2008 
Some Issues in the Conversion of 
Unincorporated Joint Venture...
This article first appeared in “Legal Energy” a column in the Nigeria
              Energy Intelligence.

              Go...
procedure for joint development of the area and of joint property; the Heads
              of Agreement delimits the gener...
Each existing PJV would be incorporated with the Corporate Affairs
                     Commission (“CAC”) with shares hel...
of NNPC on the board and its effective ability to bind the other venturers, by
              virtue of its majority positi...
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Some Issues In The Conversion Of Unincorporated Joint Ventures To Incorporated Joint Ventures

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Some Issues In The Conversion Of Unincorporated Joint Ventures To Incorporated Joint Ventures

  1. 1.     2008  Some Issues in the Conversion of  Unincorporated Joint Ventures to  Incorporated Joint Venture  Odujinrin & Adefulu Church House st 1 Floor 29, Marina, Lagos
  2. 2. This article first appeared in “Legal Energy” a column in the Nigeria Energy Intelligence. Going back to the first paper in this series, one of the objectives of the government in the oil and gas industry reform process is the resolution of the joint venture cash call issue; this problem was highlighted in that paper and would not be repeated here. One of the major solutions that has been proposed by the Oil and Gas Implementation Committee in this regard, is the conversion of the existing unincorporated joint ventures to incorporated joint ventures. The purpose of this paper is to highlight some of the major issues that may arise from the perspective of the International Oil Companies (“IOCs”) in the conversion of the joint ventures. 1. CURRENT STRUCTURE The initial joint venture contracts started with Nigeria acquiring interest in the oil concessions given to IOCs in the ‘50s and ‘60s. The Nigerian Participating Joint Ventures (“PJVs”) gave the Nigerian National Oil Company a 60% share in all fixed and moveable assets of the IOC. The rights and obligations accrued under these agreements have since been transferred to the Nigerian National Petroleum Corporation (“NNPC”) which was created in 1977. The Nigerian joint venture arrangement is an un-incorporated joint venture. Under this arrangement, each co-venturer has an undivided interest in the lease as well as all oil produced and the assets employed in oil production. The effect of this is that all rights and obligations accruing to the lessee under an Oil Mining Lease (“OML”), would accrue to all the joint venture partners including NNPC. Currently, the joint ventures account for more an estimated 90% of Nigeria’s daily oil production. The table below shows the various PJVs in Nigeria and the interests of the parties. The various joint venture projects are subject to agreements, which govern the relationship of the contracting parties. The participation agreements sets out the interests of the parties; the Operating Agreement spells out the legal relationships between the owners of the lease and lays down the rules and Some Issues in the Conversion of Unincorporated Joint Ventures to Incorporated Joint Venture Page 2
  3. 3. procedure for joint development of the area and of joint property; the Heads of Agreement delimits the general principles intended to govern offtake, scheduling and lifting agreements for the crude oil. These agreements alongside the Oil Mining Leases define the relationships under the joint venture arrangements in the Nigerian oil industry. The basic features of the Nigerian PJV are: • The IOC (or one of the IOCs) is usually the operator. All parties to the PJV pool funds to facilitate exploration activities in the ratio of their participation interests. The operator is required to submit to each non-operator a statement of the amount, which it (non-operator) is due to pay to meet its participating interest share of the costs and expenditures. This is known as the ‘cash call’. • NNPC may meet its cash call obligations by allowing the operator to lift some of its crude oil. This right is subject to giving adequate notice. • NNPC has an undivided interest in the concessions and in the assets and liabilities of the venture, based on its participating interest share. • Crude oil from exploration activities is divided between NNPC and the joint venture partners according to the ratio of their participating interests. • The joint operating committee supervises matters relating to the operations of the joint venture and each venture partner is represented in accordance with their interest in the PJV although decisions by the committee are taken unanimously. 2. PROPOSED STRUCTURE The Oil and Gas Implementation Committee has proposed an alternative structure – the incorporated joint venture (“IJV”), to aid the financing of joint venture projects. An incorporated joint venture is simply one in which the legal means of dividing the project's equity is by shareholdings in a company. Whilst the detailed plans have not yet been released, the broad structure of the initiative is as follows: Some Issues in the Conversion of Unincorporated Joint Ventures to Incorporated Joint Venture Page 3
  4. 4. Each existing PJV would be incorporated with the Corporate Affairs Commission (“CAC”) with shares held by the new National Oil Company & the IOCs according to their current interest levels. The Board of the IJV is expected to reflect the shareholdings of the co- venturers. The effect being that the National Oil Company would hold the most number of seats on each board. Additionally, the employees of the new companies are expected to also reflect the shareholding of the company. Thus NNPC would provide more staff than the IOCs to these IJVs. The IJV would serve as the operator in its own fields and would be empowered to independently source for funds for executing its projects. It would also be allowed to sell and keep the funds derived from cost oil and cost gas, while transferring all other hydrocarbon produced to its shareholders. 3. LEGAL ISSUES IN THE CONVERSION OF PJVS TO IJVS The current structure is a creation of contract and not of law; therefore any changes to the structure must be with the full consent of the other co- venturers. A number of issues would need to be considered by the IOCs in making a decision whether to accept these changes. These would include for example the consideration of the potential tax implications of such a change. These tax considerations in the short term would include the possibility of transfer taxes, upon the transfer of the assets to the IJV company. In the longer term, consideration would need to be given to whether the IJV as a vehicle in itself would be subject to additional tax other than what the IOCs are currently exposed to acting under the PJV structure. In addition to these concerns, thought would need to be given to the composition and voting powers of the board members. Under the current structure the management committee acts as the overall governing body of the PJV. Whilst membership of this body is constituted proportionally, decisions of the committee are taken on a unanimous basis. It is not yet clear whether the decisions of the board of the IJV would be taken unanimously. In the position that they are not, IOCs may be concerned about the domination Some Issues in the Conversion of Unincorporated Joint Ventures to Incorporated Joint Venture Page 4
  5. 5. of NNPC on the board and its effective ability to bind the other venturers, by virtue of its majority position. The principles which apply in the case of the composition and voting powers of the board also apply in respect of employment. It should be noted, that the experience of the IOCs in acting as the operator(s) in several field cannot be replicated by NNPC, as it has had only a limited opportunities to act as an operator. Therefore, caution needs to be exercised in imposing the principle of proportionality in relation to employees. It may be accepted as general knowledge that under the current regime, decision making is very slow. A possible concern of the IOCs is that the creation of the IJVs and their board may amount to the imposition of a new layer of bureaucracy, whereby the IJV boards are not infused with sufficient independence to make decisions on their own without seeking clearance or approval from the board of the parent national oil company. 4. COMMENTS The question of whether in itself the IJV structure would provide a permanent solution to the funding problems is one that has not been approached in this paper. However given the Government’s position that this is indeed the case, and the contractual nature of the existing arrangements, it must carry the IOCs along and address some of these issues as well as other concerns they may have in the detailed plans. This paper concludes the series on the institutional reforms of the oil and gas industry. Adeoye Adefulu holds a Ph.D in oil and gas industry reform from the Centre for Energy, Petroleum and Mineral Law & Policy, University of Dundee. He is a partner in the law firm of Odujinrin & Adefulu e s t 1 9 7 2 . Some Issues in the Conversion of Unincorporated Joint Ventures to Incorporated Joint Venture Page 5

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