)
Petroleum Development Regime in Nigeria Note A.G Fed. Vs A.G Abia & Ors to the effect that
Nigerian states(political subdivision) do not have claim to offshore
Note NDDC Act enacted before this case which refers to “offshore of Nigeria Delta area”
Petroleum Development Regime in Nigeria
Petroleum Act is main statute that deals with petroleum resources and how they may be developed
Petroleum Act only provides for development of petroleum resources through phases of exploration, prospecting and production
Grants to companies registered in Nigeria separate rights for each phase through a license /lease regime
Petroleum Development Regime in Nigeria: OEL Oil Exploration License right to ‘undertake
exploration for petroleum’ not exclusive over compact area not exceeding 5000 sq miles
for a duration to lapse by 31st Dec next; renewable 3 months before end of period for a period not exceeding 1 year
Petroleum Development Regime in Nigeria: OPL Oil Prospecting Licence ‘exclusive right to
explore and prospect for petroleum’Explore and prospect implies oil drilling operations
Since holder allowed to carry away and dispose of petroleum won during operations
OPL holder expected to drill to find oil in commercial quantities to be able to qualify for OML
over compact area not exceeding 1000 sq miles for a period not exceeding 5 years including renewal; in case of deep offshore minimum of 5 years aggregate of 10 years through amendment in Deep Offshore Act
Petroleum Development Regime in Nigeria: OML Oil Mining Lease exclusive right to(a) ‘conduct
exploration and prospecting operations’ (b) ‘win, get, work, store, carry away, transport, export’ (c) ‘otherwise treat petroleum discovered’ (Para 11 of First Schedule to Act
Note that section 2 of Act itself allows Minister to grant only rights to search for, win, carry away and dispose of petroleum
Right to export absent (a)from principal law that prescribes the scope of rights Minister may grant and(b) from specimen copy of OML in law
Is meaning of export consistent with ‘carry away’/’dispose of’? If not can schedule expand meaning in principal law?
In practise OML holder allowed to export
Petroleum Development Regime in Nigeria: OML over compact area not exceeding 500sq miles for
duration not exceeding 20 yearsNote “All oil mining leases deriving from an oil
prospecting licence shall be in compact blocks or units; and where more than one block or unit is so derived, each block or unit shall be the subject of a separate and distinct lease”(Reg. 293) Petroleum(Drilling and Production) Regulation)
50% of area to be relinquished after 10 years of grant OML may be renewed indefinitely
Note recent controversy over renewal of ExxonMobil’s blocks
Petroleum Development Regime in Nigeria: OML Condition for grant of Oil Mining Lease:
Minister ‘may’ grant ‘only’ OPL holder an OMLIf oil is found in commercial quantity
(10,000 barrels per day) If all conditions in licence satisfied
Two separate leases may be granted from single OPL(Oil Prospecting Licences (Conversion to Oil Mining Leases, ETC.) Regulations)
Note South Atlantic Petroleum v Min of Petroleum Resources
Position of Operator under Act No specific provision under Act Act seems to assume sole participation by
mining/mineral right holder and assumes holder shall also be operator
Regulation 9 Petroleum (Drilling and Production) Regulation that states: “The holder of an oil exploration licence, oil prospecting licence or oil mining lease shall (a) appoint a manager resident in Nigeria to supervise the operations under the licence or lease”
Petroleum Development Arrangements in NigeriaStatutory lease regime serves as source of contractual
arrangements developed in response to government policy on hydrocarbon development
U-JVs created between IOCs (previously granted OMLs before advent of state participation) and NNPC on behalf of Nigeria to achieve state participation policy
PSCs created between NNPC (as OPL/OML holders) and IOCs to achieve state participation policy
Risk Service Contracts between NNPC (as OPL/OML holders) and IOCs to achieve state participation policy
Petroleum Development Arrangements in NigeriaJOAs created between indigenous companies
(as OPL/OML holders) and IOCs to achieve indigenous participation policy
Farm outs created between IOCs (as original OML holders) and NNPC under U-JV on one hand, and indigenous companies on the other, to achieve indigenous participation policy
U-JVs created pursuant to Lease RegimeNigeria became OPEC member in 1970OPEC Charter provides for state participation for
member statesPetroleum Act provides for:
“Participation by the Federal Military Government in the venture to which the licensee or lessee relates, on terms to be negotiated” (Paragraph 34(a) of Act)
U-JVs created pursuant to Lease RegimeNNPC Act also enacted allowing it joint ventures in
petroleum development activitiesNNPC Act stipulates partnerships in exploration generally
“enter into contracts or partnerships with any company , firm or person which in the opinion of the Corporation will facilitate the discharge of the said duties under this Act”(s. 6(c) NNPC Act)
“doing anything required for the purpose of giving effect to agreements entered into by the Federal Government with a view to securing participation by the Federal Government of the Corporation in activities connected with petroleum”(s. 5(g) NNPC Act)
U-JVs created pursuant to Lease RegimeResulted in Participation Agreements and JOAs between
NNPC and IOCs allowing NNPC ‘undivided interest’ in OPLs and OMLs previously granted exclusively to IOCs under Act
U-JV structure seeks to vest joint legal ownership of lease rights in both NNPC and IOC?
