ARTICLE
27 October 2020

Legal Framework And Requirements For Oil And Gas Investment In Nigeria

The statutory framework of oil and gas cuts across the ownership, control, operation of oil and gas in Nigeria. Various legislations govern oil and gas investment in Nigeria.
Nigeria Energy and Natural Resources
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The statutory framework of oil and gas cuts across the ownership, control, operation of oil and gas in Nigeria. Various legislations govern oil and gas investment in Nigeria.

Section 44(3) of the Constitution of the Federal Republic of Nigeria, 1999 (as amended), the Land Use Act and Petroleum Act vests the exclusive control, ownership, and management of oil and gas in the Federal Government and not to the State of Local Government where the oil and gas are situated. This is because the oil and gas resources are held in trust by the Federal Government on behalf of the citizens of Nigeria for the overall benefit and development of the country under the prevailing law.

The various laws that regulate the oil and gas industry in Nigeria are examined below.

The Petroleum Act 1969

The Petroleum Act is the first legislation that regulates oil and gas in Nigeria. Section 1 of the Act states that "the entire ownership and all petroleum in, under or upon any land in Nigeria is vested in the State" which is the Federal Government of Nigeria. Section 1(2) also provides that the ownership applies to all land (including land covered by water), which is in Nigeria under the Nigerian territorial waters, forms part of the continental shelf, or forms part of the economic zone of Nigeria.

In respect of oil and gas investment in Nigeria, Section 2(1) of the Act provides that only citizens or companies incorporated in Nigeria can validly partake in the oil and gas industry for activities such as oil exploration, drilling, storage, production, refining and transportation of the oil and gas. Under this section of the Act, companies are granted licenses such as the oil exploration license to explore for petroleum prospects, a prospecting license, and an oil mining lease.

Section 9 of the Petroleum Act grants the Minister of Petroleum the power to establish subsidiary regulations for the oil and gas sector

Under the Petroleum Act, Section 2 provides that the powers of the Minister include amongst many the power to grant and revoke licenses. Before a license granted is revoked by the Minister, the Minister must inform the licensee of the grounds for the revocation, and the license holder will be invited for an explanation according to Section 25 of the Act.

The procedures for the revocation of oil prospecting licenses or oil mining licenses by the Minister of Petroleum is highlighted in Section 25-26 of the Act. The Section states that such licenses can be revoked where;

  • Where the licensee or lessee which is an oil company becomes controlled ultimately or indirectly by a non-Nigerian or a foreigner;
  • The license granted can be revoked if the licensee or lessees (oil firms) are not conducting their operations or activities continuously or not conducting their operations in a business-like manner by requirements approved for the lessee and not conducting their activities in accordance with good oil field practices.
  • Licenses granted can be revoked if oil firms fail to adhere to the provisions of the Petroleum Act and other allied regulations or laws.
  • The Minister can also revoke oil licenses granted if oil companies fail to pay their rent or royalties within the specified period and if they fail to submit reports on its operations or activities as the Minister may require from time to time.

The Nigerian National Petroleum Corporation Act (NNPC Act), 2004

This Act by Section 1 establishes the NNPC and empowers the corporation to participate directly in oil and gas operations and manage the interest of the oil and gas industry on behalf of the Federal Government. The overall responsibilities and functions of the NNPC are to drive the Nigerian economic and technical advancement while leveraging on the petroleum endowment of the country.

The Nigerian Oil and Gas Industry Contents Development Act 2010

The Act establishes the Nigerian Content Development and Monitoring Board (NCDMB) under Section 4 of the Act to guide, monitor, coordinate and implements the provisions of the Act. The Act aims at promoting indigenization of the nation's oil and gas industries in respect of all operations in the oil and gas sector.

The Act in Section 106 defines a Nigerian company as the one registered under the Companies and Allied Matters Act with not less than 51% equity shares owned by Nigerians. Also, Nigerian operators and indigenous companies are given consideration first in the award of oil blocks, oil field licenses, and projects awarded in the oil and gas industry, although this is subject to the fulfillment of conditions that may be specified by the Act as provided by Section 3 of the Act.

