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Practical Issues in Oil & Gas Assets Trading in Nigeria
By Donald Ibebuike Esq., LLM, Oil & Gas, University of Aberdeen, UK.
Foundation Chambers
24B Apapa Lane, Dolphin Estate, Ikoyi Lagos
d.ibebuike@foundationchambers.com
Introduction
There has been a surge in oil and gas assets divestment and acquisition in Nigeria in recent
time by the traditional and mostlyestablished and experiencedmultinational oil companies to
new entrants who are mainly foreign independents, local, smaller and less experienced
companies. This development has some obvious advantages which include: creating
opportunities for local players to emerge in the industry; development of technical
competence of local companies and their ability to compete in international arena; the
banking, and legal service sectors being exposed to the asset finance and documentation
issues; and providing revenue to the government through tax and consent fees etc. While the
advantages derivable from this trend are commendable, it is expedient for government to
address the perceived fears that led to this appetite for divestment which include uncertainty
in the industry as a result of non passage of the Petroleum Industry Bill (PIB) into law,
insecurity and unhealthy relationship with the host communities, pipeline vandalism and
crude oil theft. However, the speed with which this divestment is being carried out has
provoked the writer to discuss some serious issues that may be of importance to the
regulators, IOCs, employees, the new entrants and intending ones. These are regulatory
treatment of some transactions, time scale, decommissioning liability, employment, health,
safety and environmental issues.
Regulatory Issues – Consent Requirement
Regulation 14 of the 1st Schedule to the Petroleum Act requires the consent of the Minister
for any assignment of an interest in an Oil Prospecting Licence (OPL) or Oil Mining Lease
(OML). By Reg. 15 of the 1st Schedule to the Petroleum Act, the Minister can only grant his
consent if the applicant or its associated companies is of good reputation, has sufficient
technical knowledge and experience, sufficient financial resources and also acceptable to the
federal government of Nigeria. The proposed Section 194 (4) of the PIB will replace the
requirement of the applicant being acceptable to the Federal Government of Nigeria with the
requirement that where the intended assignee is to serve as an operator, it shall satisfy the
Minister of its competence. By Regulation 4 of the Petroleum (Drilling and Production)
Regulations of 1969 such an application for assignment or takeover can be made to the
Minister in writing and accompanied by the prescribed fee unless payment of application fee
is waived by the Minister especially in cases where the assignment is between associated
companies or for re-organisation.
It is not clearly stated under the current Petroleum Act that sale of controlling shares in a
company occasioning change in control of the company including its assets requires the
consent of the Minister. However, the issue became the subject of litigation in the case of
Moni Pulo Limited V. Brass Exploration Unlimited & Ors (2012) 6 CLRN 153 where the
Federal High Court relied on Reg. 14 of the 1st Schedule to the Petroleum Act and Reg. 4 of
the Petroleum (Drilling and Production) Regulations to conclude that such transaction
requires the consent of the Minister for it to be effective. This decision has attracted mixed

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reactions from some legal experts in Nigeria. While some applauds the Judgment others are
of the opinion that the Judgment of the Federal High Court is ‘unfortunate, surprising and
creates confusion in the law’. It is the contention of this writer that any contrary decision by
the Federal High Court would defeat the requirement of Reg. 15 of the 1st Schedule to the
Petroleum Act and the proposed Section 194 (4) of the PIB (cited above) namely – the need
for the regulator to satisfy itself that the new entrant is technically and financially sound to
undertake the work programme.
