Abstinence and Love – From a Man’s Point of View

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Abstinence and Love – From a Man’s Point of View

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Law Review: Moni Pulo Vs. Brass & 7 Ors.

On May 7, 2012, the Federal High Court, Lagos, presided over by Justice Okechukwu Okeke handed a judgment that injected certainty into the interpretation of perhaps, the most contentious provision of the Petroleum Act. The Court had finally made a pronouncement on the meaning and purport of Paragraph14 of the First Schedule to the Petroleum Act and Regulation 4 of the Petroleum (Drilling and Production) Regulations (the “Regulations”). The judgment came on tide of the scuffle between Moni Pulo Limited (“Moni Pulo”) and Brass Exploration Unlimited (“Brass”) and 7 others. Both the government and oil companies involved in corporate restructurings have been ambivalent about taking the matter to the courts for interpretation due to the enormous ramifications for both the winner and the loser, until Moni Pulo challenged Brass on the issue, and the latter was compelled to furnish its defence.

Background

 

On May 8, 1992, Moni Pulo was awarded 100% participating Interest in Oil Prospecting License Number 230 (“OPL 230”). To afford it the technical expertise and financial capacity for prospecting, discovery and exploitation of oil in commercial quantity, Moni Pulo, in March 1996 commenced a working relationship with Baker Hughes Incorporated, an American oil services company, on the consideration that Moni Pulo will assign 40% interest in and rights to OPL 230 to Baker Hughes or its nominated subsidiaries.

Baker Hughes subsequently nominated Brass Exploration Unlimited (“Brass”), a shelf company held by its wholly-controlled offshore companies, Brassco (Cayman) Ltd and Brass Holding Limited (together, “Brass Holdcos”) to hold forty percent (40%) of the participating interest in OPL 230. Moni Pulo’s assignment of the 40% interest was duly consented to by the Minister of Petroleum Resources upon the application made by Moni Pulo.

Following the conversion of OPL 230 to OML 114, Baker Hughes, in 2003, informed Moni Pulo of its decision to divest from OML 114, and it was agreed to transfer/sale the shareholding in the Brass Holdcos to Rachael Holdings Limited, a company wholly owned by Chief Olu Lulu-Briggs, the major shareholder of Moni Pulo. This transfer was consented to by the Minister. Chief Lulu-Briggs invited Petroleum Oil & Gas Company of South Africa (Nigeria) Ltd (“PetroSA”), and PetroSA agreed, to acquire the entire shares of the Brass Holdcos, and thereby, the 40% Participating Interest in OML 114. Moni Pulo applied for the Minister’s consent to the transfer on 3rd October, 2003. The consent was granted on 27th January, 2004. Just before the dispute between the parties, the shares of Brass were held by the PetroSA.

PetroSA subsequently sought to relinquish its interest (held through Brass) in OML 114 by a sale of the entirety of its shareholding in Brass. In line with the pre-emption rights of the parties to the JOA for OML 114, PetroSA offered the shares in Brass back to Moni Pulo, but the parties negotiations broke down over valuation of the worth of Brass. Moni Pulo however remained opposed to the proposed purchasers of the Brass Shares, Camac Energy Services Limited and Camac Energy Resources Limited (together, “Camac”). Despite Moni Pulo’s refusal to accept or acknowledge Camac as a bonafide purchaser of the Brass shares, PetroSA proceeded to consummate the transfer of the shares, effectively transferring control of Brass, and its 40% participating interest in OML 114, to Camac. PetroSA did not apply to the Minister for consent to the transfer, though it requested Moni Pulo to make this application, a request ignored by Moni Pulo.

With Brass now controlled by Camac as its partner in the lease, Moni Pulo faced the unpleasant situation of having to deal with a partner unacceptable to it. The other option was to seek to nullify the share transfer to Camac.

As far as Nigeria’s company laws were concerned, however, the transfer of the shares of Brass to Camac was completely valid and unassailable. Further, going by the legal personality of corporate entities established by the case of Salomon v Salomon and Co. Ltd ((2002) 1 WRN 1; (1897) A.C. 22) and entrenched by section 37 of the Companies and Allied Matters Act, 2004,   the corporate identity of Brass remained unchanged, and the validity of its claim to the 40% interest in OML 114 was totally faultless. To Moni’s potential advantage, though, was one potent legal weapon, Paragraph14 of the First Schedule to the Petroleum Act and Regulation 4 of the Regulations.

 

The Strategy

 

The law recognizes shares as choses in action (things, or personal property) which may be sold or transferred by the owner anytime he so wishes. Therefore, the share transfer from PetroSA to Camac could not be challenged on corporate compliance grounds, as PetroSA was within its corporate rights to dispose of its shares to whomsoever it wishes. However, if Moni Pulo could convince the court that the share transfer (and consequential ceding of control of Brass’ control of 40% of OML 114) to Camac did not receive the prior consent of the Minister of Petroleum Resources), then Brass (as controlled by Camac) may be restrained from exercising any rights and/or taking any benefits from and under the Lease. The success or otherwise of this strategy is dependent on the courts interpretation of Paragraph14 of the First Schedule to the Petroleum Act and Regulation 4 of the Regulations. The snag to this approach though, was two fold: The relevant provisions do not expressly contemplate share transfers as being subject to the Minister’s prior consent, and, the Ministry of Petroleum Resources appeared unsure wither lies the bounds of the Minister’s rights.

