A Critical Review Of The Inter Agency Memo2

2009
A Critical Review of Upstream Provisions
of the InterAgency Memorandum on the
Petroleum Industry Bill

Odujinrin &
Adefulu
Church House
st
1 Floor
29, Marina, Lagos

1. CONTENTS

2. INTRODUCTION .......................................................................... 3

3. INSTITUTIONAL FRAMEWORK ........................................................ 4

COMMENTS ON THE PROPOSED CHANGES TO THE INSTITUTIONAL
FRAMEWORK ................................................................................... 6

4. NNPC LTD. ................................................................................. 6

5. INCORPORATED JOINT VENTURES .................................................. 8

COMMENTS ON THE IJV PROVISIONS ................................................. 10

6. ACREAGE CONTROL & LICENSING ................................................ 11

LICENSES AND LEASES .................................................................... 11

PEL ........................................................................................... 13

PPL ........................................................................................... 13

PETROLEUM MINING LEASE ........................................................... 17

PPL & PML AWARD PROCESS .......................................................... 19

ASSIGNMENTS, MERGERS & ACQUISITIONS ...................................... 19

PRODUCTION SHARING CONTRACTS & OTHER UPSTREAM DEVELOPMENT
CONTRACTS .................................................................................. 20

TREATMENT OF SUBSISTING PRODUCTION SHARING CONTRACTS & RISK
SERVICE CONTRACTS ................................................................... 21

ENVIRONMENTAL PROVISIONS ......................................................... 21

RELINQUISHMENT OF EXISTING LICENSES/LEASES .............................. 23

7. GENERAL COMMENTS ................................................................. 24

A Critical Review of the Inter-Agency Memorandum on the Petroleum Industry Bill Page 2

2. INTRODUCTION

The Petroleum Industry Bill, which promises to change the landscape of
Nigeria’s petroleum industry was submitted by the Executive Branch of the
Federal Government to the National Assembly in December 2008. The Bill,
which has passed through the first and second readings in both houses of the
National Assembly, was referred to the relevant committees and public
hearings have been held by the Senate and the House of Representatives on
the Bill.

Various entities submitted memoranda to the National Assembly to address
shortcomings of the Bill. A memorandum was also submitted by the Executive
Branch of the Federal Government, through the Inter-Agency Team 1,
proposing to address some of the deficiencies in the Bill. The Memorandum
was in the form of a new draft Petroleum Industry Bill. Whilst, there is
technically no problem with such a submission, it is at the very least, highly
unusual for the Federal Government to be seeking to amend the provisions of
the Bill it originally sent. The breadth of the proposed revisions is quite
substantial and includes for example broad changes to the fiscal and
institutional frameworks. It is based on the background of the significance of
these changes, as well as our opinion, that the National Assembly would give
careful consideration to the contents of the Inter-Agency Memorandum, that
this paper has been written.

1
T he In te r-A g en c y Tea m co mp r ise d o f M i nist r y of P etr o le um Reso ur ces , M in is t ry o f
J ust ic e, Mi n is tr y o f F i na nc e, F e de ra l In la n d Rev e nu e S erv i ce, D e par t me nt o f
Petro leum R esources, Nigerian Ex tra ctive I ndus tr i es T ra nspa re nc y In i t iat ive,
Re v en ue Mo b i lisa t ion A l loca t ion an d Fisc al Co m miss io n & the Ni ge r ian Nat io na l
P e t ro le u m C o rp o ra t ion .


The paper focuses only on the upstream aspects of the Inter-Agency
Memorandum and the proposed draft Petroleum Industry Bill 2. The fiscal
aspects would be addressed in another article. It draws comparisons between
the Official Version & Version IV and also refers to the existing legal
framework.

3. INSTITUTIONAL FRAMEWORK

Under the Official Version, the upstream petroleum industry is to be governed
by the Minister – responsible for broad policy formulation the National
Petroleum Directorate (“NPD”) which was to act as the Secretariat for the
Minister and to be responsible for detailed policy formulation. The NPD is also
to be responsible for holding unallocated acreage and in consultation with the
Petroleum Inspectorate (the “Inspectorate”) would be responsible for
organizing bid rounds. The Inspectorate is charged with overseeing the
technical aspects of the upstream petroleum industry such as environmental
issues, health and safety and engineering matters. Finally, the National
Petroleum Assets Management Agency (“NAPAMA”) is to act as a cost
regulator for the upstream industry.

2
F o r t he pur p o s e s o f t h is pa p e r, t h is is r e fer r e d t o a s V e rs io n IV. T he B il l s ub m i t t e d
t o t h e N a t io na l As s e mb l y is r e f e rr e d t o a s t h e O f f ic ia l V e rs io n.


