Shell now liable for acts of its Nigerian subsidiary

A Dutch appeals court ruled on Friday that Royal Dutch Shell may be held liable for oil spills at its subsidiary in Nigeria, potentially opening the way for other compensation claims against multinationals in the Niger Delta and elsewhere.

The ruling was hailed by rights groups as a victory for victims of environmental pollution worldwide, while Shell said it was disappointed.

Judges in The Hague ordered Shell to make available to the court documents that might cast light on the cause of the spills and whether leading managers were aware of them.

A lower Dutch court in 2013 had found that Shell's Dutch-based parent company could not be held liable for leakages of oil at its Nigerian subsidiary.

The legal dispute dates back to 2008 when four Nigerian farmers and campaign group Friends of the Earth filed suit against the oil company in the Netherlands, where its global headquarters is based.

"Shell can be taken to court in the Netherlands for the effects of the oil spills," the court stated on Friday. "Shell is also ordered to provide access to documents that could shed more light on the cause of the leaks."

The court still has to decide if Royal Dutch Shell is in fact responsible for the Nigerian spills. The court will continue to hear the case in March 2016.

Judge Hans van der Klooster said the court had also found that it "has jurisdiction in the case against Shell and its subsidiary in Nigeria".

Shell's Nigerian subsidiary, Shell Petroleum Development Company of Nigeria Ltd (SPDC), said in a statement: "We are disappointed the Dutch court has determined it should assume international jurisdiction over SPDC."

"We believe allegations concerning Nigerian plaintiffs in dispute with a Nigerian company, over issues which took place within Nigeria, should be heard in Nigeria," it said.

UNIQUE RULING

Shell has always blamed the leakages on sabotage which under Nigerian law would mean it is not liable to pay compensation. But the Dutch court said on Friday: "It is too early to assume that the leaks were caused by sabotage."

"The ruling is unique and can pave the way for victims of environmental pollution and human rights abuses worldwide to turn to the Netherlands for legal redress when a Dutch company is involved," Friends of the Earth Netherlands said in a statement.

In January 2013, the district court in The Hague ruled that one of the farmers in the original suit was eligible for compensation from Shell's Nigerian division for spills on his land in the Niger Delta, the heart of Nigeria's oil industry.

The farmer appealed over whether the parent company should also be liable.

In a separate case, Shell agreed in January to pay out 55 million pounds ($82 million) in out-of-court compensation for two oil spills in Nigeria in 2008 after agreeing a settlement with the affected community in the Delta.

(This story removes erroneous reference to overturning of 2013 ruling, par 2)

(Additional reporting by Anthony Deutsch; editing by Richard Balmforth)

Source: Reuters

Nigerian government proposes new Bill to reform State oil company

Nigeria's government is breaking up an all-encompassing oil bill that has been stuck in parliament for years, replacing it first with a law to overhaul the state sector which aims to close loopholes that bred corruption, according to a draft seen by Reuters.

Under the draft legislation, the Nigerian National Petroleum Corporation (NNPC) which is the State's oil company will be split in two - rather than a series of units as envisaged by the stalled 2012 bill - including a National Oil Company that will be run on commercial lines and partly privatized.

Africa's biggest oil producer has been trying to pass a new oil law for years but lawmakers have never agreed on every aspect of the 200-page Petroleum Industry Bill (PIB), particularly the aspects on taxation and host community funds.

In November, Kachikwu, the head of the NNPC said the government was working on a new PIB that would probably be passed in sections, particularly the thorny issue of a new tax regime that has been criticized by major international oil firms.

The first new bill, drafted by the Senate and overseen by the oil ministry, is entitled "Petroleum Industry Governance and Institutional Framework Bill 2015" and aims to create "commercially oriented and profit driven petroleum entities".

It is expected to be presented to senators this week.

The bill repeals the act that created NNPC that contained legal gray areas that allowed mismanagement to go unchecked and billions of dollars in revenues to go seemingly unaccounted for as operating costs rocketed.

"The bill will be the first statutory reform of the NNPC since its establishment in 1977, and if passed into law, will be crucial to ushering in a new oil company that can fulfill its responsibilities and obligations both to the country and to its JV partners," Harrison Declan, a Lagos based energy lawyer said.

Under the Nigerian constitution, NNPC is supposed to hand over its revenues to the federal government, which then returns what the firm needs to operate based on a budget approved by parliament. However, the act establishing the state firm allows it to cover costs before remitting funds, in effect enabling it to do what it wants with the cash.

The institutional changes in the new draft have been greatly simplified from the 2012 PIB that created many new regulators and broke up the oil company into separate downstream (refining and retail), upstream oil and gas companies.

Instead, NNPC will be split into two: the Nigeria Petroleum Assets Management Co (NPAM) and a National Oil Company (NOC).