In Contention

 

Paragraph 14 of the First Schedule to the Petroleum Act states as follows:

Without the prior consent of the Minister, the holder of an oil prospecting licence or an oil mining lease shall not assign his licence or lease, or any right, power or interest therein or thereunder.

In apparent fortification of this pause button, Regulation 4(a) of the Petroleum (Drilling and Production) Regulations provides for the manner of making the application to the Minister for consent to the assignment of the oil concession, or any right, power or interest therein or thereunder. Interestingly, Regulation 4(b) repeats the provision of Regulation 4(a), with the insertion of “takeover” as a process for which the consent of the Minister also ought to be obtained in the manner prescribed. Worthy of note is the fact that Paragraph 14 of the First Schedule to the Petroleum Act does not mention takeover.

The Issues

 

Moni Pulo asked the court to determine the following:

  1. Whether by      virtue of Paragraph 14 of the First Schedule to the Petroleum Act, and Paragraph      4(a) and 4(b) of the Petroleum Regulations, a transfer, assignment, sale      and/or takeover of an oil mining lease or any right, power, or interest      therein or thereunder could be validly effected without the prior consent      of the Minister of Petroleum Resources first sought and obtained.
  1. Whether the      acquisition of the entire (100%) share capital of Brass from PetroSA by      Camac amounts to an assignment and/or a takeover of any right, power or      interest in Brass’ 40% participating interest in OML 114 as contemplated      by Paragraph 14 of the First Schedule to the Petroleum Act and Paragraph      4(b) of the Petroleum Regulations.
  1. Following from      (2) above, whether the takeover of the right, power and/or interest in      Brass’ 40% participating interest in OML 114 by Camac without the prior      consent of the Minister of Petroleum Resources, is not in clear violation      of the intendment of Paragraph 14 of the First Schedule to the Petroleum      Act and Paragraph 4(b) of the Petroleum Regulations.

 

The Decision

 

The court acknowledged that while PetroSA may ordinarily take benefit of their rights to buy and sell shares under the Companies and Allied Matters Act, such rights must be subject to the specific legislation regulating the petroleum industry. On that basis, the corporate veil of Camac would have to be lifted to enable the Minister satisfy himself or herself that Camac is qualified to participate in OML 114.

The court further stated that “the requirement that the Minister of Petroleum Resources’ approval for the transfer or sale and/or acquisition of the entire (100%) share capital of the 1st Defendant [Brass] from the 2nd, 3rd, and 4th Defendants [PetroSA] by the 5th, 6th, and 7th Defeendants [Camac] is not in doubt.

In view of its findings, the court ordered as follows:

  1. that whoever buys, acquires and takes over the controlling shares      of Brass ultimately buys, acquires and takes over the right, power and      interest in the Brass’ 40% participating interest in OML 114 and must      obtain the approval of the Minister of Petroleum Resources before such an      assignee can exercise such right, power and interest.
  1. that PetroSA can sell, transfer and/or convey the entire (100%)      share capital of Brass or any controlling interest in Brass to Camac or      any third party/parties subject to the approval of the Minister of      Petroleum Resources, to give such assignee the right, power and all      interest in and/takeover of Brass.

 

  1. that PetroSA’s sale, transfer and/or conveyance of the entire      (100%) share capital of Brass to Camac remains fluid until concretized by      the approval of the Minister of Petroleum Resources.

 

 

Ramifications of the Decision

 

  • Henceforth,      corporate restructures by an OPL or OML holder which will have the effect      of transfer or takeover of the      relevant asset will require the consent of the Petroleum Minister. Share      transfers will no longer provide an ‘asset transfer option’ for such holders      to effect a takeover their concessions (as attempted by PetroSA) without      the Minister’s approval.
  • Until the      decision is overturned on appeal or legislative amendment, the Minister of      Petroleum Resources no longer requires a legal opinion from DPR (as is sometimes      the DPR’s internal process) as to whether or not a particular corporate      restructuring involving the acquisition or takeover of an oil concession      requires the Minister’s consent.
  • It also goes      without saying that the payment of consent fees by share transferors will      be a veritable fee earner for the Federal Government.
  • Another      bureaucratic hurdle has been solidified against companies seeking to      divest themselves of their assets via share transfer which will have the      effect of transfer or takeover      of the target asset, as another level of due diligence checklist – the      possibility of obtaining the consent of the Minister.
  • It remains to      be seen, though, if the wide net of the Minister’ consent reinforced by      this decision, will be spread to capture the daily trading of shares of      publicly quoted concession holders.
  • Finally, the      efficacy of the foregoing implications are yet be tested and confirmed      when the appeal is decided by the Court of Appeal.