It also mandates that international oil & gas companies give up to 50% stake in their companies to Nigerian citizens either directly or by outsourcing to local businesses, to encourage Nigerian representation and participation in the oil and gas sector.

The Environmental Impact Assessment (EIA) Act of 1992

This Act states that natural gas production projects must comply with environmental impact assessment before coming on stream. The goals and objectives of the Act as provided by Section 1 of the Act are;

  • To establish, before a decision is taken by a person, authority or corporate body or unincorporated body including the Government of the Federation, State or Local Government intending to undertake or authorize the undertaking of any activity, those matters that may likely or to a significant extent affect the environment or have an environmental effect o those activities which shall first be taken into account.
  • To promote the implementation of appropriate policy in all Federal lands, State or Federal Government areas, consistent with all laws and decision-making processes through which the goal and objective in paragraph (a) will be realized.
  • To encourage the development of procedures for information exchange, notification, and consultation between organs and persons when proposed, activities that are likely to have significant environmental effects and boundary or trans-state or on the environment of bordering towns and villages.

OIL & GAS REGULATORY AGENCIES IN NIGERIA

The principal agencies of the government that are responsible for supervising and regulating the oil and gas industry will be briefly discussed below.

The Department of Petroleum Resources (DPR)

The DPR is responsible for the regulation of the upstream and downstream sectors of the oil and gas industry in Nigeria. The functions of this agency are highlighted below;

  • The DPR is responsible for the overall supervision of oil and gas activities carried out by companies engaging in oil and gas operations;
  • The department is responsible for issuing and granting licenses, permits, authorization, and approval in the oil and gas industry.
  • The department is responsible for monitoring and control oil industry operations to guarantee compliance with the national and public policies;

NIGERIAN NATIONAL PETROLEUM CORPORATION (NNPC)

The NNPC is a statutory corporation that engages in commercial oil and gas activities. The scope of activities of the NNPC ranges from exploration, production, refining, transportation, distribution, and supply of oil and gas products. The NNPC has various subsidiaries in which it operates in the oil and gas sector. Some of the NNPC subsidiaries are;

  • The Nigerian Petroleum Development Company (NPDC)- this subsidiary company of the NNPC engages in the business of oil exploration and production.
  • National Petroleum Investment Management Services- this subsidiary company of the NNPC is responsible for administering the investments of the Federal Government in the upstream petroleum operations conducted under joint ventures, product sharing contracts, and other petroleum arrangements with international oil companies.
  • The Petroleum Product Marketing Company Limited (PPMC)- it is responsible for the transportation of crude oil to the various refineries and also the transportation of petroleum products to depots situated in different parts of Nigeria.

The Ministry of Petroleum Resources

The Ministry of Petroleum Resources has the overall duty for the supervision and regulation of the oil and gas industry. The ministry also formulates, coordinate, and implement Federal Government policies for the oil and gas sector.

The Minister who heads the Ministry has the powers to issue licenses for the oil and gas operations per the Petroleum Act. Such licenses include the oil prospective license (OPL) and the oil mining lease (OML).

Nigerian Content Development & Monitoring Board (NCDMB)

The primary duty of the NCDMB is to promote local investment and participation in the oil & gas sector. Consequently, the NCDMB registers and monitors companies participating in the upstream sector to ensure such a company has the requisite indigenous participation under the Act.

National Oil Spill Detection & Response Agency (NOSDRA)

NOSDRA is the government agency responsible for monitoring and control of oil spills in Nigeria. The functions of the Agency include the surveillance and ensure compliance with all existing environmental legislation and the detection of oil spills in the petroleum sector. As part of its duties, the Agency receives reports of oil spillages and coordinate oil spill response activities.

