Introduction
Scope
Application procedure
Other considerations
Treatment of amortised surface assets
Assignments register
Comment
In March 2021 the Department of Petroleum Resources (DPR) issued updated guidelines on the assignment of interests in oil and gas assets. The guidelines (which were originally published in 2014) establish the procedure for obtaining the prior written consent of the minister of petroleum resources (the minister) that is required for the assignment of a participating interest in upstream oil and gas assets, in accordance with the primary legislation, the Petroleum Act.
This article highlights the changes that have been introduced by the 2021 guidelines. While the questions concerning legality that plagued the 2014 iteration are still present, in the absence of any successful legal challenge, the industry will comply with these updated guidelines.
Assets
The definition of the term "assets" has been expanded to cover oil and gas pipeline licences, which also require the minister's prior written consent for the assignment of a participating interest therein.
Interest
The term "interest" has been expanded to cover charges and liens. This update to the definition is critical in an industry heavily reliant on debt financing. The general practice has been that charges or liens created over oil and gas assets require ministerial consent only at the point of enforcement and not at the time of creation. However, given that the aim of the guidelines is to ensure that consent is obtained prior to an assignment, it would appear that the Department of Petroleum Resources now requires borrowers to obtain consent at the point of creating a charge or lien on their assets. In addition to the lack of clarity around this provision (as to whether consent is also required at the time of enforcement or discharge of the charge or lien), these changes also have the potential to significantly increase the cost of accessing finance in a market with ever-dwindling financial sources, and at a time when numerous investors are turning away from investing in fossil fuels.
Reassignments
The 2021 guidelines have introduced a new class of assignment that will require ministerial consent – reassignments. It is contemplated that an assignment back to an original assignor will be treated as a new transaction for which consent is required. However, it could be argued that this is only a confirmed legislative uptake of what is already common practice in the sector.
Assignment by operation of law
The term "assignments" has been expanded to cover the appointment of a receiver, receiver or manager, or administrator under the Companies and Allied Matters Act 2020 or any other law where such an appointment results in an assignment of the asset or an interest therein.
Stages
The application process under the 2021 guidelines is not significantly different to that under the 2014 guidelines. However, the 2021 guidelines have streamlined and clarified the application stages. The first stage, which is notification of an intention to assign an interest, has been qualified somewhat by empowering the Department of Petroleum Resources to intervene in a bid process that it believes is not transparent or does not meet global standards. There is no indication of the benchmark for determining this transparency or what the international standards will be. The second stage is the notification of prospective bidders; the third stage is the commercial and approval stage. At this final stage, the DPR reviews the application, conducts due diligence if necessary and recommends the application for approval or denial.
Timelines
Timelines have been imposed for certain Department of Petroleum Resources actions. The DPR has 10 days to respond to a notice of intention; otherwise, approval is deemed to have been granted and the proposed assignor can proceed to calling for and evaluating bids or conducting its first-stage activities. The DPR also has 10 days to respond in the second stage, following the notification of prospective assignees. However, in this second stage, no presumed approval has been provided for if there is no response from the DPR . While the Executive Order on the Promotion of Transparency and Efficiency in the Business Environment signed on 18 May 2017 by the Nigerian vice-president introduced the concept of default approval where a government agency or official fails to communicate approval or rejection within a stipulated time, given the national and economic sensitivities around oil and gas assets, prospective assignors may wish to solicit the DPR for a response so that its transaction can proceed to the final stage.
Due diligence
At the final stage, the Department of Petroleum Resources may conduct due diligence on the parties to enable it to make a recommendation for the grant of ministerial consent. This process has commenced and is already in practice; DPR has developed a due diligence questionnaire that parties are expected to answer. The guidelines are silent on which party bears the cost of this due diligence exercise. There is also no indication as to how long the commercial stage will last or a timeframe within which approval must be granted or denied. The DPR has missed an opportunity to entrench clarity in this process and, in the absence of this, applicants will have to keep engaging with the DPR until a decision is made one way or the other.
Fees and premium
The 2021 guidelines have updated the fees and premium to reflect the changes brought about by the 2019 Petroleum (Drilling and Production) Amendment Regulations 2019 (for further details please see "Minister's powers under Petroleum Industry Bill 2020"). The application fees are now calculated in US dollars, while the premium has been increased from 1-5% to 5-10% of the transaction fund. The updated fees have been applied by the Department of Petroleum Resources for a number of years now, invariably causing an increase in the cost of several transactions.
The Petroleum Act gives the minister the discretion to waive payment of a fee or premium where he is satisfied that the assignment is being made to a company in a group of which the assignor is a member. However, the guidelines are clear that consent will not be conveyed until the premium has been fully paid.
The 2021 guidelines have also introduced the following provisions with respect to divestments.
Assignments of interest in NNPC joint venture assets
An assignor of an interest on an asset held in a joint venture with the Nigerian National Petroleum Corporation (NNPC) must comply with the following:
- Where an assignment is by way of transfer and it involves the execution of a crude handling or purchase agreement, the assignor will also submit a draft of the agreement to the Department of Petroleum Resources before execution.
- Where the assignor is an operator in an asset in which the NNPC is either a joint venture partner or concessionaire, the assignor will not transfer the right of operatorship without the approval of the department and may not make the right of operatorship a part of the commercial consideration in the transaction. Previously, transfer of operatorship was prohibited outrightly. It would appear that this can now be made a term of the assignment, to the extent that the department has been informed and approves of this inclusion. This change should have the effect of making such interests attractive to third-party investors.
- Where the assignment is by way of a transfer of an asset held in a joint venture with the NNPC, the assignor will submit an agreement between the parties on the treatment of the assignor's abandonment and decommissioning liabilities; such costs will be deducted pro rata from the transaction fund. This provision has been included to ensure that the assignor's share of the decommissioning cost is adequately provided for in the event of a transfer. The deduction from the transaction fund is to determine the premium to be paid on the transaction. This should reduce the amount of premium, thereby making such assets more attractive to investors.
Treatment of amortised surface assets
Another addition to the guidelines is the amortisation of surface assets. This aims to reduce the cost of acquiring assets for new players in the industry. An assignor can no longer include the cost of such amortised assets in the valuation of its asset where the investment on surface facilities has been fully amortised through cost recovery while the assignor held the asset. It is anticipated that this development will be most welcomed by indigenous players looking to invest in upstream assets.
The DPR is now empowered to maintain a register of all of the assignments with ministerial approval. It is not clear whether this register will be freely accessible to the public upon payment of the relevant fees.
The guidelines were issued to provide clarity on a number of Department of Petroleum Resources processes. However, it is arguable that some provisions have created further uncertainty, with the potential for increased cost of entry to or operating in the sector.
For further information on this topic please contact Gloria Biem at Streamsowers & Köhn by telephone (+234 1 271 2276) or email ([email protected]). The Streamsowers & Köhn website can be accessed at www.sskohn.com.