February 3, 2022

MUSINGS ON THE NIGERIAN MARGINAL FIELDS BID ROUNDS

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Introduction

As the 2020 Marginal Fields Bid Rounds approaches
sunset with the award of 57 Fields to 161 Successful Bidders, certain grey
areas have come to fore which continue to get clearer as the process is winding
down. Despite the relative success of the process, 33 awards were unpaid
for and 247 bidders were unsuccessful. This briefing note highlights events
that have happened in recent times including matters which have arisen during
the process for which clarity may have been obtained and grey areas which require
further clarification.

The Petroleum Industry Act
and the Nigerian Upstream Regulatory Commission:

The enactment of the Petroleum
Industry Act in August of 2021 changed the regulatory landscape for petroleum operations in Nigeria.
One of such changes is the establishment of the Nigerian Upstream Regulatory
Commission (the “Commission”). By virtue of the PIA, the Commission has taken
over the role of the erstwhile Department of Petroleum Resources (“DPR”) which hitherto was in charge of
the Marginal Field Bid Rounds. The Commission will conclude the award process
and has been proactive in this regard.

One of the steps taken by the
Commission is the
engagement of Awardees with respect to providing clarity on the award process
and also providing assurances with respect to investment protection and policy
directive of the government. The
Commission has
expressed the desire to support the Awardees to get to First Oil within the
shortest possible time. The Commission also recognized the need for the
Awardees to enter into commercial discussions with the original leaseholders of
the Field.

No Requirement for Farmout
Agreements:

Apart from the fact that the PIA
provides that there shall be no marginal fields going forward, Section 94(2) of the PIA obviates the need for Awardees to enter
into Farmout Agreements with the original leaseholders. Specifically section 94() provides as
follows:

“A
discovery declared as a marginal field prior to 1^st January 2021 and
is not producing shall be converted to petroleum prospecting licence…”

The import of the foregoing
provisions (which has been confirmed by the Commission) is to the effect that
Awardees are to be granted
Petroleum Prospecting Licenses (“PPLs”) by the
Commission.

Award of Petroleum
Prospecting Licenses:

As mentioned above, the Awardees shall be granted PPLs in accordance with the
provisions of the Section 94(2) of the
PIA. It may be recalled that when the erstwhile DPR issued award letters to the
Awardees, it directed that SPV should be formed by the Awardees with the
Awardees holding shares in the SPV in proportion of the percentages of their
award. The Commission has
confirmed that
PPLs shall be awarded to the SPVs. Therefore, the Awardee’s interests in the relevant PPLs shall be an
indirect interest in their capacity as shareholders of the SPV. We understand
the Commission is developing license terms for PPLs which shall form the basis
of the award and contain terms, conditions and milestones with respect to field development. Upon the grant
of the PPLs, the ownership of the relevant field will be separate and distinct
from that of the original leaseholders. It is expected the Commission will
issue the PPLs within the shortest possible time as issues such as field development, environmental impact assessment/environmental base line survey and financing of field development will be largely hinged on ownership of
the assets, which can only be evinced by a PPL.

Overriding Royalties:

Flowing from the above point on ownership of PPLs which will be
separate and distinct from the original leaseholders of the marginal fields, a
pertinent question to ask is what is the fate of the original leaseholders with
respect to overriding royalties? It may be recalled that the rationale for
overriding royalties is to compensate the original leaseholders of marginal fields for exploration and development costs
incurred by original leaseholders with respect to the discovery of the field.
The framework for overriding royalties has hitherto been contained in Farmout
Agreements for legacy marginal fields. What remains unclear is the compensation
structure to be adopted for the original leaseholders with respect to costs
which they have incurred before the fields were declared
marginal. While
there is a school of thought that believes that there should be no compensation
to the original leaseholders on the basis of the fact that they have left the field for several years
unattended to and as such have denied government revenues in form of royalties
and taxes, another
school of thought is of the view that a denial of compensation to the original
leaseholders may be a basis to argue expropriation against government.

It will be necessary for the
Commission to provide definite guidance on this in order to avoid the seeming
confusion. We believe that an arrangement where the original leaseholders are
compensated through either a lump sum payment or periodic payments may be
appropriate in order to compensate the original leaseholders for exploration
and development costs. This arrangement may be documented by agreements between
the original leaseholders and the incorporated SPVs that will be awarded the
PPLs. We believe this is not only an appropriate approach but a pragmatic
solution in order to avoid needless litigation.

Field Development Plans:

It is
noteworthy to mention that the Commission expects the Awardees to have
commenced field development studies on the field. The practicality of this
remains to be seen as physical handover of the fields are required to be made
to the Awardees for the conduct of development studies and environmental impact
assessments. We believe that the physical handover may not take place until the
Awardees have been issued with their relevant PPLs. Therefore, it appears the
issuance of PPLs may be contingent on the occurrence of other activities such
as field development and financing.

Assignment
and Transfer of Awards:

It is not inconceivable that Awardees may be contemplating transfer of
all or part of their awards either for (i) the purposes of raising finance for
the development of the asset or (ii) for other strategic reasons. It is
necessary to examine: (i) at what stage can transfer be effected? (ii) what
type of interest can be transferred? and (iii) the need for regulatory
approvals. There is an argument that interests cannot be transferred until PPLs
have been awarded. While this may be true for a direct transfer of interest in
PPLs, this may not be the case with respect to the ability of Awardees as
shareholders in the SPVs to transfer their shares. Save for the restrictions in
the articles of the company and the requirement of regulatory approvals (i.e.
Federal Competition and Consumer Protection Commission approval and consent of
the Minister of Petroleum Resources), there is no restriction on the transfer
of shares by shareholders in the SPV.

In the
event there is an intention of a direct transfer of interest in a field by an
Awardee, a pertinent question that requires clarification would be whether the
Commission would mandate the transaction to be an acquisition of relevant
shares in the SPV or the acquiring party can hold a direct interest in the PPL.
This question is pertinent bearing in mind that the Awardees have been mandated
to form SPVs for the purposes of operating the asset.

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For
further information on the foregoing (none of which should be construed to be
an actual legal advice), please contact (with the subject: “Musings on the
Marginal Field Bid Rounds”):

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