NEW BOOK SHEDS LIGHT ON CASES ON NIGERIAN OIL AND GAS LAW

Nigerian Oil and Gas Law: Cases, Commentaries, and Materials
Published by Westhill Publishers.
ISBN (Hardcover) 9789789657834
Book Cover Image Copyright @Berardo62

Nigeria remains Africa's biggest oil and gas producer, making knowledge of the country's oil and gas laws crucial to foreign and local investors. Cases decided by courts give us better understanding and attaches a level of certainty to the laws enacted by the legislature.

In his Nigerian Oil and Gas Law: Cases, Commentaries, and Materials, Harrison Declan discusses the laws in Nigeria's oil and gas industry, as well as the cases that have decided and interpreted such laws. He also included cases of foreign oil and gas jurisdictions on areas where Nigeria does not have a precedence. Speaking with the author, he noted that the reasons for these inclusion are first, the global nature of the oil and gas industry; second, the discretion of Nigerian courts to rely on foreign cases which decided similar issues; and third, to give a guide to future courts who would at some point be faced with similar issues.

AN INVESTOR’S GUIDE TO MODULAR REFINERY INVESTMENT IN NIGERIA

Introduction

Since the development of the “7big wins” initiated by the Ministry of Petroleum Resources and its subsequent launching by the President, modular refining is now becoming a part of the Nigerian petroleum sector.

Recently, the Federal Government of Nigeria disclosed that it has received thirty-five (35) applications for the establishment of modular refineries in the Niger Delta region, out of which thirteen (13) had reached the Licence to Construct Stage.[1] These are in addition to the several licenses the government has approved for the setting up of Modular Refineries in the region[2] and the grant of $1 million approved by the United States Trade and Development Agency for the detailed engineering design of 20,000 bpd modular refinery in Lagos.[3]

While there are a lot to be considered in modular refining investment in Nigeria, this piece will focus on the General Requirements and Guidance Information for the Establishment of Modular Refineries in Nigeria issued by the Federal Ministry of Petroleum Resources.

What are modular refineries?

The Guidelines issued by the Department of Petroleum Resources considers a modular refinery as a refinery with a design capacity of not more than thirty thousand barrels per day (30,000 bpd). Where it exceeds 30,000 bpd, it would be considered a full conventional refinery.

Technically, a modular refinery is a processing plant that has been constructed entirely on skid mounted structures. Each structure contains a portion of the entire process plant which are piped together to form an easily manageable process.[4] Thus, unlike a full conventional refinery, a modular refinery is easy to build, manage and operate.

Application for licenses

An application for a license to construct or operate a modular refinery is made to the Minister of Petroleum Resources through the Department of Petroleum Resources, in the statutory form.

The licensing process is in three (3) phases: License to Establish a refinery (LTE), Approval to Construct a refinery (ATC), and License to Operate a refinery (LTO).

The License to Establish a refinery is to confirm general feasibility of the proposed project and is the approval stage of the three-stage process. It is granted for a period of two years. The statutory fee is USD 50,000 and a DPR Processing Fee of N500,000.

The Approval to construct may be granted after the applicant has submitted the detailed engineering of the plant/refinery to the Department of Petroleum Resources and made a comprehensive presentation on the project design to the Department. Once granted, it is valid for a period of twenty-four (24) months. However, where the project is not completed, the approval can be revalidated for a period not exceeding two (2) years, without an option for further renewals or revalidation. It has a DPR Processing Fee of N500,000

The license to operate a refinery will be granted upon mechanical completion of the refinery or plant, an application for license to operate the plant, and the payment of the statutory fees. It has a Statutory fee of USD1,000 per 1,000 bpd up to 30,000bpd and a DPR Processing Fee of N500,000.

What are the laws governing modular refineries in Nigeria?

The legal framework governing modular refineries in Nigeria are:

a.       The Petroleum Act of 1969;

b.       The Petroleum Refining Regulations;

c.       The General Requirements and Guidance Information for the Establishment of Modular Refineries in Nigeria;

d.   The Supplementary Guidelines for the Design, Construction and Operation of Modular (mini) Refinery Plants in Nigeria.

Considerations for modular refineries investment

i.         Location

An investor seeking to set up a modular refinery should first consider the location of the refinery. The government intends that the location of a modular refinery be strategic and influenced by proximity to the source of crude oil, producing fields and tie-in supply infrastructure or clusters.

ii.          Business Model

The business model most welcomed by the government is one that will be a private sector led partnership with equity participation from the state government or its agencies, registered local cooperative societies and the integration of the regional refinery stakeholders, with the private investor having majority equity as well as operate Joint Venture.

iii.        Investment Category

The government has created three (3) different investor category.