REMOVING STATE OBSTACLES

The NOC will be an "integrated oil and gas company operating as a fully commercial entity", the document states, and will run like a private company.

The onus will be on its board to make profits and raise its own funding. The NOC will keep its revenues, deduct costs directly and pay dividends to the government, although the bill does not elaborate on the details.

In theory, trimming NNPC down into two leaner companies could solve a chronic funding problem. Part of Nigeria's oil output comes from joint ventures with foreign and local companies in which NNPC holds the majority stake. However, NNPC is always behind on covering its share of costs owing to the slow pace of government approvals.

To start off, the NOC will receive about $5 billion, or at least the five-year average of the amount of money NNPC had to put into joint venture operations. In October, NNPC estimated it owed around $6 billion to oil companies.

The new NOC will also be partially privatized. At least 30 percent of NOC shares will be divested within six years of its incorporation.

NPAM is expected to manage assets "where the government is not obligated to provide any upfront funding". These include oil licenses run under production-sharing agreements in which independent oil companies cover operating costs and pay tax and royalties on output.

Compared with previous PIB drafts, the law curtails ministerial powers as board appointments are made by the Nigerian president and confirmed by the Senate.

If passed, the law would also create a Nigeria Petroleum Regulatory Commission (NPRC) to oversee everything from oil license bid rounds to fuel prices. Previously, regulation was split between many bodies with ill-defined roles, leading NNPC to act in part as its own watchdog in a conflict of interest.

A Special Investigation Unit would also be set up under the NPRC with the powers to seize items and make arrests without a warrant.

Sourced from Reuters

Problems with the DPR Guidelines for Oil Workers

Source: The Punch Newspapers, October 26, 2015

The Nigerian Oil and Gas Industry have in recent times been unsettled by the Guidelines for the Release of Workers in the Oil and Gas Industry recently released by the Department of Petroleum Resources (DPR). The Guidelines subject the release of a worker by an oil and gas company to the consent of the Minister of Petroleum Resources.

The Guidelines was signed by the erstwhile Director of the DPR, George Osahon, and was issued pursuant to Regulation 15A of the Petroleum (Drilling and Production)(Amendment) Regulations. Regulation 15A was itself issued pursuant to section 9 of the Petroleum Act, LFN 2004 which empowers the Minister of Petroleum Resources to issue regulations for the purpose of giving effect to the Act.

Certain questions have arisen in relation to these Guidelines. Questions like does the DPR have the power to issue the Guidelines? Do the Guidelines violate labour laws which state that an employer can terminate an employee’s contract of employment for good, bad or no reason at all? Do the Guidelines apply to downstream companies? I have been asked some of these questions by some of the affected companies. I wish to use this medium to air my view on the issue.

Provisions of the Guidelines

While it is not the purpose of this piece to examine the provisions of the Guidelines (as I have done that in another medium), suffice it to say that the Guidelines require that employers must submit to the DPR some stated information about their new and current workers, including their names, date of birth, date of commencement of work, designation at commencement of work, current designation (if already in employment) and one coloured passport photograph. In the case of a new worker, it must be submitted within 7 days of the employment of the new worker and in the case of an existing worker, within 60 days of the enactment of the Guidelines. So far so manageable.

 However, the Guidelines stirred the hornet’s nest when vide paragraph 5.1 it mandated an employer desirous of releasing a worker from its employment to, prior to the release, apply for consent, in writing, to the Director of the DPR stating the manner of staff release, the reasons for the proposed release, the compensation due to the worker, and the proposed replacement of the worker (if any). Paragraph 5.3 further provides that an employer shall not release any worker without the prior consent of the Minister through the Director of the DPR! The DPR, after receiving the application for release shall conduct an investigative inquiry into the proposed staff release and make a decision on whether to grant consent or otherwise.

More bewildering is the penalty for non-compliance. Permit to state at this point that paragraph 6.0 which imposes penalties was not well drafted. It failed to state whether the itemised penalties were conjunctive or disjunctive, i.e. whether one or all of them is imposable at a single instance. The use of the “and” or “or” would have made the difference. The uncertainty created by this paragraph is evident in for instance paragraph 6.2 where both suspension and cancellation are imposable as penalties. Can a lease be suspended and cancelled at the same time? We can’t even conclude it is disjunctive as the penalties listed in paragraph 6.1, i.e. fine of N100,000.00, letter from the DPR indicting the company, and suspension of permit and approvals, can be imposed conjunctively at a single instance of default.

The penalty for failure to seek the DPR’s consent prior to release of a worker is a fine of ten million naira, recall of worker, suspension, (and/or) cancellation of lease, licence or permit. The penalty for failure to implement DPR’s decision on staff release is a fine of five million naira, (and/or) suspension of lease, licence or permit, amongst other penalties.