The Department of Petroleum Resources (DPR) has further clarified the legal and regulatory
treatment of assignment of shares of an Oil and Gas Company and other related transactions
relatingto oil and Gas assets through its Guidelines and Procedures for Obtaining Minister’s
Consent to the Assignment of Interest in Oil and Gas Assets issued on August 11, 2014 and
made pursuant to Paragraphs 14-16 of the First Schedule to the Petroleum Act and Section17
(5)(d) of the Oil Pipelines Act (the Consent Guidelines). The Consent Guidelines states what
constitutes an Assignment in the following terms:
“Assignment as usedherein involves thetransfer of a licence, lease or marginal field or an
interest, poweror right therein by any company with equity, participating, contractual or
working interest in the said OPL, OML or marginal field in Nigeria, through merger,
acquisition, take-over, divestment or any such transaction that may alter the ownership,
equity , rightsor interest of the assigning company in question, not minding the nature of
upstream arrangement that the assigning company may be involved in, including but not
limited to Joint Venture (JV), Production Sharing Contract (PSC), Service Contract, Sole
Risk (SR) or Marginal Fields operation”
The Consent Guidelines further listedinstancesof assignment to include exchange or transfer
of Shares; private or public listingof a part or of the whole of the shares of a Company which
holds an Oil Prospecting Licence, Oil & Gas Pipelines Licence, Oil Mining Lease or
Marginal Field in a Stock Exchange anywhere in the World; merger and acquisition of Oil
and Gas Companies. Other instances of assignment recognised by the Consent Guidelines
include assignment to a Company in a group of which the assignor is a member and made for
the purpose of re-organisation and finally assignment arising by reason of devolution of
shares or interest in ownership of shares by way of operation of law and testamentary device.
The Consent Guidelines has not only ensuredcertaintyas to the requirement of the Minister’s
Consent to such transaction but has gone ahead to clarify regulatory treatment of similar
transactions including private and public listingof Company’s shares anywhere in the World.
Section 194 (1 & 2) of the PIB seems to have also reflected the decision in Moni Pulo as it
provides that where a licensee, lessee or production sharing or service contractor is taken
over by another company or merges, or is acquired by another company either by acquisition
or exchange of shares, including a change of control of a parent company outside Nigeria, it
shall be deemed to be and treated as an assignment within Nigeria and shall be subject to
subsection2 requiringconsent of the Minister. The proposed PIB and the Consent Guidelines
have now provided the neededcertaintyin suchtransactionso that parties will from the onset
know that they would be seeking for the consent of the Minister.
Time Scale
The uncertainty regarding timing of completion of asset trading transactions is a major
practical issue that needs to be streamlinedin order to ensure efficiency and predictability of

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the process. Aside from the delays in negotiationbetweenthe seller and the purchaser, a huge
amount of time is spent to obtain Minister’s consent. It is also customary for Joint Operating
Agreement, Unit Operating Agreement or even Government Contracts to contain clauses
restrictingalienationof a party’s interest in a licence to a third party. Such restrictions could
among others be by way of conferring on the co-venturers the right to pre-empt an ongoing
transaction. Therefore, for a transaction to proceed, the existing co-venturers need to waive
their right of pre-emption and consent to it.
In order to ensure certaintyinthe process, encourage and standardise asset trading activity, it
is expedient for the petroleum ministry, the regulator and the industry to collaborate to
introduce a contractual mechanism that specifies time limit within which the Minister is
requiredto grant his/her consent and also to ascertain in time, if any of the other existing co-
venturers will exercise its right of pre-emption. The advantage of this arrangement is that it
will save time and cost to the intending Assignee who would not need to embark on a lengthy
and needless negotiation only to be pre-empted at the tail end of the transaction. The UKCS
was faced with a similar problem but was able to resolve it in 2003 by introducing a standard
document – the Master Deed which streamlined asset transfer arrangement through timing
mechanism and standard transfer documents.
Decommissioning Liability
This is an issue that new entrants as well as the regulator and the divesting IOCs need to
advert their minds to before concluding a deal. This becomes necessary since the expected
liability for decommissioning is huge and the regulator needs to ensure that the assignee is
capable of carrying out the decommissioning programme in order to save tax payers from
carrying the burden of decommissioning cost. The situation becomes more worrisome when
the current legal regime on the subject is not helpful. There is no clear cut provision relating
to decommissioningof onshore/offshoreinstallations, pipelines, utilities and structures under
the current regime except Reg. 36 of the Petroleum (Drilling & Production) Regulations
which relate only to abandonment of borehole or existing well. The provisions are grossly
inadequate to regulate the modern day installations, structures, well, pipelines and the
practicalities associated with them.
