petroleum development arrangements in nigerias oil and gas sector.ppt
TRANSCRIPT
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Dr Bayo AdaralegbeFCIArb (UK); FEI(UK); FCIS(UK); LL.M, Ph.D (Dundee)
Partner & Head, Energy Group
Babalakin & Co
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Outline of Presentation
Various influences that shape the contractual frameworkof oil and gas activities
Various international petroleum development agreementsin use; how they evolved and their conceptual differences
Various petroleum development agreements in use inNigeria; the policies that shape their evolution, thestatutory framework that provides a basis for them, andtheir conceptual differences
Changes to expect under the current reform processes inNigerias petroleum industry-the Nigerian Content Act andthe PIB
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Influences that Shape
Contractual Framework ofPetroleum 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 Earthssurface and therefore not easily accessible, unlike other
natural resources
because hydrocarbon resources increase human lifeexpectancy they are very significant in modern worldand therefore affect their development
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Extractive Nature of Resourcesas an Influence
Petroleum development activities require oil and gasresources to be first searched for through readings that arefar from precise
If at all found, these resources have to be converted from
primary state to secondary state for consumption byend user
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Extractive Nature of Resources asan Influence Extractive nature of oil and gas therefore results in different
phases:
Exploration (seeking these natural resources based ondata reading)
Production (getting them off the ground after findingthem)
Transportation (moving them out of in situ state)
Processing (converting them from a natural state to asecondary state where they can be used)
Disposal (making them available to end user)
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Effect of Resources on ModernLife as an Influence Hydrocarbon resources mainly responsible for cooking,
cooling, lighting, heating and transportation, apart from somany other uses
Referred to as lifeblood of industrialisation for this
reason Such significance causes players from industrialised
countries to dominate petroleum development activitiesglobally, even though developing countries hold greater
reserves
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Effect of Resources on ModernLife as an Influence
Such significance also causes host countries to play directrole in development of petroleum activities fornationalistic and for economic reasons
This has resulted in an international political economythat has in turn had an effect on petroleum developmentarrangements
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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
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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 theUS(s.44(3) of Nigerian Const)
Sovereign states therefore have to grant mining/mineralrights, typically to IOCs from industrialised countries forpetroleum development
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Participation Arrangements Single mineral right holder rare due to capital and
technology intensity of activities; third parties allowed toacquire 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
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Field/Service Contracts at
Exploration PhaseA number of field/services contracts required at
exploration phase:
Seismic Survey
Rig Contractor
Rig Services Contractors
Supply of equipment
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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
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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
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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 industrythereby improving general efficiency
Model contracts said to require no more than 20%
adaptation to peculiar situations
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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 CompetivenessLOGIC(formerly Cost Reduction Initiative in the New Era,CRINE)
United Kingdom Offshore Operators Association(UKOOA)
Rocky Mountain Mineral Law Foundation(RMMLF)
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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 GeophysicalContractors(IAGC)
P t l D l t
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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 oneparagraph Concessionthat granted mining/mineral rightsover large areas and for long durations in the USA whereland owners owned natural resources
Developing countries that at that time where undercolonial rule, were influenced by this practice and grantedconcessions in return for royalty and tax when they beganto find oil
P t l D l t
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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
t t
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etro eum eve opmentArrangements and how they
Evolved Developing countries could still not prevent IOCs from
involvement in their natural resources due to lack oftechnical, managerial and financial capacity
Hence next best option: state participation emphasizingproduction, profit and control of countries over theirnatural resources towards economic development through
Better fiscal terms for the sovereign state
Industrialization
Technology transfer
Development of local content
P t l D l t
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Petroleum DevelopmentArrangements and how they
Evolved Because of this constitution of many countries , especially
Latin American and Middle East states, preventedforeigners from owning mineral/mining rights
Resulted in new arrangements where developing countriesestablished NOCs vested with mineral/mining rights that
were then contracted out to IOCs to develop
P t l D l t
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Petroleum Development
Arrangements and how they
Evolved Risk Service Contracts emerged out of this where
developing states engaged IOCs as contractors in respectof mineral/mining rights that they vested in their NOCs orPetroleum Ministries
Under this arrangement IOCs used their own capitalexpenditure and operating costs to explore for petroleum
IOCs only got reimbursed through a service fee if oil wasproduced
Sometimes IOCs were allowed to buy back part of oilproduced as consideration for service
P l D l
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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 orPetroleum Ministries
IOCs also used their capital expenditure and operatingcosts to explore for petroleum under this arrangement
Under this arrangement IOCs only got reimbursedthrough a share of the oil produced
e ro eum eve opmen
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e ro eum eve opmenArrangements and how they
Evolved Under this arrangement IOCs
First received cost oil to cover costs and expenses limited to apercentage , and thereafter
IOCs and NOCs split the oil produced known as profit oil torepresent their return on investment
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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?
