Nigeria: A Critical Review Of Upstream Provisions Of The Federal Government’s Latest Comments On The Petroleum Industry Bill (Part 1)

Last Updated: 27 October 2009
Article by Adeoye Adefulu

1. INTRODUCTION

The Petroleum Industry Bill, which promises to change the landscape of Nigeria's petroleum industry was submitted by the Executive Branch of the Federal Government to the National Assembly in December 2008. The Bill, which has passed through the first and second readings in both houses of the National Assembly, was referred to the relevant committees and public hearings have been held by the Senate and the House of Representatives on the Bill.

Various entities submitted memoranda to the National Assembly to address shortcomings of the Bill. A memorandum was also submitted by the Executive Branch of the Federal Government, through the Inter-Agency Team1, proposing to address some of the deficiencies in the Bill. The Memorandum was in the form of a new draft Petroleum Industry Bill. Whilst, there is technically no problem with such a submission, it is at the very least, highly unusual for the Federal Government to be seeking to amend the provisions of the Bill it originally sent. The breadth of the proposed revisions is quite substantial and includes for example broad changes to the fiscal and institutional frameworks. It is based on the background of the significance of these changes, as well as our opinion, that the National Assembly would give careful consideration to the contents of the Inter-Agency Memorandum, that this paper has been written.

The article is divided in to two both of which focus only on the upstream aspects of the Inter-Agency Memorandum and the proposed draft Petroleum Industry Bill2. The fiscal aspects would be addressed in another article. The articles draw comparisons between the Official Version & Version IV and also refer to the existing legal framework. This first part deals with the institutional elements of the upstream proposals.

2. INSTITUTIONAL FRAMEWORK

Under the Official Version, the upstream petroleum industry is to be governed by the Minister – responsible for broad policy formulation the National Petroleum Directorate ("NPD") which was to act as the Secretariat for the Minister and to be responsible for detailed policy formulation. The NPD is also to be responsible for holding unallocated acreage and in consultation with the Petroleum Inspectorate (the "Inspectorate") would be responsible for organizing bid rounds. The Inspectorate is charged with overseeing the technical aspects of the upstream petroleum industry such as environmental issues, health and safety and engineering matters. Finally, the National Petroleum Assets Management Agency ("NAPAMA") is to act as a cost regulator for the upstream industry.

Institutional Framework under the Official Version

Version IV significantly changes this framework. Whilst the functions of the Minister and the NPD do not change significantly, Version IV abandons NAPAMA and places the cost/commercial function within the Inspectorate3. The Inspectorate would exercise this function in the approval of "...commercial and cost elements of all field development programmes..."4 The Inspectorate would also be responsible for developing "cost benchmarks for the evaluation of opportunities in the Upstream Petroleum Operations"5

Institutional Framework under Version IV

COMMENTS ON THE PROPOSED CHANGES TO THE INSTITUTIONAL FRAMEWORK

The changes proposed to the upstream institutional framework by Version IV should help in strengthening the Bill. By housing the costs/commercial function in the Inspectorate, it avoids the problems associated with having multiple regulators such as high regulatory costs and excessive bureaucracy. Additionally, by placing the costs/commercial function in the work commitment & field development process, the ambiguities raised under the Official Version as to the extent of this form of regulation have been minimised.

3. NNPC LTD.

Version IV also proposes the establishment of NNPC Ltd to replace the Nigerian National Petroleum Corporation ("NNPC"). Like its predecessor, Version IV does not place a positive duty on any entity to create the company.6 This is an oversight which should be corrected at the National Assembly. Version IV also states that ownership of NNPC Ltd. should be vested solely in the Federal Government of Nigeria. Under the Companies and Allied Matters Act ("CAMA") which regulates limited liability companies in Nigeria, each company is required to have at least two shareholders7. It is suggested therefore, that it would be useful for the Bill to name the specific shareholders which it proposes to hold shares in the company or to detail the process by which those entities are determined.

Version IV copies the asset transfer process under the Official Version. It deems the assets and liabilities of NNPC to be transferred to NNPC ltd on the transfer date. It does not provide for a process by which the assets and liabilities of NNPC are identified and the documentation for effecting this transfer. Such a transfer may be deficient and lead to disputes in the future. It may be useful for the National Assembly to examine the asset transfer procedure under the Electric Power Sector Reform Act ("EPSRA") for an example of an effective transfer procedure. The EPSRA in effecting the transfer of assets and liabilities from the National Electric Power Authority to the initial holding company (now Power Holding Company of Nigeria Plc) provided as follows:

  1. The formation of the initial holding company, who should form it and the timeframe within which it should be formed.8
  2. The shareholders in the initial holding company.9
  3. Transfer of assets and liabilities by a transfer order issued by the National Council on Privatisation.
  4. The assets and liabilities are identified on the audited balance sheets of the Authority.
  5. Asset transfers to be exempted from stamp duties.
  6. The formation of the initial holding company to be exempted from stamp duties.10

4. INCORPORATED JOINT VENTURES

Version IV made notable amendments with respect to incorporated joint ventures ("IJVs"). Under section 260(3) of Version IV, the National Oil Company may appoint a majority of members to the Board of Directors, where it is the majority shareholder. Under the existing participating joint venture framework ("PJV"), the joint operating committee ("JOC") acts to supervise joint operations under the PJV. The JOC is constituted according to the interests of the parties, which inevitably means that NNPC has majority interest. However, the decisions of the JOC are taken unanimously11, which effectively serves to protect the minority. Version IV does not speak to the voting power of the directors, therefore the Articles of Association of the Company or any shareholder's agreement may address this issue.