To whom do the Guidelines Apply?

The Guidelines apply to upstream companies, downstream companies, oil servicing companies, and even oil refining companies. Obligations under the Guidelines are imposed on an “Employer”. An “employer” is defined in paragraph 2.0 to mean “any organisation, company, partnership, or registered business name which holds an oil mining lease, licence or permit (or an interest therein) issued under the Petroleum Act or under Regulations made thereunder or any person registered to provide any services in relation thereto”.

Without doubt, it is clear that upstream companies are caught by the Guidelines as they hold their oil mining lease pursuant to section 2 of the Petroleum Act. Downstream companies also hold their licence or permit pursuant to section 4 of the Petroleum Act. Oil serving companies are covered by the part of the Guidelines which says “…any person registered to provide any services in relation thereto”. Oil refining companies hold their licence pursuant to section 3 of the Petroleum Act.

Does the Department of Petroleum Resources have the authority to issue the Guidelines?

I have read and heard arguments that the DPR does not have the authority to issue the Guidelines. Proponents of this argument rely on section 12(1) of the Petroleum Act which empowers the Minister to delegate to another person powers conferred on him under the Act except the power to make orders and regulations. Reference has also been made in some instances to section 3 of the Ministers’ Statutory Powers and Duties (Miscellaneous Provisions) Act, CAP. M14, LFN, 2004. With due respect, it is submitted that this is a wrong interpretation of those sections. 

The reason for this is twin. First, the purpose of the cited sections is to ensure that the power to make any document with the force of law is reserved with the Minister. To this end, it provides that the powers of the Minister to make regulations, bye-laws and orders cannot be delegated. Generally, “Guidelines” do not fall into the category of documents with the force of law. One single denominator that runs in all definitions of “Guidelines” is that they are non-binding principles that are meant to provide direction. Guidelines are mostly issued by Regulatory bodies to guide on compliance with an existing regulation, bye-laws or orders. Accordingly, the Department of Petroleum Resources have issued several Guidelines for the oil and gas industry to guide on compliance with the Petroleum Act and all the Regulations made thereunder. It would thus, with due respect, be intellectually mischievous to argue that the DPR has no authority to issue the Guidelines.

The second reason is section 10 of the Nigerian National Petroleum Corporation Act, CAP. N123 LFN 2004 (NNPC) which confers on the Director of the Department the regulatory functions of the Minister. The section provides that “…notwithstanding the foregoing, any regulatory function conferred on the Minister pursuant to the said Acts [i.e. the Oil Pipelines Act, the Petroleum Act, or any other enactment…] or any other enactment shall, as from the appointed day, be deemed to have been conferred upon and may be discharged by the chief executive of the Inspectorate [i.e. the Director of the Department]”. So this is not even a case of delegation of powers by the Minister to the Director of the Department, as the powers of the Director are exercised pursuant to section 10 of the NNPC Act.

The case of statutory ubiquity

The Chambers dictionary defines ‘ubiquity’ to mean “existence everywhere at the same time”. The simple truth in this instance is that the Petroleum (Drilling and Production)(Amendment) Regulations is ubiquitous. The problem is not the Guidelines, the problem is the Regulations, and it is unfortunate, and we energy lawyers should chastise ourselves for not questioning this legislative anomaly long before now. At the expense of prolixity, Regulation 15A provides that “the holder of an oil mining lease, licence or permit issued under the Petroleum Act 1969 or under regulations made thereunder or any person registered to provide any services in relation thereto, shall not remove any worker from his employment except in accordance with guidelines that may be specified from time to time by the Minister”. So even if our opposition to the Guidelines is successful, what happens to that Regulation? This is a clear case of over regulation. The Petroleum Drilling Regulations have no business with how a worker is removed from employment.

My take on the Guidelines and the Regulations

While the DPR has the powers to issue the Guidelines, I believe the Regulations which is the cistern from which the Guidelines flowed, is faulty and unconstitutional. Section 40 of the Constitution of the Federal Republic of Nigeria, 1999 (as amended) guarantees the right of every person (including a legal person) to freedom of association. This means that every person or company has the right to associate or disassociate with any person as employee or employer. This unwavering provision extends its tentacles to labour law as seen in the doctrine of not foisting a willing employee on an unwilling employer, which doctrine has received notorious judicial solidarity, and is even expressed in section 11 of the Labour Act which gives a party to a contract of employment the freedom to terminate the employment by giving the requisite statutory notices. If the Regulations is declared unconstitutional, then everything flowing from it, the Guidelines inclusive, is null and void and of no effect whatsoever.