The first category consists of private investors with financial and technical capacity, preferable with established Nigerian presence or partnership.

The second is the Public-Private Partnership category which will have credible participation from relevant stakeholders such as foreign technical partners, State Government, MDAs, Local Government Council, organized private organizations, cooperative societies, community equity contribution, etc.

The third category consists of Regional Refinery Stakeholders involved in artisanal activities with focus to converting the vocationally acquired skills to cognitive technical skills. This third category is meant to give opportunity to illegal refiners in the Niger Delta region, and give them an opportunity to move from illegal refiners to refiners with established business models.

Qualifications for investing in modular refineries in Nigeria

To be qualified to receive an approval for setting up and operating a modular refinery in Nigeria, an investor must meet the following requirements:

a.       Must be a legal entity duly registered under the business registration laws in Nigeria;

b.       Must have a three (3) years Audited Account, Financial report and Tax documents. It must also have a detailed financial plan with proof and source of funding, sworn affidavit and letter of authority allowing verification of all claims;

c.       Must have Health, Safety and Environment (HSE) Plans, Quality Management System, Security Plans, Management of Change Procedure, Community Affairs and Corporate Social Responsibility (CSR) Plans.

d.       Must comply with Nigerian Content requirements in accordance with the Nigerian Oil and Gas Industry Content Act, 2010.

e.       Must meet up with the technical specifications set out by the Department of Petroleum Resources

Government support and incentives

In its bid to encourage construction of modular refineries, the government is willing to give its support to prospective investors. This will be in the form of facilitation of crude commercial agreements from marginal and other oil fields, and facilitation of ownership-joint venture investment vehicles with organized host communities and State governments.

Such prospective investor will also benefit from fiscal incentives granted by section 39 of the Companies Income Tax Act, which includes tax relief for a period of up to five (5) years, accelerated capital allowances, tax free dividend where capital was in foreign currency, and deduction of interest on loans obtained with the prior approval of the Minister in computation of tax.

N.B. This guide is based on the General Requirements and Guidance Information for the Establishment of Modular Refineries in Nigeria, and as such is not exhaustive of the considerations for investing in modular refineries in Nigeria. It does not seek to provide legal advice and as such potential investors are advised to seek more exhaustive legal advice beyond the scope of this piece.

About the Author

Harrison Declan, LLM (Aberdeen) is a Texas based attorney, licensed to practice law in Texas and in Nigeria. He constantly advises and facilitates business transactions on behalf of clients. Harrison is well skilled in the business and practice of law, and is also well published. He is the author of the book Local Content in Africa’s Petroleum States: Law and Policy, which was sold and read in three different continents. He also blogs at Afrienergy.blogspot.com.

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[1] The Punch, ‘35 Apply to Build Modular Refineries in Niger Delta’, November 13, 2017 http://punchng.com/35-apply-to-build-modular-refineries-in-niger-delta/. Accessed November 12, 2017.

[2] The Nation, ‘Modular Refinery: FG Approves 56 Licenses to Operators’. http://thenationonlineng.net/modular-refinery-fg-approves-56-licenses-to-operators/ Accessed November 12, 2017.

[3] Vanguard, ‘U.S. Agency Approves N360m for Development of Modular Refinery in Nigeria’, August 13, 2017. http://punchng.com/fg-approves-modular-refinery-for-pti/ Accessed November 12, 2017.

[4] Chemex Modular. Chemex Modular is a Texas based modular refinery construction company which pioneered the new modular refinery manufacturing method.

Tanzania: Tanzania Overhauls Legal And Regulatory Regime For The Extractive Industry

Article by Mwanaidi Maajar and Tabitha Maro

Tanzania has enacted three pieces of legislation that introduce sweeping changes to the legal and regulatory regime governing the natural resources extractive industry.

The new laws are the Natural Wealth and Resources Contracts (Review and Re-Negotiation of Unconscionable Terms) Bill, 2017; the Natural Wealth and Resources (Permanent Sovereignty) Bill, 2017 (the "Permanent Sovereignty Bill") (awaiting assent by the President); and the Written Laws (Miscellaneous Amendments) Act, 2017. The latter extensively amends the Mining Act, 2010 and, to a limited extent, the Petroleum Act, 2015.

