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A Critical Review Of The Inter Agency Memo2


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The Inter Agency Memorandum provides an alternate version of the Petroleum Industry Bill. This paper critically reviews its content in relation to the upstream petroleum industry.

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A Critical Review Of The Inter Agency Memo2

  1. 1.   2009  A Critical Review of Upstream Provisions  of the Inter­Agency Memorandum on the  Petroleum Industry Bill  Odujinrin & Adefulu Church House st 1 Floor 29, Marina, Lagos
  2. 2. 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   A Critical Review of the Inter-Agency Memorandum on the Petroleum Industry Bill Page 2
  3. 3. 2. INTRODUCTION The Petroleum Industry Bill, 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 Bill, which has passed through the first and second readings in both houses of the National Assembly, was referred to the relevant committees and public hearings have been held by the Senate and the House of Representatives on the Bill. Various entities submitted memoranda to the National Assembly to address shortcomings of the Bill. A memorandum was also submitted by the Executive Branch of the Federal Government, through the Inter-Agency Team 1, proposing to address some of the deficiencies in the Bill. The Memorandum was in the form of a new draft Petroleum Industry Bill. Whilst, there is technically 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 Bill it originally sent. The breadth of the proposed revisions is quite substantial and includes for example broad changes to the fiscal and institutional frameworks. It is based on the background of the significance of these changes, as well 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 T he In te r-A g en c y Tea m co mp r ise d o f M i nist r y of P etr o le um Reso ur ces , M in is t ry o f J ust ic e, Mi n is tr y o f F i na nc e, F e de ra l In la n d Rev e nu e S erv i ce, D e par t me nt o f Petro leum R esources, Nigerian Ex tra ctive I ndus tr i es T ra nspa re nc y In i t iat ive, Re v en ue Mo b i lisa t ion A l loca t ion an d Fisc al Co m miss io n & the Ni ge r ian Nat io na l P e t ro le u m C o rp o ra t ion . A Critical Review of the Inter-Agency Memorandum on the Petroleum Industry Bill Page 3
  4. 4. The paper focuses only on the upstream aspects of the Inter-Agency Memorandum and the proposed draft Petroleum Industry Bill 2. The fiscal aspects would be addressed in another article. It draws comparisons between the Official Version & Version IV and also refers to the existing legal framework. 3. INSTITUTIONAL FRAMEWORK Under the Official Version, the upstream petroleum industry is to be governed by the Minister – responsible for broad policy formulation the National Petroleum Directorate (“NPD”) which was to act as the Secretariat for the Minister and to be responsible for detailed policy formulation. The NPD is also to be responsible for holding unallocated 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. Finally, the National Petroleum Assets Management Agency (“NAPAMA”) is to act as a cost regulator for the upstream industry. 2 F o r t he pur p o s e s o f t h is pa p e r, t h is is r e fer r e d t o a s V e rs io n IV. T he B il l s ub m i t t e d t o t h e N a t io na l As s e mb l y is r e f e rr e d t o a s t h e O f f ic ia l V e rs io n. A Critical Review of the Inter-Agency Memorandum on the Petroleum Industry Bill Page 4
  5. 5. Institutional Framework under the Official Version Minister National Assets  National Petroleum  Petroleum  Petroleum  Directorate Inspectorate Management Agency Policy Direction Costs/Commercial  Technical Regulator Acreage Holder Regulator Version IV significantly changes this framework. Whilst the functions of the Minister and the NPD do not change significantly, Version IV abandons NAPAMA and places the cost/commercial function within the Inspectorate 3. The Inspectorate would exercise this function in the approval of “…commercial and cost elements of all field development programmes…” 4 The Inspectorate would also be responsible for developing “cost benchmarks for the evaluation of opportunities in the Upstream Petroleum Operations” 5 3 T h is A ut ho r has pr ev i o us l y a r gu e d fo r t he a ba n do nme nt o f N A PA M A a s t he ro l e o f t he a ge n cy was un cle ar a nd was li ke l y to a d d a bu r eau c rat i c l ay er t o u ps t rea m p e t ro l e u m i n d u s t r y reg u la t i o n . S e e “ H igh li gh ts o f As pec ts o f th e P et ro le u m I n d ust r y B i l l ” a p a pe r p re s e nt e d a t t he N i g e ria n As s o c ia t io n o f E n e r g y E co n o m i cs C o nf e r e n ce i n Ab u ja 2 00 9 – w w w . o d uj i nr i na de f ul u. co m/ 4 S ec ti on 39( 2 ) (a) o f Ve rs io n IV . 