- IBA Lagos Conference 2013

Report
THE NIGERIAN OIL AND GAS INDUSTRY & ITS
CHANGING INVESTMENT CLIMATE
By
Sola Adepetun
Managing Partner
International Bar Association
African Regional Forum
6th – 8th November , 2013
Lagos, Nigeria
INTRODUCTION
“Any change, even a change for the better, is always
accompanied by drawbacks and discomforts”
-Arnold Bennet
1
OUTLINE
I.
Introduction



Nigerian oil & gas industry statistics
Recognisable legal environment and investment climate to
prolonged reforms and uncertainty
The emerging environment for petroleum operations
II. Where were we



The Pre-Reform Era: Established upstream legal and regulatory
framework
The Pre-Reform Era: Contractual framework
The Pre-Reform Era: Upstream fiscal regime
III.
Where are we

Emerging trends

The Reforms and the PIB Debate

The Emerging Law and Changing Practice

A paradox of Divestments and Opportunities
IV.
Where are we going: an uncertain future?

Recent Global Developments
IV.
Concluding questions
2
1.1 Nigerian Oil & Gas Industry Statistics

Facts & Figures
 37.2 million barrels of proven oil reserves;
42.1% oil reserves-to-production ratio as at
2012; the second largest proven oil reserves in
Africa (Source: BP statistical Review of World
Energy, 2013)
 Current oil production- 2.2 million barrels per
day (bbl/d); potential for over 3 million bbl/d
(Source: PWC Oil and Gas Review, June 2013)
 Over 182 trillion cubic feet (Tcf.) of proven gas
reserves. The largest in Africa and the 9th
largest in the world (Source: BP statistical
Review of World Energy, 2013)
 Petroleum sector accounts for more than 95%
of export earnings and more than 75% of
Federal Government revenue
3
1.2. From a stable legal environment and investment climate to
prolonged reforms and uncertainty
•1956 - 2000
•Unprecedented
investments in upstream
and downstream ventures
•Proposals and FIDs in
LNG, Gas pipeline
projects, refineries,
offshore E&P activities
etc.
•Industry developed faster
than extant laws and
regulations
BEFORE THE
REFORMS
THE REFORMS
•2000 – till date???
•National Oil and
Gas Policy, 2004
•The Petroleum
Industry Bill (PIB)
2008? 2009?? 2012
???
•Uncertainties
•Divestments
•New indigenous
investors backed by
foreign capital and
other independents
like SEPLAT,
NECONDE, Addax &
Sinopec, Afren etc.
THE CURRENT
CLIMATE
4
1.3. The emerging environment for petroleum operations
“…Uncertainties in Nigeria's investment policies and regulatory
framework have caused a slowdown in oil and gas exploration
activity, and delays in project development... However, the longawaited and delayed Petroleum Industry Bill (PIB) could potentially
iron out investment uncertainties and set a regulatory framework
for the country's oil and gas industry…” [emphasis added]
Source: US Energy Information Administration (EIA), 2012 Country
Analysis on Nigeria
Is the current investment climate sustainable or not?
What are the relevant legal and policy issues?
What are the emerging trends?
5
WHERE WERE WE?
6
2.1. The Pre-Reform Era: Established upstream legal and
regulatory framework
Law/ Regulation
•Petroleum Act 1969
•Petroleum (Drilling and Production)
Regulations 1969
•Deep Offshore and Inland Basin
Production Sharing Contracts Decree
1999 (“DOI-PSCs Decree”)
•Petroleum Profit Tax Act, 2004
(“PPTA”)
Licenses/Lease/farm outs
•Oil exploration license (OEL)
•Oil prospecting license (OPL)
•Oil mining lease (OML)
•Indigenous concessions
•Marginal fields
Main Regulators
•Minister of Petroleum (Minister)
•Department of Petroleum Resources
(DPR)

A recognisable upstream regulatory
framework

OEL: non-exclusive license to explore. Expires 31st
December of the year granted

OPL: exclusive rights to exploration/production.
Duration: 5years (onshore and shallow waters); 10
years (deep offshore and inland basins), including
period of renewals

OML: exclusive rights to win, get, work, store,
carry away, transport, export or otherwise treat
petroleum discovered. Duration- 20 years. To be
renewed as provided by the Act and Regulations

Other issues covered- assignments; revocations;
farm outs; regulation for fees, rents and royalties;
field development, drilling and production
operations etc

