Petroleum Development Arrangements in Nigerias Oil and Gas Sector.ppt

7/27/2019 Petroleum Development Arrangements in Nigerias Oil and Gas Sector.ppt

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Dr Bayo AdaralegbeFCIArb (UK); FEI(UK); FCIS(UK); LL.M, Ph.D (Dundee)

Partner & Head, Energy Group

Babalakin & Co


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Outline of Presentation

Various influences that shape the contractual frameworkof oil and gas activities

Various international petroleum development agreementsin use; how they evolved and their conceptual differences

Various petroleum development agreements in use inNigeria; the policies that shape their evolution, thestatutory framework that provides a basis for them, andtheir conceptual differences

Changes to expect under the current reform processes inNigerias petroleum industry-the Nigerian Content Act andthe PIB


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Influences that Shape

Contractual Framework ofPetroleum Development Petroleum exploration and production activities influence

petroleum development contract forms

These activities are borne out of fact that

crude oil and natural gas resources lie far below the Earthssurface and therefore not easily accessible, unlike other

natural resources

because hydrocarbon resources increase human lifeexpectancy they are very significant in modern worldand therefore affect their development


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Extractive Nature of Resourcesas an Influence

Petroleum development activities require oil and gasresources to be first searched for through readings that arefar from precise

If at all found, these resources have to be converted from

primary state to secondary state for consumption byend user


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Extractive Nature of Resources asan Influence Extractive nature of oil and gas therefore results in different

phases:

Exploration (seeking these natural resources based ondata reading)

Production (getting them off the ground after findingthem)

Transportation (moving them out of in situ state)

Processing (converting them from a natural state to asecondary state where they can be used)

Disposal (making them available to end user)


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Effect of Resources on ModernLife as an Influence Hydrocarbon resources mainly responsible for cooking,

cooling, lighting, heating and transportation, apart from somany other uses

Referred to as lifeblood of industrialisation for this

reason Such significance causes players from industrialised

countries to dominate petroleum development activitiesglobally, even though developing countries hold greater

reserves


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Effect of Resources on ModernLife as an Influence

Such significance also causes host countries to play directrole in development of petroleum activities fornationalistic and for economic reasons

This has resulted in an international political economythat has in turn had an effect on petroleum developmentarrangements


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Contractual Framework of

Petroleum Development

Activities Three 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


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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 theUS(s.44(3) of Nigerian Const)

Sovereign states therefore have to grant mining/mineralrights, typically to IOCs from industrialised countries forpetroleum development


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Participation Arrangements Single mineral right holder rare due to capital and

technology intensity of activities; third parties allowed toacquire 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


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Field/Service Contracts at

Exploration PhaseA number of field/services contracts required at

exploration phase:

Seismic Survey

Rig Contractor

Rig Services Contractors

Supply of equipment


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Contracts from Production to

Midstream Phase A number of contracts also required from production to

midstream phase

FPSO

Crude oil lifting

Crude oil transport

Crude oil sale

Decommissioning of well


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Contracts from Production to

Midstream Phase In specific case of gas development:

Gas gathering and processing

Gas balancing

EPC agreement for construction of infrastructure

Gas transportation

Pipeline transportation

LNG transportation Gas sales


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Model Contracts Developed by various petroleum bodies and covering all

phases

Avoid time spent on negotiations

Reduce transaction costs

Seek to achieve common standard in international industrythereby improving general efficiency

Model contracts said to require no more than 20%

adaptation to peculiar situations


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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 CompetivenessLOGIC(formerly Cost Reduction Initiative in the New Era,CRINE)

United Kingdom Offshore Operators Association(UKOOA)

Rocky Mountain Mineral Law Foundation(RMMLF)


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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 GeophysicalContractors(IAGC)

P t l D l t


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Arrangements and how they

Evolved Country where petroleum development originated and

international political economy shape types

Petroleum development agreements began in form of oneparagraph Concessionthat granted mining/mineral rightsover large areas and for long durations in the USA whereland owners owned natural resources

Developing countries that at that time where undercolonial rule, were influenced by this practice and grantedconcessions in return for royalty and tax when they beganto find oil

P t l D l t


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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

t t


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etro eum eve opmentArrangements and how they

Evolved Developing countries could still not prevent IOCs from

involvement in their natural resources due to lack oftechnical, managerial and financial capacity

Hence next best option: state participation emphasizingproduction, profit and control of countries over theirnatural resources towards economic development through

Better fiscal terms for the sovereign state

Industrialization

Technology transfer

Development of local content

P t l D l t


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Petroleum DevelopmentArrangements and how they