5 S ec ti on 39( 2 ) ( d) o f Ve rs io n IV A Critical Review of the Inter-Agency Memorandum on the Petroleum Industry Bill Page 5
  6. 6. Institutional Framework under Version IV Minister National Petroleum  Inspectorate Directorate Policy Direction Technical & Costs  Acreage Holder Commercial Regulator 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 Bill. By housing the costs/commercial function in the Inspectorate, it avoids the problems associated with having multiple regulators such as high regulatory costs and excessive bureaucracy. Additionally, by placing the costs/commercial function in the work commitment & field development process, the ambiguities raised under the Official Version as to the extent of this form of regulation have been minimised. 4. NNPC LTD. Version IV also proposes the establishment of NNPC Ltd to replace the Nigerian National Petroleum Corporation (“NNPC”). Like its predecessor, Version IV does not place a positive duty on any entity to create the A Critical Review of the Inter-Agency Memorandum on the Petroleum Industry Bill Page 6
  7. 7. 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 Allied Matters Act (“CAMA”) which regulates limited liability companies in Nigeria, each company is required to have at least two shareholders 7. It is suggested therefore, that it would be useful for the Bill to name the specific shareholders which it proposes to hold shares in the company or to detail the process by which those entities are determined. Version IV copies the asset transfer process under the Official Version. It deems the assets and liabilities of NNPC to be transferred to NNPC ltd on the transfer date. It does not provide for a process by which the assets and liabilities of NNPC are identified 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 Electric Power Sector Reform Act (“EPSRA”) for an example of an effective transfer procedure. The EPSRA in effecting the transfer of assets and liabilities from the National Electric Power Authority to the initial holding company (now Power Holding Company of Nigeria Plc) provided as follows: 1. The formation of the initial holding company, who should form it and the timeframe within which it should be formed. 8 2. The shareholders in the initial holding company. 9 3. Transfer of assets and liabilities by a transfer order issued by the National Council on Privatisation. 10 6 It o n ly sta tes th at if t h e com pa ny h as no t be en c re ate d af te r 3 m o nt hs o f t he p a s s a ge o f t he A ct , th e gov er nm e nt s h o u ld ca use its c re a t io n . 7 S ec ti on 18 o f CAMA 8 S ec t i o n 1 o f E P SR A 9 S ec t i o n 2 o f E P SR A A Critical Review of the Inter-Agency Memorandum on the Petroleum Industry Bill Page 7
  8. 8. 4. The assets and liabilities are identified on the audited balance sheets of the Authority. 11 5. Asset transfers to be exempted from stamp duties 12. 6. The formation of the initial 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 Oil Company may appoint a majority of members to the Board of Directors, where it is the majority shareholder. Under the existing participating 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 parties, which inevitably means that NNPC has majority interest. However, the decisions of the JOC are taken by unanimous decision 14, which effectively serves to protect the minority. Version IV does not speak to the voting power of the directors, therefore the Articles of Association 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 S e c t i o n 3(4 ) o f E P SRA 11 S e c t i o n 3(2 ) & ( 4) o f E PSR A 12 S ec t i o n 4 o f E P SR A 13 S ec t i o n 4(a ) o f E PSRA 14 S ee A d ed ol a po A k in rel e, N ig e ria O i l a nd Gas L aw, at pa ge 15 1. A Critical Review of the Inter-Agency Memorandum on the Petroleum Industry Bill Page 8
