Nigeria Petroleum and Gas News

In commercial transactions generally, the worth of an economic right is often measured by the ability of its holder to transfer the right outright or in part, or admit third parties to participate in the rights. Grantors of these rights on their part are forever vigilant in ensuring that such a process does not diminish the value of the rights at the expiration of the holder’s duration and seek to avoid this by stipulating the grantor’s consent as a requirement for the validity of third party participation. At a very basic level we see this play out in a Landlord/Tenant relationship where the tenant can only sublet with the consent of the Landlord. Where the grantor of the right is government the consent requirement is usually both contractually and statutorily stipulated.Considering the significant commercial value attaching to oil exploration rights, and the various methods employed in the industry to develop oil fields, often involving third party participation, my intention here is to examine whether the consent of the regulator is a requirement in respect of third party participation in exploration rights. In this regard only certain arrangements would be considered. Statutory Consent Requirement in Exploration Rights Regulation 14 of the First Schedule to the Petroleum Act states that the holder of a license or lease shall not assign his licence or lease or any right, power or interest in it without the prior consent of the Minister. Regulation 16A (1) of the same Schedule in the amended Act provides that a lease holder may, with the consent of the Head of State, Farm Out any marginal field within its lease area. These are the only provisions that deal with transfer/dilution of oil exploration rights. Scope of Consent Requirement (1) Farm-Out Arrangements: Some background Farm outs originated from the US oil industry. As a country where oil ownership resides privately with persons and not the state, this arrangement took its shape from practices that obtained in that country’s agriculture business long ago where sharecroppers could earn in the farmers crop by working on the farm, hence its name.Under a Farm-Out, a direct holder of oil rights (or assignee) is vested with an oil field/acreage with some work conditions imposed, and the holder commits to this work programme within a specific time scale. In a Farm-Out, such a holder (farmor) yields a part of the operations of the field in favour of a third party who acquires a share of the oil field in consideration of performing part of the farmor’s work obligations. Farm outs are becoming increasingly popular all over for a number of reasons. The Farmor may lack the financial or technical capabilities to develop the oil field. In other cases such development may simply not be high on its priority list as a result of other exploration commitments or because its interpretation of relevant seismic data is negative. Also, because it has a work programme that it is committed to, the failure of which may result in termination or surrender of the exploration rights, the option of farming out this field is attractive. For the Farmee, an obvious reason for agreeing to this arrangement would be its lack of possessing exploration rights directly, and a number of reasons may be responsible for this. Such a company may not meet the conditions to qualify it as a direct holder; where it possesses the qualification criteria, the process may not be transparent enough to guarantee it a right, and even where the process is transparent it may be infrequent. Apart from this, the Farmee may simply want to reduce its risk either by pulling resources together with a holder of rights, or by lowering its exit barriers-as it faces less regulatory constraints when it decides to exit the market. There are also fiscal/tax considerations. Consent Requirement and Farm-OutsRegulation 14 above only applies where the rights that are sought to be assigned are held by a holder of a lease/licence granted under the Petroleum Act. Thus, a licensee/ lessee holder of oil exploration rights under the Petroleum Act who seeks to engage an oil exploration company under a PSC arrangement (typically by NNPC as a holder of oil rights under the Act engaging an oil company referred to as a contractor to carry out its oil exploration) would normally require the regulator’s consent in accordance with Regulation 14 of the Act. However, the possibility also is there that such an exploration company may wish to further involve a third party in the operation of the oil interests vested in it under the PSC arrangement. From a strict construction of Regulation 14 such a company/contractor, not being a direct holder of rights under the Petroleum Act, is under no legal obligation to obtain any statutory consent. Such a party is only obliged by a contractual obligation imposed by Clause 18 of the PSC Model clause. And that clause only obligates the consent of the exploration company’s principal in the PSC (NNPC) and not the regulator. This point is very important because Farm-Outs in Nigeria are typically created under this situation. Although Regulation 16(A) (1) requires the consent of the Head of State for Farm-Outs, this provision addresses only a very specific situation: Farm-Outs in areas designated as marginal fields in Nigeria, and the provision is therefore actually narrower in scope than Regulation 14 above. 