Jama Onwubuariri

Attorney

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The Petroleum Industry Bill: Energy Reforms in Legislative Limbo

The Petroleum Industry Bill: Energy Reforms in Legislative Limbo

 

 

OUTLINE

 

  1. Background
  2. The Dream
  3. The Proposed Reforms
  4. The Concerns, the Realities
  5. Conclusion

 

  1. Background

 

Nigeria Oil and Gas: Facts & Figures

Nigeria’s economy is heavily dependent on the production and exportation of oil, and the importation of petroleum products. Crude oil exports account for about 90% of the nation’s gross earnings. Producing 2.2 million barrels[1] per day[2], Nigeria’s oil reserves are ranked 10th largest in the world and 2nd largest in Africa with proven reserves of 37.1 million bpd[3]. In addition, the nation boasts of being the seventh largest natural gas reserve holder in the world and the largest in Africa[4]. The oil industry is one that cuts across, and affects each member of the Nigerian Society, determining, to a large extent, the cost of goods and services, the availability of transportation, the cost of manufacturing, access to power, and the volume of available public revenue.

Oil and Gas Production and Regulation: Down the Memory Lane

 

Oil, or crude oil, was discovered in commercial quantities in Nigeriain 1956. Since 1969, the exploration, prospecting and exploitation of crude oil have been regulated largely by the Petroleum Act[5] together with regulations and policies made under it. These regulations and policies, usually made by the reigning Minister of Petroleum Resources, are mostly constructed in a hurry, to cater for the latest mischief perfected by oil and gas companies and discovered by seating Minister[6]. In other cases, the regulations seek to create an immediate solution to a particular objective of government, usually without the necessary think-thorough on their long-term implications, implementation and effectiveness[7].

With the more than 50 years of oil exploration and production in Nigeria, local infrastructure, human and material capacity of the nation’s economy in general, and the oil and gas industry in particular, have failed to measure up to expectations, especially with the volume of investment attracted by this black gold. Nigerian citizens have not grown any richer, employment opportunities have not commensurately improved, nor have Nigerians become better trained and equipped to preside over the various technical and management positions of the industry. Worse yet, the regulatory authorities are continually grappling with the onerous responsibility of managing the nation’s primary resource using a trial and error approach.

The Social and Regulatory Challenges

 

Among the current challenges in the industry are –

         i.            the over dependence of the economy on oil and the consequent stunted development of other sectors, coupled with a dearth of adequate institutional, regulatory and infrastructural framework for the effective development and utilization of gas, leading to the loss of revenue and environmental degradation from the continued flaring of gas;

       ii.            the difficulty in accessing the various legislations and regulations governing the industry and the complexity of such regulations;

      iii.            the loss of livelihood due to pollution in the indigenous communities which depend on agriculture and fishing for sustenance and the consequent militancy in the Niger Delta region leading to further disruption and sabotage of petroleum operations;

     iv.            poor revenue derivation by Government from proceeds of oil and gas exploration;

       v.            poor infrastructure for training and transfer of technology to Nigerians to take up strategic management and technical positions in the industry;

     vi.            the frequently unmet cash call obligations of the Government in Joint ventures in which the NNPC is a partner;

    vii.            The dual (and often confusing) role of the NNPC as both a player and a regulator;

  viii.            the lack of transparency in the award of licenses, leases and contracts in the industry, and the secrecy often surrounding various oil and gas transactions in which the Government is involved. Government officials and regulatory institutions have variously been accused of poor fiscal practices and outright corruption.

The Need for a Gear-Shift

The Petroleum Industry Bill (“PIB”) is the result of a series of efforts by the Federal Government of Nigeria (“Government”) to reform the legal, regulatory and institutional framework of the Nigeria oil and gas industry and ensure that the industry is able to meet the contemporary demands of a global energy sector, and the expectations of the people, the government and investors. The foregoing included the replacement of the obsolete laws, regulations and policies and the consolidation of the several legislations and legislative instruments regulating the industry and scattered in various documents into one comprehensive document.

The above need led to the inauguration of the Oil and Gas Sector Reform Implementation Committee (“OGIC”) by the administration of President Obasanjo on April 24, 2000. The OGIC was made up of a select team of industry veterans, players, members of regulatory institutions and other experienced industry practitioners. The mandate of the OGIC included fashioning a new and pragmatic oil and gas policy for Nigeria, as well as recommending a workable legal, regulatory and institutional framework for the industry. The OGIC was subsequently reconstituted in 2005 and 2007 respectively, and its report and reform proposals submitted on August 3, 2008 translated into, among other things, the draft PIB[8].

  1. The Dream

 

The goal of the PIB is to bring about long reaching reforms ofNigeria’s oil sector. The major objectives are as follows:

  • to create new regulatory institutions which will be professional, independent and streamlined in their respective roles;
  • to consolidate all the laws, regulations and policies regulating the industry and which have been trickle-fed by successive governments and scattered in various documents into one comprehensive, easy-reference document;
  • to encourage Nigerians and Nigerian indigenous oil companies to take greater charge and a bigger share of the returns from oil and gas investments in the country;
  • to turn the NNPC into a fully-capitalised and profitable National Oil company and refocus it from being a cost and accounting centre to a profit-making oil company;
  • to convert existing joint ventures between the multinational oil companies and the Nigerian National Petroleum Corporation (NNPC) into Incorporated Joint Ventures (IJVs) which will be managed as independent companies;
  • to institute a new regime for tax, rents and royalties in the industry that significantly increases the revenue accruing to the Government from oil and gas exploitation;
  • to remove confidentiality in the award of petroleum licences and leases and discourage corruption by promoting transparency in all operations in the industry, thus giving citizens access to information relating to the nations primary revenue earner;
  •  to fully deregulate the downstream[9] sector; and
  • overall, to develop Nigerian human and service capacity in the oil and gas industry and encourage the growth of other sectors of the economy and shift emphasis from oil and gas.