Section 260(6) provides for the decision of the board of directors of the IJVs to comply with the decisions taken in the shareholder's meetings. This appears to contradict the provisions of CAMA, which place a fiduciary duty on company directors.12

Section 260(10) provides that NNPC ltd shall have the rights to appoint more than 50% of the management team. This right of appointment is not tied to the shareholding of the NNPC Ltd in the IJV and there is an additional requirement that 80% of the management of each IJV must be Nigerian.

One of the objectives of creating the IJV structure was to create self-funding institutions, which would not need to rely on government funds to run their operations. Section 261(2) which provides that the shares of NNPC Ltd in any of the IJVs may not be transferrable by way of sale, assignment, mortgage or pledge, may have a negative impact on the actualisation of this objective. By including such a restriction in the law, it removes flexibility from decision makers and does not allow them to effectively respond to the facts on the ground. It significantly limits the financing options which may be utilised in seeking operational funds. Version IV further extends those restrictions to other shareholders in the IJVs who may not transfer their shares without the written consent of NNPC Ltd.13 It does not provide for such consent not to be unreasonably withheld nor does it provide for a time frame within which the consent must be granted or refused. This would significantly hamper commercial decision making.

Section 263 seeks to protect the shareholders of the IJV from incurring any additional tax liabilities provided all assets are transferred to the IJV at net book value. It does not offer similar protection in terms of company registration fees at the Corporate Affairs Commission ("CAC"), which are likely to be significant in view of the potential assets of these IJV companies.

Version IV also introduces special provisions with respect to the liquidation of the IJVs. It provides for the process by which liquidation may take place and for disposal of the assets of the IJV. Of particular concern is the provision which requires that all the assets of the IJV, whether tangible or intangible, real or personal shall only be transferred to NNPC Ltd in liquidation. In view of the fact that the law provides for a single buyer, there is no room for competition in selling these assets and the shareholders are effectively stuck with the valuation placed on them by NNPC Ltd. It also places significant pressure on NNPC Ltd. in terms of arranging financial commitments for the acquisition (or re-acquisition) of such assets, as well as effective application/management of such assets post liquidation.

COMMENTS ON THE IJV PROVISIONS

It appears that the Inter-Agency team in its proposals sought to provide extensive protections for the State in these IJV vehicles. In doing so however, these provisions appear to create an entity unrecognisable under Nigerian law – a hybrid, if you will, of the typical state corporation and the limited liability company. The provisions entrench rules in favour of the majority and do not appear to be concerned about minority protections. It is suggested that a number of the State protections are better dealt with within a Shareholders' Agreement or the Articles of Association of the IJV. This method would allow for flexibility as it is difficult to amend legislation once it is passed.

It is also useful to note that in a number of areas, there are gaps in the provisions, which may be addressed by Shareholders' Agreements. For example, if the provisions of Version IV were adopted and passed into law as is, it may be necessary for a Shareholders' Agreement to require NNPC Ltd. to pay market value as determined by an independent consultant for the assets transferred in liquidation.

This article is concluded in the second part of the paper.

Footnotes

1. The Inter-Agency Team comprised of Ministry of Petroleum Resources, Ministry of Justice, Ministry of Finance, Federal Inland Revenue Service, Department of Petroleum Resources, Nigerian Extractive Industries Transparency Initiative, Revenue Mobilisation Allocation and Fiscal Commission & the Nigerian National Petroleum Corporation.

2. For the purposes of this paper, this is referred to as Version IV. The Bill submitted to the National Assembly is referred to as the Official Version.

3. This Author has previously argued for the abandonment of NAPAMA as the role of the agency was unclear and was likely to add a bureaucratic layer to upstream petroleum industry regulation. See "Highlights of Aspects of the Petroleum Industry Bill" a paper presented at the Nigerian Association of Energy Economics Conference in Abuja 2009 – www.odujinrinadefulu.com/

4. Section 39(2) (a) of Version IV.

5. Section 39(2) (d) of Version IV

6. It only states that if the company has not been created after 3 months of the passage of the Act, the government should cause its creation.

7. Section 18 of CAMA

8. Section 1 of EPSRA

9. Section 2 of EPSRA

10. See Sections 3 & 4 of EPSRA

11. See Adedolapo Akinrele, Nigeria Oil and Gas Law, at page 151.

12. The duty of a director is to the company and not to the person whose nominee he is. See Orojo, Company Law and Practice in Nigeria, at page 310.

13. Section 261(4) of Version IV

To read Part 2 of this article please click here.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions