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Exploration and production

Rights

Who holds the rights to oil and gas reserves in your jurisdiction?

The Constitution, the Petroleum Act and the Exclusive Economic Zone Act grant the rights to, as well as the control of, all minerals, mineral oils and gas in Nigeria and its territorial waters and exclusive economic zone in the federal government.

Is there a distinction between surface and sub-surface rights?

The ownership of surface rights does not automatically confer subsurface title rights, which are vested in the government. Likewise, exploration and production rights are granted only in connection with the resources located within sub-surface regions. The Petroleum (Drilling and Production) Regulations prohibit the occupation or exercise of any concession rights in areas designated as sacred by state authorities.

Ministerial permission is required to obtain and exercise surface rights in certain areas (eg, those set aside for public purposes or occupied for government purposes).

For privately owned land, ministerial permission is required subject to payment of compensation to lawful occupiers of such land.

What rules and procedures govern the grant of rights for exploration and production purposes (e.g. through licences, leases, concessions, service contracts, production sharing agreements)?

Exploration and production companies conduct petroleum operations through the following concessions:

  • An oil exploration licence – this licence is non-exclusive and granted in respect of areas of unproven reserves for the exploration of petroleum. It expires on December 31 in the year that it was granted.  
  • An oil prospecting licence – this licence is an exclusive licence, granted for any period determined by the minister of petroleum resources of up to five years for onshore areas and shallow waters and up to 10 years for deep offshore and inland basins. The oil prospecting licence permits the licensee to conduct more extensive exploration activities and remove and dispose of petroleum discovered while prospecting.
  • An oil mining lease – this licence allows full-scale commercial production in a lease area. It is granted to oil prospecting licence holders on the discovery of oil in commercial quantities (at least 10,000 barrels per day). It grants the lessee an exclusive right to prospect, explore, produce and undertake marketing activities in connection with the specified acreage for a period of 20 years.  An oil mining lease may be renewed subject to the fulfilment of certain conditions.
  • Farm out – the Petroleum Act empowers the president to farm out a marginal field that has been left unattended for at least 10 years from its first discovery to a third party (farmee). The farmee enters into a farm-out agreement with the holder of the oil mining lease, which permits the farmee to explore, prospect, win, work and remove petroleum during the validity of the lease.
  • Production sharing contract – the Nigerian National Petroleum Corporation (NNPC) enters into production sharing contracts (as the proprietary holder of oil prospecting licences or oil mining leases) with exploration and production companies as contractors to the NNPC. Under production sharing contract arrangements, the NNPC’s contractors bear the cost of petroleum operations within the contract area and, in return, can recoup costs (after defraying royalty) and realise profit (after allocating tax oil).

What criteria are considered in awarding exploration and production rights (e.g. are there any restrictions on the participation of foreign investors/companies)?

The minister of petroleum has absolute discretion under the Petroleum Act to grant oil exploration, prospecting and mining licences to companies incorporated in Nigeria.

The Petroleum (Drilling and Production) Regulations outline the application process and submission requirements, including evidence of the licensee’s financial status and technical competence and details of:

  • the proposed work programme of the operations;
  • the annual expenditure;
  • the start date of the operations;
  • the schemes for recruiting and training Nigerians;
  • the licensee’s capacity to market petroleum;
  • annual reports on the licensee’s exploration and production activities; and
  • any other information that the minister of petroleum may require.

The government has awarded exploration and production rights (including marginal field and production sharing contract awards) through competitive bidding processes known as licensing rounds. Criteria for such awards vary, but are published by the ministry in pre-licensing round guidance notes and include:

  • evidence of financial and technical capacity;
  • the applicable premium (ie, signature, prospectivity and production bonuses); and
  • evidence of the commitment to projects of strategic national interest and minimum work programme commitments.

In addition to the above, the Nigerian Oil and Gas Industry Content Development Act entrenches the principle of according first consideration to Nigerian operators in the award of oil blocks, oil field licences, oil lifting licences and contracts for the execution of projects in the Nigerian oil and gas industry.

Joint ventures

Do any special legal provisions apply to joint ventures?

According to the Department of Petroleum Resources’ Guidelines and Procedures for Obtaining the Minister's Consent for the Assignment of Interests in Oil and Gas Assets, where an assignor of interests is the operator of an asset to which the Nigerian National Petroleum Corporation is a joint venture partner or concessionaire, the assignor is prohibited from transferring the right of operatorship to an assignee and will not make the right of operatorship part of the commercial consideration in such a transaction.

The Petroleum Act and its subsidiary legislation are drafted from a single operator (licensee-lessee) perspective. Therefore, the applicable law applies jointly and severally to joint venture partners.  

Otherwise, joint ventures in Nigeria are regulated by the terms of the respective joint operating agreements.

Third parties

Can exploration and production rights be transferred to third parties?

Oil prospecting licence and oil mining lease holders are prohibited from assigning their licences or leases, or any right, power or interest therein, without the prior consent of the minister of petroleum. Further, the Petroleum (Drilling and Production) Regulations require that the takeover of an oil prospecting licence or oil mining lease is subject to the minister of petroleum’s consent.

This was confirmed by the Federal High Court in Moni Pulo Limited v Brass Exploration Unlimited, where the court confirmed that an indirect transfer of interest in an oil mining lease (by way of the sale of shares of a lessee resulting in a change of control) requires ministerial consent.  

The Department of Petroleum Resources’ Guidelines and Procedures for Obtaining the Minister's Consent for the Assignment of Interests in Oil and Gas Assets, aim to include (albeit not exhaustively) descriptions of transactions that constitute assignments requiring ministerial consent, including:

  • assignments by way of an exchange or transfer of shares;
  • share listings;
  • mergers or acquisitions to directly or indirectly take over or acquire the whole rights or interests in an underlying petroleum asset.

Fracking

Is hydraulic fracturing (‘fracking’) permitted in your jurisdiction?

There are no specific laws and regulations on fracking in Nigeria. However, the Petroleum (Drilling and Production) Regulations require licensees and lessees to use Department of Petroleum Resources-approved methods and practices for the production of crude oil or gas from any pool or reservoir.

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