In summary, the Guidelines is a clear case of regulatory profligity. The DPR has more important issues to regulate on, and shouldn’t regulate issues on labour and employment, which, even if there is a need to regulate such, should be regulated by the Nigerian Content Development and Monitoring Board (NCDMB). On its part, the Regulations is a clear case of legislative ubiquity. Making provisions on how a company should terminate an employee is just a case of being everywhere. It is accordingly submitted that the Regulations be revisited and the Guidelines withdrawn.

Harrison Declan, MCIArb(UK)

Energy Lawyer and Researcher, and Editor, Energy Law Review, is a Senior Energy Associate with Hybrid Solicitors 

Nigeria Issues Draconian Guidelines on Release of Workers in the Oil and Gas Industry

Nigeria’s Department of Petroleum Resources, the arm charged with the regulation of the country’s oil and gas industry has released Guidelines for the release of staff in the Nigerian oil and gas industry. The Guidelines titled Guidelines No. 1 of 2015 for the Release of Staff in the Nigerian Oil and Gas Industry was signed by the erstwhile Director of the department, George Osahon, and is meant to establish the procedure for obtaining the consent of the Honourable Minister of Petroleum Resources for the release of any worker employed by an oil company.

Provisions of the Guidelines

Paragraph 5.0 requires every employer who wishes to release a worker from its employment, prior to such release, to apply for consent, in writing to the Director of the Department stating the manner of staff release, the reasons for the proposed release, the compensation due to the worker, and the proposed replacement of the worker (if any). Paragraph 5.3 prohibits the release of any worker by any employer without the prior consent of the Minister through the Director, provided that the employer shall only be required to notify the Department of the release of a worker where the worker retires, resigns, dies, or abandons their duty post.

After receiving the application for consent, Paragraph 5.4 requires the Department to conduct and investigative inquiry into the proposed staff release and make a decision on whether to grant consent or otherwise. To this extent, the employer shall not advertise, publish or make a press release in respect of the release of the worker prior to the Department’s decision.

With respect to existing workers, Paragraph 4.2 of the Guidelines requires every employer, within 60 days of the enactment of the Guidelines, to submit to the Director of the Department, the following information on its current employees: name, date of birth, date of commencement of employment, designation at commencement of employment, current designation and one coloured passport sized photograph of the worker.

With respect to new workers, Paragraph 4.1 of the Guidelines requires every employer to within 7 days of the employment of the new worker, submit to the Director of the Department the following information: name of the worker, date of birth, date of commencement of employment, designation at commencement of employment and one coloured size passport photograph.

Application of the Guidelines 

The Guidelines is to apply to every employer. Paragraph 2.0 defines an employer as “any organisation, company, partnership, or registered business name which holds an oil mining lease, licence or permit (or an interest therein) issued under the Petroleum Act or under Regulations made thereunder or any person registered to provide any services in relation thereto”. By this definition, the Guidelines is to apply to both upstream and downstream companies as well as service firms.

A worker is also defined as any person employed by an employer as defined above.

Penalties for breach

The Guidelines prescribes draconian penalties for breach of the provisions of the Guidelines. The penalty for failure to seek the Department’s consent prior to release includes a fine of Ten Million Naira, suspension or cancellation of lease, licence or permit. The penalty for publication of information on staff release prior to consent of DPR is Five Million Naira, and the fine for the failure to implement the Department’s decision on staff release is Five Million Naira and suspension of lease, licence or permit.

The Democratic Republic of Congo Enacts New Petroleum Law: A Mixed Report

By Nicolas Bonnefoy and Geoffrey Picton-Turbervill

Ashurst September 2015 Energy Briefing

The DRC Government has finally officially published the new petroleum law (Law No. 15/012 dated 1 August 2015), putting into force a new regime for the upstream oil and gas sector. In our briefing of July 2015 (New petroleum law in the Democratic Republic of Congo: will a new regime eventually emerge?) we reported on the key features of the draft law. Now that the law has been finalised, we recap on those key features, once again distinguishing between improvements to the regime and some deficiencies (particularly from an international oil company perspective).

Improvements

Rights are to be awarded by way of a tender process on the basis of technical and financial criteria established by the Council of Ministers, giving the regime greater transparency.

The award process has been simplified, with awards to be made only on the basis of a petroleum contract. It excludes exploration permits and zones exclusives de reconnaissance et d'exploration (exclusive exploration and reconnaissance areas), which had led to significant confusion in the past.

The geological coordinates of the petroleum blocks are to be determined by order of the Minister of Hydrocarbons, therefore avoiding the materialisation (delimitation) of the zones exclusives de reconnaissance et d'exploration (exclusive exploration and reconnaissance areas), which had also led to confusion in the past.