3.   The Proposed Reforms

New Regulatory Authorities
The new regulatory agencies to be created under the PIB are:

                     i.     National Petroleum Directorate (the Directorate) to replace the Ministry of Petroleum Resources. The Directorate is to formulate strategies and policies and implement the same for the industry.

                   ii.     Nigerian Petroleum Inspectorate (the Inspectorate) to replace the Department of Petroleum Resources (DPR) and be responsible for the technical regulation of the upstream[10] sector.

 

                  iii.     National Petroleum Assets Management Agency (the Agency) to monitor and approve costs in the upstream sector with the objective of maximizing the total revenue accruing to the Government.

 

                 iv.     Nigerian Petroleum Research Centre (“the Centre”) to carry out research in all areas of the petroleum industry, especially exploration and production process technology, and to advise the Minister on the same.

 

                   v.     National Frontier Exploration Service (“the Service”) is also established, with the objective of promoting efficient, sustainable exploration of hydrocarbons in the frontier basins ofNigeria.

                 vi.     Petroleum Equalization Fund (“the Equalization Fund”) into which shall be paid any net surplus revenue recovered from petroleum products marketing companies and any such sums as may be provided for that purpose by the Federal Government.

                vii.     Petroleum Products Regulatory Authority (“PPRA”) to serve as commercial regulator for the downstream sector.

 

Conversion of the NNPC and Incorporation of Joint Ventures
The PIB provides for the incorporation of a legal entity to be known as the Nigerian National Petroleum Company Limited (“the National Oil Company”) registered under the Companies and Allied Matters Act[11], with the Federal Government as its sole shareholder. The Bill contemplates that the National Oil Company shall be a limited liability company and a successor to the assets and liabilities of the NNPC. This new structure will permit the National Oil Company to be run as a profitable, dividend-yielding private business, and no longer as a public parastatal, which is one of the major criticisms of the NNPC. The current “public corporation” status of the NNPC has been held as a key impediment to the competitiveness of the NNPC.

The PIB also contemplates that with effect from the commencement of the Petroleum Industry Act[12], the interests held by the NNPC in respect of the joint ventures for the exploration and production of petroleum in Nigeria shall be vested in the National Oil Company. It further provides that each such joint venture shall, within twelve months from the commencement of the Act, be incorporated as a limited liability company. The ownership of the equity in such IJVs shall be in proportion to the interests of the participating companies i.e the IOCs and the National Oil Company.

      New Regime for Taxes, Rents and Royalties

      Tax

  1. All companies, contractors and subcontractors involved in petroleum operations under the Petroleum Industry Act shall be subject to companies income tax (“CIT”) under the Companies Income Tax Act, Chapter C21, Laws of the Federation of Nigeria 2004.

 

  1. All companies involved in the production of crude oil or natural gas shall be liable to the payment of the Nigerian Hydrocarbon Tax (“NHT”). The NHT shall not be a deductible expenditure for determining the CIT payable under the PIB. The rate of the NHT varies depending on the foreign or indigenous ownership of the company, the terrain from which the production is derived, and, for indigenous companies, their volume of oil or gas production per day.

 

Rents and Royalties

 

The PIB provides for the payment to the Government of a rent by holders of petroleum prospecting licenses and petroleum mining leases. The rent payable will depend on the attainment of certain milestones. Royalties are also payable monthly, the applicable rate for each company depending on the terrain from which the production is derived, the volume of oil or gas production per day and the price of oil or gas at the relevant time.

  1. 4.        The Concerns, the Realities

Skepticisms

Perhaps, the greatest scepticism that has attached itself to the PIB is how much political will the successive Government administrations have to see the PIB through. Since its submission to the National Assembly, the PIB have enjoyed, or endured the patronage of two administrations, each claiming that it will see the bill through to passage. Over the months, the Government of the day had given, and missed several self-imposed deadlines for the passage of the PIB. On certain occasions, even elements within the Government itself had sought, directly or indirectly, to scuttle the Bill or certain aspects of the reform objectives.

A further scepticism has stemmed from the fact that may industry watchers see the position taken by the International Oil Companies (“IOCs”) ostensibly in support of the proposed reforms as mere puff and unconvincing lip service.

Criticisms

Virtually all oil companies, both the IOCs and indigenous companies have raised alarm over some of the provisions of the PIB. While generally affirming their support for the proposed reforms, they also argue that many provisions in the bill are unclear and open to multiple interpretations which would substantially increase investment risk, comparatively placing Nigeriaat a disadvantage for inflow of foreign investment. The IOCs are united in the belief that the new tax regime will reduce their profit and decrease by as much as half the capital investment in the sector in the next 10 years, and that new oil and gas production will be reduced by nearly 50 percent, with a high proportion of new projects becoming uneconomic. Government economic rents will thus decline in the long-term and overall economic growth will be negatively affected[13].

