05 Jul

3.3.4 Farm-Out Arrangements Marginal Fields and Reversionary Rights of the Government

3.3.4 Farm-Out Arrangements Marginal Fields and Reversionary Rights of the Government[1].

“Farm-out” means an agreement between the holder of an oil mining lease and a third party which permits the third party to explore, prospect, win, work and carry away any petro- leum encountered in a specified area during the validity of the lease;

“Marginal field” means such field as the President may, from time to time, identify as a marginal field[2].

The Minister and President have an important role to play here.

Paragraph 17 (1) The holder of an oil mining lease may, with the consent of and on such terms and conditions as may be approved by the President, farm out any marginal field which lies within the leased area. (2) The President may cause the farm-out of a marginal field if the marginal field has been left unattended for a period of not less than ten years from the date of the first discovery of the marginal field.

Where a major oil company has a concession in an oil field which does not contain a significant discovery and the field is neglected[3] for more than 10 years, the minister may (with the requisite approval of the head of state) cause a farm-out of the oil field to an indigenous company managed and controlled by Nigerians[4]. For example the farm out of Chevron’s Ogbelle Field to the Niger Delta Petroleum Resources Ltd.

The farm out process has been criticised for being bureaucratic, ambiguous and conferring much discretion on the minister and president. To remedy this defect, the 2001 guidelines for farm-out and operation of marginal fields was formulated. The guidelines provided for consideration of royalty being paid to the farmour, resolved ownership issues and indemnification of the farmour by the farmee for pollution and other liability created or non-observance with good oil practices. The guideline however failed to address the delay in allocation process and did not dispense with head of state’s consent.

On February 24 2003, 21 marginal fields were farmed out to 31 indigenous companies (some bidders were jointly awarded). A premium of $150,000 was payable to the government. The Awardees also created a group called The Marginal Fields Operator’s Group (MFOG) to improve terms and standard of operation and form a united force to promote their interests. Furthermore, seminars on marginal field development attended by nestors and key players in the field have been held to educate farmours and farmees.

The farmee should conduct and fund operations. They are also to comply with safety and regulatory requirements[5].

With regards to the reversion of Oil residue; I have established that the property in Petroleum is vested in the Government[6] but concessions can be granted to applicants to explore for petroleum. The truth is that title still rests in the Government. Therefore, the issue of reversion usually arises.

Reversionary interest connotes the right of the government to repossess title to natural resources that had initially been allocated to a corporate entity.

In Re An Application by Alliance Energy for Generation License, the court noted that upon the expiration of licenses, there is a reversion of interest in the government.

In the SAPETRO’s Case, the Supreme Court noted that the grant of an OPL, OEL and OML is a discretionary power of the minister and upon relinquishment, the minister has a discretion to grant an applicant an additional OML and his discretion should not be challenged.

[1] See Kammel Khan, Petroleum Resources and

Developments, Legal and Policy Issues for Developing Countries 38 Int’l l Comp. L.Q.1 (1989), John S.

Lowe : Analyzing Oil and Gas Farmout Agreements, 41 SW. L.J.759 (1987) See also John R. Scott: How

to prepare an Oil and Gas Farmout Agreement 33 Baylor L. Rev. 63 (1981).

[2] Paragraph 17 of the First Schedule to the Petroleum Act. See Generally, Guidelines for Farmout and Operation of Marginal Fields, issued in August 2001 by the Office of the Presidential Adviser on Petroleum and Energy Matters.

[3] The Multi-national Oil Companies assert that neglect of field is as a result of the production limit set by OPEC and the inability of the government to meet its cash call obligations promptly. They also contended that the power conferred on the head of state to cause farm-out without consent of the leasee could amount to expropriation. On the other hand, proponents of the farm out maintain that it encourages production and facilitate the indigenisation policy.

[4] See Paragraph 16A and 17 of the First Schedule to the Petroleum Act.

[5] See for Example; Article 6 and 7 of the “Stubble Field Model Farm-Out Agreement

[6] Section 1 mineral and mining Act, section 44(3) of the 1999 constitution, Section 1 Petroleum Act.



Quite eccentric really

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