Institutional Framework under the Official Version

Minister
National Assets
National Petroleum Petroleum
Petroleum
Directorate Inspectorate
Management Agency

Policy Direction Costs/Commercial
Technical Regulator
Acreage Holder Regulator

Version IV significantly changes this framework. Whilst the functions of the
Minister and the NPD do not change significantly, Version IV abandons
NAPAMA and places the cost/commercial function within the Inspectorate 3.
The Inspectorate would exercise this function in the approval of
“…commercial and cost elements of all field development programmes…” 4
The Inspectorate would also be responsible for developing “cost benchmarks
for the evaluation of opportunities in the Upstream Petroleum Operations” 5

3
T h is A ut ho r has pr ev i o us l y a r gu e d fo r t he a ba n do nme nt o f N A PA M A a s t he ro l e o f
t he a ge n cy was un cle ar a nd was li ke l y to a d d a bu r eau c rat i c l ay er t o u ps t rea m
p e t ro l e u m i n d u s t r y reg u la t i o n . S e e “ H igh li gh ts o f As pec ts o f th e P et ro le u m I n d ust r y
B i l l ” a p a pe r p re s e nt e d a t t he N i g e ria n As s o c ia t io n o f E n e r g y E co n o m i cs C o nf e r e n ce
i n Ab u ja 2 00 9 – w w w . o d uj i nr i na de f ul u. co m/
4
S ec ti on 39( 2 ) (a) o f Ve rs io n IV .
5
S ec ti on 39( 2 ) ( d) o f Ve rs io n IV


Institutional Framework under Version IV

Minister
National Petroleum
Inspectorate
Directorate

Policy Direction Technical & Costs
Acreage Holder Commercial Regulator

COMMENTS ON THE PROPOSED CHANGES TO THE INSTITUTIONAL FRAMEWORK

The changes proposed to the upstream institutional framework by Version IV
should help in strengthening the Bill. By housing the costs/commercial
function in the Inspectorate, it avoids the problems associated with having
multiple regulators such as high regulatory costs and excessive bureaucracy.
Additionally, by placing the costs/commercial function in the work
commitment & field development process, the ambiguities raised under the
Official Version as to the extent of this form of regulation have been
minimised.

4. NNPC LTD.

Version IV also proposes the establishment of NNPC Ltd to replace the
Nigerian National Petroleum Corporation (“NNPC”). Like its predecessor,
Version IV does not place a positive duty on any entity to create the


company. 6 This is an oversight which should be corrected at the National
Assembly. Version IV also states that ownership of NNPC Ltd. should be
vested solely in the Federal Government of Nigeria. Under the Companies and
Allied Matters Act (“CAMA”) which regulates limited liability companies in
Nigeria, each company is required to have at least two shareholders 7. It is
suggested therefore, that it would be useful for the Bill to name the specific
shareholders which it proposes to hold shares in the company or to detail the
process by which those entities are determined.

Version IV copies the asset transfer process under the Official Version. It
deems the assets and liabilities of NNPC to be transferred to NNPC ltd on the
transfer date. It does not provide for a process by which the assets and
liabilities of NNPC are identified and the documentation for effecting this
transfer. Such a transfer may be deficient and lead to disputes in the future.
It may be useful for the National Assembly to examine the asset transfer
procedure under the Electric Power Sector Reform Act (“EPSRA”) for an
example of an effective transfer procedure. The EPSRA in effecting the
transfer of assets and liabilities from the National Electric Power Authority to
the initial holding company (now Power Holding Company of Nigeria Plc)
provided as follows:

1. The formation of the initial holding company, who should form it and
the timeframe within which it should be formed. 8
2. The shareholders in the initial holding company. 9
3. Transfer of assets and liabilities by a transfer order issued by the
National Council on Privatisation. 10

6
It o n ly sta tes th at if t h e com pa ny h as no t be en c re ate d af te r 3 m o nt hs o f t he
p a s s a ge o f t he A ct , th e gov er nm e nt s h o u ld ca use its c re a t io n .
7
S ec ti on 18 o f CAMA
8
S ec t i o n 1 o f E P SR A
9


4. The assets and liabilities are identified on the audited balance sheets
of the Authority. 11
5. Asset transfers to be exempted from stamp duties 12.
6. The formation of the initial holding company to be exempted from
stamp duties. 13

5. INCORPORATED JOINT VENTURES

Version IV made notable amendments with respect to incorporated joint
ventures (“IJVs”). Under section 260(3) of Version IV, the National Oil
Company may appoint a majority of members to the Board of Directors,
where it is the majority shareholder. Under the existing participating joint
venture framework (“PJV”), the joint operating committee (“JOC”) acts to
supervise joint operations under the PJV. The JOC is constituted according to
the interests of the parties, which inevitably means that NNPC has majority
interest. However, the decisions of the JOC are taken by unanimous
decision 14, which effectively serves to protect the minority. Version IV does
not speak to the voting power of the directors, therefore the Articles of
Association of the Company or any shareholder’s agreement may address this
issue.