While some companies such as Total and Chevron are pressing on with scheduled projects in the country, others like Shell have adopted a hardball stance, including veiled threats to divest from the country or refuse to commit to further investments[14]. To press home its discomfort with the tax and royalty rates proposed in the PIB, In 2010, Shell announced that it is offering 10 of its offshore oil blocs for sale as part of its efforts to divest fromNigeria. The sale of these blocs is being finalised by Shell at the moment.

The criticisms against the PIB are not restricted to the IOCs. Some Nigerian indigenous companies lament that the incentives for indigenous companies provided in the Bill is insufficient to encourage the growth of local companies and enhance their competitiveness in the sector[15]. The view of the indigenous operators is that the bill seeks to impose more onerous terms on the success of their operations, thereby stunting their growth. Indigenous companies currently make up 3% of the production capacity of the industry, as compared to 7% in the recent past.

Outright Opposition

 

Quite apart from silent and overt attempts to delay, discourage or completely strangle the PIB, there have been reports of attempts by representatives of the various stakeholders to outrightly oppose the PIB. From maintaining liaison offices in Abuja dedicated to lobbying the legislators to yield grounds to the pressures of the relevant stakeholder, to scandals of bribery to pass or delay the passage of the PIB[16], the legislature and the executive has failed to muster sufficient goodwill and political clout to meet their own various deadlines on the passage of the Bill. Further, although the final version is yet to be made public, the journey of the PIB through the legislature has, with the robust assistance of several vested interests, significantly watered down various provisions reflecting the original dream of the OGIC and the Government.

 

The Realities

 

The oil and gas industry is patently important to the day-to-day functioning of the Nigerian economy, and its future. The Government therefore cannot afford to let the regulation of the industry slide. Further, as a major oil producing nation,Nigeriais an investment hotspot for IOCs. It will be expected that the affected IOCs will put all resources at their disposal towards securing their investments, and with the heavy financial chest of these companies, acting singly or in consortium, and the endemic corruption in the country, the PIB may effectively be declared an endangered legislative species.

      5.   Conclusion

AlthoughNigeriais blessed with abundant oil and gas resources, including global records of gas reserves, the effective management of these resources, both for the present and the future of the economy and ofNigeria’s people, cannot be a game of trial and error, of faith without works, or of half-hearted attempts. With the lofty dreams of the Government in inaugurating the OGIC and the noble objectives of the PIB,Nigeriahad a chance to get its prime economy right, or let it slip right through its fingers. As the current federal administration concludes its term, with a new executive and legislature coming into play, the passage of the PIB, or failure thereto, before May 29, 2011, may mean a welcoming dawn, or the end of the dream, as the case may be, forNigeria’s energy reforms.

JAMA ONWUBUARIRI is an Associate in the Energy & Project Finance Group of the Commercial Law Firm of Adepetun Caxton-Martins Agbor & Segun, Lagos, Nigeria


[1] A barrel is made up of 42U.S. gallons, or approximately 159 litres.

[2] Obasa, R. (2010 August). Getting Nigeria’s Reserves Addition Back on Track. Nigerian Oil and Gas Journal.

[3] Ibid.

[4]National Energy Policy of Nigeria , available from www.energy.gov.ng

[5] The Petroleum Act was enacted in 1969, and is currently compiled as Chapter P10 in the Laws of the Federation of Nigeria, 2004.

[6] For instance, the Regulation 4(b) of the Petroleum (Drilling and Production) Regulations was inserted by Chief Dan Etete, the Minister of Petroleum Resources on 12th February, 1996, by the Petroleum (Drilling and Production) (Amendment) Regulations (Statutory Instrument No. 3 of 1996) with a commencement date of January 1st, 1995. The introduction was apparently in an effort to prevent oil producing companies from by-passing the consent of the Minister by transferring their oil licenses or leases through share transfers, instead of through direct assignment, which is restricted under the Petroleum Act.

[7] See for instance, Obasa, R. (2010 February). Government Puts Deregulation on Hold. Nigerian Oil and Gas Journal.

 

[8] The official version of the PIB so far made available by the National Assembly is accessible from http://www.nass.gov.ng/nass/legislation.php?pageNum_bill=29&totalRows_bill=806&radio=radio2&search=Select+Year&button2=GO.,. It is to be noted that several efforts are being made by various groups to protect their interest by lobbying for amendments to the PIB before passage, and that varied memoranda by such interest groups and the Government itself have consequently been submitted to and are being considered by the National Assembly. This foregoing has given rise to several and sometimes conflicting “versions” of the PIB. Please be advised that the comments in this article are restricted to the provisions contained in the copy of the draft PIB posted on the website of the National Assembly (referenced above) and which has so far formed the basis for the deliberations by the National Assembly. To this effect, this article has ‘ignored’ the provisions of the various memoranda submitted to the National Assembly which are not reflected in the original draft.

[9] The downstream sector includes transportation, refining, and finished products marketing.

[10] The upstream sector of the Industry consists of exploration and production of crude oil and natural gas.

[11] This law regulates the incorporation, management and winding up of companies inNigeria. It is presently compiled as Chapter C20 in the Laws of the Federation of Nigeria, 2004. Currently, the NNPC exists and operates by virtue of the NNPC Act, compiled as Chapter N123 in the Laws of the Federation of Nigeria, 2004.