The Permanent Sovereignty Bill reasserts that control and ownership of natural wealth shall be exercised by the people of Tanzania through the government and held in trust by the President on behalf of the people. Unlike the old regime, the Bill extends state ownership to production arising from extraction of natural wealth resources. It further provides for:

• abolishing the export of raw minerals for beneficiation outside the country;
• abolishing the retention of mineral earnings in banks outside the country;
• prohibiting proceedings in respect of national wealth and resources in foreign courts or tribunals; and
• the review of new and existing agreements by the National Assembly, subsequent to which the government may be ordered to renegotiate terms deemed unconscionable.

The laws will affect licence tenure in view of the provision empowering the Executive to declare certain areas that are the subject of mining operations "controlled areas" without excluding areas that are the subject of granted mining licences. This issue may be clarified in the regulations, which the law requires the Minister to introduce to operationalise the process pursuant to which such declaration may be made.

The government will have at least 16% equity in all mining operations under a mining licence or a special mining licence, and such equity cannot be diluted. The government is further entitled to up to 50% equity of the shares of a mining company in proportion to tax benefits enjoyed by the company. The law provides that such a tax benefit, defined as "tax expenditures", will be the quantified value of tax incentives granted to a mining company by the government. The law makes no reference to the mandatory listing requirements for mining companies, which must list 30% of their equity on the Dar es Salaam Stock Exchange. Further clarification will likely be provided in the regulations that will be made by the Minister of Energy and Minerals.

While existing agreements such as mining development agreements ("MDAs") and petroleum sharing agreements ("PSAs") have been preserved, they are nevertheless subject to review by the National Assembly. All new agreements must be approved by the Cabinet and the National Assembly, which may direct the government to renegotiate them should they be deemed to contain unconscionable terms.

Disputes must be settled pursuant to Tanzanian laws and in Tanzanian courts or judicial bodies. There will be no reference to international arbitral processes. Existing agreements that contain provisions allowing international arbitration may be of no effect, because the law regards such provisions to be unconscionable terms. If the National Assembly requires the government to renegotiate an existing agreement containing unconscionable terms, the government will be obliged to initiate negotiations within one month. Should the mining company and the government fail to reach agreement within 90 days, the law provides that the terms will be expunged. This will affect all existing MDAs and PSAs, taking away guaranteed access to international arbitration.

All proceeds from mineral sales must be maintained in local banks. Under the old regime, mining companies could, subject to Bank of Tanzania's approval, maintain funds in foreign banks to service foreign loans.

Export of raw minerals and concentrates are now banned. Similarly, all won minerals may be held at the mine site for five days only and thereafter must be sent to government minerals warehouses (to be established in due course). Gem and mineral clearing houses for auction and exchange will also be established.

There is an increase in royalties for uranium from 5% to 6%, and gold from 4% to 6%, while the rate for other minerals (building and industrial) remains at 3%. There is an additional 1% clearing fee on all minerals exported with effect from 1 July 2017, which was introduced by the Finance Act, 2017.

More stringent local content requirements, obligatory corporate social responsibility, commitment by mining companies to reinvest profits in the national economy, engaging and training local staff, and planning and reporting requirements to monitor compliance are enshrined in the law.

Stabilisation provisions lasting the life of a mine are prohibited and, where permitted, there must be provision for periodic review and renegotiation. The value of any tax exemption under such agreements must be quantified and provision must be made for the government to take shares in the company commensurate to the tax benefit enjoyed. The freezing of applicable laws (stability clauses) is prohibited, as this is deemed as taking away the government's sovereign powers to legislate. Nevertheless, the government has said that mine development will now be made pursuant to mining licences alone and there will not be new agreements. It is unclear if this will apply to petroleum licences as well.

The transfer of interest in mining companies of licences is restricted to the extent that consent to transfer will be granted only if there is evidence of substantial development by the transferor. A repealed consent provision has stated that consent would not be unreasonably withheld.

The government also announced on 4 July that the issuance and processing of licences have been suspended until a full evaluation is undertaken. We will continue to monitor this matter and update our clients accordingly.

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.

Source: Mondaq.com

Nigeria: Ministry Of Petroleum Resources Releases Draft National Petroleum Fiscal Policy

The Ministry of Petroleum Resources has released a draft fiscal policy for Nigeria's petroleum industry. This is a fall out of the Ministry's roadmap tagged "7 Big Wins" for the petroleum industry which was launched last year (Deloitte Tax Alert – FG launches new roadmap for Oil and Gas Sector).