Evolved Because of this constitution of many countries , especially

Latin American and Middle East states, preventedforeigners from owning mineral/mining rights

Resulted in new arrangements where developing countriesestablished NOCs vested with mineral/mining rights that

were then contracted out to IOCs to develop

P t l D l t


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Evolved Risk Service Contracts emerged out of this where

developing states engaged IOCs as contractors in respectof mineral/mining rights that they vested in their NOCs orPetroleum Ministries

Under this arrangement IOCs used their own capitalexpenditure and operating costs to explore for petroleum

IOCs only got reimbursed through a service fee if oil wasproduced

Sometimes IOCs were allowed to buy back part of oilproduced as consideration for service

P l D l


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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 orPetroleum Ministries

IOCs also used their capital expenditure and operatingcosts to explore for petroleum under this arrangement

Under this arrangement IOCs only got reimbursedthrough a share of the oil produced

e ro eum eve opmen


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e ro eum eve opmenArrangements and how they

Evolved Under this arrangement IOCs

First received cost oil to cover costs and expenses limited to apercentage , and thereafter

IOCs and NOCs split the oil produced known as profit oil torepresent their return on investment


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Types of Petroleum

Development Arrangements Concessions: used in 60 countries

Production Sharing Contracts : used in 41 countries

Risk Service Contracts: used in 4 countries

Participation Agreements?

Hybrid?


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Arrangements: How they differ In Risk Service and Production Sharing Contracts the IOC

did not receive any reimbursement for their expenses orany 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/miningrights of NOC in key areas such as area, duration,revocation , etc


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Arrangements: How they differ In modern practise licences/leases have taken over

from old concessions with significant modifications

Only limited areas now granted Only shorter durations of between 20-30 years now

granted

Sovereign 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


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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 theirdisposal to pay for services

Some countries use all these arrangements simultaneously


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Arrangements: How they differ Licenses/leases:

Exclusive right granted mineral/mining rights holder to explore forpetroleum , and if found, to dispose of in consideration for royalty, rentand tax

In some countries a single license covers exploration and productionphases; in others separate licenses for exploration phase; licensegranted for production phase only allowed when oil is found incommercial quantities

Mining /mineral rights granted conceptually similar to profit aprendi

in common law lease estate Mining/mineral rights have both public and private law character

Mining/mineral rights vest legal title, but over petroleum resourcesproduced at well head

Sovereign state continues to own natural resources in accordance with

international law


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Arrangements: How they differ Production Sharing Contracts

E and P Company undertakes petroleum developmentactivities on behalf of holder of mining/mineral rights,typically NOC

E and P Company is contractor/operator, but not legalowner

Contractor bears sole risk of exploration activities


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Arrangements: How they differ Risk Service Contracts

E and P Company undertakes petroleum developmentactivities on behalf of holder of mining/mineral rights,typically NOC

E and P Company not legal owner

E and P Company bears sole risk of petroleumdevelopment activities


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Arrangements: How they differ

Rough conceptual analogy may be made between

petroleum development arrangements and real estateprojects:

License/lease can compare to legal title holder of land

PSC Contractor can compare with property developer

who is compensated with rent of specific floors as whomay have some equitable interest in property

Risk Service Contractor may be likened to contractorwho develops property and who gets paid off for his

services without any legal or equitable interest in thero ert


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Regime in Nigeria

Ownership of petroleum resources in Nigeria

Notwithstanding the foregoing provision of this section theentire property inshall vest in the Government of theFederation...(s.44(3) Const.)

The entire ownership and control of all petroleum inshall bevested in the state(s. 1(1) Petroleum Act)


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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 watersof Nigeria(c) that forms part of the Continental Shelf (d) thatforms 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 seabed, subsoil and superjacent waters of the Exclusive Zone shallvest in the Federal Republic of Nigeria.... (s2(1) of the EEZ

Act)


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Regime in Nigeria NoteA.G Fed. Vs A.G Abia & Ors to the effect that

Nigerian states(political subdivision) do not have claim tooffshore

Note NDDC Act enacted before this case which refers tooffshore of Nigeria Delta area


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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 andproduction

Grants to companies registered in Nigeria separate rightsfor each phase through a license /lease regime



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Regime in Nigeria: OEL Oil Exploration License right to undertake exploration

for petroleum not exclusive

over compact area not exceeding 5000 sq miles for aduration to lapse by 31stDec next; renewable 3 months

before end of period for a period not exceeding 1 year


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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 quantitiesto be able to qualify for OML

over compact area not exceeding 1000 sq miles for aperiod not exceeding 5 years including renewal; in case ofdeep offshore minimum of 5 years aggregate of 10 yearsthrough amendment in Deep Offshore Act



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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 treatpetroleum discovered (Para 11 of First Schedule to Act

Note that section 2 of Act itself allows Minister to grantonly rights to search for, win, carry away and dispose ofpetroleum

Right to exportabsent (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 exportconsistent with carry away/disposeof? If not can schedule expand meaning in principal law?