[12] When it is passed into law, the PIB will be known s the Petroleum Industry Act

[13] The thickest of the criticisms appear to be coming from the pipelines of Royal Dutch Shell. In January, 2010, the company had declared through its Group Chief Executive that it no longer counted on Nigeria for its “growth aspirations.” That position was reiterated on June 17 as the company’s management in Nigeria warned that multi-billion dollar investments proposed for the country would be held back unless the PIB was reformulated to accommodate Shell’s objections. (see the Punch Newspaper’s online article of 12th July, 2010 available at http://www.punchng.com/Articl.aspx?theartic=Art20100712015650, and Shell Shifts Oil Output Growth to Other Regions in Nigeria’s Oil and Gas Monthly (2010 February) page 8.

[14] For instance, in June 2010 a Shell spokesperson stated that the company is withholding some $40 billion (N6.0 trillion) worth of investments from the Nigerian oil and gas industry until the PIB is passed. (see the Daily Champion of 23rd June, 2010, available at http://allafrica.com/stories/201006230443.html)

[15] The PIB provides, for instance that “the fiscal terms applicable generally to companies engaged in upstream petroleum operations shall apply to an indigenous oil company with an aggregate production of more than fifty thousand barrels of oil or its gas equivalent per day.” Thus, the favourable rate of tax available to small-producing indigenous companies will not be available to “successful” indigenous companies which produce more than 50,000 barrels of oil or natural gas equivalent per day.

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The Local Content Act 2010 – Enactment, Enforcement and Matters Arising

           

The Local Content Act 2010 – Enactment, Enforcement and Matters Arising

 

Preliminary

Thursday, April 22, 2010 witnessed a landmark in the history of the Nigerian oil and gas industry (“the Industry”) by the signing into law of the Nigerian Oil and Gas Industry Content Development Bill (also known informally as the “Nigerian Content Bill or “Local Content Bill”) by the then Acting-President, Dr. Goodluck Jonathan, to “provide for the development of Nigerian content in the Nigerian oil and gas industry,”, as stated in the preamble to the Act. As a policy, ‘Nigerian content’ or ‘local content’ (as it is also popularly referred to) seeks to promote a policy framework whereby local Nigerian competencies are built through the active participation of Nigerians and the deployment of local resources, raw materials and services in oil and gas related activities.

The President had followed the assent to the Act with the constitution of the Nigerian Content Development Monitoring Board (“Board”) which is vested with the implementation and enforcement of the Act. With the passage of the Act now legislative history, investors (both foreign and indigenous) have to navigate its provisions to ensure their immediate compliance in the face of its (still) uncertain implementation by the Board. This is moreso as some pertinent issues of particular concern remain to be fully resolved by the Act despite the hope of investors that the sea of confusion and uncertainty hitherto trailing the implementation of the local content policy would be laid to rest with its enactment.

Considered below are some thoughts on the practical implication of the provisions of the Act on your day to day business.

 

 

The Purpose:

The Government’s policy on Nigerian content in the Industry over the years seeks to promote the utilization and progressive development of local competencies (to internationally acceptable standards) by the active participation of Nigerians, and the deployment of local resources and raw materials, in the nation’s primary sector. In recent times, the policy had crystallized into a proposed legislation in the form of the Nigerian Content Development Bill in 2003 and has passed through various amendments between the years 2003, 2005 and 2008, culminating in the Nigerian Oil and Gas Industry Content Development Bill 2009 (“the Bill”). The Bill was passed by both houses of the Nigerian National Assembly in March 2010, followed by the President’s assent in April. The policy thereby became formalized as the Nigerian Oil and Gas Industry Content Development Act.

The Meat of the Pie

Interestingly, the Act does not place an emphasis on the nationality of the shareholders of a company operating in the Industry as the sole basis of the “local content” of a company concerned. Instead, a more demonstrative and progressive requirement has been placed on increasing the “Nigerian content” of a company, defined as “the quantum of composite value added to or created in the Nigerian economy by a systematic development of capacity and capabilities through the deliberate utilisation of Nigerian human, material resources and services in the Nigerian oil and gas industry”. Notably, the Act seeks to incentivise companies with high “Nigerian Content” among companies bidding for contracts in the Industry even though it does stipulate an equity threshold for the determination of what constitutes an “indigenous” or “Nigerian company” (defined in Section 109 as “a company formed and registered in Nigeria in accordance with the provision of the Companies and Allied Matters Act with not less than 51% equity shares held by Nigerians”). Some highlights of the Act are as follows:

@           Compliance with the provisions of the Act and promotion of Nigerian content development shall form a major criterion for a company’s operations in the Industry.

@           All operators are expected to consider the “Nigerian content” of any bid during evaluations; indeed, the Act stipulates that where commercial bids are within 1% of each other at the commercial stage, the bid containing the highest level of Nigerian content shall be selected, provided the Nigerian content in the selected bid is at least 5% higher than its closest competitor.

@           International companies operating through their Nigerian subsidiaries within the sector are required to demonstrate that a minimum of 50% of the equipment deployed by them for the execution of work is owned by the Nigerian subsidiaries. The language of the section suggests ownership rather than rental of equipment, though the Act does not specify exactly how ownership is quantified or valued.

