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20 Jan

OIL AND GAS 1.3 STATE PARTICIPATION (A) CONTRACTUAL ARRANGEMENTS

STATE PARTICIPATION AND CONTRACTUAL ARRANGEMENTS FOR EXPLORATION OF PETROLEUM.

State participation entails where a host State[1] gets involved in the exploitation of its natural resources. “State Participation” generally entails an arrangement where the host government has some interest in its oil industry. State participation encourages independence and asserts the sovereignty of a state.

State participation is usually effected through a state’s National Oil Corporation… which in Nigeria’s case is the Nigeria National Petroleum Corporation (NNPC)[2].

 

Initially, IOCs (International Oil Companies) exercised nearly sovereign rights over the host state’s oil. However, the following events changed the tides:

  • Nigeria’s Independence in 1960 and the subsequent federalization which severed it from the umbilical cord of the British.
  • The formation of OPEC. The OPEC mandated member states to have their National Oil Corporations which should be a vehicle of participation.
  • Various declarations on the permanent sovereignty of states over their natural resources like the United Nation’s Resolution on Permanent Sovereignty, UN Declaration on the establishment of a new economic order… and other international conventions that…
  • Nigeria’s realisation of its disadvantaged positon.
  • After the civil war, dire needs for funds to rehabilitate the economy further necessitated the need to participate and reap the economic benefits derivable from petroleum.

With the introduction of the military regime in January 1966, participation and acquisition process impatiently began. The Nigerian Enterprise Promotion Acts 1972 and 1977 divested ownerships in favour of Nigerians.

Various Acts vested ownership of in the FG[3]. The Petroleum Profit Tax Act imposes tax on certain upstream petroleum operations.

The participation of the government is done by entering various contract

CONTRACTS FOR THE EXPLORATION AND PRODUCTION OF PETROLEUM.

  • Joint Venture
  • Production sharing contract.
  • Risk service contract.
  • Pure service contract.
  • Technical assistance agreement.

JOINT VENTURES AGREEMENTS.

Contribution and risk is shared between the Government and Operator. Regulated by the Joint Operating Agreement consisting of: the Participation Agreement (which sets out respective interest of the parties) and Operating Agreement (which regulates the joint development of the area). An operator is appointed and may be removed where he defaults in his duty/obligation, assigns responsibilities or goes bankrupt/insolvent.

Joint venture agreement entails two stages:Pre-licence agreement: where confidentiality (information shared shall not be divulged), joint bidding, co-operation agreements are concluded.

Post licence Agreements: represents the basic consortium between the co-venturers. Regulates the Joint venture dealing with operatorship, insurance, ppt, arbitration, and so on.

Salient clauses in the JOA:

  • Participating interest: of each licensee is specified thereby creating a tenancy in common and severing a joint tenancy.
  • Relationship, rights and duties of the parties: shall be several rather than joint or partnership, and so on. Article 11 TJV JOA.
  • The operator: provided for under Article 2. He is responsible for executing the whole operations on behalf of the whole consortium. Usually the one with majority interest so that he would be dedicated. Although in Nigeria, the NNPC has the most interest but is not an operator.

The operator can resign or be replaced where he assigns his interest, winds up, liquidated or found guilty of wilful misconduct or material breach of JOA by a competent court.

FUNCTIONS, POWERS AND OBLIGATIONS OF THE OPERATOR. (ARTICLE 2);

  • To conduct all joint operations with utmost good faith, diligence, transparency and good practice.
  • Keep accurate records and books of account.
  • Submit budget to the committee not later than 31st October each year.
  • Can recruit its employees for joint operation.
  • Can contract on behalf of the joint operation as an agent and can bind the co-venturers. Where permission is not sought, operator can be made solely liable to obligation and benefits under such contract.
  • He is entitled to reimbursement for expenses incurred in carrying out duties of the Joint operation.
  • The operator shall not be liable for any loss incurred or unintentional damage arising from joint operation. Save for “wilful misconduct” (intentional and conscious recklessness/wanton disregard for the provisions of the agreement- Article 1) except it is an honest mistake or done under legal compulsion or to safeguard life and prevent damage and pollution.
  • His liability in tort depends on whether the act was previously authorised or not. Although there is implied authority in some discretionary matters.
  • Holds money in the joint account in trust for the benefit of the non-operators.
  • He has implicit authority to conduct litigation and settle claims not exceeding N300,000 for and on behalf of the parties.