The award formalities are simple and clear: execution of contracts (and all amendments) by the Minister of Hydrocarbons and the Minister of Finance after deliberation of the Council of Ministers, and entry into force after approval by ordinance from the President. Hydrocarbon rights awarded are to be included in a specific register at the Ministry of Hydrocarbons, and contracts are to be published in the Journal Officiel (official journal) and on the website of the Ministry of Hydrocarbons within 60 days after approval, giving the regime additional transparency.

The processes for the renewal and the extension of exploration rights, the approval of the development plan and the authorisation of transfers on the basis of a decree by the Minister of Hydrocarbons have also been simplified and clarified.

The law expressly recognises the right of the contractor to exploit all discoveries it considers commercially viable, subject to the approval of a development plan, and of the right to recover the related costs.

There is provision for disputes to be resolved by negotiation, and for subsequent referral to arbitration as necessary. Technical or operational disputes are to be referred to expert determination.

Importantly, there is a separation of the commercial functions of the national oil company from the policy making and regulatory functions exercised by the Minister of Hydrocarbons.

Petroleum blocks are to be allocated into different fiscal zones taking into account the "caractéristiques géologiques et environnementales" (geological and environmental characteristics). There is also provision for the establishment of a specific fiscal regime for each zone.

Production figures, payments and tax collections from oil and gas companies are to be published on the website of the Ministry of Hydrocarbons, again giving the regime enhanced transparency.

Deficiencies

The fiscal regime is overly burdensome: it includes the customary royalty, cost oil, and profit oil, and additional excess oil. It also includes:

· a participation for the national oil company (20 per cent minimum);

· a commitment to fund community sustainable development projects, community infrastructure projects, and a programme of activités secondaires ("secondary activities");

· a commitment to fund the training of Congolese nationals;

· a transfer tax;

· a super profit oil;

· custom duties; and

· not less than fifteen various additional royalties, taxes, bonuses and contributions.

The provisions dealing with production sharing are somewhat uncertain: the mechanism for the determination of royalties, cost oil, excess oil, and profit oil is not completely clear. There is no provision for the measurement and valuation of production at this stage.

There is no express tax exemption in the law. In this context, it is not entirely clear whether the fiscal regime applies in addition to or instead of the general tax regime.

There is no provision for the stabilisation of the fiscal regime. This means that international oil companies are not protected from future changes to the fiscal regime. The law does not set out a regime applicable to the transport of hydrocarbons. This is a significant oversight given that transportation is a key issue in the context of oil and gas development: the DRC is a vast territory, which is difficult to access, and has limited maritime export capacity, thereby requiring petroleum companies to consider hydrocarbons transport and export through neighbouring countries.

The regime applicable to natural gas has not been developed in any detail. The law does not address issues specific to gas, such as the need to extend exploration rights during the period necessary to complete a feasibility study for the determination or the development of a market and the implementation of the corresponding transport, liquefaction and export infrastructure, as well as the establishment of a specific fiscal regime.

The contractor is not authorised to transfer any exploration rights before the completion of the works programme pertaining to each contractual year. This will certainly act as a limitation on companies' ability to farm-out.

For all transfers, the national oil company has a pre-emption right. However, the law does not specify how that right is to be exercised. The national oil company is to be a party to a joint operating agreement with other members of the contractor group during the exploration phase. However, the exploration costs are to be borne solely by the other members of the contractor group and are not to be refunded by the national oil company. This runs contrary to the generally accepted principle that the right to attend operating committee meetings, the power to make decisions and the right to access data and information should only be given to parties who finance the related cost.

The transitional provisions are not very clear or comprehensive at this stage: current contracts are expressly stated to remain in force and it is implicitly understood that they will therefore remain governed by the previous petroleum law (ordinance-law No. 81- 013 dated 2 April 1981). Current contracts are then to be governed by the new petroleum law upon any renewal. The law does not, however, specify the implementation mechanism for this to happen.

Next steps

The transitional provisions mentioned above are stated to apply to current contracts which were validly awarded. It is intended that the Minister of Hydrocarbons will publish a list of current valid contracts within 30 days after entry into force of the new petroleum law.

The new law also contemplates that implementation provisions will be enacted within six months after entry into force of the new petroleum law. It is anticipated that implementation provisions will include a new model contract.

Conclusion

The new petroleum law includes features which are a significant improvement when compared to the existing regime. However, there are also some significant deficiencies. In particular, although it is not possible to determine the precise level of Government take at this stage, it is likely to be relatively high compared to the geological and environmental characteristics of the blocks in the context of the global competition to attract investment from international oil companies. Ultimately, the attractiveness of the new regime will be tested as and when the Congolese Government holds the next licensing round.