@           All companies operating in the Industry are to insure their insurable risks solely with an insurance company and through insurance brokers registered in Nigeria, unless local capacity have been certified by the National Insurance Commission as fully exhausted. Similar provisions are made for the utilisation of legal and financial services.

@           Operators, contractors and subcontractors must retain 10% of total revenue accruing from Nigerian operations in a Nigerian bank account.

@           The sum of one percent of the value of every contract, awarded to every contractor, subcontractor, or alliance partner engaged in any project, operation, activity or transaction in the upstream sector shall be deducted at source and paid over into a Nigerian Content Development Fund to be maintained by the Board.

@           Schedule A to the Act provides the parameters and minimum level/percentages to be used in determining and measuring Nigerian content in the composite human, material resources and services applied by operators and contractors in any project in the Industry.

@           The insistence on Nigerian content notwithstanding, the Act provides that the Minister may, in the case of a dearth in local materials, authorize the continued importation of the relevant items for a period not exceeding three years from the commencement of the Act.

The above demonstrates the fact that the level of Nigerian content achieved by an entity operating in the Industry, and not necessarily the shareholding of such entity, would be the determining factor in ascertaining compliance with local content provisions. Therefore, where, for instance, during the commercial stage of a bid, a Nigerian company being wholly or partly owned by foreigners (but not having the threshold equity participation of a “Nigerian Company” as defined under the Act), is able to achieve, at least 5% more Nigerian content than a “Nigerian Company” (even if it is wholly Nigerian owned), then such a company, according to the Act should be the preferred bidder to win the award of the relevant contract, provided that their bids are within 1% of each other. 

The Dilemma

  • The greatest challenge for investors and other Industry participants, perhaps, is that the Act does not consistently lend itself to clear or conclusive interpretation. For instance, it is not always immediately clear which participants are required to comply with specific requirements, or the exact extent or scope of their obligations. As an example, different categories of participants with distinct legal and technical roles such as ‘operators, contractors, subcontractors, alliance partners and other entities’ are often lumped in the Act thus making it difficult for the participants, and indeed their lawyers, to determine the extent of their respective obligations.

 

  • Hitherto, the local content policy has been implemented through guidelines issued and enforced by various regulatory agencies of the Federal Government of Nigeria (FGN), including the NNPC through its Nigerian Content Division (NNPC NCD), and the Ministry of Petroleum Resources through the DPR, most notably its Nigerian Content Division (DPR NCD). With the enactment of the Act, Section 103 provides that “[u]pon the commencement of this Act, all functions and powers conferred on any agency or department of the [FGN] to carry out the implementation of Nigerian content development or policy in the [Industry] by any law or enactment is hereby transferred to the [Board]”. Presumably, therefore, the regulatory body with the role of implementing and enforcing the Act and matters related to Nigerian content in the Industry is now the Board. However, indications emerging from the NNPC NCD are that the NNPC NCD shall nevertheless continue to regulate the Nigerian content matters relating to the assets of the FGN held by the NNPC and transactions involving the NNPC and its partners, while the DPR NCD seem to hold the view that service companies are still required to justify to the DPR NCD the expatriate quota positions needed by such companies, prior to making any application for expatriate quota to the Ministry of the Interior.

 

Some clarity by the Board is thus required regarding the specific regulatory body responsible for regulating these and other Nigerian content matters, as the potential for bureaucracy and the duplication of regulatory authorities for the same processes is very real and can clog the wheels of the business of investors.

  • The definition of ‘Nigerian company’ under Section 106 without specific reference to ‘Nigerian Company’ as a defined term in the body of the Act is an untidy legislative slip. Further, references to several other descriptive terms which are not defined in the Act are made, such as ‘Nigerian independent operators’, ‘Nigerian indigenous service companies’, ‘Nigerian indigenous company’ andoperators and companies’. The specific meaning and particular application of these expressions are apparently left to anyone’s (including the Board’s) guess.

 

Pursuant to Section 21(c), “a description of corporate ownership (main shareholders by percentage) of bidders” is required to be submitted to the Board before an invitation to tender is issued by an operator, project promoter or alliance partner for any contract. Therefore, although the Act does not provide any marked shareholding benchmark for assessing the contractor companies or any company operating in the Industry on this basis (i.e. on the basis of shareholding), it would appear that the Board would consider the shareholding of such company (specifically as ‘quantum of Nigerian content’) in the short listing for, and award of, contracts. A cause for concern for the IOCs is therefore the valid need to maintain control of investments and project-specific undertakings, which could be prejudiced by any management or operating options which includes an arranged partnership with indigenous shareholders or management personnel so as to attain or satisfy ‘Nigeria content’ requirements.

  • A further concern for investors (raised even by Nigerian indigenous companies) is that the present inadequate Nigerian capacity for skilled personnel especially, will hamper the ability of companies operating in the Industry to employ certain necessary skilled manpower or management personnel who may not be readily sourced from within Nigeria. This is especially considering the requirement of Section 31(1) of the Act that each expatriate position in respect of which a company submits a succession plan to the Board shall be understudied by a Nigerian for a maximum period of 4 (four) years, after which the position will become Nigerianised.

