The Evolution Of Upstream Contracts In The Nigerian Oil And Gas Industry

1
756

fornoma2Nigeria’s oil industry has always struggled with the challenge of devising appropriate legal regimes and fiscal policies aimed at maintaining the balance between meeting national objectives and at the same time responding to developing trends in the global oil industry and encouraging investment. A result of this has been the use of various types of petroleum contracts over the course of Nigeria’s petroleum development history. This article takes a look at this evolution and highlight the various types of contracts that have been utilised over time.

Concessions (Pre 1969)

In 1905, the first known mineral survey was performed in present day Ondo State which is in the South West region of Nigeria. Shortly afterwards was the drilling of some exploratory wells by a German firm, Nigerian Bitumen Corporation, in 1908 which proved unsuccessful. In 1937, an Anglo-Dutch company; Shell D’Arcy Petroleum Development Company, came into Nigeria and in 1938 was granted an oil exploration license covering the entire country by the British Colonial Government under the Mineral Oils Ordinance of 1914. However, no commercial discovery was made until 1956 when the company made the first commercial discovery of oil in Oloibiri, in the present day Bayelsa State, in the South South region of Nigeria. The repeal in 1958 of Section 6(1) (a) of the Mineral Oils Ordinance of 1914 broke Shell D’arcy’s monopoly and spurred on other companies to become involved in exploratory activities. The types of oil right which could be acquired by IOCs for exploration activities under the Mineral Oils Ordinance of 1914 were Oil Exploration Licences, Oil Prospecting Licences and Oil Mining Licences. Between 1960 and 1969 these concessions began to be criticised as being too colonialist and exploitative in nature. Meanwhile on the international scene, the conflict between oil producing developing countries and IOCs eventually led to the UN resolution on permanent sovereignty over natural resources, which shifted the balance of power from the IOCs to the developing countries.

Concessions (Post 1969)

Thus, in 1969 the first major attempt at producing a detailed and comprehensive law for the grant of rights was made through the promulgation of the Petroleum Act 1969. Through this, the Mineral Oils Ordinance of 1914 was repealed and changes were made to the license structure in existence at the time. Although it should be noted that the duration, rent and royalty terms in pre-1969 licenses were saved from the operation of the 1969 Petroleum Act. Hence, despite the changes which were made with regard to vesting the state with ownership of petroleum in situ, the reduction of primary terms of certain categories of concessions and paving the way for the introduction of equity participation by the state, the Act was criticized for the lack of fundamental changes from pre 1969 grants of oil rights and that Nigeria’s financial derivations from petroleum did not appear to increase to any appreciable extent as a result. In 1971 the real opportunity for increased equity participation by the state was enhanced by Nigeria joining OPEC and with the formation of the Nigerian National Oil Corporation (NNOC) through Decree No. 18 of 1971 which was later merged with the Ministry of Petroleum Resources to form the Nigerian National Petroleum Corporation (NNPC) in 1977. Furthermore, in 1972 the Federal Government through Government Notice No. 311 of 24 February 1972, announced the assignment to NNOC of all rights to explore for and produce petroleum in Nigerian territory including concession areas which might be relinquished or surrendered to the government, except for those areas which were covered by existing licences.

Emergence of equity participation by the NNPC

Joint Operating Agreements (JOAs)

In 1971, the first JOA was executed in Nigeria. The JOA allowed the NNPC to be able to own certain interest percentages in the operations of licences that were in existence prior to the 1969 Petroleum Act. These types of contracts usually designated an IOC as the operator of the venture but reserved the right of the NNPC to become the operator of the licensed area. Explorations were funded by the IOCs and NNPC in proportion of their participation interests. The NNPC had an undivided interest in the license and assets and liabilities on the basis of its participating interest share (60%). The NNPC was also entitled to its participation percentage share of petroleum from operations. These joint venture arrangements have produced the majority of Nigeria’s oil over time although recently some of these joint ventures have undergone some restructuring. The JOA however, faced major challenges in the early 1990’s in that the government became increasingly unable to meet its cash call obligations to its partners due to other pressures on its resources. Furthermore, Nigeria’s oil and gas industry was expanding into shallow and deep offshore areas and the need to source the necessary funding and technical expertise to accelerate the scope of exploration activities in these deep offshore and inland basin frontier areas led to the replacement of JOAs with PSCs as the new contractual regime.

Production Sharing Contracts (PSCs)

The PSC was first utilized in Nigeria in 1973, in a contract between the NNOC and Ashland Oil Nigeria Company. The terms of this particular agreement were criticized due to its high overall tax and cost recovery allocations and the final NNOC production split which was considered inconsequential due to the small percentage of oil left for sharing and the profit sharing ratio. It subsequently underwent a series of amendments between 1977 and 1992. However, the PSC was not widely introduced until the early 1990s as a result of the issues with the JOA highlighted above. Thus, a new round of PSCs was signed in 1993 and others have been entered into since then. Literally all of Nigeria’s PSCs are on deep offshore and inland basin contract areas and their major advantage for Nigeria is their ability to attract new investment from IOCs to these frontier areas through flexible fiscal and legal regimes while at the same time eliminating the government’s financial responsibility of contributing funds to petroleum activities by shifting this burden to the IOCs. Today, PSCs have largely overtaken JOAs as the most utilised type of upstream contractual arrangement in Nigeria.  As a result, the Deep Offshore and Inland Basins Production Sharing Contracts Decree of 1999 was passed and currently regulates the operation of PSCs in Nigeria. Prior to 1999, there was no specific legislation dealing with the Nigerian PSC arrangement. The Deep Offshore Decree amends both the Petroleum Act 1969 (as amended) and the Petroleum Profit Tax Act (as amended) and according to section 15 of the decree, all pre-existing petroleum laws are to be read in conformity with it.

Service Contracts

Nigerian service contracts were originally entered into by the NNPC in 1979 with the goal of avoiding the less beneficial aspects of the PSC such as high percentages of cost oil and tax oil, windfall profits accruable to IOCs during peaks in oil prices and the management and operational responsibility by the IOCs. Today, pure service or risk service contracts are all but obsolete as a major type of upstream contractual arrangement in Nigeria. However, the Nigerian Petroleum Development Company (NPDC) a fully owned subsidiary of the Nigerian National Petroleum Corporation (NNPC) recently signed a strategic agreement with Atlantic Energy Drilling Concept to provide funds for carrying out petroleum operations in OMLs 26, 30, 34 and 42 and to also support the NPDC with technical expertise.  To recoup its cost in funding the NPDC part of the operations, Atlantic Energy Drilling is to receive, at the beginning of production, 60% of the volume of crude oil to which NPDC (NNPC) is entitled.  This is the cost oil. When the cost is fully recovered, Atlantic’s share will drop to 30% of the crude oil to which NPDC is entitled.

 

*Noma Garrick is a lawyer and consultant with extensive experience in oil and gas and energy related matters. 

  • Rancho Kareem

    i enjoyed your article..thanks alot. please is it possible for you to write on the challenges facing petroleum grants in Nigeria and the Back-In-Rights of government? thanks