2) Mergers: Some backgroundMergers are another method through which operating rights may pass to third parties. Mergers are defined under Part G(1), Rule 227 of the Subsidiary Rules and Regulations to the Nigeria Investment and Securities Act of 1999(ISA) as “any amalgamation of undertakings or any part of undertakings or interest of two or more companies or the undertakings or part of the undertakings of one more companies and one or more bodies.” Under this arrangement, two companies of roughly the same size are in a marriage in which their assets are vested in, or under the control of one company through the shareholders of one or both merging companies exchanging their shares for shares in the other, or a third company. One (or both) of the merging companies may cease to carry on business and disappear. Depending on how the merger is structured, either one of the merging companies survives (or indeed a third company) and succeeds to the assets and liabilities of the disappearing company. S.99 (2) of the ISA requires the prior review and approval of SEC for “every merger, acquisition or any form off business combination between or among companies.” It is suggested that it is only where companies’ transfer/exchange shares/assets that a merger, acquisition, or business combination takes place for which the approval of the SEC is required. As noted above, there are various merger/acquisition structures. Some of these structures may include the disappearance of some of the companies involved in the merger. In such a case, the operating rights (licence/lease) of such a company cannot attach to the surviving company by operation of law. Such a right would have to be vested through an assignment. Consent Requirement and Mergers From the above analysis we see that there are statutory and contractual controls that deal with the participation of third parties under the Nigerian regime in the form of Regulations 14 and 16(A), as well as Clause 18 of the PSC Model Contract. Each of these controls is however of limited application, and does not cover every conceivable area where holders seek to transfer their rights. Regulation 14 applies where a holder of rights under the Petroleum Act is assigning its interest. We see how this provision is inapplicable in the case of an oil exploration company/contractor who seeks to involve a third party in the participation of interests it acquires under a PSC through a Farm-Out. In respect of a merger, acquisition, or business combination Regulation 14 would only apply where by the structure of the transaction the operating rights are being assigned in favour of a surviving third party. It is important to make the point that even in respect of assignments to which Regulation 14 actually applies, in practice this provision is actually breached. This is because in those Model PSCs the Minister endorses its consent at the bottom of the PSC, contrary to the provision under reference that stipulates “prior” consent.ConclusionIn practice however, the DPR, generally understood to be the regulator of the oil industry, insists that its consent is required for the various arrangements considered above in which third party participation occurs (presumably in satisfaction of the requirement for the Minister’s consent in accordance with Regulation 14) while a second consent - that of NAPIMS (presumably in satisfaction of the requirement of the principal’s consent, here the NNPC)-is additionally insisted upon in a PSC.To be fair, there is every reason why the oil regulator’s “say-so” is important in these schemes. In the case of Farm Outs for instance, the performance of oil operations by a party whose involvement is not subject to the regulator’s scrutiny probing for financial and technical capabilities, does not augur well in an industry whose activities are well known to affect not only its immediate environment, but with consequences reaching far into the future and unborn generations. The same is the case with mergers. Even though this scheme requires SEC approval, not being a body that is grounded in the oil industry, some fine details are bound to escape it. Clearly therefore, the consent of the oil regulator is desirable.Unfortunately, there is absolutely no basis for the regulator’s statutory consent in the above arrangements by a strict construction of the relevant laws reviewed above. As I have argued elsewhere, regulatory powers derive from, and may only be used in accordance with an enabling legislation, otherwise it is ultra vires. (See Adaralegbe, A, “Mergers in the International Petroleum Industry: Legal Aspects on the Operations of Petroleum Development Companies in Nigeria” Journal of Energy & Natural Resources Law, 2003).It is obvious that the requirement for statutory consent as stipulated in the Petroleum Act has been outpaced by advances in contractual developments in the international petroleum industry. It is clear that our current petroleum laws as they stand need a new outfitting to accommodate these nimble contractual arrangements.
• Mr. Adaralegbe is a Fellow of the Energy Institute, UK, and member of the Association of International Petroleum Negotiators in Houston. He is also a Partner in Babalakin & Co.