Both Paragraph 14 of the First Schedule to the Petroleum Act (Chapter P10, Laws of the Federation of Nigeria, 2004) and practice make clear that prior written consent of the minister of petroleum resources is required for the assignment of a participating interest in an oil prospecting licence, oil mining lease and a marginal field. Similarly, Section 17(5)(d) of the Oil Pipelines Act (Chapter O7, Laws of the Federation of Nigeria, 2004) provides that in the absence of express provision to the contrary, it shall be deemed a condition of every oil pipeline licence issued pursuant to the Oil Pipelines Act that a holder of an oil pipeline licence be restricted from assigning, subletting, mortgaging or otherwise parting with its oil pipeline licence or any right or interest thereunder without obtaining the prior written consent of the minister. In addition to crude oil pipelines, 'oil pipelines' are defined in the Oil Pipelines Act to include petroleum products pipelines, gas pipelines and those used for conveying its derivatives, and pipelines used for conveying any substance such as steam and water used or intended to be used in the production of crude oil, gas or their derivatives.
Therefore, under Paragraph 14 of the First Schedule to the Petroleum Act, it has been established that prior ministerial consent is required for a direct assignment of a participating interest in an oil prospecting licence, oil mining lease or a marginal field. Under Section 17(5)(d) of the Oil Pipelines Act such consent is also required to assign, sublet, mortgage or otherwise part with an oil pipeline licence or any right or interest under it.
In relation to oil prospecting licences and oil mining leases, before the Federal High Court decision in Moni Pulo Limited v Brass Exploration Unlimited (May 7 2012), it was unclear whether an acquisition of shares in a licensee or lessee of such a licence or lease required the minister's consent. However, the informal position of the Department of Petroleum Resources – the technical arm of the Ministry of Petroleum Resources and primary day-to-day regulator of the Nigerian oil and gas industry – was often that consent was required for such transactions. The issue was laid to rest by the Moni Pulo decision as the court held that prior ministerial consent had to be obtained for an acquisition of controlling shares or the entire share capital of a licensee of an oil prospecting licence or lessee of an oil mining lease. However, the court's decision did not clarify whether ministerial consent is required for other types of transaction involving those licences or assets, including:
- a change of control in an offshore parent company of a licensee of an oil prospecting licence or lessee of an oil mining lease (or licensee of a marginal field);
- the creation of security interests over the majority or all of the shares in such licensee or lessee company that would lead to the transfer of legal interests in those shares to a third party (eg, a legal mortgage over the shares);
- an acquisition of controlling interest or more shares in a licensee of an oil pipeline licence or other non-upstream licences (eg, refinery licences, depot licences, storage and sale licences issued to petrol filling station operators);
- the listing of a licensee or lessee company on the Nigerian Stock Exchange or any other stock exchange; and
- the transfer to a third party of an economic interest such as the receipt of profits due to a licensee of an oil prospecting licence or a marginal field or lessee of an oil mining lease from its petroleum operations.
In respect of the transactions listed above, some licensees and lessees, as well as prospective investors and lenders, have had to seek legal opinions from Nigerian legal advisers and clarification from the Department of Petroleum Resources as to whether ministerial consent is required for such transactions on a case-by-case basis.
Perhaps in a bid to provide some clarity and certainty, on August 11 2014 the Department of Petroleum Resources issued the Guidelines and Procedures for Obtaining the Minister's Consent to the Assignment of Interests in Oil and Gas Assets. The guidelines set out clearly the transactions for which the minster's consent is required and the procedure for applying for and obtaining such consent. The guidelines were made pursuant to Paragraphs 14 to 16 of the First Schedule to the Petroleum Act and Section 17(5)(d) of the Oil Pipelines Act.
Paragraph 3.1 of the guidelines provides that an assignment involves:
"the transfer of a licence, lease or marginal field or an interest, power or right therein by any company with equity, participating, contractual or working interests in the said oil prospecting licence, oil mining lease or marginal field in Nigeria, through merger, acquisition, take-over, divestment or any such transaction that may alter the ownership, equity, rights or interest of the assigning company in question, not minding the nature of upstream arrangement that the assigning company may be involved in, including but not limited to Joint Venture (JV), Production Sharing Contract (PSC), Service Contract, Sole Risk (SR) or Marginal Fields operation."
