Introduction

In a previous publication, we discussed the transitional framework of existing marginal fields ("MF") introduced by the Petroleum Industry Act ("PIA") and specifically, the categorization of existing MFs as producing MFs and non-producing MFs1.

While the PIA mandated non-producing MFs to be automatically converted to petroleum prospecting licences ("PPL") from the effective date of the Act2 ("Effective Date"), producing MFs were permitted to continue operating under the original royalty rates and existing farm-out agreement entered into with the farmor of the MF ("FOA"), subject to a requirement to convert the producing MF to a petroleum mining lease ("PML") within eighteen (18) months3 from the Effective Date4, being 15 February 2023 ("Conversion Deadline").

In view of the fast-approaching Conversion Deadline, this publication seeks to discuss the requirements for conversion under the Conversion and Renewal (Licences and Leases) Regulations, 2022 ("Regulations"), which commenced on 26 October 2022. Some of the key provisions of the Regulations are highlighted below:

1. Objective

The Regulations were issued pursuant to the powers of the Nigerian Upstream Petroleum Regulatory Commission ("NUPRC") under the PIA to issue guidelines in respect of upstream petroleum operations. The objective of the Regulation is to set out regulatory processes for the conversion and renewal of upstream prospecting licences and mining leases5.

2. Application for Conversion of an MF to a PML

An application for the conversion of an MF to a PML shall be accompanied by the following documents6:

A. A proposal indicating the following:

  1. the status of development and production activities of the MF;
  2. a proposed work programme for maintaining field production in the MF area;
  3. where applicable, a field development plan following a commercial discovery within any development area of the MF;
  4. the proposed value of the performance security7 to be provided to guarantee the work programme or field development plan in (ii) and (iii) above;
  5. computation of the rent payable for the first year for the PML after conversion; and
  6. location of the measurement point or deemed measurement point for approval by the NUPRC;

B. The original letter of award of the MF;

C. The original copy of consent granted by the Minister of Petroleum Resources ("Minister") to an assignment of interest in the MF; and

D. Such other documents as the NUPRC may determine.

3. The Status of Existing Farm-Out Agreements

It is worth noting that following the award of a PML to an MF operator, any FOA will be effectively terminated and will no longer regulate the operations of the MF. Interestingly, the Regulations further provide that the termination of such FOAs will not affect any accrued obligations under any contractual arrangement for facility use with a farmor, such as the evacuation of production, pipeline tie-in, and proximity arrangements8.

4. Timeline for the Grant of a PML

The Regulations provide for the time limit for the NUPRC and the Minister to consider applications for an MF conversion. The Regulations require the NUPRC to make a recommendation to the Minister within ninety (90) days of receipt of the application, while the Minister is mandated to decide within another sixty (60) days, failing which the consent will be deemed granted subject to the fulfillment of all pre-conditions stipulated in the Regulations9.

5. Conclusion

The Regulations have provided clarity on certain critical points that may affect stakeholders, such as the status of FOAs and other operational agreements with the farmor, following the conversion of an MF to a PML. However, the issue of involuntary deprivation and compensation to farmors for loss of property rights as a result of the automatic termination of the FOAs and the award of a PML, as well as the projected revenues from overriding royalties, is yet to be expressly addressed. Nonetheless, operators of producing MFs should concentrate on meeting the imminent Conversion Deadline, as an immediate next step, as they await regulatory guidance on the lingering issues.

Footnotes

  1. Non-producing MFs are new discoveries declared as MFs prior to 1 January 2021
  2. 16 August 2021
  3. We note an inconsistency in the timeline for conversion under the Regulations, which mandated an MF to convert to a PML within 16 months from the effective date of the PIA. However, given the Regulations is a subsidiary legislation made pursuant to the PIA, the provisions of the PIA would take precedence i.e., eighteen (18) months. Paragraph 11 (b) of the Regulations.
  4. Section 94 (1) of the PIA
  5. Paragraph 1 of the Regulations
  6. Paragraph 6 (2) of the Regulations
  7. The Regulations provide that the performance security could be in form of a parent company guarantee, performance bond, letter of credit, bank guarantee or any other guarantee acceptable to the NUPRC.
  8. Paragraph 6 (4) and (5) of the Regulations
  9. Paragraph 13 (1), (2) and (3) of the Regulations

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.