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Acquisition of Oil Rights under Contractual Joint Ventures in Nigeria

Published online by Cambridge University Press:  28 July 2009

Lawrence Atsegbua
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Extract

This article inquires critically into the different modes of acquisition of oil rights in Nigeria by international oil companies (IOCs) under contractual joint ventures. These contractual joint ventures are either production sharing or service contracts.

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Articles
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Journal of African Law , Volume 37 , Issue 1 , Spring 1993 , pp. 10 - 29
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Copyright © School of Oriental and African Studies 1993

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References

1 Blinn, K. W.et al, International Petroleum Exploration and Exploitation Agreements—Legal, Economic and Political Aspects, New York, 1986, 3 (hereinafter Blinn).Google Scholar

2 Hossain, K., Law and Policy in Petroleum Development, London, 1979, 173 (hereinafter Hossain).Google Scholar

3 Blinn, , 34.Google Scholar

4 Hossain, , 100.Google Scholar

5 Ibid. at 102. A good example of this can be seen in Nigeria where the fiscal terms originally fixed by the Petroleum Profits Tax Act of 1949 has constantly been amended. Today however, the taxes payable by the IOCs are computed under the revised memorandum of understanding (MOU) between the Nigerian government and the IOCs. See below, p. 27.

6 Thompson, A. R., “Sovereignty and natural resources: a study of Canadian petroleum legislation” (1967) 1 Val. U.L.Rev. 284 at 290, quoted in Hossain, 103.Google Scholar

7 Hossain, , 104. This provision is currently in use in Alberta. In Nigeria, a provision to the same effect can be found in the various forms of contractual arrangements, e.g. clause 15 of the production sharing contract between the Nigerian National Petroleum Company and Ashland Oil (Nigeria) Company, which provides that “no term or provision of this contract … shall prevent or limit the government of Nigeria from exercising its inalienable rights”.Google Scholar

8 The Nigerian Petroleum Act of 1969 repealed the Mineral Oils Ordinance of 1914 and reduced the term of oil mining leases from 30 years (onshore) and 40 years (offshore) to 20 years. Oil mining leases granted prior to 1969 were however not affected.

9 Blinn, , 34.Google Scholar

10 Ibid. See also Hossain, 107.

11 Date-Bah, S. K. and Rahim, M.,“Promoting petroleum exploration and development: issues for government action”in Khan, K. (ed.), Petroleum Resources and Development—Economic, Legal and Policy Issues for Developing Countries, London, 1987, 93 at 95.Google Scholar

12 Hossain, , 101.Google Scholar

13 Blinn, , 34. In Nigeria, however, as a result of the good relationship between the government and the IOCs, contractual flexibility has been achieved through the process of renegotiation. See the memorandum of understanding (MOU) below, p. 27.Google Scholar

14 Hossain, , 101. The repealed Mineral Oils Ordinance of 1914 fell within the framework of the flexible system.Google Scholar

15 Blinn, , 34 and Date-Bah and Rahim, 96.Google Scholar

16 Ibid.

17 Etikerentse, G., Nigerian Petroleum Law, London, 1985, 42.Google Scholar

18 See s. 2 of the Petroleum Act 1969.

19 Asante, S. K. B.,“Restructuring transnational mineral agreements”, (1979) 73 American J.I.L. 335 at 359.Google ScholarSee also Mikesell, R. F., Petroleum Company Operations and Agreements in Developing Countries, Washington, D.C., 1984, at 25. These new forms of contractual arrangements were the result of strong political antagonism towards IOCs brought about by the new ideology of permanent sovereignty over natural resources.Google Scholar

20 Asante, , loc. cit.Google Scholar

21 Ibid. at 360.

22 Blinn, , 69. A production sharing contract bears some resemblance to a farmout arrangement. In a typical farmout arrangement, a lessee contracts to transfer acreage to a company if the company drills a well. Once payout occurs an d the driller recovers all the costs of drilling the well, the driller and the lessee share the proceeds of production on a predetermined formula. SeeGoogle ScholarSmith, E. E. and Dzienkowski, J. S.”, (1989)“A fifty-year perspective on world petroleum arrangements”, 24 Texas I.L.J. 13 at 37 n. 174.Google ScholarFor a study of Canadian farmout agreements see Lucas, A. R. and Hunt, C. D., Oil and Gas IJIW in Canada, Toronto, 1990, at 145–161.Google Scholar

