A. INDUSTRY HIGHLIGHTS AND GLOBAL

TRENDS

NIGERIA

Oil and Gas

£ Senate passes Amended Production Sharing

Contract Bill

£ FG spent N2.3 trillion on oil, electricity subsidies in 4

years

£ Nigeria targets US investors for gas flare business

opportunities

£ Non-passage of Petroleum Industry Bill (PIB) slows

down $100bn oil projects

£ NNPC set to begin full rehabilitation of refineries in

January 2020

Power

£ FG begins review of Power Procurement Policy

£ TCN shows inefficiency with 5,300 interruptions

despite $1.6bn fund

£ Meter Asset Providers at crossroads over 35% hike in

customs duty

£ GenCos look to take FG to court over N1trn debt

Alternative Energy

£ Renewables to displace oil as top global energy

source before 2050

£ Nigeria working to achieve 30% renewables in its

energy mix by 2030

£ AfDB fund to invest $500,000 in Nigeria's sustainable

energy

£ Nigeria to assemble solar cars by 2020

Environment

£ EU lifts Nigeria's renewable energy reform scheme

£ Presidency to mobilize Nigerian youths to plant 25

million trees

£ Federation of Nigerian Mining Host Communities

holds inaugural summit.

B. GLOBAL TRENDS

Oil and Gas

£ Uganda set to miss 2020 oil production deadline

£ Tanzania-Uganda pipeline deadlock very disruptive

£ Ivory Coast and Ghana finally delimit their maritime

border

£ Niger abandons linking Chad-Cameroon pipeline

over Boko Haram conflicts

Power

£ Power grids of Southern and Eastern Africa to be

interconnected within 3 years

£ US and Egypt launch strategic energy dialogue

£ Rockefeller Foundation sets up electricity access

commissions to work with AfDB

£ Ghana's ECG to diversify business operations to

telecom services provision

Alternative Energy

£ 3 European countries provide $350 million for solar

energy and energy storage in Africa

£ Angola, Senegal to champion Sustainable

Development Goals (SDGs) initiative for Africa

£ The French Development Agency (AFD) launches

call for proposals to develop off-grid energy in Africa

£ 39 solar power projects receive approval in

Zimbabwe

Environment

£ AI helps reduce Amazon hydropower dams' carbon

footprint

£ Exposure to pollution linked to 'silent miscarriages'

£ Saudi Arabia keeps oil floating as it patches up

wounded industry

B. INDUSTRY RISK/OPPORTUNITIES REVIEW SNAPSHOT

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C. INDUSTRY FOCUS ANALYSIS

THE LEGAL AND REGULATORY FRAMEWORK FOR DEEP WATER OFF-SHORE DRILLING IN NIGERIA

1.0 INTRODUCTION

Deep water drilling falls within the ambit of upstream oil

exploration and production (E&P) of the oil and gas

value chain. In a bid to meet the local energy demand in

Nigeria, improve the share of crude oil products within

international markets, and fully explore Nigeria's wealth

of resources, international oil companies (IOCs)

operating within the sector commenced massive

investments in Nigeria's offshore deep waters.

In 2018, 37% of the total oil production was derived

from deep water production. Assets worth 13 billion

barrels of oil equivalent resources remain presently

untapped in Nigeria's deep offshore area, only 7 out of

the 87 deep water oil blocks in Nigeria are producing

while 6 are at different phases of development, 10 deep

water projects are lined up for sanctioning. This report

seeks to present a brief guide on the legal and

regulatory framework governing deep water offshore

drilling in Nigeria including local content requirements

and investor considerations.

2.0 APPLICABLE LAWS AND REGULATIONS

There exists a plethora of laws and regulations which

govern offshore drilling activities, a few of the key

legislations will be considered below:

£ Petroleum Act, 1969

The primary legislation governing the oil and gas

sector is the Petroleum Act, 1969. The Act generally

governs and regulates onshore as well as offshore

exploration and production of petroleum and

petroleum products in Nigeria.