  9. 9. appears to contradict the provisions of CAMA, which place a fiduciary duty on company directors. 15 Section 260(10) provides that NNPC ltd shall have the rights to appoint more than 50% of the management team. This right of appointment is not tied to the shareholding of the NNPC Ltd in the IJV and there is an additional 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 actualisation of this objective. By including such a restriction in the law, it removes flexibility from decision makers and does not allow them to effectively respond to the facts on the ground. It significantly limits the financing options which may be utilised in seeking operational funds. Version IV further extends those restrictions 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 time frame within which the consent must be granted or refused. This would significantly hamper commercial decision making. Section 263 seeks to protect the shareholders of the IJV from incurring any additional tax liabilities provided all assets are transferred to the IJV at net book value. It does not offer similar protection in terms of company 15 T he d ut y o f a d i re cto r is to the c o mpa n y a n d n o t to t he p e rso n w ho s e nom i ne e he i s. S ee O roj o, C om pa ny La w a n d P ra ct i ce in N i g e ria, a t p a ge 3 1 0/ 16 S ec ti on 261 ( 4) o f Ve rs io n IV A Critical Review of the Inter-Agency Memorandum on the Petroleum Industry Bill Page 9
  10. 10. registration fees at the Corporate Affairs Commission (“CAC”), which are likely to be significant in view of the potential assets of these IJV companies. Version IV also introduces special provisions with respect to the liquidation of the IJVs. It provides for the process by which liquidation may take place and for disposal of the assets of the IJV. Of particular concern is the provision which requires that all the assets of the IJV, whether tangible or intangible, real or personal shall only be transferred to NNPC Ltd in liquidation. In view of the fact that the law provides for a single buyer, there is no room for competition in selling these assets and the shareholders are effectively stuck with the valuation placed on them by NNPC Ltd. It also places significant pressure on NNPC Ltd. in terms of arranging financial commitments for the acquisition (or re-acquisition) of such assets, as well as effective application/management of such assets post liquidation. 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 will of the typical state corporation and the limited liability 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 Articles of Association of the IJV. This method would allow for flexibility as it is difficult to amend legislation 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, it may be necessary for a Shareholders’ Agreement to require NNPC Ltd. to A Critical Review of the Inter-Agency Memorandum on the Petroleum Industry Bill Page 10
  11. 11. pay market value as determined by an independent consultant for the assets transferred in liquidation. 6. ACREAGE CONTROL & LICENSING Like the Official Version of the Bill, Version IV vests all unallocated acreages in the Directorate on behalf of the Federal Government of Nigeria. 17 It is suggested that a body saddled with the responsibility for detailed policy 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 definition of license and lease areas, relinquishments 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 Bill provides for three upstream licenses; the petroleum exploration licence (“PEL”), the petroleum prospecting licence (“PPL”) and the petroleum mining lease (“PML”). Whilst the PPL & PML were provided for in the Official Version, the PEL is introduced in this version. The objective of its introduction may be to cater for exploration companies, which primarily explore for petroleum and sell data to those which seek to exploit it. A major departure from the Official Version is the recognition that PPLs and PMLs may be in respect of crude oil and natural gas. 18 Section 257(1) of the 17 S ec ti on 269 ( 1) o f Ve rs io n IV 18 S ec ti on 271 ( 4) o f Ve rs io n IV A Critical Review of the Inter-Agency Memorandum on the Petroleum Industry Bill Page 11