LICENSING IN THE OIL AND GAS SECTOR

To operate and invest in the upstream sector of the oil and gas industry in Nigeria, the investor or company operating in the oil and gas sector is required to own a license issued by the appropriate issuing authority. The Minister of Petroleum Resources has the regulatory powers and responsibility of granting rights for the exploration, extraction, and production of oil and gas in Nigeria through the various types of Licenses. Currently, there are three major types of licenses issued by the Minister of Petroleum Resources and they are;

  • Oil Prospecting License (OPL)
  • The Oil Prospecting License is granted by the Minister of Petroleum Resources as provided by Section 2 of the Petroleum Act to an applicant company registered solely for exploration and production purposes. The holder of the license has the exclusive right to conduct extensive exploration activities and remove the petroleum won and discovered while prospecting within the area covered by the license, subject to the fulfillment of obligations imposed on the holder by the Act or by the Petroleum Profits Tax Act or any other law imposing taxation in respect of petroleum in Nigeria
  • OPL is granted for a period determined by the Minister of Petroleum Resources but shall not exceed the term of five years as provided in the First Schedule of the Petroleum Act, including the period for renewal for onshore areas and 10 years for deep offshore and inland basins.
  • Before this type of license is granted, the applicant must prove that it has the requisite financial resources for at least $10,000,000 (Ten Million US Dollars) or One Billion Naira in its equivalent or in the case of an applicant having a technical partner, they must both have joint evidence of the same amount.
  • Oil Mining Lease (OML)
  • This type of license is granted to an applicant for full-scale commercial production of oil and gas in an area, it grants the holder the exclusive rights to explore, prospect, produce and operate market activities for 20 years. It is granted to the holder of the Oil Prospecting License upon the discovery of oil in at least 10,000 barrels per day or large commercial quantities from the licensed area.
  • Marginal Field License- marginal fields are fields that are reported to have production potentials; it must have been left unattended to for at least 10 years from the date of its first discovery for it to qualify as a marginal oil field. Paragraph 14 (4) of the First Schedule of the Petroleum Act states that the President is vested with the right to designate a marginal oil field. The award of marginal oil field licenses is carried out by a process of marginal oil field bidding rounds conducted by the Federal Government. The application for the bidding round for a marginal field license is made to the Department of Petroleum Resources (DPR) and it involves a 12 step process as follows;
    • Announcement of the marginal oil field bidding round and launch of its portal;
    • Filling of application form and submission of required documents;
    • Evaluation and prequalification of registered applicant companies, which will be based on the incorporation status, technical knowledge, and financial capability of the applicants;
    • Notification of prequalified applicants;
    • Evaluation by the Department of Petroleum Resources (DPR) of the submitted bids, which is subsequently forwarded to the Minister of Petroleum Resources for approval;
    • Submission by the applicants of technical and commercial bids after payment of application and processing fees.
    • Granting of access to pry data and lease data to the applicants who can purchase the reports after payment of prescribed fees;
    • Prequalified applicants are granted access to fields teasers;
    • Notification of preferred bidders;
    • Payment of signature bonus by the preferred bidder;
    • Award of Marginal Field to the preferred bidder;
    • Negotiation and execution of the farm-out agreement between applicants and the Oil Mining Lease Holders.
  • Upon successful bidding round, a bidder has the right to enter into negotiation for farm-out with an Oil Mining Leaseholder. The bidding round is accessible to companies registered for exploration and production activities in Nigeria.
  • The current fees applicable for the award of the marginal oil field license are;
    • Registration fee of N500,000 (Five Hundred Thousand Naira);
    • Application Fee of N2,000,000 (Two Million Naira) per field;
    • Bid Processing Fee of N3,000,000 (Three Million Naira) per field;
    • Data Prying Fee of N15,000 (Fifteen Thousand Naira) per field;
    • Data Leasing Fee of N25,000 (Twenty-Five Thousand Naira) per field;
    • Competent Person Report of N50,000 (Fifty Thousand Naira) per field;
    • Field Specific Report of N25,000 (Twenty-Five Thousand Naira) per field;

THE PRODUCTION PARTNERSHIPS IN THE OIL AND GAS SECTOR

Nigeria is a country with large oil and gas deposits and to fully maximize its economic wealth and welfare, the Government goes into production partnerships through the Nigerian National Petroleum Corporation (NNPC) with multinational oil and gas companies for exploration, production, development of oil and gas with the view of raising capital and maximizing fiscal revenues.