Ancillary regulations include: the Mineral Oils
(Safety)
Regulations,
Petroleum
Refining
Regulations, and the National Domestic Gas
Supply and Pricing Regulations 2008, etc
7
2.2. The Pre-Reform Era: contractual framework
Concessions
•Dominated by the multinationals prior to NNPC’s establishment and
participation in OMLs
•Current trend is to award sole risk and PSC concessions
•60% to 40% indigenous to foreign participating interest ratio in the indigenous
concessions
Joint Venture/Joint Operating Agreement (JV/JOAs)
•Arose from NNPC acquisition of participatory interests in OMLs
•JOAs define working relationship of parties
•Memorandum of Understanding (MoUs) later introduced in the 1990s to secure
profit margins
•NNPC currently has six (6) JV/JOA arrangements with SPDC/Elf/Agip,
Chevron, ExxonMobil, NAOC, Texaco Overseas and Total respectively
Production Sharing Contracts/Risk Service Contracts
•NNPC holds the OML; Oil companies are contractors
•Marginal field operators entered into funding arrangements and RSC hybrids
with Independents
• PSCs- Cost oil/gas, profit oil/gas shared in agreed percentages
• RSCs- a flat fee is paid to the contractor
8
Law/ Regulation
•Petroleum Profits Tax Act (PPTA)
•DOI-PSCs Act
•Section 39, Companies Income Tax Act
(CITA)
Regulators
•The Minister
•DPR
•Federal Inland Revenue Service
(FIRS)
• National Petroleum Investment
Management Services (NAPIMS)
- The Petroleum Profits Tax (PPT)
2.3. The Pre-Reform Era:
Upstream fiscal regime

Tried and tested upstream fiscal regimeOutdated?

PPT applied to the chargeable profits of
companies engaged in upstream petroleum
operations as provided in the PPTA

A general PPT of 85%. A PPT rate of 65.75%
for first five years of petroleum operations

PPT applicable to PSCs is 50% flat rate for the
contract area

The Regulations and the DOI-PSCs Act deal
with royalties

The DOI-PSCs has a fixed royalty rate of 20%
for onshore PSCs (with production above
10,000 bpd) and a sliding scale of royalties
(based of water depth) for offshore PSCs