Furthermore, the Act vests in the Minister of

Petroleum, powers to grant Oil Mining Licenses

(OML) and Oil Prospecting Licenses (OPL)

required for E&P operations in deep waters.

Owners of these licenses may enter into third-party

contracts for drilling operations with drilling

companies.

£ Deep Offshore and Inland Basin Production

Sharing Contracts Act, 1999

This prescribes the fiscal incentives for companies

operating within the deep offshore and inland basin

areas of Nigeria under production sharing

contracts. The Act provides the legislative

framework guiding Nigeria's deep offshore oil

production, covering acreages greater than 200

meters in water depth. It provides for fiscal

incentives with a zero royalty and fifty percent (50%)

flat rate of chargeable petroleum profit from

upstream E&P companies involved in exploration

beyond 1000 meters water depth. The Act has been

presented for amendment and has recently been

passed by the Senate and assented to by the

President. The amendment Bill now an Act is for

upward review of the royalty rate to the government

from zero to 50%.

£ Petroleum (Drilling and Production)

Regulations 2006

The regulation provides for the procedure in

applying for permits for survey, oil prospecting

license (OPL), oil mining lease (OML) and drilling

rig license for onshore and offshore E&P activities.

Regarding drilling operations (i.e. boring holes or

wells in oil fields), the regulation prohibits any one

from operating a drilling rig without a valid license

granted by the Minister of Petroleum Resources or

any public officer authorized on his behalf in

writing.

The Regulations stipulate graduated royalties for

onshore and offshore drilling activities depending

on the water depths and barrels of oils produced

per day.

£ Nigerian Oil and Gas Industry Content

Development Act 2010

The Act targets the development of indigenous

capacity across the Nigerian Oil and Gas industry

and in line with this objective, it prescribes

minimum Nigerian Content for various services. It

provides that exclusive consideration be given to

Nigerian companies possessing relevant

equipment and capacity to execute deep water

drilling to bid for work in such areas.

3.0 CONTRACTUAL AGREEMENTS

£ Drilling Contracts

The Offshore Drilling Contract is the primary

contract which governs deep water drilling

projects. It allocates roles and responsibilities

between the parties (E&P Company and drilling

company) including risks regardless of fault such

as personal injury, damage to property, pollution

risks, amongst others. Some of the key elements of

a drilling contract include mobilization and

demobilization, term, allocation of risks, insurance

and liability provisions, representations and

warranties, damages, payment terms, assignment

and rig sharing, breach and termination.

Key considerations for contractors are water depth,

formation/reservoir being drilled, drilling stages,

number of wells, completion, blowout prevention,

drilling fluid management and general safety on the

drilling rig. Types of drilling contracts include Day

Rate, Modified Day Rate, Footage and Turnkey

contracts. Although deep offshore contracts are

typically expensive and decisions on the type of

contract is usually project specific, for instance

footage contracts are generally preferred by the

parties for their economic advantage. Under

footage contracts, the specified rate paid to the

drilling contractor is per metre or foot drilled within

the well and the contractor typically performs at a

more efficient rate because it generally possesses

wider decision-making rights and is paid on the

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basis of the work delivered per milestone.

4.0 LOCAL CONTENT REQUIREMENTS

Local content in Nigeria is primarily governed by the

NOGIC Act and implemented by the Nigerian Content

Development and Monitoring Board (“the Board”)

which stipulates the requirements for the operations of

local content in the Oil and Gas industry in Nigeria. The

local content requirements for offshore deep-water

operations will be considered briefly:

£ Nigerian Content Plan

The NOGIC Act states that the submission of the

Nigerian Content Plan by a bidder for a license, in

this case, an OML or OPL is an essential

requirement of the bid documents. The Plan must

provide that 'first consideration' will be given to

Nigerian independent contractors, goods and

services by the license holders as well as provide

employment and specialized trainings to Nigerians

in deep offshore drilling operations. In this regard,

there should be a transfer of knowledge from

expatriates and international experts to Nigerians

working on the project, such as deep-water oil and

gas engineers.