23 Blinn, , 69–70. See alsoGoogle ScholarKhan, K.,“Petroleum taxation and contracts in the Third World—a law and policy perspective”(1988) 22 J.W.T.L. 67 at 83–84 andGoogle ScholarMikesell, , op. cit., 28.Google Scholar

24 See Basic Oil Laws and Concession Contracts South and Central Africa, (Original Texts), Supplement Nos. 51–55 (1978–1979).

25 Etikerentse, , op. cit., 42.Google Scholar

26 Ibid., under Clause l(g), commercial quantity is defined as“the capacity to produce at least 10,000 barrels per day of crude-oil from the contract area”.

27 Hossain, , 148.Google Scholar

28 Ibid. at 104.

29 Ibid. at 149.

30 Blinn, , 77.Google Scholar

31 Ibid. See above on the percentage split between the Indonesian government and the IOCs under a PSC.

32 Etikerentse, , 43.Google Scholar

33 Blinn, , 77.Google Scholar

34 Ibid. at 78. See also Hossain, 140.

35 Hossain, , 141.Google Scholar

36 Etikercntse, , op. cit., 43.Google Scholar

37 Hossain, , 117.Google Scholar

38 See below, p. 27.

39 Blinn, , 79.Google Scholar

40 Hossain, , 109.Google ScholarSee also Attwell, J. E.,“Changing relationship between host countries and international petroleum companies”(1979–1980) 17 Houston L.R. 1015 at 1015:“One must look at the substance of each agreement to determine the bottom-line financial benefits as well as the controls that are involved in the particular contractual arrangement chosen”.Google Scholar

41 See also Mikesell, , op. cit., 136: “Model contracts employed by governments have frequently been formulated with a view of satisfying domestic ideological objections to foreign investment in petroleum production”.Google Scholar

42 Hossain, , 111–112.Google Scholar

43 Asante, , loc. cit., 364. As noted earlier, under the NNPC–AON PSC, management and control of petroleum operations is undertaken by AON.Google Scholar

44 Hossain, , 111.Google Scholar

45 Asante, loc. cit., 366.Google Scholar

46 Ibid.

47 Ibid. Under clause 14 of the NNPC–AON production sharing contract, NNPC's officials are entitled to have access to account books kept by AON. There is however, no provision granting NNPC the right to have access to other documents, reports and data kept by AON.

48 Above n. 24, clause 6(iv).Google Scholar

49 Asante, , op. cit., 366.Google Scholar

50 See also Sasegbon, F.,“Current development in oil and gas law: Nigeria—with comparative analysis with other African oil producing countries”(1981) I Energy Law 361 at 371:“After the operating company took its 40% of the proceeds for the amortisation of its investment and operating expenses … and after setting aside the 55% for the payment of … petroleum profit tax, the balance left was hardly anything to warrant the application of any ratio whether 35/65 or 30/70”.Google Scholar

51 Report of the Tribunal of Inquiry into Crude Oil Sales (1980) at 25, referred to in Sasegbon, loc. cit., 377 n. 26.Google Scholar

52 Ibid. at 371. See also Y. Omorogbe, “Contractual forms in the oil industry: the Nigerian experience with production sharing contracts”(1986) 20 J.W.T.L. 342 at 345. The author submits that the PSC has the following drawbacks:“(i) The percentage of petroleum set aside per cost recovery is one of the highest seen; (ii) the imposition of petroleum profit tax is unusual, and makes this PSC the one with highest tax rate and allied to this is the fact that a percentage of production is set aside towards the payment of tax; (iii) the contractor, realizing that it is more beneficial can concentrate on producing one lucrative field, while slowing down exploration on other areas covered by the PSC; (iv) the contractor, since its expenses will be fully met, can afford to be wasteful or extravagant to the disadvantage of the HC; and (v) the contractor may earn windfall profits when there is a great increase in the price of crude oil.”