Rents and fees are dealt with in the
Regulations

Signature and production bonuses are
required for PSCs and other concessions
- MoUs
- Rents, fees and royalties
- Signature and production bonuses
for E&P contracts
9
WHERE ARE WE?
What have the reforms or the “PIB” got to do with it?
10
3.1. Emerging Trends
Nigeria’s 2011 crude oil and
condensate:
 Production reduced by 3%
from 2010
 Domestic and export lifting
reduced by 4% from 2010
Source: NNPC, Annual Statistical
Bulletin, 2011
Security Challenges:
 Crude oil theft – over US$6
billion lost annually
Source: Thisday, April 1, 2013, Pg 12
 Refined products theft- over
N105 billion lost annually
•Source: Thisday, April 1, 2013. Pg 12
 Pipeline sabotage
 Piracy
 Kidnapping
 Petroleum exploration activity
 Rash of Divestments:
levels:
 British Gas- 100%
 At their lowest in 10 years.
 SPDC- 30% stake in OMLs 4, 38,
 Only 3 exploratory wells drilled
41, 42 etc.
in 2011 compared to over 20 wells
Total- 20% stake in OML 138
drilled in 2005
ConocoPhilips- 100%
Source: EIA, 2012 Country Analysis on
Nigeria
Petrobras- 100%???
Chevron -OMLs 83 and 85.
Plans to divest interests in
OMLs 52, 53 and 55
SPDC- again?
11
3.2. The Reforms and the PIB Debate
2012 – 2013
New PIB re-submitted in July, 2012
was to be enacted within six months
2008/2009
The PIB 2008 submitted to the
National Assembly and amended in
2009 (public hearing debacle)
Key proposals (Upstream)2000 - 2004
The oil and Gas Sector Reform
Implementation Committee2000
The National Oil and Gas
Policy, 2004
Incorporation of upstream JV/JOAs,
unbundling of NNPC and
incorporation of a National Oil
Company (NOC)
A National Petroleum Directorate to
replace the Ministry of Petroleum
Key objectivesPrivatisation
A National Petroleum Inspectorate
to replace DPR
Separating the commercial,
regulatory and policy-making
institutions and framework
A National Petroleum Assets
Management Agency to replace
NAPIMS
Constructive increase in
government and national
revenue
A National Frontier Exploration
Service for frontier exploration
Transparency and
accountability
Nigerian Hydrocarbon Tax (NHT) +
Companies Income Tax (CIT)
regime
Efficient institutions and
regulators
Key proposals (Upstream)Discards with incorporation of
JV/JOAs
An Upstream Petroleum Inspectorate
(UPI) to replace DPR
A Downstream Petroleum Regulatory
Agency (DPRA) to replace Petroleum
Products Pricing and Regulatory
Agency (PPPRA) and Department of
Gas
A Nigerian Petroleum Assets
Management Company Ltd (NPC) to
acquire NNPC’s interest in JV/JOAs
A National Petroleum Assets
Management Corporation (NPCO) to
own NPC
A National Oil Company to retain
NNPC assets and liabilites not
trasnferred to NPC or Nigerian Gas
Company
NHT ( 50%- onshore and shallow
water areas) (25%- bitumen, frontier
acreages and deep water areas) + CIT
(30%)+ PHCF (10%)
Royalties, fees and rentals to be
prescribed by the Minister
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3.2.1. The Proposed PIB: Regulatory and Institutional
Framework
13
The Proposed PIB: Regulatory and Institutional Framework (contd)
National Oil
Company Plc
Nigerian Petroleum
Assets Management
Company Limited
National Petroleum
Assets Management
Corporation
•Takes over NNPC assets
and liabilities, excluding
those transferred to the
Management Company
i.e. Unincorporated Joint
Ventures (UJV) assets/
liabilities and National
Gas Company (NGC) Plc
•Takes over
Government/NNPC
interests and assets in
existing JV/JOAs; to be
transferred within 12 - 24
months from the
Effective Date
•Holding corporation for
the NPC
• To be incorporated as a
public company
•Initial 2 years work
programme to be funded
by the NPCO. Initial
shares held by the NPCO
(99%) and Ministry of
Petroleum (1%). Not
bound by FRA & PPA
•Administrative support
to be provided by the
NPC
•30% of its shares goes
public in the first six
years. Initial shares held
by government (Ministry
of Petroleum Resources
and Ministry of Finance
Incorporated). Not bound
by Fiscal Responsibility
Act, (FRA) 2007 and
Public Procurement Act,
(PPA) 2007
•To manage government
assets and investments
upstream like current
NAPIMS
14
3.3The Emerging Law and Changing Practice
 Existing legal
framework
and
institutional
 PIB considered ambitious and time
consuming
 Resultant state of flux!!
 Drawback- development of practice
rules outside the framework
• Nigerian Oil and Gas Industry
Content Development Act, 2010
(“Local Content Act”)
 Applies to all matters
pertaining to local content
 Supremacy issues; major
reference document
 Drafting and clarity issues
 Interpretation issues e.g.
Nigerian subsidiary of
international or
multinationals- S.41(2)
 The lacuna and the unclear
legislation
• “Regulatory discretion”
 OML renewals
 Arbitrary extensions
 Material changes
 “Wait for the PIB”
• Resort to case law
 The Moni Pulo case
― Acquisition of
controlling shares in
concession owning
company requires
prior ministerial
consent
― Sections 194(1) & (2),
PIB
 The Famfa Case
― Supreme Courtgovernment must
follow due process of
negotiation before
exercising back-inrights
15
3.4. A Paradox of Divestments and Opportunities
 State of flux- negative impact on investment climate
 Heightened investment risk profile
Disincentive to oil and gas project development
Discouraging industry statistics
IOC divestments
 Fresh investment opportunities created by divestments
“Dumped” concessions being snapped up
Emerging indigenous powerhouses
― OANDO, Sahara, SEPLAT, AFREN, Midwestern, NECONDE,
First E&P; Atlantic, etc
16
WHERE ARE WE GOING: AN UNCERTAIN FUTURE?
17
4.1. Recent Global Developments

Competitive global markets

(Cheaper) shale oil and gas explosion

East and West African discoveries
―

Kenya, Uganda, Tanzania, Mozambique, Ghana, etc
Dire need for favourable investment climate

Full throttle production
―

“Make hay while the sun shines”
Investments in new and existing oil and gas projects required
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CONCLUDING QUESTIONS
Is there anything we can do to improve the investment climate
while we wait for the PIB to be passed?
Strengthen the Local Content Act?
When will the PIB be passed???
Politicization
Stagnation
Political will- can this bill be shelved?
Yet another change???
“To improve is to change; to be perfect is to change often”
- Winston Churchill
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ADEPETUN CAXTON-MARTINS AGBOR & SEGUN
CONTACT DETAILS:
Sola Adepetun
Managing Partner
9th Floor, St. Nicholas House
Catholic Mission Street
Lagos, Nigeria
Tel: + 234 4613141
Cell: + 234 803 301 6030
Email: [email protected]
20

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