Nigeria: Oil & Gas: Challenges Facing The New Government

By Rob Hamill, partner and Jamie Lad, trainee solicitor

Mayer Brown

Nigeria has vast oil and gas history and potential. It has the largest natural gas and second largest oil reserves in Africa with estimated known reserves of 37 billion barrels of oil and 5 trillion cubic metres of natural gas. Oil generates around 70 percent of the country's revenue and current output amounts to 1.9 million barrels per day, with the capacity to increase to 4 million barrels per day. What is causing this huge under-capacity? Heavy government participation, legislative uncertainty, corruption, and large-scale oil theft are a few of the factors that have been cited. Are these issues likely to be solved by the incoming government?

What Are the Issues Facing the Nigerian Oil and Gas Industry?

Nigeria's oil industry is largely controlled by the government-owned Nigerian National Petroleum Company (the NNPC) via join ventures (JVs) and production sharing contracts (PSCs) with international oil companies (IOCs). The government has an average of 60 percent ownership interest in JVs with IOCs, which account for the majority of the country's crude oil production. It is no secret that this government has suffered from corruption, and its close links with the NNPC means that the oil industry has also suffered. A recent PwC report recommended an urgent overhaul of the way that Nigeria manages its oil industry. The report, among other things, raised questions about the legality behind several multibillion dollar transactions conducted by the NNPC and found a discrepancy of more than $2 billion in the total value of crude oil sales—making the financials of the company barely auditable.

Another issue stifling the industry is uncertainty over the passing of the Petroleum Industry Bill, which was first proposed in 2008 but is still not sanctioned. Controversy over several of its provisions (mainly relating to tax and government participation) has delayed the passing of the Bill. For example, one of the proposed drafts would increase the government's share of production revenue from deepwater projects, which have traditionally contained more favorable fiscal terms for IOCs than onshore/shallow water projects. Many IOCs, therefore, view the proposed changes as making deepwater projects commercially unviable. According to a recent US Energy Information Administration report, well under half of planned deepwater oil projects are currently sanctioned by IOCs due to this uncertainty.

Many IOCs also consider onshore/shallow water projects to be commercially unviable. This is mainly due to the financial challenges posed by operating their assets as JVs with the NNPC and also due to the large scale oil theft/pipeline vandalism (an estimated 100,000 barrels of oil is stolen daily) that plagues much of these onshore and shallow water assets. A large proportion of IOCs have therefore been divesting their interests. A recent PwC article estimates that by the end of 2015, IOCs will have sold at least 250,000 barrels per day worth of equity in onshore and shallow water producing assets in the Niger delta region. This is great news for indigenous oil companies as it provides an opportunity to participate in the upstream sector. The divestments may also be good for the country's deepwater sector if IOCs consider such projects to be a viable alternative. However, uncertainty surrounding fiscal provisions for deepwater projects may mean that the presence of IOCs will diminish in both the onshore and offshore sectors.

Is the Situation Likely To Improve?

Many of the industry's problems have been blamed on the outgoing government led by Goodluck Jonathan. Will the new government be any better? General Muhammudu Buhari of the All Progressive Congress Party took office on 29 May 2015. He first governed Nigeria as a military ruler in the 1980s and was petroleum minister when the NNPC was created in 1977. His manifesto planned to break up the NNPC, and the manifesto's main themes include security and anti-corruption.

One month after taking office, Buhari dissolved the board of the NNPC in an attempt to stamp out the corruption that has stifled the country's oil industry for years. He also appointed Harvard-trained lawyer and former ExxonMobil executive Emmanuel Ibe Kachikwu as head of the NNPC in August of this year. The day after he was appointed, Kachikwu sacked eight senior managers of the NNPC. His strategy has been to hire from the private sector (e.g. Total, Statoil and Royal Dutch Shell) in an attempt to provide a fresh, corruption-free start for the national oil company. He is also set to review all PSCs and JV agreements made between IOCs and the NNPC.

More recently, it has been reported that Nigeria is to start using drones to fight oil theft, with an aim to end crude theft in the next eight months. Kachikwu has also said that the NNPC would work more closely with the country's navy to deal with the problem. These are good examples of the incoming government's commitment to stamping out corruption and getting the oil industry back on its feet.

Is It Enough?

Buhari and Kwachikwu have already made some key changes to the NNPC but there is still much to be done in the sector as a whole. It is unclear what Buhari's plans are for the sector and who is advising him on possible reforms. There is talk of splitting the NNPC into two (a regulatory body and a national oil company) and either reverting the Petroleum Industry Bill back to its original version or breaking it up into more manageable pieces.

Change is urgently needed, particularly as government finances are straining with oil prices below $50 per barrel, but the uncertainty that has been affecting the industry for years looks set to continue, at least in the short term. Many have claimed that Buhari is moving too slowly because he has yet to appoint an oil minister or the rest of his cabinet. Is he acting too slowly or is he taking time to familiarize himself with the company's problems? Only time will tell.