Unlike other countries, Nigerian statutory regime permits IOCs to hold mining/mineral rights
However currently policy against granting these rights in favour of IOCs
Rather, policy directs NNPC and indigenous oil companies to hold these rights and for IOCs to be contractors
U-JVs created pursuant to Lease Regime Six U-JVs currently exist between NNPC on one
hand, and Shell, ChevronTexaco, ExxonMobil, Elf and Agip
Although NNPC has between 55%-60% participating interest, IOCs appointed operator under each U-JV because IOCs were already operating before U-JVState of technical readiness in Nigeria
95% of oil development in Nigeria estimated to be under U-JVs
Farm Outs of Marginal Fields Farm Outs only possible where
Lease holder seeks consent of President to farm out marginal field out of its area
President may ‘cause a Farm Out’ of a marginal field where field unattended for period not less than 10 years
In practice latter approach in useFarm outs between IOCs (as holders of OMLs) and NNPC
under U-JV, on one hand, and indigenous companies on the other
Act says government must be satisfied with farmee of marginal field but does not stipulate who selects
In practise bids carried out in past by Minister
Nigerian PSC StructurePSCs became popular from era of offshore
petroleum development activities in Nigeria due to heavy costs involved
Mostly in use in Nigeria todayGovernment recently contemplated converting
existing U-JVs to PSCs to overcome cash call problems created by section 162 of Const
Deep Offshore Act contemplates NNPC(and not Min of Pet) and Indigenous Companies as OPL/OML holders, and describes IOCs as ‘Contractors’
Nigerian PSC StructurePSCs also describe NNPC as OPL/OML
holders, and IOCs as ContractorsNigerian PSCs are like Risk Service
except for NNPCs option to change Contractor at production phase of Risk Service, and Contractor’s oil sharing that is assured under PSCs
IOCs under U-JVs made by government to set up separate entities for PSC arrangements to avoid ring fencing
Nigerian PSC StructureUnder PSC IOC contracted to carry out
petroleum operations exclusively within contract area
No recital that Minister’s statutory consent required and obtained; but Minister’s ‘approval’ endorsed on PSC
No express statutory provision allowing PSC in Nigeria
Nigerian PSC StructureIOCs remuneration dependent on production; production
can only happen if NNPC gets an OML; OML in turn depends on NNPC meeting all its OPL conditions
Hence, 30 years granted in PSC to cover OPL/OML duration in lieu of NNPC undertaking to get OML
Note that duration phased in other countries Question: what is legal basis for NNPC granting
duration beyond OPL? PSC terms mirror back OPL/OML terms like duration,
relinquishment; PSCs, OPLs/ OMLs relationship more serious than sublease and head lease
Note conceptual confusion in case law on PSC in KNOC v President, FRN & Ors
Nigerian Risk Service ContractOnly notable case is between NNPC and AGIP over
Agbara Oil FieldNNPC has right to take over operations, or replace
IOC Contractor with another at production phaseContractor reimbursed from proceeds of production
for exploration, development and production costsContractor entitled to remuneration based on
prescribed formula that factors in volume and market price of crude oil produced
Nigerian Risk Service ContractContractor has option of taking prescribed
quantity of oil produced in lieu of remuneration NNPC controls operations through
Approval of work programs appointment of subcontractorsApproval of budgets and expenditure
Contractor pays tax while NNPC is responsible for royalty
Nigerian Petroleum Development Arrangements on GasPetroleum Act defines ‘petroleum’ to include ‘crude oil’ or
‘natural gas’Question: Can same OPL/OML cover oil and gas
development in light of disjunctive interpretation of ‘or’? Currently, Nigeria gas development is incident of
associated oil No statutory or contractual framework specifically for gas
development, and that takes its peculiar character into account , especially in terms of longer time required for development
Contractor to notify NNPC under PSC and Risk Service if gas is found and another contract to be entered into for gas development
Nigerian Petroleum Arrangements: how they differDistinguishing features may be identified
through parameters used by foreign investors to determine investing in a countryNature of ownership granted Nature of protection available from this
ownership Nature of fiscal regimeOthers
Nigerian Petroleum Arrangements: how they differNature of ownership:
Mining/mineral rights: under PSC and Risk Service legal title vests solely in NNPC; IOC has legal title under U-JC. NNPC’s legal title to mining rights under U-JV debatable