In practise OML holder allowed to export


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Regime in Nigeria: OML over compact area not exceeding 500sq miles for duration

not exceeding 20 years

Note 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 anddistinct 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 ExxonMobils blocks


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Regime in Nigeria: OML Condition for grant of Oil Mining Lease:

Minister maygrant only OPL holder an OML

If oil is found in commercial quantity (10,000

barrels per day)

If all conditions in licence satisfied

Two separate leases may be granted from singleOPL(Oil Prospecting Licences (Conversion to OilMining Leases, ETC.) Regulations)

Note South Atlantic Petroleum v Min of PetroleumResources


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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 prospectinglicence or oil mining lease shall (a) appoint a manager resident inNigeria to supervise the operations under the licence or lease


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Arrangements in Nigeria Statutory lease regime serves as source of contractual

arrangements developed in response to governmentpolicy on hydrocarbon development

U-JVs created between IOCs (previously granted OMLsbefore advent of state participation) and NNPC on behalfof 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


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Arrangements in NigeriaJOAs created between indigenous companies (as

OPL/OML holders) and IOCs to achieve indigenousparticipation policy

Farm outs created between IOCs (as original OMLholders) and NNPC under U-JV on one hand, andindigenous companies on the other, to achieveindigenous participation policy


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U-JVs created pursuant to Lease

Regime Nigeria became OPEC member in 1970

OPEC Charter provides for state participation for member

states

Petroleum Act provides for:

Participation by the Federal Military Government in theventure to which the licensee or lessee relates, on terms

to be negotiated (Paragraph 34(a) of Act)


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Regime NNPC Act also enacted allowing it joint ventures in

petroleum development activities

NNPC Act stipulates partnerships in exploration generally

enter into contracts or partnerships with any company , firm orperson which in the opinion of the Corporation will facilitate thedischarge 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 aview to securing participation by the Federal Governmentof the Corporation in activities connected withpetroleum(s. 5(g) NNPC Act)


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Regime Resulted in Participation Agreements and JOAs between

NNPC and IOCs allowing NNPC undivided interest inOPLs 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


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Regime Six U-JVs currently exist between NNPC on one hand, and

Shell, ChevronTexaco, ExxonMobil, Elf and Agip

Although NNPC has between 55%-60% participatinginterest, IOCs appointed operator under each U-JVbecause

IOCs were already operating before U-JV

State of technical readiness in Nigeria

95% of oil development in Nigeria estimated to be underU-JVs


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Farm Outs of Marginal Fields Farm Outs only possible where

Lease holder seeks consent of President to farm out marginalfield out of its area

President may cause a Farm Out of a marginal field wherefield unattended for period not less than 10 years

In practice latter approach in use

Farm outs between IOCs (as holders of OMLs) and NNPC

under U-JV, on one hand, and indigenous companies onthe other

Act says government must be satisfied with farmee ofmarginal field but does not stipulate who selects

In practise bids carried out in past by Minister


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Nigerian PSC Structure PSCs became popular from era of offshore

petroleum development activities in Nigeria due toheavy costs involved

Mostly in use in Nigeria today

Government recently contemplated convertingexisting 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 asOPL/OML holders, and describes IOCs asContractors


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Nigerian PSC Structure PSCs also describe NNPC as OPL/OML holders,

and IOCs as Contractors

Nigerian PSCs are like Risk Service except forNNPCs option to change Contractor at productionphase of Risk Service, and Contractors oil sharingthat is assured under PSCs

IOCs under U-JVs made by government to set upseparate entities for PSC arrangements to avoidring fencing


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Nigerian PSC Structure Under PSC IOC contracted to carry out petroleum

operations exclusively within contract area

No recital that Ministers statutory consent requiredand obtained; but Ministers approval endorsed onPSC

No express statutory provision allowing PSC in

Nigeria


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Nigerian PSC Structure

IOCs remuneration dependent on production; productioncan only happen if NNPC gets an OML; OML in turndepends 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 grantingduration beyond OPL?