The provision goes on to list some of those transactions that constitute an assignment under the guidelines and for which prior ministerial consent is required, as follows:
- an exchange or transfer of shares that will involve the acquisition of part or all of the shares in a licensee of an oil prospecting licence, a marginal field, an oil pipeline licence or a lessee of an oil mining lease;
- the private placement or public listing of a part or the whole of the shares in a licensee of an oil prospecting licence, a marginal field, an oil pipeline licence or a lessee of an oil mining lease on a stock exchange anywhere in the world;
- a merger, which would involve the combination of a licensee of an oil prospecting licence, a marginal field or an oil pipeline licence or a lessee of an oil mining lease with one or more companies to form another company by way of payment, exchange of shares or any other means;
- an acquisition, wherein the acquiring company directly or indirectly takes over or acquires the whole rights or interest in a licence, lease or marginal field and associated assets of the assigning company, including the acquisition of interest by an entity in a parent company whose affiliate has interest in a licence, lease or marginal field or associated assets in Nigeria;
- an assignment of an interest to a company in a group of which the assignor is a member (ie, an assignment to an affiliate company) and which is to be made for the purpose of reorganisation in order to achieve greater efficiency and to acquire resources for more effective petroleum operations;
- an assignment brought about by reason of devolution of ownership of shares or interest in ownership of shares by way of operation of law (ie, a judgment of a competent court of law or an award from an arbitration panel) and testamentary device (ie, the transfer of shares pursuant to a will, letters of administration or a deed of gift); and
- under Paragraph 4.16 of the guidelines, where the parent company of a licensee or lessee is taken over by or merges with another company outside Nigeria, in which case he veil of incorporation (of the Nigerian licensee or lessee) shall be lifted in to determine whether the transaction constitutes an assignment under the Petroleum Act.
The guidelines set down the following requirements to be met before the commencement of the assignment process and before applying for the minister's consent.
Pre-transaction notification of and approval from the Department of Petroleum Resources
The guidelines introduce a new requirement that is not provided for in the Petroleum Act or the Oil Pipelines Act, to the effect that the holder of an oil prospecting licence, oil mining lease, marginal field or oil pipeline licence seeking to assign an interest in its licence, lease or any interest, power or right therein to a third party, should notify the Department of Petroleum Resources of the proposed assignment before the commencement of the transaction involving the assignment. The licensee or lessee must not to proceed with any process incidental to the envisaged transaction until the Department of Petroleum Resources has authorised it to do so. This means that a prospective assignor shall not advertise, publish or make press releases in respect of the proposed assignment without the prior approval of the Department of Petroleum Resources.
The notification to the Department of Petroleum Resources shall state the reason for the proposed assignment, the method for the conduct of the assignment (eg, whether it would be by an open or selective bidding process) and the possible technical and economic value that such assignment would bring to the operation of the licence or lease. If the assignment is to be made to an assignee selected through an open bidding process involving pre-qualification, technical and commercial stages, the procedure for that process must be transparent and outlined in the notification letter to the Department of Petroleum Resources. However, where the assignment is to be made through selective tendering or a negotiated transfer, this fact shall be disclosed to the department before the commencement of such assignment process.
This requirement for pre-transaction notification and approval of the Department of Petroleum Resources suggests that such approval is distinct from the ministerial consent required for an assignment. If this is the case, there now appear to be two levels of approval required for an assignment:
- the pre-transaction notification of and approval from the Department of Petroleum Resources; and
- ministerial consent to the assignment of the interest, which is a condition precedent to the completion of the transaction.