53 Hossain, , 157.Google Scholar

54 Ibid. See also Omorogbe, op. cit., 371.

55 Hossain, , 158.See alsoGoogle ScholarOmorogbe, , op. cit., 347.Google Scholar

56 In Nigeria, if there is a sharp increase or decrease in the oil price, the contract can be renegotiated with the IOCs. For an example, see the MOU, below p. 27.

57 Omorogbe, , loc. cit.Google Scholar

58 Omorogbe, y.,“The legal framework for the production of petroleum in Nigeria”(1987) 5 No. 4J.E.N.R.L. 273 at 281. The model PSC of September 1990 issued by the NNPC differs from the NNPC–AON PSC. In respect of the recovery of operation cost and sharing of profit, it provides that the“cost oil”recoverable by the IOC shall be 30%,“tax oil”is fixed at 40% and the balance of 30% shall be shared 35% NNPC, 65% IOC. Taxes due on the IOCs share shall be paid by the IOC in accordance with the Companies Income Tax Act, and shall not under any circumstances be reimbursable to the IOC. This provision differs from clause 6 of the NNPC-AON PSC which has been the subject of criticisms. See Basic Oil Laws and Concession Contracts South & Central Africa (Original Text), Supplement Nos. 100–105 (1990–1991). In March 1991, the Nigerian government produced a confidential model PSC. The 1991 model contains some substantial differences from the 1990 model. The major changes are in respect of the recovery of operating costs and of crude oil allocation. Article 8(i) provides: (a) Tax oil; to offset actual tax and royalty due, will be deducted in full n i the relevant year. Government Agency shall take in kind, lift and dispose of tax oil and from the proceeds pay royalty, petroleum profit tax and concession rentals, (b) Cost oil; for cost recovery purposes, operating costs will be recovered in the year of expenditure, while capital cost will be recovered in a minimum of 20 quarterly instalments. Contractor shall take in kind, lift and dispose of cost oil and from the proceeds pay all operating cost, (c) Profit oil; crude oil after deduction of royalty, petroleum profit tax, concession rental and cost recovery. Profit oil for the Niger Delta area in the south of Nigeria, will be shared between the parties as follows:Google Scholar

The percentage splits for offshore and frontier areas are different. See Basic Oil IMWS and Concession Contracts, South and Central Africa (Original Text), Supplement No. 107 (1991).

59 Blinn, , 82.Google Scholar

60 See Neto, J. S. C.,“Risk-bearing service contracts in Brazil”(1985) 3 J.E.N.R.L. 114.Google Scholar

61 Ibid. See also Khan, op. cit., 84–85.

62 Asante, , op. cit. 360.Google ScholarSasegbon, , op. cit., 371 andGoogle ScholarAdeniji, K.,“State participation in the Nigerian oil industry”(1977) 11 J.W.T.L. 156 at 170.Google Scholar

63 Blinn, , 88–90.Google Scholar

64 Etikerentse, , op. cit., 47.Google Scholar

65 Signed with Elf, Agip, Africa, and Nigus Petroleum Companies referred to in Omorogbe, op cit., 281.Google Scholar

66 Etikerentse, , op cit., 47.Google Scholar

67 Under the NNPC Proforma/Draf t Service contract of July 1979, reproduced in Basic Oil Laws and Concession Contracts, South and Central Africa (Original Text), Supplement Nos. 56–60 (1979–1980), the method of reimbursement is as follows, Article 11.9:

Under article 7.10, a commercial discovery is defined as: “The ratio of the present worth of the net earnings expressed in United States dollars to the projected quantity of petroleum won and save over the duration of the contract, expressed in cubic meters, yields a profit margin greater than 4.75”.