Section 260(6) provides for the decision of the board of directors of the IJVs
to comply with the decisions taken in the shareholder’s meetings. This

10
S e c t i o n 3(4 ) o f E P SRA
11
S e c t i o n 3(2 ) & ( 4) o f E PSR A
12
13
S ec t i o n 4(a ) o f E PSRA
14
S ee A d ed ol a po A k in rel e, N ig e ria O i l a nd Gas L aw, at pa ge 15 1.


appears to contradict the provisions of CAMA, which place a fiduciary duty on
company directors. 15

Section 260(10) provides that NNPC ltd shall have the rights to appoint more
than 50% of the management team. This right of appointment is not tied to
the shareholding of the NNPC Ltd in the IJV and there is an additional
requirement that 80% of the management of each IJV must be Nigerian.

One of the objectives of creating the IJV structure was to create self-funding
institutions, which would not need to rely on government funds to run their
operations. Section 261(2) which provides that the shares of NNPC Ltd in any
of the IJVs may not be transferrable by way of sale, assignment, mortgage or
pledge, may have a negative impact on the actualisation of this objective. By
including such a restriction in the law, it removes flexibility from decision
makers and does not allow them to effectively respond to the facts on the
ground. It significantly limits the financing options which may be utilised in
seeking operational funds. Version IV further extends those restrictions to
other shareholders in the IJVs who may not transfer their shares without the
written consent of NNPC Ltd. 16 It does not provide for such consent not to
be unreasonably withheld nor does it provide for a time frame within which
the consent must be granted or refused. This would significantly hamper
commercial decision making.

Section 263 seeks to protect the shareholders of the IJV from incurring any
additional tax liabilities provided all assets are transferred to the IJV at net
book value. It does not offer similar protection in terms of company

15
T he d ut y o f a d i re cto r is to the c o mpa n y a n d n o t to t he p e rso n w ho s e nom i ne e he
i s. S ee O roj o, C om pa ny La w a n d P ra ct i ce in N i g e ria, a t p a ge 3 1 0/
16
S ec ti on 261 ( 4) o f Ve rs io n IV


registration fees at the Corporate Affairs Commission (“CAC”), which are
likely to be significant in view of the potential assets of these IJV companies.

Version IV also introduces special provisions with respect to the liquidation of
the IJVs. It provides for the process by which liquidation may take place and
for disposal of the assets of the IJV. Of particular concern is the provision
which requires that all the assets of the IJV, whether tangible or intangible,
real or personal shall only be transferred to NNPC Ltd in liquidation. In view
of the fact that the law provides for a single buyer, there is no room for
competition in selling these assets and the shareholders are effectively stuck
with the valuation placed on them by NNPC Ltd. It also places significant
pressure on NNPC Ltd. in terms of arranging financial commitments for the
acquisition (or re-acquisition) of such assets, as well as effective
application/management of such assets post liquidation.

COMMENTS ON THE IJV PROVISIONS

It appears that the Inter-Agency team sought to provide extensive
protections for the State in these IJV vehicles. In doing so however, these
provisions appear to create an entity unrecognisable under Nigerian law – a
hybrid if you will of the typical state corporation and the limited liability
company. The provisions appear to entrench rules in favour of the majority
and do not appear to be concerned about minority protections. It is
suggested that a number of these protections are better dealt with within a
Shareholders’ Agreement or the Articles of Association of the IJV. This
method would allow for flexibility as it is difficult to amend legislation once it
is passed.

It is also useful to note that in a number of areas, there are gaps in the
provisions, which may be addressed by Shareholders’ Agreements. For
example, if the provisions of Version IV were adopted and passed into law as
is, it may be necessary for a Shareholders’ Agreement to require NNPC Ltd. to


pay market value as determined by an independent consultant for the assets
transferred in liquidation.

6. ACREAGE CONTROL & LICENSING

Like the Official Version of the Bill, Version IV vests all unallocated acreages
in the Directorate on behalf of the Federal Government of Nigeria. 17 It is
suggested that a body saddled with the responsibility for detailed policy
making should not hold acreage, which is an implementation issue. It would
be more appropriate to vest acreage in the Inspectorate, which in its
regulatory capacity is involved in acreage management.

