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

Partner & Head, Energy GroupBabalakin & Co

Outline of Presentation Various influences that shape the contractual

framework of oil and gas activities Various international petroleum development

agreements in use; how they evolved and their conceptual differences

Various petroleum development agreements in use in Nigeria; the policies that shape their evolution, the statutory framework that provides a basis for them, and their conceptual differences

Changes to expect under the current reform processes in Nigeria’s petroleum industry-the Nigerian Content Act and the PIB

Influences that Shape Contractual Framework of Petroleum Development Petroleum exploration and production activities

influence petroleum development contract formsThese activities are borne out of fact that

‘crude’ oil and ‘natural’ gas resources lie far below the Earth’s surface and therefore not easily accessible, unlike other natural resources

because hydrocarbon resources increase human life expectancy they are very significant in modern world and therefore affect their development

Extractive Nature of Resources as an Influence Petroleum development activities require oil and

gas resources to be first searched for through readings that are far from precise

If at all found, these resources have to be converted from ‘primary’ state to ‘secondary’ state for consumption by end user

Extractive Nature of Resources as an Influence Extractive nature of oil and gas therefore results in

different phases:Exploration (seeking these natural resources

based on data reading)Production (getting them off the ground after

finding them)Transportation (moving them out of in situ state) Processing (converting them from a natural state

to a secondary state where they can be used)Disposal (making them available to end user)

Effect of Resources on Modern Life as an Influence Hydrocarbon resources mainly responsible for

cooking, cooling, lighting, heating and transportation, apart from so many other uses

Referred to as ‘lifeblood’ of industrialisation for this reason

Such significance causes players from industrialised countries to dominate petroleum development activities globally, even though developing countries hold greater reserves

Effect of Resources on Modern Life as an Influence Such significance also causes host countries to

play direct role in development of petroleum activities for nationalistic and for economic reasons

This has resulted in an international political economy that has in turn had an effect on petroleum development arrangements

Contractual Framework of Petroleum Development ActivitiesThree 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

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 the US(s.44(3) of Nigerian Const)

Sovereign states therefore have to grant mining/mineral rights, typically to IOCs from industrialised countries for petroleum development

Participation Arrangements Single mineral right holder rare due to capital and

technology intensity of activities; third parties allowed to acquire 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

Field/Service Contracts at Exploration Phase A number of field/services contracts required

at exploration phase:Seismic SurveyRig ContractorRig Services Contractors Supply of equipment

Contracts from Production to Midstream Phase

A number of contracts also required from production to midstream phase

FPSOCrude oil liftingCrude oil transport Crude oil sale Decommissioning of well

Contracts from Production to Midstream Phase In specific case of gas development:Gas gathering and processingGas balancingEPC agreement for construction of infrastructure Gas transportation

Pipeline transportation LNG transportation

Gas sales

Model Contracts Developed by various petroleum bodies and

covering all phasesAvoid time spent on negotiations Reduce transaction costsSeek to achieve common standard in

international industry thereby improving general efficiency

Model contracts said to require no more than 20% adaptation to peculiar situations

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 Competiveness

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

United Kingdom Offshore Operators Association(UKOOA)

Rocky Mountain Mineral Law Foundation(RMMLF)

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 Geophysical

Contractors(IAGC)

Petroleum Development Arrangements and how they Evolved Country where petroleum development originated

and international political economy shape typesPetroleum development agreements began in

form of one paragraph Concession that granted mining/mineral rights over large areas and for long durations in the USA where land owners owned natural resources

Developing countries that at that time where under colonial rule, were influenced by this practice and granted concessions in return for royalty and tax when they began to find oil

Petroleum Development Arrangements and how they 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

Petroleum Development Arrangements and how they Evolved Developing countries could still not prevent IOCs

from involvement in their natural resources due to lack of technical, managerial and financial capacity

Hence next best option: state participation emphasizing production, profit and control of countries over their natural resources towards economic development through Better fiscal terms for the sovereign state IndustrializationTechnology transferDevelopment of local content

Petroleum Development Arrangements and how they Evolved Because of this constitution of many countries ,

especially Latin American and Middle East states, prevented foreigners from owning mineral/mining rights