  12. 12. Official Version states that: “Every petroleum prospecting license or petroleum mining lease shall clearly state that it shall be in respect of crude oil or natural gas but not of both crude oil and natural gas.” The proposed amendment is commendable as it was never clear why the government proposed a dichotomy between products which usually can be found together. The introduction of a differentiation between the qualifications required by an operator and a non-operator for the purpose of licensing is also noted and commended 19. The only qualification necessary with regard to non-operators is the means to finance its obligations under any license. This appears to be appreciated in the Inter Agency Memorandum. It should also be noted that Version IV has changed the character of potential licensees. Under the Official Version, licences or leases may be granted to two categories of companies- the National Oil Company and indigenous oil companies. 20 Version IV provides for licenses and leases to be granted to the National Oil Company 21 and to a winning bidder of an acreage bid round. 22 The choice not to limit licenses and lessees essentially to local 19 S ec ti o n 271 ( 6) (a ) & (b ) o f V e rs io n IV 20 S e ct io n 25 7 ( 1 ) o f t he O f f ic ia l V e rs io n. T he O f f i c ial V e r s ion d e fi nes a n i nd i ge no us o i l co mpany as a co mpa ny: a. E n gag e d in t h e e x p lo ra t io n fo r a n d p ro d u c t io n o f c ru de o il a n d n a t u ra l gas o f w h ic h s ix t y p e r c e n t o r m o r e o f i t s s ha r e s a re be ne f ic ia l l y o w ned d i re ct l y o r i n d i re ct ly by N i ge r ia n c i t i z e ns o r a s s o c ia t io ns o f N i ge r ia n c it i ze ns; b. W hi ch m eets t he r e qu i re me nt s o f a n y g uid e l in es o r r e gu la t io ns t h a t ma y b e i s s u e d b y th e D i re cto ra te o r I ns pe ct o ra te ; a n d c . W hi ch is a cc re d it e d a s a n ind i g e no us o i l co m pa ny b y t he D i r e c t o r a t e o r Ins p ecto rate... Section 467 o f the Officia l Vers io n. 21 A g r a n t t o N N P C L t d . is u n d e r t h e c o n d iti o n t ha t i t h a s co m ple t e d a n o pe n a n d t ra n s pa re n t b id p ro c e s s for po ten t ia l co nt ra cto rs. 22 S ec ti o n 271 ( 2) (a ) & (b ) o f V e rs io n IV A Critical Review of the Inter-Agency Memorandum on the Petroleum Industry Bill Page 12
  13. 13. companies would encourage a wider pool of bidders. It may however be regarded as discouraging the efforts to build strong local players in the Nigerian oil and gas industry. PEL The PEL essentially replaces the oil exploration license (“OEL”) under the Petroleum Act 1969. It proposes to grant a non-exclusive right to carry out geological, geophysical and geochemical exploration of petroleum. 23 It also allows for a PEL to cover an area that includes PPLs and PMLs. 24 This would appear to interfere with the exclusive rights 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 allowed to cover existing PPL or PML areas. PPL The holder of a PPL is granted an exclusive right to carry out petroleum exploration operations and has the right to carry away and dispose of crude oil or natural gas won during prospecting operations. 25 In terms of duration, the distinction between PPLs granted over land & shallow waters and deep water areas & inland basins is maintained. However the duration with respect to land and shallow waters is increased to seven years under Version IV 26 as opposed to five years under the Official Version. 27 The period of 10 years for deep water areas and inland basins is maintained. In both areas however, 23 S ec ti on 274 ( 1) o f Ve rs io n IV 24 S e c t ions 2 7 1( 3 ) & 27 4 ( 3 ) o f V e rs io n I V . It should be noted th a t s ec tio n 2 7 4( 3) r e fe rs to “p e tro l eu m m i n in g li cen c es” as oppose d to “ pet ro le um m i ni n g l eases ”. 2525 S ec ti on 275 of V ers ion IV 26 S ec ti on 276 (a ) of V ers io n IV 27 Section 261 (a) of the Official Version A Critical Review of the Inter-Agency Memorandum on the Petroleum Industry Bill Page 13
