Nigeria: Recommendations For Addressing Identified Issue(s) In Insolvency Of An Oil And Gas Asset Holder In The Nigerian Petroleum Industry [Part 6]

Energy & Natural Resources

23^rd October 2019.

Peter Olaoye Olalere, Esq¹

RECOMMENDATIONS FOR ADDRESSING IDENTIFIED ISSUE(S) IN INSOLVENCY OF AN OIL AND GAS ASSET HOLDER IN THE NIGERIAN PETROLEUM INDUSTRY

PART 6

From the laws, regulations and guidelines reviewed in part one, the practice of raising finance for the assets and fields in Nigeria in part two, the case study in part three, the powers of the Minister of Petroleum Resources where an oil and gas asset or Interest holder becomes insolvent in part four, and the comparative study of other jurisdictions in part four of this paper; we have identified two broad but clear areas or issues that require attention from the statutory, regulatory and policy perspectives. Addressing the two key areas (and this can be done from various angles) will help in commencing the process of repositioning the Nigerian petroleum industry for better financing and resolution of insolvency situations. This concluding part thus make certain general recommendations in relation to resolving issues thrown up by insolvency of an oil and gas asset holder in Nigeria.

The Issues

Our view is that one of the main issues that DPR faces is a procurement and operational inefficiency issue in terms of the delay in giving or refusing consent to assignment or charge on interests on an oil and gas asset. In other climes, we observe that the regulator would timeously make a decision either granting or rejecting the application for Minister's consent, instead of failure to give official feedback for a protracted period as was the case in respect of the Lekoil application. Generally, in the industry consent is not given or refused timeously enough for the necessary confidence building of the investors and other stakeholders even based on the current law, regulations and guidelines. Reasons for the delay in giving feedback on applications for the consent of the Minister may range from bureaucracy, inadequate statutory or regulatory provisions for the consent, categorizing all request for consent under the same category/stage and making the same/similar requirements for the application for consent, and the Minister's reluctance to give the consent etc.

The implication of the delay in giving feedback on the application for consent from the Minister's or DPR's offices is that the players in the industry (the licensees or lessees) are not willing to seek consent to charges created on oil and gas assets for the purpose of raising funds for the projects. Instead, the players engage in complex structures to obfuscate the need for consent. Most operators and asset holders are of the view that they do not require consent of the Minister to charge the asset to raise funds, once they can structure their financing to make their position arguable. Some charge the oil and gas assets but do not register the charge with the DPR as they do not want to get caught up in the bureaucracy and delays involved in securing the Minister's consent.

Also, as earlier identified, the law and regulations do not specifically make insolvency a ground for revocation of a license or lease as is the case in other jurisdictions like Brazil, and the UK. Most Operating Agreements and JVA also do not make adequate provisions for insolvency of the licensee or lessee. The 'deemed approval of work programme' statutory provision in Brazil, the joint ownership of licence, and partial revocation of licence post January 2009 in the UK, and the provision for "immediate replacement" of an operator under the Bankruptcy and Insolvency Act, RSC 1985, c B-3 [BIA] in Canada, are, in our view, effective measures that help prevent and or resolve the insolvency situations in those jurisdictions.

Recommendations.

To address these issues, we suggest that the law, regulation and guidelines should be reviewed to put strict provisions in place for enforcement of the timeline within which the grant or refusal of consent of the Minister must be communicated to the assignor or the consent must be deemed granted. We observe that this was exactly what the Executive Order was made to cure but this was rejected by the court in the Afren's case reviewed in part 3 of this work. The court's decision that the Executive Order is inapplicable on account of its incapacity to have retroactive effect and not being positive, affirmative and definitive approval expected by the Petroleum Act and regulation is regrettable.

In lieu of the Executive Order, we propose that the principle of 'deemed grant of consent' be enacted into the substantive legislation to deal with the decision of the court in the Afren case, so as to elevate the Executive Order from being just subsidiary legislation,2 and give it the power of law like the regulations and guidelines made pursuant to the Petroleum Act and the Oil Pipelines Act. Before such enactment, we recommend that the DPR and the Minister should positively implement the provisions of paragraph 6.2 of the guidelines and procedure for obtaining the Minster's consent to the assignments of interest in oil and gas assets which obliges them to give feedback within 3 months of the nomination and to proactively and efficiently treat applications for consent.

By paragraph 25 (1) of the First Schedule to the Petroleum Act, insolvency is presently not a reason for revocation under the law. However, our recommendation is that "insolvency" itself simpliciter, should be made a reason for revocation of licence or lease by the Minister in line with what obtains under the laws in Brazil and the UK. We also recommend that a provision be enacted in the regulation or guidelines mandating the asset holders and operators to give notification of early warning signs of insolvency with a view to enabling the DPR and the licence or lease holder to manage the process seamlessly for the benefit of all concerned. Pending amendment to the legislation, we are of the view that, although the powers of the Minister to revoke a licence are explicit in the law and he cannot include additional grounds by Regulation or Directive as such regulation or directive may be ultra vires and may likely be overturned by the court; the Minister can compel an insolvent licensee or lessee to demonstrate its capability to fulfil its obligations under the licence if DPR has early warning signs reported as proposed above.

Further to this, the Minister, through the DPR, can make the determination of when a licence or lease holder is about to breach, is breaching or has breached the provisions of the obligations and conditions of the licence or lease and take proactive steps pursuant to paragraph 25 (2) of the First Schedule to the Petroleum Act. Another option would be to introduce provisions that will impose a clear timeline within which insolvency proceedings involving a licensee or leaseholder must be resolved failing which revocation of the licence or lease would take place.

Also given that the Joint Operating Agreements ("JOAs") of existing companies may not have adequately addressed insolvency, to facilitate commercial resolution of insolvency matters, the DPR may in the interim issue directives to existing licensees requiring them to address the question of 'what happens in an insolvency situation with multiple parties in a licence in their JOA' or amend the directives or guidelines to include the provisions requiring the licence or lease holders to address that question of what happens in an insolvency situation with multiple parties in a licence in their JOA. Such a directive may also be enforced by using other regulatory powers validly held by the Minister or DPR such as the powers to approve Field Development Programme ("FDP"), wells, etc.

We suggest that the guidelines be amended to include clear requirements and processes mandating licensees to ensure that project finance agreements, where deployed to fund projects, should take cognizance of the consent requirement, should be disclosed, be subjected to the consent of the Minister and be registered with the DPR. The DPR should retain the power to conduct due diligence on all lenders and third parties to whom the receiver/manager, may ultimately transfer or assign the asset at the point of insolvency as a precaution to such likely future transfer.

We also suggest that provisions be considered that would authorise the DPR to appoint interim operators/administrators in consultation with the creditor during the period when an insolvent asset holder makes efforts to resolve the insolvency if certain predetermined criteria are met so that the effect of the insolvency does not stop operation of the asset. If some of these suggestions are implemented, there is no doubt that the effect of insolvency of asset holders in the Nigerian petroleum sector will be better managed.

Footnote

1 Notary Public for Nigeria and Senior Associate with the Dispute Resolution Department of S. P. A. Ajibade & Co., Lagos Office, Nigeria.

2 See the dictum of Georgewill JCA in Elephant Group Plc. v. National Security Adviser & Anor. (2018) LPELR-45528(CA).

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