property used for operations: under PSC and Risk Service title to equipment and property acquired for operations transferred to NNPC at end of contract; title vests jointly in IOC and NNPC under U-JV
data: NNPC retains ownership all data , logs, reports, information acquired in performance of contract under PSCs and Risk Service; ownership vests jointly in NNPC and IOC under U-JV
Nigerian Petroleum Arrangements: how they differ
reserves: Under U-JV IOC and NNPC entitled to book reserves in proportion of their participation interest; under PSC NNPC can book reserves, while IOC may only book reserves to extent of its share of oil; under Risk Service IOC may not book reserves except there is agreement for buy back
ownership of gas found: Under U-JV gas found belongs jointly to IOC and NNPC; under PSC and Risk Service gas found belongs to NNPC alone
Nigerian Petroleum Arrangements: how they differNature of Protection:
Expropriation: Under U-JV both IOC and NNPC entitled to compensation; under PSC and Risk Service, NNPC entitled. Based on wording of s. 44 of const, and jurisprudence of international investment law, IOC may also be entitled because of right to oil produced; IOC may not be entitled under Risk Service
Dispute Settlement: PSCs provide for arbitration in accordance with ACA; Act provides for arbitration in event of dispute from OML(s. 11; Para 14); note s. 251 of const vests exclusive jurisdiction in FHC Question: What is the legal effect of arbitral provision in
statute?
Nigerian Petroleum Arrangements: how they differFiscal Regime As a matter of concept NNPC and
IOC should be jointly liable for royalty and rent under U-JV; Under PSC and Risk Service, NNPC alone should be liable for rent and royalty based on language of Petroleum Regulation
As a matter of Nigerian law, Nigerian contract clauses and practice situation unclear
Petroleum (Drilling & Production) Regulation imposes obligation on only “The licensee or lessee shall pay to the Minister not more than one month after the end of every quarter... (a) royalty at a rate...”(reg. 60 )
Annual rent payable on OPL and OML (reg. 59)
Nigerian Petroleum Arrangements: how they differBut note that Deep Offshore Act and PSC models
imply that IOC is also liable to paying royalty and rents “The Corporation or the Holder, as the case may be, shall pay all royalty, concession rentals....on behalf of itself and the Contractor...”(s. 11(1)
“The CORPORTION shall pay all Royalty, Concession Rentals...on behalf of itself and the CONTRACTOR...” (Clause 15.3 PSC Model)
Nigerian Petroleum Arrangements: how they differOthers
Decommissioning: Petroleum (Drilling & Production)Regulation contemplates this but applies to leaseholder. IOC and NNPC jointly liable under U-JV ; NNPC solely
liable under PSC and Risk Service. Some(not all) PSCs impose obligation on IOC to set up an Abandonment Fund for decommissioning or provide security for this.
Control: Under U-JV Operating Committee; under PSC Management Committee
Nigerian Petroleum Regime: Emerging ReformPIB expressly allows PSCs, Risk Service Contracts and
other forms of Petroleum Development Arrangements PIB restyles Oil Prospecting Licenses and Oil Mining
Leases as Petroleum Prospecting Licenses and Petroleum Mining Leases
Unlike existing system that was limited to Minister’s statutory approval in relation to transfers of OPL and OML interests, and that did not expressly cover JOA’s, PSCs, Farm outs, etc, PIB requires consent in respect of all forms of contractual transfers, including mergers and change of ownership control situations
Nigerian Petroleum Regime: Emerging ReformPIB creates very elaborate process for migration
from PPL to PMLMining rights to be granted solely for gas
development Regime for gas development different from oil and
also more generous due to its peculiar character Export rights no longer part of mining rights
granted under the PIBDomestic gas supply mandatoryPermit now required for gas export
Nigerian Petroleum Regime: Emerging ReformPIB expressly creates provisions for operatorship IJV contemplated in place of U-JV NNPC’s character as NOC may change under PIB
as it is contemplated for privatizationNNPC to continue to play role of NOC under
PSCsPIB silent about IOCs right to obtain
mining/mineral rights directly
Nigerian Petroleum Regime: Emerging ReformIncreased indigenous ownership of
mining/mineral rights due to:Nigerian Content Act that stipulates ‘first
consideration’Explicit marginal fields regime under PIB
Marginal fields one of few areas where discretionary allocations would be allowed
Aggressive relinquishment regime in PIB