The release is in line with the objective of addressing the policy and regulation issues with a view to gaining a robust fiscal policy instrument for the industry, as part of the 7 major focus of the roadmap.

The purpose of the policy is to provide a fiscal framework that will guide the planning and development of petroleum activities in an efficient manner and ultimately lead to the socioeconomic development of Nigeria. Federal Government is also interested in increasing revenue generated from this sector of the economy.

The policy covers all sectors of the petroleum industry – upstream, midstream and downstream, and includes all petroleum related products.

Highlights of the policy document include:

• Detailed outline of FGN's policy, vision and purpose for Nigeria's petroleum fiscal resources
• Short, medium and long-term goals for fiscal development
• Strategies to be pursued to ensure the successful implementation of the policy

The policy is still a work in progress and therefore open to consultation with stakeholders. If gazetted and implemented, the policy will bring about various tax implications e.g.:

• Changes to Petroleum Profits Tax (PPT) by introducing Nigerian Hydrocarbon Tax (NHT) which is considered to be a simplified form of PPT
• Companies Income Tax (CIT) will be applicable to all petroleum companies (not only downstream)
• Reduction of deductible items for NHT purposes
• Elimination of upstream investment allowance
• Increased collection of royalties; etc.

Please be on the lookout for our newsletter on this subject where we will analyse in detail, the proposed provisions in the policy. A copy of the policy can be accessed HERE.

Article by Deloitte Nigeria as published on mondaq.com

Angola and Mozambique Enact New Legislation

Both Angola and Mozambique’s governments have enacted legislation that affects their respective oil and gas industries. In Angola,Order No. 475/16, of October 18 incorporated an oil industry union. The order approved the by-laws of the Luanda Oil Industry Workers Union (Sindicato dos Trabalhadores da IndústriaPetrolífera e Afins de Luanda-STIPAL).

The order confirms the conclusion of STIPAL’s incorporation process, as well as its legal capacity to operate as a union in the Luanda Province.

Meanwhile, a resolution in Mozambique regarding concession contracts has been approved. Mozambique, by means of Resolution No. 25/2016, of October 3 has a new exploration and production contract model. The Council of Ministers approved the new Petroleum Exploration and Production Concession Contract Model, which will henceforth serve as a basis for the negotiations with the concessionaires.

Source: Petroleum Africa

South Africa’s Parliament Finally Passes Petroleum Bill

South Africa’s National Assembly has voted to pass the Mineral and Petroleum Resources Bill. 198 voted yes to 80 NO votes.

The legislation, which has been in debate at the assembly for close to 10 years, has been forwarded to the National Council of Provinces (NCP) for approval.
President Jacob Zuma is expected to give his assent after the NCP’s nod.

Just when the law appeared close to final sign off by President Jacob Zuma, in mid-2014, it was challenged by both mining and oil companies for harbouring certain clauses,causing the legislation to be returned back to the parliament.

Mining companies were concerned that it might infringe global trade obligations and was unconstitutional, partly because it elevated the country’s Mining Charter -meant to redress imbalances of the nation’s past apartheid rule -to the status of legislation. The Mining Charter contains regulations and stipulates rules for white-owned companies to sell stakes to black businesses.

The bill also gives wide-ranging powers to the mines minister to place certain minerals in a “value-addition” category requiring a portion of extracted resources to be processed domestically and not be exported in raw form.

Source: Africa Oil and Gas Report

CORA House, 95 Bode Thomas Street,
Surulere, Lagos, Nigeria.

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What Gas Flaring Prohibition bill will achieve

Harrison Declan

The Gas Flaring (Prohibition and Punishment) Bill 2016 is currently being considered by the Senate for possible passage into law. The bill, among other things, seeks to make provisions for the prohibition of gas flaring in any oil and gas production operation, blocks, field, onshore or offshore, and gas facility treatment plant in Nigeria. The bill is made to apply all over Nigeria, and shall also apply to the Exclusive Zone, Free Trade Zones, and all the land in Nigeria, including land under the territorial waters of Nigeria, or that forms part of the continental shelf, or that forms part of the Exclusive Economic Zone of Nigeria.