Department of Petroleum Resources? to consider local content in granting approval
The Department of Petroleum Resources has an obligation under Paragraph 4.14 of the guidelines to take into consideration whether preference is being given to Nigerian indigenous oil and gas exploration and production companies in accordance with the Oil and Gas Industry Content Development Act 2010 in granting its approval for the commencement of any divestment of an interest in a licence or lease. Therefore, an assignor is required to have a plan that shows how it will ensure that indigenous companies are given preference in the bid for the licence, lease or interest.
Paragraph 4.15 of the guidelines provides that where there is an assignment of an interest in a sole risk asset, a maximum of 40% of the aggregate interest in the asset can be assigned to a foreign entity. A 'foreign entity' appears to be a company incorporated in Nigeria but in which Nigerians do not hold up to 51% of its shares. However, where the interest to be assigned is an interest in a marginal field, a maximum of 49% interest in that field may be assigned to a foreign entity.
Department of Petroleum Resources to conduct due diligence on prospective assignees
On the completion of the technical evaluation of candidates or bidders, the assignor is required by Paragraph 4.5 of the guidelines to submit to the department a list of shortlisted candidates or bidders in respect of any transaction that constitutes an assignment for preliminary due diligence of such candidates or bidders by the department. The guidelines provide, at Paragraphs 4.5 and 6.2, that the purpose of the due diligence is to ensure that:
- any such candidates or bidders that may not otherwise be acceptable to the Nigerian government are precluded from proceeding to the commercial stage of the transaction; and
- an assignee has the requisite technical competence and financial capability.
Where a prospective assignee is a member of a group of companies, a Department of Petroleum Resources technical team will, under Paragraph 6.2 of the guidelines, carry out due diligence on that assignee's parent company within three months of the nomination to do so. As part of the due diligence, the department will consider the pricing of the asset to ensure that there is no adverse effect on the revenues of Nigeria. The assignor will bear the cost of the due diligence carried out by the department. The failure to submit the list to the department for due diligence before proceeding to the commercial stage of a bid will make the transaction ineligible for the grant of ministerial consent.
However, the requirement for the Department of Petroleum Resources to conduct preliminary due diligence is not new – the Department of Petroleum Resources had a standard practice of conducting such due diligence on prospective assignees (even those located outside Nigeria) before the guidelines were issued.
Purchase price to be held in escrow pending ministerial consent
Paragraph 4.7 of the guidelines provides that on the successful consummation of a transaction in accordance with the guidelines, culminating with the execution of a suitable form of sale and purchase agreement, all proceeds from the interest being assigned should from the date of the agreement be paid into an escrow account that would be opened by the assignor for that purpose, pending when ministerial consent is obtained. However, the guidelines do not provide for how those proceeds would be applied in the event that the minister gives or withholds consent. It could be argued, based on standard and globally acceptable commercial practice, that those proceeds would be released to the assignor if the minister consents to the assignment, or released to the prospective assignee where the minister withholds consent.
Applying for consent
Regulations 4(a) and (b) of the Petroleum (Drilling and Production) Regulations 1969 (as amended), made pursuant to the Petroleum Act, set down the procedure for applying for ministerial consent to an assignment. In summary, an application for consent shall be made to the minister in writing and should be accompanied by the prescribed fee and information required to be furnished by an applicant for a new licence or lease. In practice, such written applications have been made to the minister through the Department of Petroleum Resources. The department treats the application and makes recommendations to the minister, but the minister is not legally bound to accept.
Paragraph 5.0 of the guidelines makes similar provisions. However, Paragraph 5.2 goes further to specify the supporting documents that should be submitted with an application for consent:
- deed of assignment;
- a copy of the existing joint operating agreement or production sharing contract, where applicable;
- the farm-in agreement between the assignor and the assignee;
- a catalogue of the applicant's exploration and production activities carried out in the asset to date;
- the assignee's technical and financial track records in exploration and production operations;
- the assignee's incorporation documents;
- the technical service agreement;
- the sales and purchase agreement;
- in the case of an assignment by way of private or public listing in a stock exchange, the approvals, documents and rules governing such listing in any of the stock exchanges involved;
- in the case of a merger or acquisition involving a publicly or privately quoted company, a copy of the approvals, documents and rules governing such mergers and acquisitions in all relevant approving jurisdictions;
- in the case of an assignment as a result of the operation of law, the details of the court judgment or the legal administration of the estate, will or deed of gift; and
- a bank draft, written in favour of "FGN/DPR Fees Account", for the sum of N500,000 for an assignment of an interest in an oil prospecting licence or oil mining lease and N50,000 for an assignment of an interest in a marginal field.