A National Grid System is introduced to this version under section 270(1).
The system would be used for the definition of license and lease areas,
relinquishments etcetera. This is a welcome introduction and would serve to
provide a uniform basis for acreage control and as such should be adopted by
the legislature.

LICENSES AND LEASES

Version IV of the Bill provides for three upstream licenses; the petroleum
exploration licence (“PEL”), the petroleum prospecting licence (“PPL”) and
the petroleum mining lease (“PML”). Whilst the PPL & PML were provided for
in the Official Version, the PEL is introduced in this version. The objective of
its introduction may be to cater for exploration companies, which primarily
explore for petroleum and sell data to those which seek to exploit it.

A major departure from the Official Version is the recognition that PPLs and
PMLs may be in respect of crude oil and natural gas. 18 Section 257(1) of the

17
18


Official Version states that: “Every petroleum prospecting license or
petroleum mining lease shall clearly state that it shall be in respect of crude
oil or natural gas but not of both crude oil and natural gas.” The proposed
amendment is commendable as it was never clear why the government
proposed a dichotomy between products which usually can be found together.

The introduction of a differentiation between the qualifications required by
an operator and a non-operator for the purpose of licensing is also noted and
commended 19. The only qualification necessary with regard to non-operators
is the means to finance its obligations under any license. This appears to be
appreciated in the Inter Agency Memorandum.

It should also be noted that Version IV has changed the character of
potential licensees. Under the Official Version, licences or leases may be
granted to two categories of companies- the National Oil Company and
indigenous oil companies. 20 Version IV provides for licenses and leases to be
granted to the National Oil Company 21 and to a winning bidder of an acreage
bid round. 22 The choice not to limit licenses and lessees essentially to local

19
S ec ti o n 271 ( 6) (a ) & (b ) o f V e rs io n IV
20
S e ct io n 25 7 ( 1 ) o f t he O f f ic ia l V e rs io n. T he O f f i c ial V e r s ion d e fi nes a n i nd i ge no us
o i l co mpany as a co mpa ny:

a. E n gag e d in t h e e x p lo ra t io n fo r a n d p ro d u c t io n o f c ru de o il a n d n a t u ra l gas o f
w h ic h s ix t y p e r c e n t o r m o r e o f i t s s ha r e s a re be ne f ic ia l l y o w ned d i re ct l y o r
i n d i re ct ly by N i ge r ia n c i t i z e ns o r a s s o c ia t io ns o f N i ge r ia n c it i ze ns;

b. W hi ch m eets t he r e qu i re me nt s o f a n y g uid e l in es o r r e gu la t io ns t h a t ma y b e
i s s u e d b y th e D i re cto ra te o r I ns pe ct o ra te ; a n d

c . W hi ch is a cc re d it e d a s a n ind i g e no us o i l co m pa ny b y t he D i r e c t o r a t e o r
Ins p ecto rate... Section 467 o f the Officia l Vers io n.
21
A g r a n t t o N N P C L t d . is u n d e r t h e c o n d iti o n t ha t i t h a s co m ple t e d a n o pe n a n d
t ra n s pa re n t b id p ro c e s s for po ten t ia l co nt ra cto rs.
22
S ec ti o n 271 ( 2) (a ) & (b ) o f V e rs io n IV


companies would encourage a wider pool of bidders. It may however be
regarded as discouraging the efforts to build strong local players in the
Nigerian oil and gas industry.

PEL

The PEL essentially replaces the oil exploration license (“OEL”) under the
Petroleum Act 1969. It proposes to grant a non-exclusive right to carry out
geological, geophysical and geochemical exploration of petroleum. 23 It also
allows for a PEL to cover an area that includes PPLs and PMLs. 24 This would
appear to interfere with the exclusive rights granted to the holder of a PPL
under section 275(a) and the holder of a PML under section 281(1). It is
suggested that this ambiguity needs to be resolved. It is suggested that a
PEL should not be allowed to cover existing PPL or PML areas.