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Nigeria: Outlook For The Nigerian Oil And Gas Market

Article by Raj Kulasingam, Danielle Beggs, David Tennant, Humphrey Douglasand Tim Pipe

Dentons

Nigeria needs to do more to promote the gas industry so that it becomes an integrated oil and gas producing country that generates as much revenue from gas as oil.

When a conversation with my Nigerian friends and colleagues turns to oil and gas, it inevitably involves the following questions:

• How is Nigeria going to survive in a world with low oil prices?
• How should the Buhari regime react to this and related issues (including the perennial issue of corruption in Nigeria)?
• What are the key issues that are affecting and will shape the Nigerian oil and gas sector?
• How can the Buhari regime help develop and build Nigeria to achieve its true potential?

Nigeria's oil and gas industry is the largest on the African continent, yet in 2014 it only contributed about 14 percent to Nigeria's economy. Whilst Nigeria's economy is more diversified than most people realise, the Federal Government still relies massively on oil revenues. 70 percent of government revenues and 95 percent of foreign exchange earnings come from oil.

In its 2015 budget, the government assumed US$53/barrel; which was down from US$78/barrel used in the 2014 budget. However, the IMF says that Nigeria needs US$119/barrel to balance its 2015 budget. So with oil prices hovering in the US$50 to 65+/barrel range, the country is already running a deficit and will need to come up with other sources of revenue.

Nigeria needs oil to stop its reliance on oil

Nigeria needs to continue to diversify its economy and stop its reliance on oil revenue. Whilst this diversification requires strong leadership, good policies and political will, it also requires money. So ironically, income from oil is required to diversify Nigeria's economy - to fill the infrastructure gap, to provide power and to create and grow other industries that are holding the country back.

Better tax collection

However, oil revenue is not the only source of revenue for the Nigerian government.

Any Nigerian company looking to come to the international capital markets would do well to take on board the lessons from Afren and Seplat when preparing to come to the market.

According to the World Bank, the country collected the equivalent of less than 2 percent of its national income in tax receipts in 2012; compared to an average of 16 percent for emerging markets and 18 percent for Sub-Saharan African economies.

The IMF also reported that non-oil tax revenue in Nigeria stood at just 5 percent of non-oil GDP. Whereas the average oil producing country collects around three times as much. The solution to this issue is complex and requires all layers of government to cooperate and have coherent policies. However, one fundamental issue is the need to change mindsets and have a culture of tax payment as the norm and part of each citizen's moral and civic duty.

Gas is the way

Nigeria needs to do more to promote the gas industry so that it becomes an integrated oil and gas producing country that generates as much revenue from gas as oil. Take the example of Qatar, which is the world's most dominant gas exporter. It has the highest per capita GDP which is mostly driven by natural gas.

Increases in gas production require investment in gas infrastructure which in turn requires gas pricing that provides the necessary return on investment that is also stable and predictable. The knock-on effect of getting gas onshore is well known, with gas-to-power plants the first in line, and benefits for other sectors such as fertilizer, petrochemicals, cement, etc. This will have a huge impact on the domestic economy through improved GDP, import substitution and employment generation.

Today, the majority of Nigeria's natural gas is still being flared off. It is estimated that Nigeria loses US$18.2 million daily from the loss of the flared gas. For more details see http://myndff.org/policy-dialogue/the-nigerian-gas-conundrum-2/. Yet gas flaring has been prohibited in Nigeria since 1984 under the Associated Gas Re-Injection Act Number 99 of 1979. The things required here are both carrot (in terms of attractive gas pricing and incentives to invest in gas infrastructure) and stick (in terms of enforcing this legislation).

IOC divestments and the rise of the Nigerian indigenous oil company

So what is happening in the Nigerian oil and gas industry?

The multi-national international oil companies (including Shell, Total, Eni and Chevron) have been divesting their interests in oil blocks and marginal fields for some time. Many of these assets are Nigerian onshore assets that have been plagued by industrial-scale oil theft, insecurity and spillages.

This divestment programme, together with local content legislation, positive government policies and Nigerian entrepreneurs' ability to raise capital and form alliances with foreign technical partners, has resulted in the rise of the Nigerian indigenous oil and gas companies. The corollary of this has been increased technical competence, job creation and a reduction in capital outflow from the country. Yet there is more to be done on all fronts.

Successes have ranged from the completion of the US$1.5 billion ConocoPhillips asset purchase by Oando to Seplat's landmark listing in Lagos and London in April 2014. Other deals are awaiting ministerial consent and financing. On completion of the divestments, we could see Nigerian indigenous companies controlling 20 to 25 percent of the country's oil production (currently 10 – 15 percent). One thing is certain: the IOCs are going to continue divesting assets in Nigeria and there are clear opportunities for indigenous Nigerian oil and gas companies to take advantage of this.