  14. 14. Version IV breaks down the term of the PPLs. The table below graphically illustrates this. PPL Duration under the Official Version & Version IV Area Official Version Version IV Land & Shallow Not more than 5 years Not more than 7 years Waters consisting of: 1. Initial period of 3 years 2. Renewal period of 2 years 3. Appraisal period of 2 years Deep Water Areas & Not more than 10 years Not more than 10 years Inland Basin consisting of: 1. An initial period of 5 years 2. Renewal period of 3 years 3. Appraisal of 2 years MINIMUM WORK COMMITMENTS Version IV also introduces provisions in relation to minimum work commitments. The main purpose of minimum work obligations is to maximise exploratory activity in the licensed area in a timely manner. 28 This is done by imposing terms on the licensee to carry out specific work in a specified 28 G e o f f H e w i t t a n d A d r ia n H il l, “O f fs h o re L ic e n ce O p e ra t io ns : T h e E x p l o r a t ion P ha s e ”, i n T e re n ce Dai n t it h et al , U n ite d K in g do m Oi l a n d Gas Law ( Lo n do n: S we et & M a x w e ll, 2 0 05 ) . A Critical Review of the Inter-Agency Memorandum on the Petroleum Industry Bill Page 14
  15. 15. period. 29 Section 277(2) imposes an obligation on the licensee to commit to drilling of at least one exploration well to a specified minimum depth. Such a commitment must be supported by a bank guarantee or performance bond from a reputable international bank 30. 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. Firstly, by specifying the minimum drilling requirements in legislation, it ties the hands of the regulators and does not provide for flexibility in accordance with field specifications. Further, the provisions do not explicitly tie the completion of the work commitment in the initial period to the renewal process; such an explicit tie would be useful to provide a clear basis for license renewals. Additionally, whilst there is a provision for a bank guarantee or a performance bond for the full 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 spirit 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 W i l l ia m On o r a t o & J . J a y Pa rk, “Wo r l d Pet ro le u m Leg i s la t ion : F ra me w o rks t ha t F ost er O i l a n d Gas De ve lo p me nt” , 39 A l be rt a L. R ev. pp. 70 - 126 . See a lso P ete r C a me ron , “T he St ru ctu r e o f P et ro le u m A gre em en ts” , i n Ni ck Be re dj ic k a nd T ho mas W a l de ( e ds. ) , P e t ro le u m In ves t me nt Po l ic i e s in Dev e lo p in g Co un t r i e s , ( L o n do n: Graham & T rotma n, 1988). 30 S ec ti on 277 ( 15 ) of V er s ion IV 31 S u ch a p ro v isi o n may b e fou n d w i t h i n C la u s e s 6. 5 a n d 6. 6 o f t h e N ig e ria n 2 0 05 Mo de l P ro du c tio n S ha ri n g Con t ract . A Critical Review of the Inter-Agency Memorandum on the Petroleum Industry Bill Page 15
  16. 16. Version IV also makes more detailed provisions with respect to commercial discoveries and field development plans. A commercial discovery is defined as “...a discovery of crude oil, tar sands, bitumen, heavy oils, extra heavy oils, natural gas or condensates within a petroleum prospecting licence which can be economically developed in the opinion of the licensee, after consideration of all relevant economic factors normally applied for the evaluation of crude oil, natural gas or condensate evaluation or development”. 32 Unlike under the Petroleum Act, this definition does not peg commerciality to a certain number of barrels per day 33 but makes it subjective based on the licensee’s circumstances. This recognises the fact that the commerciality of a discovery is significantly dependent on the economic condition of the holder of the licence. Upon the declaration of a commercial discovery, the licensee must submit a field development plan to the Inspectorate within 120 days. 34 The development plan must be approved by the Inspectorate within 90 days, if it meets certain criteria. 35 32 S e ct io n 52 6 o f V e rs io n IV. I t s e e ms u n us u a l t o i n clu d e t a r s a n ds a n d b it u me n in t h is de f in it i o n a s t h e y h a v e bee n t r a d it ion a l l y t r e a t e d u nd e r t he s o li d m i ne ra ls r e g im e i n N i g e ria . 33 Cla use 9, Firs t Sche dule to t he Pet ro le u m Act 34 S ec ti on 278 ( 1) o f Ve rs io n IV 35 T he c ri te r ia i nc lud e- a n a p p ro v ed N a t io na l C o nte nt Pl a n , a n a p pr o v ed e n vi ro n men ta l ma na ge me nt p lan, pro v is ion f o r ro ut in e g as f la ri ng et ce te ra. I t is not c l e a r i f t he 1 20 da ys w i t h i n w h i c h t o s ub m i t a dev e lo pm e n t p l a n u nde r s e c t io n 2 7 8( 1 ) wou l d a l low a l i ce nse e to me et a l l t hes e o bl ig at io ns. Be fo re th e p r ov is io ns a re a do pt e d b y t h e l e g i s la t u r e , it w o u l d be n ec es s a r y to m a p t he t i me i t wo u ld ta ke t o ge t t ho s e a p p ro v a ls . A Critical Review of the Inter-Agency Memorandum on the Petroleum Industry Bill Page 16