It is worthy of note that this is not the first attempt to legislate on gas flaring in Nigeria. In 1979, the Associated Gas Re-injection Act was enacted. The Act, in the main, prohibited gas flaring and fixed the flare-out deadline for January 1, 1984. However, this was not to be, as the deadline was subsequently moved to December 2003, then to 2006, to January 2008 and then December 2008. Also, on July 2, 2009, the Senate passed the Gas Flaring (Prohibition and Punishment) Bill 2009 (SB. 126) into law, which fixed the flare-out deadline for December 31, 2010. The Petroleum Industry Bill fixed it for 2012. The Gas Flaring (Prohibition and Punishment) Bill 2016, which is, in many respects, a reproduction of the 2009 bill, has also fixed the flare-out deadline for December 2016.

On the international level, there are also measures put in place to curb gas flaring globally. Some of such measures include the World Bank’s Global Gas Flaring Reduction Partnership and the Zero Routine Flaring by 2030 Initiative.

Prohibition and cessation of gas flaring

Section 1 of the bill prohibits the flaring or venting of natural gas in any oil and gas production operation as soon as the Act comes into effect. Vide Section 4, no company engaged in the production of oil and gas shall flare gas after December 31, 2016. There are only two instances where gas is permitted to be flared under the bill. First is where flaring or venting is technically and economically justified. Second is in the case of start-up, equipment failure, shut down or safety flaring, in which case a permit must be obtained from the Minister of Petroleum Resources, and which permit must not last for more than 30 days. This is the only instance where the minister is empowered to permit gas flaring, as the bill takes away from the minister the general powers to permit gas flaring as vested in him by Section 3 of the Associated Gas Re-injection Act, 1979 (now CAP A26, Laws of the Federation of Nigeria, 2004).

Restrictions on grant of licences or leases

Section 8 of the bill makes it a condition that an application for the grant of an oil production license or oil mining lease must be accompanied with a comprehensive programme acceptable by the minister, for the utilisation of natural gas for general, domestic and export purposes. The utilisation programme must be in consonance with the National Gas Master Plan, domestic supply obligation, and national policies as may be made in respect of the gas sector from time to time by the Federal Government.

Also, the bill prohibits the establishment of an oil and gas facility in Nigeria without the authorisation of the minister first obtained for the design, commissioning and production phases of the facility. The application for authorisation in each of these phases must cover issues of gas flaring and venting, flaring and venting assumptions and the methods of their calculations and a forecast of volumes for the flare and vent categories specified in the bill.

Obligations on operators, licensees and lessees

Licensees or lessees operating oil and gas fields in Nigeria before the commencement of the Act are mandated to, within three months of the commencement of the Act, submit to the minister a feasibility study, programme or proposals that they have for the gathering, utilisation and re-injection of any natural gas, whether associated with oil or not, which has been discovered in the relevant area. A licensee or lessee who is of the view that the gas produced from his field cannot be re-injected or utilised is required to shut the field.

The bill imposes on operators with flared gas resources the obligation to within 90 days of its passage, categorise all of their flared gas resources and submit same alongside the gas utilisation plans to the minister before the flare out deadline. The minister is required to approve same within 60 days of receipt of the said plan, and make public all approved plans and all the data of the unplanned natural gas resources.

Third party companies with commercial uses for the unplanned gas resources are permitted to bid for them within a period of 120 days of the minister making public the data of the unplanned natural gas resources. Within 60 days of their bidding for same, the minister shall review the bids and contracts with eligible bidders and it shall be signed for long-term access to these gas resources. All gas which remains unplanned for are required to be shut in or re-injected within one year of the finalisation of the third party contracts.

Also, each licensee or lessee is required, within three months from the commencement of the Act, to install the metering equipment as may be specified from time to time by the minister on every facility in its operation from which gas is flared or vented.

The minister is expected to set annual flare reduction targets. Every licensee or lessee is required to meet this target. A fine is imposed for non-compliance, and is measured by the cost of gas at the international market.

Incentives for compliance

The bill makes provisions for special considerations to be given to entities that comply with its provisions. In this regard, under Section 15, all infrastructural projects undertaken to support a flare out will be entitled to five years tax exemption and other concessions as may be granted by the government. Also, all projects aimed at producing for the Nigerian market shall enjoy a five-year corporate tax exemption, land or equivalent of the cost of the land in tax deductions from VAT, tax write-off for insurance policy premium for five years after commissioning projects employing above 200 Nigerians or that has at least 40 per cent Nigerian equity ownership.