Some of the production partnership by private oil companies and the NNPC will be briefly discussed below.

Traditional Joint Venture

A Joint Venture is one of the most common forms of creating business relationships in the oil and gas sector. It involves engaging in the exploration, development, and production operations in the oil sector. The NNPC is currently in Joint Venture partnerships with major oil companies in Nigeria and overseas. The multi-national Exploration & Production companies operate predominantly in the on-shore Niger Delta, coastal offshore areas, and lately in the deep waters. The Federal Government and the Minister of Petroleum Resources have the power to negotiate and enter into joint venture arrangements with all existing multinational oil corporations and for the joint ventures to be used as special considerations for the grant of license or lease in the oil and gas industry.

The interest acquired in a Joint Venture Agreement confers on the parties to the agreement, the right to participate in the operational rights under the Oil Mining Lease, which includes the right to explore, win, develop and carry away discovered petroleum in a leased area.

Each party to the joint venture has an undivided stake in the capital, risks, liabilities derived from the Joint Venture activities entered into with the NNPC. In Nigeria, 71% of upstream oil and gas investments are spent through alliance or Joint Venture agreements. The Nigerian Government through NNPC has about 60% participatory interest in all Joint Venture agreements. Traditional Joint Ventures are the most favorable in the level of participation in oil and gas projects as it affects the economic rent derivable from the contracts. Also, Joint Ventures with private foreign capital are promoted in Nigeria in the hope that technology will improve efficiency in the use of national oil inputs and increase the inter-link flow of resources.

Productions Sharing Contract (PSC)

The PSC is regulated by the Deep Offshore and Inland Basin Production Sharing Contract Act, LFN 2004. This sort of production partnership with oil and gas companies and NNPC acting in the capacity as the proprietary holders of Oil Prospecting Licenses or Oil Mining Lease is entered into with exploration and production companies acting in the capacity as contractors to the NNPC, to carry out petroleum operations in Nigeria. The contractors bear the cost of petroleum operations within the specified contract areas and in turn realize profits after allocating tax oil and defraying all royalties. It is a common system of oil and gas contractual relationships between government and foreign oil companies. In PSC, the government has no participatory interest in the development and exploration levels, in which the foreign oil companies bear the financial, technical, and operational cost of exploration, drilling, and development expenditure, the host government has the right to participate in the venture as a working interest owner at a predetermined rate. The contractor recovers its share of exploration costs from future production. The contractor is allowed to market the portion of the production allocated to the oil but at a price fixed by the NNPC.

RAISING FUNDS FOR OIL OPERATIONS IN NIGERIA

The oil and gas industry require capital that can be raised from investors to operate successfully. Several factors influence fundraising in the oil and gas industry and these factors are;

  • Putting in place a transparent and accountable corporate governance structure in the oil and gas industry;
  • Effective clear and concise communication with the market, stakeholders, and regulators;
  • Having a reputable oil and gas operation and
  • Ensuring the proper and experienced team in structuring and distribution is put together.

Thus, capital can be raised for oil operations through the following means;

  • Equity capital can be raised through public offers, private placements, and private equities;
  • Sale of government equity share of crude oil;
  • Debt capital for oil and gas operations can be raised through project finance, trade finance, or by reserve base lending;
  • Royalty on petroleum operations through the Department of Petroleum Resources;
  • Convertible bonds and loans and convertible shares;
  • Through farm-outs, strategic agreements, and carry agreements;
  • Through financial and technical service agreements.

CONCLUSION

Petroleum exploration and production in the Niger Delta region of Nigeria and the export of oil and gas resources by the petroleum sector have greatly improved the nation's economy. The activities of petroleum exploration and production involve geological survey, exploratory drilling, development drilling, discharges of petroleum hydrocarbon and petroleum, etc. Under Nigerian law, it is a criminal offense to engage in any type of petroleum transaction without the requisite license.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

ARTICLE
27 October 2020

Legal Framework And Requirements For Oil And Gas Investment In Nigeria

Nigeria Energy and Natural Resources

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