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Petroleum Development
Arrangements: How they differ In Risk Service and Production Sharing Contracts the IOC
did not receive any reimbursement for their expenses orany 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/miningrights of NOC in key areas such as area, duration,revocation , etc
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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 20-30 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
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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 theirdisposal to pay for services
Some countries use all these arrangements simultaneously
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Petroleum Development
Arrangements: How they differ Licenses/leases:
Exclusive right granted mineral/mining rights holder to explore forpetroleum , and if found, to dispose of in consideration for royalty, rentand tax
In some countries a single license covers exploration and productionphases; in others separate licenses for exploration phase; licensegranted for production phase only allowed when oil is found incommercial 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 resourcesproduced at well head
Sovereign state continues to own natural resources in accordance with
international law
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Petroleum Development
Arrangements: How they differ Production Sharing Contracts
E and P Company undertakes petroleum developmentactivities on behalf of holder of mining/mineral rights,typically NOC
E and P Company is contractor/operator, but not legalowner
Contractor bears sole risk of exploration activities
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Petroleum Development
Arrangements: How they differ Risk Service Contracts
E and P Company undertakes petroleum developmentactivities 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 petroleumdevelopment activities
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Petroleum Development
Arrangements: How they differ
Rough conceptual analogy may be made between
petroleum development arrangements and real estateprojects:
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 whomay have some equitable interest in property
Risk Service Contractor may be likened to contractorwho develops property and who gets paid off for his
services without any legal or equitable interest in thero ert
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Petroleum Development
Regime in Nigeria
Ownership of petroleum resources in Nigeria
Notwithstanding the foregoing provision of this section theentire property inshall vest in the Government of theFederation...(s.44(3) Const.)
The entire ownership and control of all petroleum inshall bevested in the state(s. 1(1) Petroleum Act)
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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 watersof Nigeria(c) that forms part of the Continental Shelf (d) thatforms 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 seabed, subsoil and superjacent waters of the Exclusive Zone shallvest in the Federal Republic of Nigeria.... (s2(1) of the EEZ
Act)
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Petroleum Development
Regime in Nigeria NoteA.G Fed. Vs A.G Abia & Ors to the effect that
Nigerian states(political subdivision) do not have claim tooffshore
Note NDDC Act enacted before this case which refers tooffshore of Nigeria Delta area
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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 andproduction
Grants to companies registered in Nigeria separate rightsfor each phase through a license /lease regime
Petroleum Development
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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 aduration to lapse by 31stDec next; renewable 3 months
before end of period for a period not exceeding 1 year
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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 quantitiesto be able to qualify for OML
over compact area not exceeding 1000 sq miles for aperiod not exceeding 5 years including renewal; in case ofdeep offshore minimum of 5 years aggregate of 10 yearsthrough amendment in Deep Offshore Act
Petroleum Development
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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 treatpetroleum discovered (Para 11 of First Schedule to Act
Note that section 2 of Act itself allows Minister to grantonly rights to search for, win, carry away and dispose ofpetroleum
Right to exportabsent (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 exportconsistent with carry away/disposeof? If not can schedule expand meaning in principal law?
In practise OML holder allowed to export
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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 anddistinct 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
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Petroleum Development
Regime in Nigeria: OML Condition for grant of Oil Mining Lease:
Minister maygrant 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 singleOPL(Oil Prospecting Licences (Conversion to OilMining Leases, ETC.) Regulations)
Note South Atlantic Petroleum v Min of PetroleumResources
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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 prospectinglicence or oil mining lease shall (a) appoint a manager resident inNigeria to supervise the operations under the licence or lease
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Petroleum Development
Arrangements in Nigeria Statutory lease regime serves as source of contractual
arrangements developed in response to governmentpolicy on hydrocarbon development
U-JVs created between IOCs (previously granted OMLsbefore advent of state participation) and NNPC on behalfof 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
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Petroleum Development
Arrangements in NigeriaJOAs created between indigenous companies (as
OPL/OML holders) and IOCs to achieve indigenousparticipation policy
Farm outs created between IOCs (as original OMLholders) and NNPC under U-JV on one hand, andindigenous companies on the other, to achieveindigenous participation policy
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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 theventure to which the licensee or lessee relates, on terms
to be negotiated (Paragraph 34(a) of Act)
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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 orperson which in the opinion of the Corporation will facilitate thedischarge 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 aview to securing participation by the Federal Governmentof the Corporation in activities connected withpetroleum(s. 5(g) NNPC Act)
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U-JVs created pursuant to Lease
Regime Resulted in Participation Agreements and JOAs between
NNPC and IOCs allowing NNPC undivided interest inOPLs 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
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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% participatinginterest, IOCs appointed operator under each U-JVbecause
IOCs were already operating before U-JV
State of technical readiness in Nigeria
95% of oil development in Nigeria estimated to be underU-JVs
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Farm Outs of Marginal Fields Farm Outs only possible where
Lease holder seeks consent of President to farm out marginalfield out of its area
President may cause a Farm Out of a marginal field wherefield 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 onthe other
Act says government must be satisfied with farmee ofmarginal field but does not stipulate who selects
In practise bids carried out in past by Minister
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Nigerian PSC Structure PSCs became popular from era of offshore
petroleum development activities in Nigeria due toheavy costs involved
Mostly in use in Nigeria today
Government recently contemplated convertingexisting 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 asOPL/OML holders, and describes IOCs asContractors
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Nigerian PSC Structure PSCs also describe NNPC as OPL/OML holders,
and IOCs as Contractors
Nigerian PSCs are like Risk Service except forNNPCs option to change Contractor at productionphase of Risk Service, and Contractors oil sharingthat is assured under PSCs
IOCs under U-JVs made by government to set upseparate entities for PSC arrangements to avoidring fencing
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Nigerian PSC Structure Under PSC IOC contracted to carry out petroleum
operations exclusively within contract area
No recital that Ministers statutory consent requiredand obtained; but Ministers approval endorsed onPSC
No express statutory provision allowing PSC in
Nigeria
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Nigerian PSC Structure
IOCs remuneration dependent on production; productioncan only happen if NNPC gets an OML; OML in turndepends 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 grantingduration beyond OPL?