PPL

The holder of a PPL is granted an exclusive right to carry out petroleum
exploration operations and has the right to carry away and dispose of crude
oil or natural gas won during prospecting operations. 25 In terms of duration,
the distinction between PPLs granted over land & shallow waters and deep
water areas & inland basins is maintained. However the duration with respect
to land and shallow waters is increased to seven years under Version IV 26 as
opposed to five years under the Official Version. 27 The period of 10 years for
deep water areas and inland basins is maintained. In both areas however,

23
24
S e c t ions 2 7 1( 3 ) & 27 4 ( 3 ) o f V e rs io n I V . It should be noted th a t s ec tio n 2 7 4( 3)
r e fe rs to “p e tro l eu m m i n in g li cen c es” as oppose d to “ pet ro le um m i ni n g l eases ”.
2525
S ec ti on 275 of V ers ion IV
26
S ec ti on 276 (a ) of V ers io n IV
27
Section 261 (a) of the Official Version


Version IV breaks down the term of the PPLs. The table below graphically
illustrates this.

PPL Duration under the Official Version & Version IV

Area Official Version Version IV

Land & Shallow Not more than 5 years Not more than 7 years
Waters consisting of:

1. Initial period of 3
years
2. Renewal period of
2 years
3. Appraisal period
of 2 years

Deep Water Areas & Not more than 10 years Not more than 10 years
Inland Basin consisting of:

1. An initial period of
5 years
2. Renewal period of
3 years
3. Appraisal of 2
years

MINIMUM WORK COMMITMENTS

Version IV also introduces provisions in relation to minimum work
commitments. The main purpose of minimum work obligations is to maximise
exploratory activity in the licensed area in a timely manner. 28 This is done by
imposing terms on the licensee to carry out specific work in a specified

28
G e o f f H e w i t t a n d A d r ia n H il l, “O f fs h o re L ic e n ce O p e ra t io ns : T h e E x p l o r a t ion
P ha s e ”, i n T e re n ce Dai n t it h et al , U n ite d K in g do m Oi l a n d Gas Law ( Lo n do n: S we et
& M a x w e ll, 2 0 05 ) .


period. 29 Section 277(2) imposes an obligation on the licensee to commit to
drilling of at least one exploration well to a specified minimum depth. Such a
commitment must be supported by a bank guarantee or performance bond
from a reputable international bank 30. The work commitment may also be
used as a single bid parameter or as part of the bid parameters in the award
of a PPL. The introduction of a framework for the work commitment process
is laudable, it is suggested however that some of these provisions would need
to be revised to maximize the benefits of the process.

Firstly, by specifying the minimum drilling requirements in legislation, it ties
the hands of the regulators and does not provide for flexibility in accordance
with field specifications. Further, the provisions do not explicitly tie the
completion of the work commitment in the initial period to the renewal
process; such an explicit tie would be useful to provide a clear basis for
license renewals. Additionally, whilst there is a provision for a bank
guarantee or a performance bond for the full amount of the committed work,
there are no provisions for a reduction in the value of the guarantee or bond
based on the value of money spent in carrying out the work commitment. 31 It
should also be noted that contrary to the spirit of local/Nigerian content, the
performance bonds or bank guarantees must be provided by an international
bank as opposed to a Nigerian bank.

COMMERCIAL DISCOVERY

29
W i l l ia m On o r a t o & J . J a y Pa rk, “Wo r l d Pet ro le u m Leg i s la t ion : F ra me w o rks t ha t
F ost er O i l a n d Gas De ve lo p me nt” , 39 A l be rt a L. R ev. pp. 70 - 126 . See a lso P ete r
C a me ron , “T he St ru ctu r e o f P et ro le u m A gre em en ts” , i n Ni ck Be re dj ic k a nd T ho mas
W a l de ( e ds. ) , P e t ro le u m In ves t me nt Po l ic i e s in Dev e lo p in g Co un t r i e s , ( L o n do n:
Graham & T rotma n, 1988).
30
S ec ti on 277 ( 15 ) of V er s ion IV
31
S u ch a p ro v isi o n may b e fou n d w i t h i n C la u s e s 6. 5 a n d 6. 6 o f t h e N ig e ria n 2 0 05
Mo de l P ro du c tio n S ha ri n g Con t ract .


Version IV also makes more detailed provisions with respect to commercial
discoveries and field development plans. A commercial discovery is defined as
“...a discovery of crude oil, tar sands, bitumen, heavy oils, extra heavy oils,
natural gas or condensates within a petroleum prospecting licence which can
be economically developed in the opinion of the licensee, after consideration
of all relevant economic factors normally applied for the evaluation of crude
oil, natural gas or condensate evaluation or development”. 32 Unlike under the
Petroleum Act, this definition does not peg commerciality to a certain number
of barrels per day 33 but makes it subjective based on the licensee’s
circumstances. This recognises the fact that the commerciality of a discovery
is significantly dependent on the economic condition of the holder of the
licence.