 

In view of these considerations, the possibility that the Act may encourage indigenous companies to secure contracts for which they are ill-equipped or for which they lack necessary skilled personnel, only to subcontract the same to foreign companies with the requisite skill and expertise, should be borne in mind by the FGN, the Board, and indeed operators in the Industry.

Beyond the Hue and Cry

In the interim, before the Board’s approach to the implementation of the Act is revealed, it will be expedient for investors seeking to secure a contract or permit in the Industry to incorporate strategies towards promoting their overall Nigerian content indicators, and thus, enhance their competitive status. A couple of suggestions are made below.

First, in view of the requirement of Section 31(1) of the Act for submission of a succession plan to the Board in respect of each expatriate position held by a company, immediate steps should be taken by investors to ensure that their succession plan for the gradual replacement by qualified Nigerian personnel of its expatriate personnel is in conformity with the maximum 4 year period. This will require that the training program for Nigerian personnel will be designed to synchronize with the termination of the validity period of the expatriate quota position so as to avoid the risk of manpower vacuums.

Secondly, regarding the requisite equity/shareholding percentages to be adopted by a company operating in the Industry (if any), resort for guidance may be made to the shareholding percentage required to qualify a company as a ‘Nigerian company’ under the Act (51% held by Nigerians) and the prevailing industry practice whereby operators seeking to award service contracts in concessions with NNPC involvement traditionally insist (other than where a specification is clearly made) on companies bidding for such contracts in the Industry to have an equity threshold of 60% Nigerian: 40% foreign. It must however be cautioned that any equity restructuring or internal re-organisation of companies which are already incorporated with wholly or major foreign participation may be hasty and premature in the absence of clear indications from the Board on how the relevance (if any) of shareholding percentages of companies operating in the Industry.

Third, in view of investors concern to demonstrate a measure of ‘Nigerian’ shareholding in their corporate structure, the option of incorporating a joint venture entity in synergy with indigenous entities/persons for the execution of contracts or business in the Industry may be explored. We therefore anticipate a host of joint venture/partnership arrangements, and attendant agreements regulating parties’ respective interests, powers, rights and obligations including, shareholders’/joint venture agreement, together with other project-specific instruments such as financial service agreements, technical service agreements, joint operating agreements, etc. In this regard, the recent remarks of the Executive Secretary of the Board should however be noted that any partnership arrangement between a Nigerian company and a foreign investor must genuinely reflect the Nigerian stake hold rather than merely having the Nigerian company play second fiddle to the foreign investor. Thus, it will no longer be sufficient for a company to be owned by Nigerians, but such company must possess the requisite capacity to perform the contract for which it is bidding and also own a good portion of the equipment used by it so as to ensure that an appreciable portion of its revenue would be retained in Nigeria.

Fourth, companies operating in the Industry should adopt overall corporate structures and policies, especially those bordering on “Nigerian human, material resources and services” that promote the development of Nigerian content in their operations, and ensure their relevant agreements and instruments also reflect Nigerian content considerations.

Finally, companies will need to demonstrate a progressive growth index of ‘Nigerian content’ quotients in their overall operations to the Board and other regulators, in order to convey a strong message that the companies are indeed aligned with the vision and policy of increased Nigerian capacity in their operations. This can be achieved by keeping the Board and any other relevant regulatory institutions abreast of the company’s internal local content policies, including its programs for training Nigerians for the purpose of technology transfer. Courtesy visits to the regulators and network platforms may be utilised.

In any event, the Industry awaits with avid interest and baited breath the interpretation, practical application and implementation of the provisions of the Act by the Board on the above and other issues.

JAMA ONWUBUARIRI is an Associate in the Energy & Project Finance Group of the Commercial Law Firm of Adepetun Caxton-Martins Agbor & Segun, Lagos, Nigeria

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Wist

Its three weeks, gone and counting

Since your last goodbye to ‘Home

I had thought ’twas for a day or two

To the east/west coast you’ve been

Your wings you’ve spread and stretched

And in your sojourn thru and fro

A night in my hearth you’ve slept

Aeons in my heart you’ve spent

Though you seem so far so cold

The warmth of my thots you’ve been…

At the end of my lonesome nights

I’ll wish they were spent with you

At the dawn of my dreadful days

I yearned for your smile,your cheer

At the toll of my midday blues

I wished you’ll come home soon

Then my ‘hungry’ evenings called

And I missed your ‘lentil’ stew!

How I wish you’ll view my heart

And see how much you’re worth

How I wish my bones I’ll bare

So you see how much I care

How I wish my nights were filmed

You’ll feel how much you’re missed

How I crave that flimsy moment

When you sighed,& missed me too!

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Children’s Day

To the child I used to be, To the child I had wished I was, to the children who now are, To the Child that is still in me… I rededicate this…..TO YESTERDAY

I was Yesterday’s child,
I was full of life and wild,
Content to eat and play,
The storm remained at bay,
The Sun promised to be mild,
What a thrill to be a child!

Tomorrow you’ll lead’ I’m told,
One day you’ll own the farm’,
‘The old men on you’ll rely’ –
But ‘Tomorrow’ called in cold,
There’s nothing left to farm,
The old men chose to lie!
The Leaders of tomorrow,
Are left with no tomorrow!
Tomorrow is still at bay 
Its always, a day away!
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