  17. 17. RELINQUISHMENT Relinquishment Provisions under Version IV Relinquishment Version IV Period Upon expiry of initial 50% of original license exploration period area Upon the expiry of All parcels that are not the renewal period part of PMLs, appraisal areas or significant gas discovery retention areas Upon expiration of All acreage that is not the PPL included in PMLs, appraisal areas or significant gas discovery retention areas PETROLEUM MINING LEASE A PML may be granted to a holder of a PPL who has satisfied the conditions under the PPL, has made a commercial discovery, and has received approval A Critical Review of the Inter-Agency Memorandum on the Petroleum Industry Bill Page 17
  18. 18. for the related development plan from the Inspectorate. 36 The holder of a PML shall have the exclusive right to carry out upstream petroleum operations in the lease area. 37 The grant of a PML shall be on the basis of a firm 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 all existing and future petroleum mining lessees 39 to comply with their obligations as prescribed by the Midstream Agency. Any licensee 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 relinquished to the Directorate. 41 A PML which is not in commercial production within five years may be revoked. 42 A lease that has 36 S ec ti on 280 ( 1) o f Ve rs io n IV 37 S ec ti on 281 ( 1) o f Ve rs io n IV 38 S ec ti on 281 ( 3) o f Ve rs io n IV 39 T his is in co r re ct fr om a t ec h ni cal pe rspec t iv e as th er e a re no “ exi st i ng pe t ro le um l i ce ns e e s ” . I t i s s u gg e s t e d t h a t i t b e a me n de d t o in c l u d e c u rr e n t h o l de r s o f oil mining leases. 40 S ec ti on 282 ( 4) o f Ve rs io n IV 41 S e c t i o n 28 3 ( 3 ) o f V e rs io n IV. T his is i n c o n t r a s t t o t he pr o v isi o ns o f t he O f f ic ia l Ve rs io n w hi c h p rov i des fo r th e du ra t ion o f t we nt y year s re new abl e fo r 2 0 ye ars at e ac h r en ewa l p e rio d. S ec t ion 239 of t he Off i c ia l Ve rsio n. 42 S ec t ion 28 3 (2 ) o f Ve rs io n IV. I t is not cle ar who the r i gh t to r e vo ke rests wi t h. A ddit io na lly , th e r i ght is d is cr et io na ry , a nd th e re is no re q ui re me nt to ta ke in to c o gn isa nc e i ssu es s uc h as fo r ce ma je u re o r a ny s pe c ia l c i rc um sta nc e, w h ic h may a f fe ct the a b ilit y to achie ve co mmercia l p ro du cti o n. It is t h er e for e s t ron g ly r e com me n de d fo r t h e s e i s s u e s t o be t a ke n i nt o con s i d e ra t ion b y t h e Na t io na l Assembly. A Critical Review of the Inter-Agency Memorandum on the Petroleum Industry Bill Page 18
  19. 19. 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 relinquish all 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 Oil Company. 44 Under both versions, such a bidding process must be conducted in consultation with the Inspectorate. Version IV includes an improvement to the Official Version by requiring that the Minister may only award licences 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 following: 1. Signature bonus; 2. Royalty percentage; 3. Work commitment in terms number of wells to a specified minimum depth; 4. Work units. 46 The introduction of these parameters would strengthen the provisions of the final Petroleum Industry Bill if included. ASSIGNMENTS, MERGERS & ACQUISITIONS 43 S ec ti on 283 ( 4) o f Ve rs io n IV 44 S ec ti on 289 ( 1) o f Ve rs io n IV 45 S ec ti on 271 ( 2) o f Ve rs io n IV. U nde r t he O f fi c ia l Ve rs ion , th is w as n ot qu it e c l ea r. 46 S e ct io n 28 9 (2 ) (a) & (b ) o f Ve rs io n IV. I t sh ou ld be no ted t ha t t her e is no d e f in it io n o r d es c r i pt ion o f w ha t co nst it ut es “ wo rk un i ts ” . A Critical Review of the Inter-Agency Memorandum on the Petroleum Industry Bill Page 19