Upon the declaration of a commercial discovery, the licensee must submit a
field development plan to the Inspectorate within 120 days. 34 The
development plan must be approved by the Inspectorate within 90 days, if it
meets certain criteria. 35

32
S e ct io n 52 6 o f V e rs io n IV. I t s e e ms u n us u a l t o i n clu d e t a r s a n ds a n d b it u me n in
t h is de f in it i o n a s t h e y h a v e bee n t r a d it ion a l l y t r e a t e d u nd e r t he s o li d m i ne ra ls
r e g im e i n N i g e ria .
33
Cla use 9, Firs t Sche dule to t he Pet ro le u m Act
34
35
T he c ri te r ia i nc lud e- a n a p p ro v ed N a t io na l C o nte nt Pl a n , a n a p pr o v ed
e n vi ro n men ta l ma na ge me nt p lan, pro v is ion f o r ro ut in e g as f la ri ng et ce te ra. I t is not
c l e a r i f t he 1 20 da ys w i t h i n w h i c h t o s ub m i t a dev e lo pm e n t p l a n u nde r s e c t io n
2 7 8( 1 ) wou l d a l low a l i ce nse e to me et a l l t hes e o bl ig at io ns. Be fo re th e p r ov is io ns
a re a do pt e d b y t h e l e g i s la t u r e , it w o u l d be n ec es s a r y to m a p t he t i me i t wo u ld ta ke
t o ge t t ho s e a p p ro v a ls .


RELINQUISHMENT

Relinquishment Provisions under Version IV

Relinquishment Version IV
Period

Upon expiry of initial 50% of original license
exploration period area

Upon the expiry of All parcels that are not
the renewal period part of PMLs, appraisal
areas or significant gas
discovery retention
areas

Upon expiration of All acreage that is not
the PPL included in PMLs,
appraisal areas or
significant gas discovery
retention areas

PETROLEUM MINING LEASE

A PML may be granted to a holder of a PPL who has satisfied the conditions
under the PPL, has made a commercial discovery, and has received approval


for the related development plan from the Inspectorate. 36 The holder of a PML
shall have the exclusive right to carry out upstream petroleum operations in
the lease area. 37 The grant of a PML shall be on the basis of a firm
commitment to develop and produce the commercial discovery made in the
lease area or to restart or continue petroleum production. 38

Version IV also introduces the Domestic Gas Supply Obligation (“DGSO”) and
requires all existing and future petroleum mining lessees 39 to comply with
their obligations as prescribed by the Midstream Agency. Any licensee that
does not comply with the DGSO would be prohibited supplying gas export
operations. 40

Under section 283(1), a PML may be granted for not more than twenty years,
but may be renewed for a further period of 10 years, after which the lease
area must be relinquished to the Directorate. 41 A PML which is not in
commercial production within five years may be revoked. 42 A lease that has

36
37
38
39
T his is in co r re ct fr om a t ec h ni cal pe rspec t iv e as th er e a re no “ exi st i ng pe t ro le um
l i ce ns e e s ” . I t i s s u gg e s t e d t h a t i t b e a me n de d t o in c l u d e c u rr e n t h o l de r s o f oil
mining leases.
40
41
S e c t i o n 28 3 ( 3 ) o f V e rs io n IV. T his is i n c o n t r a s t t o t he pr o v isi o ns o f t he O f f ic ia l
Ve rs io n w hi c h p rov i des fo r th e du ra t ion o f t we nt y year s re new abl e fo r 2 0 ye ars at
e ac h r en ewa l p e rio d. S ec t ion 239 of t he Off i c ia l Ve rsio n.
42
S ec t ion 28 3 (2 ) o f Ve rs io n IV. I t is not cle ar who the r i gh t to r e vo ke rests wi t h.
A ddit io na lly , th e r i ght is d is cr et io na ry , a nd th e re is no re q ui re me nt to ta ke in to
c o gn isa nc e i ssu es s uc h as fo r ce ma je u re o r a ny s pe c ia l c i rc um sta nc e, w h ic h may
a f fe ct the a b ilit y to achie ve co mmercia l p ro du cti o n. It is t h er e for e s t ron g ly
r e com me n de d fo r t h e s e i s s u e s t o be t a ke n i nt o con s i d e ra t ion b y t h e Na t io na l
Assembly.


been in commercial production which has terminated for a period of one
hundred and eighty days other than reason of force majeure may also be
revoked. 43 The lessee is also required to relinquish all parcels that are not in
commercial production after ten years of granting the lease.