£ Nigerian Content Development Fund

The Act requires that 1% of the total contract sum of

all upstream contracts including drilling contracts

be paid into the Fund and same is deductible at

source, prior to tax and statutory deductions. Since

offshore drilling contracts are capital intensive, the

statutory percentage provides a guaranteed

revenue stream for the Board to undertake local

content development initiatives in the oil and gas

industry.

£ Transfer of Technologies

The Act requires the submission of a programme of

initiatives to the Board. The programme should be

aimed at promoting the effective transfer of

technologies from the IOCs to Nigerian individuals

and companies. This, in effect, is to the intent that

Nigerians and Nigerian companies ultimately

possess up-to-date technical skills required for

undertaking and providing support services to

offshore drilling operations.

£ Local Technical Support

The Act essentially states that all fabrication and

welding activities are to be performed in-country.

This has served to unlock new skills that strengthen

Nigeria's engineering and technical education

capabilities in the establishment of local fabrication

yards for subsea components, pipe coating plants

and welding laboratories.

£ Local Content Requirements for Drilling

services

The Act provides for specific local content

percentage thresholds to be provided by Nigerians

for well, drilling services and drilling rigs. The

technical services include well completion

services, production drilling service, performance

services, directional and other drilling services with

varying percentages from 80% - 90%. In effect,

Nigerians are to provide these services in

accordance with the specified percentages. It is

interesting to note that the local content

percentage for drilling rigs in offshore locations

(55%) is lower than the requirement for drilling rigs

in onshore locations (70%) partly due to the level of

technical knowledge required for offshore drilling

operations.

5.0 INVESTOR CONSIDERATIONS

Oil and gas companies are usually investment-cautious

as may be seen in the length of time it takes to reach a

Final Investment Decision (FID). For an E&P contract,

the return on capital employed, the Project risks and

the financing structure are basic factors which

determine the FID. In order to guide investors, there are

key considerations which must be taken into account,

some of which are discussed as follows:

£ Stability of Legal and Fiscal Regime: The Deep

Offshore and Inland Basin Production Sharing

Contracts (Amendment) Bill 2018, when assented

to by the President, will provide an 8-year period of

comfort to operators regarding the stability of the

legal and fiscal regime governing deep water

operations. The prevalent fiscal regime will aid in

investment decisions regarding deep water drilling

particularly, on the choice of drilling contract to be

executed. Operators will generally decide on the

contract with the most advantageous terms to the

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Project. In addition, the local business environment

and international geopolitical concerns in the

industry are also valid considerations for

undertaking E&P operations.

£ Technical Qualifications: A cardinal factor for

upstream exploration and production activities in

the oil and gas sector is the technical qualifications

of the drilling contractor to undertake the project.

Technical requirements such as offshore drilling

unit capability, availability, mobilization, safety and

operating performance are essential to

demonstrate capability of performance. The

contract must clearly delineate the risks allotted to

each party and provisions relating to damages

arising from the fault of the drilling company.

6.0 CONCLUSION

The legal, regulatory and fiscal regimes governing

deep water drilling in Nigeria are expected to undergo

significant changes in the near future. This is premised

on the expected assent of the Deep Offshore

Amendment Bill with implications on the fiscal regime

of offshore operations as well as the final assent of the

Petroleum Industry Governance Bill with implications

on the legal and regulatory framework of the industry.

Investors are advised to note these potential changes

to the existing regime. GEP is available to provide

guidance regarding the legal and regulatory

implications on business operations.

Ivie Ehanmo

Partner

ivie@geplaw.com

Samson Ozah

Associate

samson.ozah@geplaw.com

DianaAbasi Okop

Associate

dianaabasi@geplaw.com