Under the proposed PIB, S. 204 (1) provides that decommissioning of onshore/offshore
wells, installations, structures, utilities and pipelines shall be conducted in accordance with
good oilfield practice and regulations and to be implemented by the Offshore Petroleum
Inspectorate (the body designated to regulate offshore industry). The Inspectorate shall by a
written notice require a licensee or lessee to provide a plan for decommissioning of a well,
installation, structure, utility and pipeline and the licensee or lessee may on the other hand
request the Inspectorate to issue such notice to it. The lessee upon receipt of the notice, shall
prepare a programme setting out an estimate of the cost of the proposed decommissioning,
details of measures proposedto be taken, clear descriptions of the methods to be employed to
undertake the work programme and steps to be taken to ensure maintenance of and safeguard
health, safety and environment where any installations, structures or pipelines are to remain
disused and in position or are to be partly removed.
The programme shall not be approved by the Inspectorate unless all relevant environmental,
technical and commercial regulations and standards are met. The Inspectorate is empowered
at its discretionto recallany licenseeor lessee responsible for decommissioning programme
with respect to all licence or lease that has expired to carry out its decommissioning

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obligations. This is to ensure that the obligation to decommission an installation inures
beyond the life time of the license/lease and also to ensure that there is a responsible person
to meet decommissioning obligation of every installation. The recall provision however
differs from that of UK where the Secretary of State is empowered to recall a licensee even
when it had divested its interest in a license if there is fear that the remaining co-venturers
will default in meeting the decommissioning obligation. The provisions of PIB on
decommissioning may need to be strengthened further to mitigate incidences of default in
carrying out decommissioning obligations in order to save tax payers from eventually paying
for decommissioning cost.
S. 204 (11) of the PIB onthe other hand, empowers the Inspectorate to require a lessee to set
up and manage an abandonment fund for purposes of decommissioning with a caveat that the
Inspectorate shall have access to the fund in case the lessee fails to carry out the
decommissioning obligation. The implication of the above provisions to a divesting IOC,
who has been served with a Notice under Section 204 (3) and has prepared a programme
thereof may, in principle remain liable to bear the decommissioning cost after divestment
since there is no provision in the PIB that provides for withdrawal of the Notice by the
Minister. Consequently, the divesting IOC may need an indemnity from the proposed
assignee by way of a clause in the transfer documentation excluding it from any liability
relating to the decommissioning of the installations. The situation is however gloomier for
new entrants as the obligation for carrying out the decommissioning programme seems to
squarely rest inthem. This is so because under the current regime, there is no requirement for
the lessees to set up a fund towards carrying out the decommissioning programme. The
implication is that new entrants acquired the assets subject to liabilities attached to it
including the 100% liability of carrying out the decommissioning programme. The PIB’s
requirement for adecommissioning fund to be set up by the licensee/lessee and its policy on
decommissioning generally may be one of the unspoken reasons the IOCs are divesting their
assets speedily before PIB becomes operative.
This precarious position coupled with not-too strong financial strength of the new entrants
(compared to the IOCs) as well as the expected huge sums required for carrying out the
decommissioning programme (in the UK decommissioning cost is projected to reach
£19billion by 2030 and could reach £23billion by 2040) raise serious issue of default. This
may lead to confusionand expose the government to the burden of meetingdecommissioning
obligationthrough tax payers’ money. Therefore, concertedefforts and collaboration need to
be made by the government and the industry to clarify issues relating to who bears the
liability for decommissioning, to what extent and introduce measures to mitigate default in
order to ensure certaintyof the process and also enable parties concerned know the extent of
their risk exposure before concluding a deal.
Another related issue is the requirement for the lessee to set up a fund towards meeting the
decommissioning obligations. The good news however is Section 305 (I) (iii ac) of PIB
allows such fund to be deducted before calculating tax payable but any amount in excess of
that expended for the decommissioning shall be treated as taxable income. This
notwithstanding, the fund set aside for decommissioningis capable of affectinginvestment as
the money that could have been ploughed back into further investment is tied down
somewhere in bank. However, PIB does not seem to contemplate granting tax relief on the
fund actually applied in carrying out the decommissioning obligation as it provides that a
company that has claimed deduction on any amount set aside for decommissioning shall not
claim further deduction upon incurring the decommissioning expenditure except on amount

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incurred in excess of the money set aside for that purpose. This seems to be in line with the
proposed abolition of the Investment Tax Credit and Investment Tax Allowance by PIB. This
will also increase the potential liability of new entrants in terms of decommissioning cost.