PPL & PML AWARD PROCESS

The grant of a PPL or PML must be by a bidding process conducted by the
Directorate or by the National Oil Company. 44 Under both versions, such a
bidding process must be conducted in consultation with the Inspectorate.
Version IV includes an improvement to the Official Version by requiring that
the Minister may only award licences to winning bidder pursuant to the bid
process. 45 It only introduces the criteria for determining a winning bid, which
may be one or a combination of the following:

1. Signature bonus;
2. Royalty percentage;
3. Work commitment in terms number of wells to a specified minimum
depth;
4. Work units. 46

The introduction of these parameters would strengthen the provisions of the
final Petroleum Industry Bill if included.

ASSIGNMENTS, MERGERS & ACQUISITIONS

43
44
45
S ec ti on 271 ( 2) o f Ve rs io n IV. U nde r t he O f fi c ia l Ve rs ion , th is w as n ot qu it e c l ea r.
46
S e ct io n 28 9 (2 ) (a) & (b ) o f Ve rs io n IV. I t sh ou ld be no ted t ha t t her e is no
d e f in it io n o r d es c r i pt ion o f w ha t co nst it ut es “ wo rk un i ts ” .


The provisions of Version IV in relation to the assignment of licences/leases
basically mirror those of the Official Version, save for the inclusion of a
provision that any assignment, merger or acquisition would be “...subject to a
fee equal to 2% of the fair market value of the transaction...”. 47 This
introduction would negatively influence the cost of doing business in Nigeria
and would impact on the ability of license holders to freely trade their rights.
It is not clear how “fair market value” would be determined. The silence on
this matter suggests that this would be based on the discretion of the
Inspectorate. The draft does not propose a mechanism by which the
judgment of the Ins pectorate may be challenged in this regard. Finally the
provisions do not take into consideration assignments, mergers and
acquisitions between related parties, which may not neces sarily be towards
direct financial gain. It is therefore suggested that these issues be taken into
consideration by the National Assembly in considering this draft provision.

PRODUCTION SHARING CONTRACTS & OTHER UPSTREAM DEVELOPMENT
CONTRACTS

Under section 272(1) of Version IV, where a Minister grants a licence or lease
to the winning bidder of an acreage bid process, such a winner, whether
NNPC Ltd. or any other company, may enter into any contract for exploration,
prospecting, production and development of oil or gas as the case may be. 48

Version IV also creates another set of upstream development contracts by
virtue of the provisions of sections 271(2) (b) and 272(2) (b). Under
271(2)(b), the Minister may, with the approval of the Directorate, grant NNPC
Ltd. a license or lease after an open and transparent bid process for potential
contractors has been conducted on the basis of a model contract approved by

47
48
It is s u gges te d t hat these pro v isions wo uld e nt i tle bid winne rs to ente r into
productio n s ha r ing contracts, risk se rv i ce co nt ra cts a n d t he l i ke w i t ho ut a
r e qu i re me nt to o b ta in p e r miss io n f ro m t he D i r ec to r a te o r th e I ns p e cto ra te.


the Directorate. Section 272(2) (b) describes those model contracts as
production sharing contracts, risk service contracts, and any other similar
contract. Part VIII of Version IV goes on to provide for the fiscal content of
the contracts entered into by NNPC Ltd. 49

The effect of this two tier structure is that the National Oil Company is not
required to always compete for acreage awarded to it. This provides it with a
significant advantage over other companies and would ultimately hinder the
ability of the NOC to compete. Additionally in the position where some of the
shares of the entity has been divested as envisaged by the draft provisions,
this considerable incentive would be in the hands of just a few and not the
national treasury.

TREATMENT OF SUBSISTING PRODUCTION SHARING CONTRACTS & RISK
SERVICE CONTRACTS

Version IV does not appear to specifically address how subsisting PSCs and
RSCs would be treated under this arrangement. These were addressed in the
Official Version. 50 It is necessary to address this issue as a number of
provisions of subsisting PSCs have a regulatory flavour, which would be
unsuitable to retain where the holder of the license is now a private
company. These comments also apply with respect to any upstream
development contracts that may be signed in the future, it is necessary to
ensure that matters which are strictly regulatory are not included in such a
contract so as not to arrogate excessive power to the National Oil Company.