The operator is controlled by the Operating Committee which consists of at least one representative of each co-venturers totalling 10. Six representing the NNPC and 4 repressenting other venturers. The Operatign Committee (Article 3): They determine location, selection of wells, approve budgets and programmes and ensure that the operator implements the Uniform Accounting Procedures.

Cash calls (Article 6): here, the parties are required to fund the joint account (not later than the first day of the cash call month) based on their participating interest. In practice, NNPC usually borrows money to meet its cash call obligation.  A non-operator may dispute the cash call on the basis that it exceeds the estimate expenditure to be reasonably incurred by the operator. A non-defaulting party can step in to meet the defaulter’s share (additional cash call).

Sole Risk Operation: Article 8 where a unanimous decision cannot be reached by the operating committee, the operation shall either terminate or a co-venturer can take it up. (after notifying other parties). He shall fund the operation which must not interfere with joint operations. The operator must account for sole risk operations.

After fulfilling cash call and participating obligations, each party can separately (rather than jointly) lift and dispose of its participating interest share of production of petroleum.

After necessary obligations have been performed and requisite government approvals obtained a party can transfer (by a written agreement) to another who shall accept or reject such transfer within one year.

THE PRODUCTION SHARING CONTRACT.

Originated in Indonesia. Here, the contractor (oil company) bears the risk of exploration and management and recoups such expenditure where crude is discovered in commercial quantities. The oil is shared on a monthly basis in pre-determined proportions. The profit oil is shared after royalty, cost and tax oil has been deducted. Royalty oil is payable based on the location of the field, the farther offshore the lower- Section 5 of the Deep Offshore and Inland Basin Productoin sharing contracts act 1999 and the petroleum drilling and production (amendment) regulation act 2003. Cost oil is percentage of oil allocated to contractor to recover its operating cost. Tax Oil, is proportion allocated to discharge tax liabilities under the PPT.

Nigeria entered into the first PSC with Ashland Oil Company in 1973 to last for 20 years with legal ownership remaining in NNPC. and profit oil was shared in the ratio 65:35 or 70:30 where discovery reached 50,000 barrels a day. Tax of 50 percent. The agreement was revoked in 1997 when Ashland assigned its right without notifying the NNPC.

New PSCs were negotiated in 1992 and 1993 with Shell, chevron, agip, mobil, and so on.

The disadvantage is that the contractor is usually extravagant in the assurance that expenditure shall be recouped from cost oil.

PSCs Usually provided a term of 30 years (10 years for exploration, 20 for production) relinquishment of 50 percent of the contract area after 10 years to avoid fallow fields. The contract area being the whole area covered by the psc and the development area being the area in which production would occur.

There is need to include environmental regulation clauses in the PSCs as they currently lack such.

THE RISK SERVICE CONTRACT.

Here risk and capital for exploration is provided by the contractor which shall be recouped where there is commercial discovery of oil and gas. The contractor shall be paid in cash or may be entitled to elect payment in crude. (Unlike the PSC which pays in crude oil). Extensively used in Brazil and Argentina. Usually lasted for 2 and 3 years and was terminated where no commercial discovery was made. Not widely utilised because of the short life span and huge risk involved to the contractor. In Nigeria, NNPC owns the concession and could elect to take over the entire operations 3 years from the day of commercial production.

THE PURE SERVICE CONTRACT.

Here the state bears all risk and employs the contractor to perform its services and pays a flat fee. This is practiced in oil rich countries like, Saudi Arabia, Qatar and other middle east countries. Here technology transfer is less likely to occur. In FBIR V Shell Petroleum Co, the court held that the contractor pays normal companies income tax.

TECHNICAL ASSISTANCE AGREEMENTS

Here the host country own oil, finances projects and equipment while the company provides technical services. The company is a mere contractor without interest in the oil. Unlike the pure service contract, there is greater likelihood of technology and knowledge transfer. Utilised in countries like Venezuela and Iran.

 

[1] Where the petroleum is found.

[2] Established in 1977 by the NNPC Act from the merger of Ministry of Petroleum Resources and the Nigerian National Oil Corporation which was established in 1971.

[3] Section 44 (3) of the 1999 constitution, section 1 Petroleum Act, Section 2 PIB, section 1 Minerals Act, and so on.

Isochukwu

Quite eccentric really

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