PSC terms mirror back OPL/OML terms like duration,relinquishment; PSCs, OPLs/ OMLs relationshipmore serious than sublease and head lease
Note conceptual confusion in case law on PSC in
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Nigerian Risk Service Contract
Only notable case is between NNPC and AGIP over AgbaraOil Field
NNPC has right to take over operations, or replace IOC
Contractor with another at production phase Contractor reimbursedfrom 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 crudeoil produced
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Nigerian Risk Service Contract
Contractor has option of taking prescribed quantity of oilproduced 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
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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 gasdevelopment, 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 gasdevelopment
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Nigerian Petroleum
Arrangements: how they differ Distinguishing features may be identified through
parameters used by foreign investors to determineinvesting in a country
Nature of ownership granted
Nature of protection available from this ownership
Nature of fiscal regime
Others
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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. NNPCs legal title to mining rights under U-JVdebatable
property used for operations: under PSC and RiskService title to equipment and property acquired for
operations transferred to NNPC at end of contract; titlevests jointly in IOC and NNPC under U-JV
data:NNPC retains ownership all data , logs, reports,information acquired in performance of contract underPSCs and Risk Service; ownership vests jointly in NNPCand IOC under U- V
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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; underRisk Service IOC may not book reserves except there isagreement for buy back
ownership of gas found: Under U-JV gas found belongs
jointly to IOC and NNPC; under PSC and Risk Servicegas found belongs to NNPC alone
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Nigerian Petroleum
Arrangements: how they differNature of Protection:
Expropriation: Under U-JV both IOC and NNPCentitled to compensation; under PSC and Risk Service,
NNPC entitled. Based on wording of s. 44 of const, andjurisprudence of international investment law, IOC mayalso be entitled because of right to oil produced; IOCmay not be entitled under Risk Service
Dispute Settlement: PSCs provide for arbitration inaccordance with ACA; Act provides for arbitration inevent of dispute from OML(s. 11; Para 14); note s. 251 ofconst vests exclusive jurisdiction in FHC
Question: What is the legal effect of arbitral provision instatute?
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Nigerian Petroleum
Arrangements: how they differ Fiscal RegimeAs 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 PetroleumRegulation
As a matter of Nigerian law, Nigerian contract clauses andpractice situation unclear
Petroleum (Drilling & Production) Regulation imposesobligation on only The licenseeor lesseeshall pay to theMinister not more than one month after the end of everyquarter... (a) royaltyat a rate...(reg. 60 )
Annual rentpayable on OPL and OML (reg. 59)
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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 TheCorporation or the Holder, as the case may be, shall pay
all royalty, concession rentals....on behalf of itself andthe Contractor...(s. 11(1)
The CORPORTION shall pay all Royalty, ConcessionRentals...on behalf of itself and the CONTRACTOR...
(Clause 15.3 PSC Model)
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Nigerian Petroleum
Arrangements: how they differ Others
Decommissioning: Petroleum (Drilling &Production)Regulation contemplates this but applies toleaseholder.
IOC and NNPC jointly liable under U-JV ; NNPC solely liable underPSC and Risk Service. Some(not all) PSCs impose obligation onIOC to set up an Abandonment Fund for decommissioning orprovide security for this.
Control: Under U-JV Operating Committee; under PSCManagement Committee
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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 MiningLeases as Petroleum Prospecting Licenses and PetroleumMining Leases
Unlike existing system that was limited to Ministersstatutory approval in relation to transfers of OPL and OMLinterests, and that did not expressly cover JOAs, PSCs,Farm outs, etc, PIB requires consent in respect of all formsof contractual transfers, including mergers and change ofownership control situations
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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
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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 iscontemplated for privatization
NNPC to continue to play role of NOC under PSCs
PIB silent about IOCs right to obtain mining/mineral rightsdirectly
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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