PSC terms mirror back OPL/OML terms like duration,relinquishment; PSCs, OPLs/ OMLs relationshipmore serious than sublease and head lease

Note conceptual confusion in case law on PSC in


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Nigerian Risk Service Contract

Only notable case is between NNPC and AGIP over AgbaraOil Field

NNPC has right to take over operations, or replace IOC

Contractor with another at production phase Contractor reimbursedfrom proceeds of production for

exploration, development and production costs

Contractor entitled to remuneration based on prescribed

formula that factors in volume and market price of crudeoil produced


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Nigerian Risk Service Contract

Contractor has option of taking prescribed quantity of oilproduced in lieu of remuneration

NNPC controls operations through

Approval of work programs

appointment of subcontractors

Approval of budgets and expenditure

Contractor pays tax while NNPC is responsible for royalty


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Nigerian Petroleum Development

Arrangements on Gas Petroleum 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 gasdevelopment, 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 gasdevelopment


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Nigerian Petroleum

Arrangements: how they differ Distinguishing features may be identified through

parameters used by foreign investors to determineinvesting in a country

Nature of ownership granted

Nature of protection available from this ownership

Nature of fiscal regime

Others


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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. NNPCs legal title to mining rights under U-JVdebatable

property used for operations: under PSC and RiskService title to equipment and property acquired for

operations transferred to NNPC at end of contract; titlevests jointly in IOC and NNPC under U-JV

data:NNPC retains ownership all data , logs, reports,information acquired in performance of contract underPSCs and Risk Service; ownership vests jointly in NNPCand IOC under U- V


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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; underRisk Service IOC may not book reserves except there isagreement for buy back

ownership of gas found: Under U-JV gas found belongs

jointly to IOC and NNPC; under PSC and Risk Servicegas found belongs to NNPC alone


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Nigerian Petroleum

Arrangements: how they differNature of Protection:

Expropriation: Under U-JV both IOC and NNPCentitled to compensation; under PSC and Risk Service,

NNPC entitled. Based on wording of s. 44 of const, andjurisprudence of international investment law, IOC mayalso be entitled because of right to oil produced; IOCmay not be entitled under Risk Service

Dispute Settlement: PSCs provide for arbitration inaccordance with ACA; Act provides for arbitration inevent of dispute from OML(s. 11; Para 14); note s. 251 ofconst vests exclusive jurisdiction in FHC

Question: What is the legal effect of arbitral provision instatute?


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Nigerian Petroleum

Arrangements: how they differ Fiscal RegimeAs 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 PetroleumRegulation

As a matter of Nigerian law, Nigerian contract clauses andpractice situation unclear

Petroleum (Drilling & Production) Regulation imposesobligation on only The licenseeor lesseeshall pay to theMinister not more than one month after the end of everyquarter... (a) royaltyat a rate...(reg. 60 )

Annual rentpayable on OPL and OML (reg. 59)


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Nigerian Petroleum

Arrangements: how they differ But note that Deep Offshore Act and PSC models imply

that IOC is also liable to paying royalty and rents TheCorporation or the Holder, as the case may be, shall pay

all royalty, concession rentals....on behalf of itself andthe Contractor...(s. 11(1)

The CORPORTION shall pay all Royalty, ConcessionRentals...on behalf of itself and the CONTRACTOR...

(Clause 15.3 PSC Model)


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Nigerian Petroleum

Arrangements: how they differ Others

Decommissioning: Petroleum (Drilling &Production)Regulation contemplates this but applies toleaseholder.

IOC and NNPC jointly liable under U-JV ; NNPC solely liable underPSC and Risk Service. Some(not all) PSCs impose obligation onIOC to set up an Abandonment Fund for decommissioning orprovide security for this.

Control: Under U-JV Operating Committee; under PSCManagement Committee


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Nigerian Petroleum Regime:

Emerging Reform PIB expressly allows PSCs, Risk Service Contracts and other

forms of Petroleum Development Arrangements

PIB restyles Oil Prospecting Licenses and Oil MiningLeases as Petroleum Prospecting Licenses and PetroleumMining Leases

Unlike existing system that was limited to Ministersstatutory approval in relation to transfers of OPL and OMLinterests, and that did not expressly cover JOAs, PSCs,Farm outs, etc, PIB requires consent in respect of all formsof contractual transfers, including mergers and change ofownership control situations


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Emerging Reform PIB creates very elaborate process for migration from PPL

to PML

Mining 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 PIB Domestic gas supply mandatory

Permit now required for gas export


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Emerging Reform

PIB expressly creates provisions for operatorship

IJV contemplated in place of U-JV

NNPCs character as NOC may change under PIB as it iscontemplated for privatization

NNPC to continue to play role of NOC under PSCs

PIB silent about IOCs right to obtain mining/mineral rightsdirectly


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Emerging Reform

Increased 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

Documents

Petroleum Development Arrangements in Nigerias Oil and Gas Sector.ppt