68 This is calculated in accordance with a formula. For example, under the NNPC Proforma/Draft Service Contract of July 1979, remuneration is paid on the following basis:

69 Etikcrcntsc, , op. cit., 47.See alsoGoogle ScholarOmorogbe, , op. cit., 281.Google Scholar

70 Etikerentse, , op. cit., 47.Google Scholar

71 Ibid.

72 Ibid., 48.

73 Omorogbe, Ibid., 282.

74 Blinn, , 97.Google Scholar

75 Omorogbe, , op. cit., 282.Google Scholar

76 Asante, , op. cit., 362.Google Scholar

77 Ibid.

78 Asante, S. K. B. and Stockmayer, A., “Evolution of development contracts: the issue of effective control” in Legal and Institutional Arrangement in Mineral Development, London, 1980, 53 at 61. See also article 14 of the NNPG Proforma/Draft Service Contract, above. In other service contracts in Nigeria, it is possible to find a schedule for training of local manpower to the following effect:Google Scholar

Source: Khan, K., “The transfer of technology and petroleum development in developing countries: with special reference to Trinidad and Tobago” (1986) 4 No. 1J.E.N.R.L. 10 at 18.Google Scholar

79 Asante, , op. cit., at 357.Google Scholar

80 Smith, D. N., New Eyes for Old; The Future, Present and Past in the Evolution of Mineral Agreements, Lagos, 1981, 8.Google Scholar

81 Hossain, , 175.Google Scholar

82 Ibid. at 176. See also C. R. Blitzer, P. E. Cavoulascos and J. L. Paddock,“Risk bearing and contract design: are stable contracts feasible”, in K. Khan (ed.), op. cit., 173, where it is argued that both countries and companies have been too conservative in their approach to contract design. Conservative means that they have been reluctant to move outside the conventional framework, to create the contract form most suitable to a particular situation, rather than using a structure which has been used perhaps successfully, by another country.

83 Asante, , op. cit., 363.See however,Google ScholarWalde, T.,“Third World mineral development in crisis—the impact of the world recession on legal instruments governing Third World mineral development”(1985) 19 J.W.T.L. 3 at 11: “A comparative analysis of the various types of agreement has found that, from a financial viewpoint, the form of the agreement is of little importance and that states often may have even lost revenues through the“innovative arrangements”advocated in the 1970s”and also Omorogbe, op. cit. at 283 that“the service contract has made little difference to the Nigerian legal framework …”.Google Scholar

84 Kemper, R.,“The concept of permanent sovereignty and its impact on mineral contracts”i n Legal and Institutional Arrangements, 29 at 33. It has been argued that state participation in the oil industry has not resulted in any radical changes in the pattern of behaviour of the IOC.Google ScholarSee Usoro, E. J.,“Foreign oil companies and recent Nigerian petroleum oil policies”(1972) 14 Nigerian J.E.S.S. 301 at 304. All modern oil contracts illustrate that ownership does not automatically imply effective control and that the function of management can be separated from ownership. On this point see Walde, op. cit., at 13.Google Scholar

85 Kemper, ibid.

86 Broadman, H. G. & Wilson, E. J.,“Trials and Tribulations of Third World Petroleum Development: Lessons and Advice for Prospective Producers”, in Khan, K. ed., Petroleum Resources and Development, 262–263.Google Scholar

87 It has been argued, that a joint venture must take into account which of the parties has a comparative advantage in bearing the risk associated with oil exploration and exploitation. This comparative advantage will depend on which party has the ability to diversify the risk and that this approach would lead to a more efficient allocation of investment and ensure contractual stability. See Blitzer, , Cavoulacos, & Paddock, , above, n.82 at 174. In most cases the IOCs have the money and technical skills which are required and are sufficiently diversified, so that they can afford risks. However, the government of HCs have neither large amount of capital or trained manpower and hence cannot afford the risk of oil exploration capital. It is therefore argued that the government of the HC should not embark on an oil exploration programme, but rather should leave it to the IOCs.Google ScholarFor a contrary view see Tanzer, M., The Political Economy of International Oil and the Underdeveloped Countries, Boston, 1969, at 133–135.Google Scholar