Employment Issues
The current asset divestment and acquisition activities in the Nigerian oil and gas sector will
expectedly trigger some employment issues. The employees of the divesting company would
be gripped with fear as to whether their employment will continue with the acquiring
company and if so whether the terms of employment will be varied and substituted with an
unfriendly working conditions. The acquiring company on the other hand would be
confronted with the issues of handling agitations from the workers of the divesting company
seeking to be retained and of deciding who possesses the requisite skills to be retained.
This issue becomes more complicated since there is no legal framework in place to regulate
the relationshipof the relevant interestedparties inthe event of acquisition and divestment of
assets. This makes the issue a matter of contractual arrangement between the divesting and
the acquiring companies. The contractual arrangement may not be in the interest of the
workforce (especially where the workforce are not consulted) and this may cause labour
unrest capable of stagnating operations. As a matter of
good practice, prospective buyers should therefore consider employment issues critically in
order to identify available options before embarking on acquisition of assets to avoid
surprises.
In the UK for instance, Transfer of Undertakings (Protection of Employment) (TUPE)
Regulations 2006 apply to regulate employment issues in the event of divestment and
acquisition of assets. The main aim of TUPE is to ensure that:
 The employees are not dismissed before or after the transfer unless there is an
economic, technical or organisational reason.
 Employment contracts shall have effect after the transfer as if originally made between
the person so employed and the transferee. This ensures that new business buyers
cannot escape the old business’ obligations to its workforce.
 Employees’most important terms and conditions of contracts are not worsened before
or after the transfer unless there is an economic, technical or organisational reason.
 Variation of employment terms shall be void if the main reasonis the transfer itself or a
reason connected with the transfer that is not an economic, technical or organisational
reason entailing changes in the workforce.
 Where the contract is varied on transfer to the detriment of employees, they can treat
themselves as dismissed by the employer and can claim for constructive wrongful
dismissal against the owner.
In order to encourage the ongoing asset trading activity in the oil and gas industry,
government and the petroleum ministry should come up with a legal framework to regulate
labour issues with a view to addressing the concerns of workmen and potential new entrants
so as to ensure certainty of the process.
Health, Safety and Environmental Issues
Following the Gulf of Mexico incident and the lessons learnt from it, the regulatorytreatment
of health, safety and environmental issues has changed tremendously. Previously, the

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requirement as capturedby Paragraph 15 of the 1st Schedule to the Petroleum Act and Section
194 (4) of the PIB was for the regulator to satisfy itself that the proposed licensee is
financially and technically sound to carry out its field development plan obligation but the
requirement has gone beyond that now. The current position is that the Regulator will in
addition satisfy itself that the intended licensee has the financial strength to also respond to
major oil spill and pollution incident in terms of recovery, clean up, remediation, ability to
drill alternative well and payment of compensation to the victims of the spill or disaster. The
financial exposure of a Company to any of such major oil spill incident or disaster may be
huge and even greater than the capital required for field development. In the Gulf of Mexico
incident for instance, BP established a compensation fund of about $20 billion to cover
compensation alone.
The risk of such incident occurring becomes even higher when an inexperienced company
with moderate balance sheet enters into the business as this increases the possibility that
health, safetyand environmental standards may be compromisedinorder to save cost. So the
Minister and the Regulator may need to put this into consideration before approving a
transaction.
Conclusion
The current asset trading activity is encouraging but the government, the regulator and the
industry need to look beyond the opportunities the trend offers by considering other issues
that could have greater impact in the industry. The Regulator should through Regulations,
Guidelines, Standards and Directives pursuant to Section 205 (1) PIB provide clearer position
as to the liability regime for decommissioning especially regarding the divesting/exiting
IOCs. Efforts of the Regulator should also be focused towards effective monitoring,
inspectionand implementationof health, safetyand environmental standards to minimise risk
and avoid major operational incident. Prospective new entrants should consider
decommissioning liability and factor in the cost of decommissioning while negotiating an
asset transfer.