Presentation is loading. Please wait.

Presentation is loading. Please wait.

Dr Bayo Adaralegbe FCIArb (UK); FEI(UK); FCIS(UK); LL.M, Ph.D (Dundee) Partner & Head, Energy Group Babalakin & Co.

Similar presentations


Presentation on theme: "Dr Bayo Adaralegbe FCIArb (UK); FEI(UK); FCIS(UK); LL.M, Ph.D (Dundee) Partner & Head, Energy Group Babalakin & Co."— Presentation transcript:

1 Dr Bayo Adaralegbe FCIArb (UK); FEI(UK); FCIS(UK); LL.M, Ph.D (Dundee) Partner & Head, Energy Group Babalakin & Co

2 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 Nigerias petroleum industry-the Nigerian Content Act and the PIB

3 Influences that Shape Contractual Framework of Petroleum 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 Earths 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

4 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

5 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)

6 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

7

8

9

10 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

11 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

12 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

13 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

14 Field/Service Contracts at Exploration Phase A number of field/services contracts required at exploration phase: Seismic Survey Rig Contractor Rig Services Contractors Supply of equipment

15 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

16 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

17

18

19

20 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 industry thereby improving general efficiency Model contracts said to require no more than 20% adaptation to peculiar situations

21 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)

22 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)

23 Petroleum Development Arrangements and how they Evolved Country where petroleum development originated and international political economy shape types Petroleum 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

24 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

25 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 Industrialization Technology transfer Development of local content

26 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

27 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

28 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

29 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

30 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?

31 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

32 Petroleum Development 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 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

33 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

34 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 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 resources produced at well head Sovereign state continues to own natural resources in accordance with international law

35 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

36 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 owner E and P Company bears sole risk of petroleum development activities

37 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 land PSC 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

38 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 )

39 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)

40 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 tooffshore of Nigeria Delta area

41 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

42 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 31 st Dec next; renewable 3 months before end of period for a period not exceeding 1 year

43 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 p eriod 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

44 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

45 Petroleum Development 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 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 ExxonMobils blocks

46 Petroleum Development Regime in Nigeria: OML Condition for grant of Oil Mining Lease: Minister may grant 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 single OPL(Oil Prospecting Licences (Conversion to Oil Mining Leases, ETC.) Regulations) Note South Atlantic Petroleum v Min of Petroleum Resources

47 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

48 Petroleum Development Arrangements in Nigeria Statutory 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

49 Petroleum Development Arrangements in Nigeria JOAs 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

50 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 the venture to which the licensee or lessee relates, on terms to be negotiated (Paragraph 34(a) of Act)

51 U-JVs created pursuant to Lease 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 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)

52 U-JVs created pursuant to Lease Regime Resulted 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

53 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-JV State of technical readiness in Nigeria 95% of oil development in Nigeria estimated to be under U-JVs

54 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 use Farm 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

55 Nigerian PSC Structure PSCs became popular from era of offshore petroleum development activities in Nigeria due to heavy costs involved Mostly in use in Nigeria today Government 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

56 Nigerian PSC Structure PSCs also describe NNPC as OPL/OML holders, and IOCs as Contractors Nigerian PSCs are like Risk Service except for NNPCs option to change Contractor at production phase of Risk Service, and Contractors 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

57 Nigerian PSC Structure Under PSC IOC contracted to carry out petroleum operations exclusively within contract area No recital that Ministers statutory consent required and obtained; but Ministers approval endorsed on PSC No express statutory provision allowing PSC in Nigeria

58 Nigerian PSC Structure IOCs 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

59 Nigerian Risk Service Contract Only notable case is between NNPC and AGIP over Agbara Oil Field NNPC has right to take over operations, or replace IOC Contractor with another at production phase Contractor reimbursed from 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 crude oil produced

60 Nigerian Risk Service Contract Contractor has option of taking prescribed quantity of oil produced 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

61 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 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

62 Nigerian Petroleum Arrangements: how they differ Distinguishing features may be identified through parameters used by foreign investors to determine investing in a country Nature of ownership granted Nature of protection available from this ownership Nature of fiscal regime Others

63 Nigerian Petroleum Arrangements: how they differ Nature 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-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

64 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

65 Nigerian Petroleum Arrangements: how they differ Nature 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?

66 Nigerian Petroleum Arrangements: how they differ Fiscal 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)

67 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 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)

68 Nigerian Petroleum Arrangements: how they differ Others 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

69 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 Mining Leases as Petroleum Prospecting Licenses and Petroleum Mining Leases Unlike existing system that was limited to Ministers statutory approval in relation to transfers of OPL and OML interests, and that did not expressly cover JOAs, PSCs, Farm outs, etc, PIB requires consent in respect of all forms of contractual transfers, including mergers and change of ownership control situations

70 Nigerian Petroleum Regime: 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

71 Nigerian Petroleum Regime: 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 is contemplated for privatization NNPC to continue to play role of NOC under PSCs PIB silent about IOCs right to obtain mining/mineral rights directly

72 Nigerian Petroleum Regime: 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


Download ppt "Dr Bayo Adaralegbe FCIArb (UK); FEI(UK); FCIS(UK); LL.M, Ph.D (Dundee) Partner & Head, Energy Group Babalakin & Co."

Similar presentations


Ads by Google