ENVIRONMENTAL PROVISIONS

The Version IV draft improves on the environmental issues related provisions
in the Bill. Instead of the requirement for the licensee/lessee to submit an

49
S e c t i o ns 49 4 - 5 06 o f V e rs io n IV
50
S e c t i o n 230 ( 2) o f t he O f f ic ia l V e r s ion


environmental programme (“EP”) or an environmental quality management
programme (“EQMP”) as required under section 283(1) of the Official
Version 51 it now only requires the submission of only an “environmental
management plan”. 52 By focussing on one type of programme or plan as
opposed to two which were indistinguishable, this proposal is preferable to
the original version. However, the contents of the environmental management
plan remain the same, which therefore raises the point as to its similarity
with the provisions requiring an environmental impact assessment (“EIA”)
under the Environmental Impact Assessment Act. Under these provisions EIAs
would be required with respect to most oil and gas operations. The provisions
of Version IV do not seek to repeal the Environmental Impact Assessment
Act, nor do they seek to void its applicability to oil and gas operations. The
effect therefore if these provisions are adopted is that there would be a
duplication of efforts by oil and gas operators. We therefore suggest that
these issues be taken into account.

We note the deletion of provisions relating to the States and Local
Governments being financially responsible for environmental damage caused
by sabotage. 53 Indeed these provisions maybe unconstitutional.

Version IV also provides for financial provisions/contributions to be made by
a licensee or lessee to a remediation fund. This version makes this fund

51
O n e o f the ma jo r c ri t ic is ms o f t he s tr u ctu r e u n de r t he O ff i ci a l V e rs io n was th e
f ac t t ha t th e E P & EQ MP we re n ot dist i ngu is h a b le a n d i t w a s n o t c le a r u n d e r w h a t
c i r cu ms ta nc es o ne wou l d be re qui r e d o v er th e o t he r.
52
53
S ec ti on 261 of t he Off i c ia l Ve rsio n


subject to audit by the “lessee” 54. It maintains the requirement for a licensee
or lessee to “annually assess its environmental liability and increase its
financial contribution to the satisfaction of the Inspectorate”. 55 This
requirement to annually increase a licensee/lessee’s contribution does not
reflect realities as the assessment of the environmental effects of a
company’s operations, could very well show a decrease in the potential
environmental liability. It may also have the effect of stifling innovation as
there is no incentive to develop better processes or use more
environmentally-efficient equipment in operations. Additionally, the
provisions remain silent on the mechanism for reimbursement of the money
paid into the fund when upstream operations end. Finally, it may be
suggested that if it is desirable to retain such an option, it may be useful to
adopt the model utilised in relation to work commitments and field
development programmes, which is to provide a bank guarantee/performance
bond. This way, cash would not be tied down for a significant amount of
time, whilst still ensuring that there is a way to fund the remediation of the
environment due to damage caused by the operations of a licensee/lessee.
Version IV also includes provisions for the payment of gas flaring penalties. 56

RELINQUISHMENT OF EXISTING LICENSES/LEASES

Arguably the most contentious aspects of the provisions of Version IV in the
upstream sector are in relation to mandatory relinquishment of license areas.
Under Section 291, existing licensees & lessees are required to select areas
for which the licensee or lessee is prepared to make a declaration of
commercial discovery, for which development is underway, in which regular

54
S e ct io n 3 02 ( 1) of Ve rs io n IV. It s hou l d be n ot ed t hat t h is pr ov is io n o nl y s ub j ec ts
t he f un d to a u di t by t he l es s ee a n d d o es no t i n cl u de t he l i ce ns ee . W e s ug ges t t ha t
t h is b e a me n de d i f t h e p ro v is io n s a re t o be a do pt e d.
55
56
S ec ti on 300 of V ers ion IV


commercial production is occurring or for which the licensee or lessee is
prepared to make a declaration of significant gas discovery. All such areas
would be converted into PMLs, and any area not so selected must be
relinquished. These provisions raise questions as to whether it amounts to
compensable expropriation. Due to volume constraints, the examination of
this issue is beyond the scope of this article and would be subject to a more
detailed review in a subsequent article.

7. GENERAL COMMENTS

Although there is still room for improvement, the upstream provisions in
Version IV are a significant improvement on the Official Version. They appear
to reflect a more considered approach to upstream petroleum issues. The
existence of two government sponsored versions of the same Bill however
creates a number of challenges for the National Assembly in organising and
selecting the appropriate provisions for inclusion in the final legislation. It
also provides a challenge for stakeholders in the review of the proposed
legislation. It is suggested that for a streamlined and efficient process, it
may be better for the Government to withdraw the Official Version and to
submit Version IV or a variation of it. There are of course genuine concerns
as to the time it would take to pass the Bill if this course is taken,
particularly in view of the potential abridged legislative timetable due to the
upcoming elections. It is however suggested that such a process would
provide better quality legislation. In view of the fact that the current
legislation has been in place for over forty years, the quality of the process
and its product should be of paramount consideration.


A Critical Review Of The Inter Agency Memo2

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