Resulted in new arrangements where developing countries established NOCs vested with mineral/mining rights that were then contracted out to IOCs to develop

Petroleum Development Arrangements and how they Evolved Risk Service Contracts emerged out of this where

developing states engaged IOCs as contractors in respect of mineral/mining rights that they vested in their NOCs or Petroleum Ministries

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

IOCs only got reimbursed through a service fee if oil was produced

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

Petroleum Development Arrangements and how they 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 or Petroleum Ministries

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

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

Petroleum Development Arrangements and how they Evolved Under this arrangement IOCs

First received ‘cost oil’ to cover costs and expenses limited to a percentage , and thereafter

IOCs and NOCs split the oil produced known as ‘profit oil’ to represent their return on investment

Types of Petroleum Development Arrangements Concessions: used in 60 countriesProduction Sharing Contracts : used in 41

countries Risk Service Contracts: used in 4 countries Participation Agreements?Hybrid?

Petroleum Development Arrangements: How they differ In Risk Service and Production Sharing Contracts

the IOC did not receive any reimbursement for their expenses or any 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/mining rights of NOC in key areas such as area, duration, revocation , etc

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

from old concessions with significant modificationsOnly limited areas now granted Only shorter durations of between 20-30 years now

grantedSovereign 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

Petroleum Development 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 their disposal to pay for services

Some countries use all these arrangements simultaneously

Petroleum Development Arrangements: How they differ Licenses/leases:

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

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

Mining /mineral rights granted conceptually similar to profit a’prendi in common law lease estate

Mining/mineral rights have both public and private law character

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

Sovereign state continues to own natural resources in accordance with international law

Petroleum Development Arrangements: How they differ Production Sharing Contracts

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

E and P Company is contractor/operator, but not legal owner

Contractor bears sole risk of exploration activities

Petroleum Development Arrangements: How they differ Risk Service Contracts

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

E and P Company not legal ownerE and P Company bears sole risk of petroleum

development activities

Petroleum Development Arrangements: How they differ Rough conceptual analogy may be made between

petroleum development arrangements and real estate projects:License/lease can compare to legal title holder of landPSC Contractor can compare with property developer

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

Risk Service Contractor may be likened to contractor who develops property and who gets paid off for his services without any legal or equitable interest in the property

Petroleum Development Regime in Nigeria Ownership of petroleum resources in Nigeria

“Notwithstanding the foregoing provision of this section the entire property in…shall vest in the Government of the Federation...”(s.44(3) Const.)

“The entire ownership and control of all petroleum in…shall be vested in the state ”(s. 1(1) Petroleum Act)

Petroleum Development 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 waters of Nigeria(c) that forms part of the Continental Shelf (d) that forms 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 sea bed, subsoil and superjacent waters of the Exclusive Zone shall vest in the Federal Republic of Nigeria....” (s2(1) of the EEZ Act)

Petroleum Development Regime in Nigeria Note A.G Fed. Vs A.G Abia & Ors to the effect that

Nigerian states(political subdivision) do not have claim to offshore

Note NDDC Act enacted before this case which refers to “offshore of Nigeria Delta area”

Petroleum Development 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 and production

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

Petroleum Development Regime in Nigeria: OEL Oil Exploration License right to ‘undertake

exploration for petroleum’ not exclusive over compact area not exceeding 5000 sq miles

for a duration to lapse by 31st Dec next; renewable 3 months before end of period for a period not exceeding 1 year

Petroleum Development 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 quantities to be able to qualify for OML

over compact area not exceeding 1000 sq miles for a period not exceeding 5 years including renewal; in case of deep offshore minimum of 5 years aggregate of 10 years through amendment in Deep Offshore Act

Petroleum Development 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 treat petroleum discovered’ (Para 11 of First Schedule to Act

Note that section 2 of Act itself allows Minister to grant only rights to search for, win, carry away and dispose of petroleum

Right to export absent (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 export consistent with ‘carry away’/’dispose of’? If not can schedule expand meaning in principal law?