  20. 20. The provisions of Version IV in relation to the assignment of licences/leases basically mirror those of the Official Version, save for the inclusion of a provision that any assignment, merger or acquisition would be “...subject to a fee equal to 2% of the fair market value of the transaction...”. 47 This introduction would negatively influence the cost of doing business in Nigeria and would impact on the ability of license holders to freely trade their rights. It is not clear how “fair market value” would be determined. The silence 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 Ins pectorate may be challenged in this regard. Finally the provisions do not take into consideration assignments, mergers and acquisitions between related parties, which may not neces sarily be towards direct financial 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 licence 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 oil 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 license or lease after an open and transparent bid process for potential contractors has been conducted on the basis of a model contract approved by 47 S ec ti on 292 ( 5) o f Ve rs io n IV 48 It is s u gges te d t hat these pro v isions wo uld e nt i tle bid winne rs to ente r into productio n s ha r ing contracts, risk se rv i ce co nt ra cts a n d t he l i ke w i t ho ut a r e qu i re me nt to o b ta in p e r miss io n f ro m t he D i r ec to r a te o r th e I ns p e cto ra te. A Critical Review of the Inter-Agency Memorandum on the Petroleum Industry Bill Page 20
  21. 21. the Directorate. Section 272(2) (b) describes those model contracts as production sharing contracts, risk service contracts, and any other similar contract. Part VIII of Version IV goes on to provide for the fiscal content of the contracts entered into by NNPC Ltd. 49 The effect of this two tier structure is that the National Oil Company is not required to always compete for acreage awarded to it. This provides it with a significant advantage over other companies and would ultimately hinder the ability of the NOC to compete. Additionally in the position 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 specifically address how subsisting PSCs and RSCs would be treated under this arrangement. These were addressed in the Official Version. 50 It is necessary to address this issue as a number of provisions of subsisting PSCs have a regulatory flavour, which would be unsuitable to retain where the holder of the license 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 strictly regulatory are not included in such a contract so as not to arrogate excessive power to the National Oil Company. ENVIRONMENTAL PROVISIONS  The Version IV draft improves on the environmental issues related provisions in the Bill. Instead of the requirement for the licensee/lessee to submit an 49 S e c t i o ns 49 4 - 5 06 o f V e rs io n IV 50 S e c t i o n 230 ( 2) o f t he O f f ic ia l V e r s ion A Critical Review of the Inter-Agency Memorandum on the Petroleum Industry Bill Page 21
  22. 22. environmental programme (“EP”) or an environmental quality management programme (“EQMP”) as required under section 283(1) of the Official Version 51 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 requiring an environmental impact assessment (“EIA”) under the Environmental Impact Assessment Act. Under these provisions EIAs would be required with respect to most oil 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 applicability to oil and gas operations. The effect therefore if these provisions are adopted is that there would be a duplication of efforts by oil 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 financially responsible for environmental damage caused by sabotage. 53 Indeed these provisions maybe unconstitutional. Version IV also provides for financial provisions/contributions to be made by a licensee or lessee to a remediation fund. This version makes this fund 51 O n e o f the ma jo r c ri t ic is ms o f t he s tr u ctu r e u n de r t he O ff i ci a l V e rs io n was th e f ac t t ha t th e E P & EQ MP we re n ot dist i ngu is h a b le a n d i t w a s n o t c le a r u n d e r w h a t c i r cu ms ta nc es o ne wou l d be re qui r e d o v er th e o t he r. 52 S ec ti on 299 ( 1) o f Ve rs io n IV 53 S ec ti on 261 of t he Off i c ia l Ve rsio n A Critical Review of the Inter-Agency Memorandum on the Petroleum Industry Bill Page 22