In addition to these documents, Paragraphs 4.10 to 4.12 of the guidelines require that the following additional documents or information should be provided together with the application for consent:
- a letter of waiver of the right of pre-emption by the non-assigning parties as provided in the relevant joint operating agreement, where the assignor is in joint venture with the Nigerian National Petroleum Corporation (NNPC) and there is a joint operating agreement;
- a letter from the NNPC acceding to the assignment in accordance with the relevant production sharing contract, if the assignor is a contractor party under a production sharing contract with the NNPC or is a member of the contractor party; and
- a letter from the other members of the contractor party waiving their right of pre-emption, where the assignor is a member of the contractor party and the right of pre-emption is contained in the production sharing contract in respect of which such parties constitute the contractor party.
Paragraph 4.13 of the guidelines precludes an assignor that is the operator of the asset in respect of which it is assigning an interest to the assignee from transferring its right of operatorship to the assignee and from making that right a part of the commercial consideration in the transaction.
Payment of a premium on the assignment
In addition to the statutory assignment fee of N500,000 for the assignment of an interest in an oil prospecting licence or oil mining lease, Paragraph 15 of the First Schedule to the Petroleum Act empowers the minister to require the payment of another fee, premium or both as she may determine. The proviso to that paragraph provides that the minister may waive payment of such other fee, premium or both if she is satisfied that the assignee belongs to a group of companies to which the assignor belongs (ie, an assignment to an affiliate company) and the assignment is to be made for the purpose of reorganisation in order to achieve greater efficiency and to acquire resources for more effective petroleum operations. However, the Petroleum Act does not provide for how such other fee or premium would be assessed and determined by the minister. In previous transactions the minister has required the assignor to pay a premium equivalent to 2.5% of the total value of the transaction.
In a bid to provide some certainty regarding the amount that can be required as a premium, Paragraph 6.3 of the guidelines provides that the amount of such other fee or premium or both shall be between 1% and 5% of the total value of a transaction. In practice, where there is no fixed transaction value, the Department of Petroleum Resources may assess and determine a value on which the premium would be imposed.
Conditions for the grant of ministerial consent
Paragraph 6.1 of the guidelines, which contains similar provisions to Paragraph 16 of the First Schedule to the Petroleum Act, provides that the minister may grant consent to an assignment only if she is satisfied that:
- the proposed assignee is of good reputation, is a member of a group of companies of good reputation or is owned by a company or companies of good reputation;
- sufficient technical knowledge or experience and financial capacity is likely to be available to the proposed assignee to continue petroleum operations in respect of the licence, lease or marginal field assigned; and
- the proposed assignee is in all respects acceptable to the government.
The new guidelines have made clearer which transactions involving the assignment of an interest in an oil block or marginal field require ministerial consent. For instance, any oil and gas exploration and production company that holds an oil prospecting licence, oil mining lease or a marginal field and seeks to list on a stock exchange is required to obtain the prior written consent of the minister for such listing. It is also now clear that transactions involving a change of control of a parent company of a licensee's or lessee may be considered to amount to an assignment of the licensee or lessee's interest, for which ministerial consent is required. It appears from the guidelines that ministerial consent should also be obtained for the creation of a legal mortgage over controlling shares in a licensee or lessee.
The guidelines are still relatively recent, and as such have not been fully tested. This will take place over the coming years, particularly with the continued divestments by Shell and some of its joint venture partners of their interests in oil blocks.
For further information on this topic please contact Folake Elias Adebowale at Udo-Udoma & Belo-Osagie by telephone (+234 1 263 4831) or email (firstname.lastname@example.org). The Udo-Udoma & Belo-Osagie website can be accessed at www.uubo.org.
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