In practise OML holder allowed to export

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

duration not exceeding 20 yearsNote “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 and distinct 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 ExxonMobil’s blocks

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

Minister ‘may’ grant ‘only’ OPL holder an OMLIf oil is found in commercial quantity

(10,000 barrels per day) If all conditions in licence satisfied

Two separate leases may be granted from single OPL(Oil Prospecting Licences (Conversion to Oil Mining Leases, ETC.) Regulations)

Note South Atlantic Petroleum v Min of Petroleum Resources

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 prospecting licence or oil mining lease shall (a) appoint a manager resident in Nigeria to supervise the operations under the licence or lease”

Petroleum Development Arrangements in NigeriaStatutory lease regime serves as source of contractual

arrangements developed in response to government policy on hydrocarbon development

U-JVs created between IOCs (previously granted OMLs before advent of state participation) and NNPC on behalf of 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

Petroleum Development Arrangements in NigeriaJOAs created between indigenous companies

(as OPL/OML holders) and IOCs to achieve indigenous participation policy

Farm outs created between IOCs (as original OML holders) and NNPC under U-JV on one hand, and indigenous companies on the other, to achieve indigenous participation policy

U-JVs created pursuant to Lease RegimeNigeria became OPEC member in 1970OPEC Charter provides for state participation for

member statesPetroleum Act provides for:

“Participation by the Federal Military Government in the venture to which the licensee or lessee relates, on terms to be negotiated” (Paragraph 34(a) of Act)

U-JVs created pursuant to Lease RegimeNNPC Act also enacted allowing it joint ventures in

petroleum development activitiesNNPC Act stipulates partnerships in exploration generally

“enter into contracts or partnerships with any company , firm or person which in the opinion of the Corporation will facilitate the discharge 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 a view to securing participation by the Federal Government of the Corporation in activities connected with petroleum”(s. 5(g) NNPC Act)

U-JVs created pursuant to Lease RegimeResulted in Participation Agreements and JOAs between

NNPC and IOCs allowing NNPC ‘undivided interest’ in OPLs 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

U-JVs created pursuant to Lease Regime Six U-JVs currently exist between NNPC on one

hand, and Shell, ChevronTexaco, ExxonMobil, Elf and Agip

Although NNPC has between 55%-60% participating interest, IOCs appointed operator under each U-JV because IOCs were already operating before U-JVState of technical readiness in Nigeria

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

Farm Outs of Marginal Fields Farm Outs only possible where

Lease holder seeks consent of President to farm out marginal field out of its area

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

In practice latter approach in useFarm outs between IOCs (as holders of OMLs) and NNPC

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

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

In practise bids carried out in past by Minister

Nigerian PSC StructurePSCs became popular from era of offshore

petroleum development activities in Nigeria due to heavy costs involved

Mostly in use in Nigeria todayGovernment recently contemplated converting

existing 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 as OPL/OML holders, and describes IOCs as ‘Contractors’

Nigerian PSC StructurePSCs also describe NNPC as OPL/OML

holders, and IOCs as ContractorsNigerian PSCs are like Risk Service

except for NNPCs option to change Contractor at production phase of Risk Service, and Contractor’s oil sharing that is assured under PSCs

IOCs under U-JVs made by government to set up separate entities for PSC arrangements to avoid ring fencing

Nigerian PSC StructureUnder PSC IOC contracted to carry out

petroleum operations exclusively within contract area

No recital that Minister’s statutory consent required and obtained; but Minister’s ‘approval’ endorsed on PSC

No express statutory provision allowing PSC in Nigeria

Nigerian PSC StructureIOCs remuneration dependent on production; production

can only happen if NNPC gets an OML; OML in turn depends 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 granting

duration beyond OPL? PSC terms mirror back OPL/OML terms like duration,

relinquishment; PSCs, OPLs/ OMLs relationship more serious than sublease and head lease

Note conceptual confusion in case law on PSC in KNOC v President, FRN & Ors

Nigerian Risk Service ContractOnly notable case is between NNPC and AGIP over

Agbara Oil FieldNNPC has right to take over operations, or replace

IOC Contractor with another at production phaseContractor reimbursed from proceeds of production

for exploration, development and production costsContractor entitled to remuneration based on

prescribed formula that factors in volume and market price of crude oil produced

Nigerian Risk Service ContractContractor has option of taking prescribed

quantity of oil produced in lieu of remuneration NNPC controls operations through