88 Mughraby, M., Permanent Sovereignty Over Oil Resources Beirut, 1966, 190.Google Scholar

89 , S. K. B.Asante,“Stability of contractual relations in the transnational investment process”(1979) 28 I.C.L.Q. 401 at 404 and“The concept of stability of contractual relations in the transnational investment process”inCrossRefGoogle ScholarHossain, K. (ed.), Legal Aspects of the New International Economic Order, New York, 1980, 234.Google Scholar

90 Asante, , “Stabilities”at 405.Google Scholar

91 United Nations General Assembly Resolution 1803 of 1962.

92 Asante, , “Stability”at 407–108.Google Scholar

93 Peter, W., Arbitration and Renegotiation of International Investment Agreements, Dordrecht, 1986 at 146.Google Scholar

94 Ibid., at 136.

95 Ibid., at 136–137. See also Blinn, 302–306 and G. R. Delaume, Law and Practice of Transnational Contracts, New York, 1988, at 45–46.

96 Peter, ibid. at 137.

97 Ibid. at 140.

98 Sornarajah, M., “The myth of international contract law” (1982) 16 J.W.T.L. 187 at 210.See alsoGoogle ScholarArechaga, E. J.,“Application of the rules of state responsibility to the nationalization of foreign-owned property”in Hossain, K. (ed.), Legal Aspects of the New International Economic Order, 220 at 229–230:“This runs counter to the fundamental concept and purpose of the permanent sovereignty of a state over its natural resources and wealth proclaimed in the Charter and in other General Assembly resolutions”. The same view is expressed by the author in (1978) 1 Recueil des Cours 296 at 297. For a contrary view see Professor Weil referred to by Arechaga at 229–230. Note however, that Professor Weil's conclusion is based on his view that oil contracts containing stabilizaton clauses are governed by international law and not the law of the HC.Google Scholar

99 Peter, , op. cit., 141.Google Scholar

100 Peter, , op. cit.Google ScholarSee also Chowdhury, S. R.,“Permanent sovereignty and its impact on stabilization clauses, standards of compensation and pattern of development co-operation”, in Hossain, K. and Chowdhury, C. R. (eds.), Permanent Sovereignty over National Resources International Law, New York, 1984, 42 at 55.Google Scholar

101 Walde, , op. cit., 25 andGoogle ScholarChowdhury, , op. cit., 56. Renegotiation of contractual arrangements is sanctioned by OPEC. See OPEC Declaratory Statement of Policy of 1968 in OPEC Official Resolutions and Press Releases, 62, where it is provided that:“Notwithstanding any guarantee of fiscal stability that may have been granted to the operator, the operator shall not have the right to obtain excessively high net earnings after taxes. The financial provisions of contracts which actually result in such excessive high net earnings shall be open to renegotiation.Google Scholar

102 Ibid. at 26.

103 The MOU was renewed in 1991 with some upward adjustment of the margins. See Press Statement by the Minister for Petroleum Resources, 23 May, 1991. Renegotiation of agreements between the Nigerian goverment an d IOCs is not a new phenomenon. See Text of Revenue Renegotiation Agreement between the Nigerian government and the IOCs, signed in May 1971 in Basic Oil Laws and Concession Contracts, South and Central Africa (Original Text), Supplement, Nos. 31–35.

104 See the renegotiations between the government of Kuwait and American Independent Oil Company. Renegotiation was provided for under article 9 of the 1948 agreement between the parties. After the renegotiations ultimately failed in September 1977, the property of the American oil company was nationalized. It seems however, that the renegotiations failed because the government of Kuwait had made up its mind to take over full ownership of its oil resources.see Peter, , op. cit., 70–71.Google Scholar

105 Chowdhury, , op. cit., 56. In Canada, the change of law clause referred to above serves the purposes of a renegotiation clause. Note that renegotiation clauses are different from hardship clauses which are restricted to hardship situations.Google Scholar

106 Under equity participation, the Nigerian government presently holds 60% shares in the IOCs operating in the country.

107 Smith, D. N. and Wells, L. T.,“Conflict avoidance in concession agreements”(1976) 17 Harv.J.I.L. 51.Google Scholar

108 Sornarajah, , op. cit., 214–215.Google Scholar