Marginal fields – why are we waiting?

I wrote about the marginal fields bid process in the first half of 2014. A year or so later, nothing seems to have changed. To recap, under the Petroleum (Amendment) Act No. 23 of 1996, the President has the power to declare a field as a marginal field – i.e. where a discovery has been made but the field has been unattended after 10 years of discovery. For a time, there was considerable hope that the marginal fields programme will further bolster the indigenous oil and gas industry in Nigeria.

However, the marginal fields promise has not reached its full potential. For example, because of the:

• lack of progress on the current marginal fields licensing round almost two years after. Then-Minister of Petroleum Resources, Mrs. Diezani Alison-Madueke, launched the bid process in December 2013 (announcing that the bid round would be completed by March, 2014); and
• lack of development of some of the marginal fields awarded in the first round of bidding more than ten years ago (see below).

Revocation of marginal field licences – just do it!

In April of this year, it was reported that about 18 of the 30 marginal oil fields awarded to indigenous companies as marginal fields were at risk of being revoked, as the deadline for the development of the fields expired at the end of March 2015. Only nine of these fields have so far been developed and are producing in over 12 years since their awards. These account for just 2.1 percent of the country's total daily crude production.

The question remains as to why these licences have not been revoked and re-auctioned especially given that there has been a two-year (unexplained) grace period extension of the 10-year development requirement which would have ended in 2013. If the intention is for greater local participation, it must be in the interest of the country to re-auction those assets that have not been developed. Perhaps with President Muhammadu Buhari's promise to fight corruption, his administration will be more rigorous in terminating licences that are in default.

There are deals to be done on these non-performing marginal fields to bring them into production. However, with the spectre of a potential licence revocation, any such deals are unlikely to get much airtime.

What does the current slump in oil price mean for Nigerian indigenous companies?

The reality of low oil prices is that there are going to be winners and losers in the Nigerian oil and gas sector.

One notable loser from this cauldron of events is Afren. At the start of 2014, the company was valued at £1.9 billion, or 169p a share and was one of the leading Nigerian oil and gas companies. Today its shares are trading around 2p a share brought about by the fall in oil prices, a boardroom corruption scandal, security issues in Kurdistan, slowing production in Nigeria and a technical default on payments to bondholders. However, the key factors that resulted in Afren's trouble were its high leverage and its debt bill.

The Afren story could easily be replayed with other indigenous Nigerian companies if they are not able to manage their costs and debt profile. However, one person's troubles could well be another's opportunity. Those companies that are inefficient have high production costs or high finance costs aregoing to find it difficult to survive. This gives other companies who have lower production costs and/or lower cost of capital the opportunity to buy into or merge with these other companies – unfortunately for Afren, no such white knight appeared and the company seems to have been handed over to its bondholders.

Governance and transparency

Perhaps one major lesson from the Afren story is the need for good governance and transparency. At a recent event held at the London Stock Exchange (in conjunction with the Nigerian Stock Exchange), this was listed as the biggest concern for international investors. Whilst Afren has suffered, the Seplat story has gone from strength to strength. Increasing investor confidence in its management and corporate governance and the appointment of a diverse board with strong non-executive directors has helped Seplat become the Nigerian poster child for the London and Nigerian Stock Exchanges.

Any Nigerian company looking to come to the international capital markets would do well to take on board the lessons from Afren and Seplat. The prize is access to capital that most Nigerian companies need to grow and to take advantage of the opportunities such as IOC divestments, marginal fields bid rounds and consolidation in the industry.

What else?

I could write pages on what else could be done on the issues I touched on this month but I am rapidly reaching my word limit. So here is a quick summary of some other points for action:

• carry out a root-and-branch reform of NNPC and the Department of Petroleum Resources;
• take steps to rout out rampant crude oil theft and trace the proceeds (President Buhari has said that "250,000 barrels per day of Nigerian crude are being stolen and people sell and put the money into individual accounts");
• deal with the high level of piracy in the Gulf of Guinea;
• review and pass the Petroleum Industry Bill. (According to Wood Mackenzie, the delay in passing this Bill has denied Nigeria about US$37 billion in private sector investments in the oil and gas industry in the last five years); and
• put in place clear and coherent laws and policies with strong independent regulators.

The future?

If you are an ice hockey fan, you may have heard of Wayne Gretzky. He summed up his secret to success when he said:

"go where the puck will be, not where it is [now]."

With the puck of oil prices forecast to stay low for the foreseeable future, what Nigeria needs are laws, policies and mechanisms to reduce its reliance on oil revenue.

This article was first published in the August 2015 edition of Financial Nigeria magazine, a monthly development and finance journal.

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.