Approval of work programs appointment of subcontractorsApproval of budgets and expenditure

Contractor pays tax while NNPC is responsible for royalty

Nigerian Petroleum Development Arrangements on GasPetroleum 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 gas

development, 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 gas development

Nigerian Petroleum Arrangements: how they differDistinguishing features may be identified

through parameters used by foreign investors to determine investing in a countryNature of ownership granted Nature of protection available from this

ownership Nature of fiscal regimeOthers

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. NNPC’s legal title to mining rights under U-JV debatable

property used for operations: under PSC and Risk Service title to equipment and property acquired for operations transferred to NNPC at end of contract; title vests jointly in IOC and NNPC under U-JV

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

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; under Risk Service IOC may not book reserves except there is agreement for buy back

ownership of gas found: Under U-JV gas found belongs jointly to IOC and NNPC; under PSC and Risk Service gas found belongs to NNPC alone

Nigerian Petroleum Arrangements: how they differNature of Protection:

Expropriation: Under U-JV both IOC and NNPC entitled to compensation; under PSC and Risk Service, NNPC entitled. Based on wording of s. 44 of const, and jurisprudence of international investment law, IOC may also be entitled because of right to oil produced; IOC may not be entitled under Risk Service

Dispute Settlement: PSCs provide for arbitration in accordance with ACA; Act provides for arbitration in event of dispute from OML(s. 11; Para 14); note s. 251 of const vests exclusive jurisdiction in FHC Question: What is the legal effect of arbitral provision in

statute?

Nigerian Petroleum Arrangements: how they differFiscal Regime As 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 Petroleum Regulation

As a matter of Nigerian law, Nigerian contract clauses and practice situation unclear

Petroleum (Drilling & Production) Regulation imposes obligation on only “The licensee or lessee shall pay to the Minister not more than one month after the end of every quarter... (a) royalty at a rate...”(reg. 60 )

Annual rent payable on OPL and OML (reg. 59)

Nigerian Petroleum Arrangements: how they differBut note that Deep Offshore Act and PSC models

imply that IOC is also liable to paying royalty and rents “The Corporation or the Holder, as the case may be, shall pay all royalty, concession rentals....on behalf of itself and the Contractor...”(s. 11(1)

“The CORPORTION shall pay all Royalty, Concession Rentals...on behalf of itself and the CONTRACTOR...” (Clause 15.3 PSC Model)

Nigerian Petroleum Arrangements: how they differOthers

Decommissioning: Petroleum (Drilling & Production)Regulation contemplates this but applies to leaseholder. IOC and NNPC jointly liable under U-JV ; NNPC solely

liable under PSC and Risk Service. Some(not all) PSCs impose obligation on IOC to set up an Abandonment Fund for decommissioning or provide security for this.

Control: Under U-JV Operating Committee; under PSC Management Committee

Nigerian Petroleum Regime: Emerging ReformPIB expressly allows PSCs, Risk Service Contracts and

other forms of Petroleum Development Arrangements PIB restyles Oil Prospecting Licenses and Oil Mining

Leases as Petroleum Prospecting Licenses and Petroleum Mining Leases

Unlike existing system that was limited to Minister’s statutory approval in relation to transfers of OPL and OML interests, and that did not expressly cover JOA’s, PSCs, Farm outs, etc, PIB requires consent in respect of all forms of contractual transfers, including mergers and change of ownership control situations

Nigerian Petroleum Regime: Emerging ReformPIB creates very elaborate process for migration

from PPL to PMLMining 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 PIBDomestic gas supply mandatoryPermit now required for gas export

Nigerian Petroleum Regime: Emerging ReformPIB expressly creates provisions for operatorship IJV contemplated in place of U-JV NNPC’s character as NOC may change under PIB

as it is contemplated for privatizationNNPC to continue to play role of NOC under

PSCsPIB silent about IOCs right to obtain

mining/mineral rights directly

Nigerian Petroleum Regime: Emerging ReformIncreased 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