  23. 23. subject to audit by the “lessee” 54. It maintains the requirement for a licensee or lessee to “annually assess its environmental liability and increase its financial contribution to the satisfaction of the Inspectorate”. 55 This requirement to annually increase a licensee/lessee’s contribution does not reflect realities as the assessment of the environmental effects of a company’s operations, could very well show a decrease in the potential environmental liability. It may also have the effect of stifling innovation as there is no incentive to develop better processes or use more environmentally-efficient equipment in operations. Additionally, the provisions remain silent on the mechanism for reimbursement of the money paid into the fund when upstream operations end. Finally, it may be suggested that if it is desirable to retain such an option, it may be useful to adopt the model utilised in relation to work commitments and field development programmes, which is to provide a bank guarantee/performance bond. This way, cash would not be tied down for a significant amount of time, whilst still ensuring that there is a way to fund the remediation of the environment due to damage caused by the operations of a licensee/lessee. Version IV also includes provisions for the payment of gas flaring penalties. 56 RELINQUISHMENT OF EXISTING LICENSES/LEASES  Arguably the most contentious aspects of the provisions of Version IV in the upstream sector are in relation to mandatory relinquishment of license areas. Under Section 291, existing licensees & lessees are required to select areas for which the licensee or lessee is prepared to make a declaration of commercial discovery, for which development is underway, in which regular 54 S e ct io n 3 02 ( 1) of Ve rs io n IV. It s hou l d be n ot ed t hat t h is pr ov is io n o nl y s ub j ec ts t he f un d to a u di t by t he l es s ee a n d d o es no t i n cl u de t he l i ce ns ee . W e s ug ges t t ha t t h is b e a me n de d i f t h e p ro v is io n s a re t o be a do pt e d. 55 S ec ti on 302 ( 3) o f Ve rs io n IV 56 S ec ti on 300 of V ers ion IV A Critical Review of the Inter-Agency Memorandum on the Petroleum Industry Bill Page 23
  24. 24. commercial production is occurring or for which the licensee or lessee is prepared to make a declaration of significant gas discovery. All such areas would be converted into PMLs, and any area not so selected must be relinquished. These provisions raise questions as to whether it amounts to compensable expropriation. Due to volume constraints, the examination of this issue is beyond the scope of this article and would be subject to a more detailed review in a subsequent article. 7. GENERAL COMMENTS Although there is still room for improvement, the upstream provisions in Version IV are a significant improvement on the Official Version. They appear to reflect a more considered approach to upstream petroleum issues. The existence of two government sponsored versions of the same Bill however creates a number of challenges for the National Assembly in organising and selecting the appropriate provisions for inclusion in the final legislation. It also provides a challenge for stakeholders in the review of the proposed legislation. It is suggested that for a streamlined and efficient process, it may be better for the Government to withdraw the Official Version and to submit Version IV or a variation of it. There are of course genuine concerns as to the time it would take to pass the Bill if this course is taken, particularly in view of the potential abridged legislative timetable due to the upcoming elections. It is however suggested that such a process would provide better quality legislation. In view of the fact that the current legislation has been in place for over forty years, the quality of the process and its product should be of paramount consideration. A Critical Review of the Inter-Agency Memorandum on the Petroleum Industry Bill Page 24