Penalties

The bill imposes various penalties for non-compliance with its provisions. These penalties include payment of fines at the cost of gas at the international market at any point in time, forfeiture of concessions granted and issuance of a Certificate of Forfeiture and revocation of the licence or lease under which the field or group of fields from which the violation occurred. Any penalty imposed is required to be made public, and where it is a fine for gas flaring after the flare-out deadline, then the operator of the field or group of fields is required to pay an amount equivalent to 50 per cent of the fine imposed as compensation to the local government council for community development activities in the adjoining communities where the gas flare or vent activity is perpetrated.

Conclusion and recommendations

The Gas Flaring (Prohibition and Punishment) Bill 2016 is another attempt to legislate on gas flaring in Nigeria. As history has taught us, more efforts should be channeled to enforcing, rather than enacting legislation. What happened to the gas flare tracking system launched with much fanfare by the government in November 2014?

It is also important that the issues that have made stoppage of gas flaring in Nigeria almost impossible since 1979 be addressed head on. In this regard, elaborate consultation with relevant stakeholders should be undertaken. I am aware that the sponsor of the bill, Senator Bassey Akpan, who is the Chairman, Senate Committee on Gas, has been involved in extensive industry stakeholder engagement on these issues. However, the bill doesn’t seem to embody a significant change from the current legislative status quo. Currently, oil companies pay fines for flaring gases. They are also at the risk of forfeiting concessions granted them under Section 4 of the Associated Gas Re-injection Act. However, this hasn’t stopped gas flaring since 1979, and oil companies have paid billions of naira fines to the government. What is the likelihood that mere imposition of fine and threat of forfeiture of concessions under the bill can deter gas flaring, particularly where it is considered more economical to flare gas? What is the possibility that oil companies would not just continue the tradition of paying fines and continuing gas flaring?

Also, some provisions of the bill might need further clarifications. For instance, Section 4 of the bill seems to suggest that gas flaring is permitted after  December 31, 2016 where it is economically and technically justifiable, without specifying, defining or stipulating the instances when flaring can be said to be economically and technically justifiable. This is a loophole that can be exploited to flare gas.

Another provision of the bill that needs clarification is Section 15(2). The section grants incentives for “all projects aimed at producing for the Nigerian marke,” without specifying what production is contemplated. Does it contemplate all projects aimed at producing gas for the Nigerian market, or all projects aimed at general production of gas for the Nigerian market, or all projects aimed at producing gas that otherwise would have been flared or vented, for the Nigerian market? This needs to be clarified.

Obviously, the flare-out deadline would be reconsidered. Perhaps it might be worth considering the possibility of leaving out a flare-out deadline in the bill. Fixing flare-out deadlines has, over the years, proved to be highly ineffective and unrealistic. In this regard, it is suggested that the minister be empowered to fix the flare-out deadline within a stipulated time frame after the commencement of the Act. This way, operational, business and industry realities would be considered in fixing realistic deadlines, to ensure the bill does not end up like its predecessor.

Finally, while we had hoped for a single piece of legislation for the Nigerian petroleum industry, the lawmakers seem to be thinking differently. First it was the Petroleum Industry Governance Bill, and now the Gas Flaring (Prohibition and Punishment) Bill. In the end, whatever legislative approach is deemed most suitable is welcomed, provided there are effective mechanisms for enforcing the legislation, because in the end, the efficiency of laws is determined not from their content but from their enforceability.

• Declan, a lawyer and Editor, Energy Law Review, writes from Lagos

 Copyright PUNCH.                
All rights reserved. This material, and other digital content on this website, may not be reproduced, published, broadcast, rewritten or redistributed in whole or in part without prior express written permission from PUNCH.

Contact: editor@punchng.com

Tanzania: Local Content And Domestic Supply Obligations Under The Tanzania Petroleum Act 2015

This Article is an abridged version of the article by Peter Kasanda and Kumara Mallikaaratchi

Clyde & Co. For the complete version of the article, please visit www.mondaq.com

Our energy briefing late last year highlighted the Petroleum Act 2015 (PA 2015), which relates to upstream, midstream and downstream petroleum activities. This briefing provides a more detailed account of the changes made specifically in relation to local content policies (LCP) and domestic supply obligations (DSO) in Tanzania.

PA 2015

This briefing will analyse the new LCP and DSO provisions in Tanzania by drawing a comparison against similar policies in other African jurisdictions. We feel that a comparison with other African jurisdictions is beneficial for several reasons. The primary benefit is because the Tanzanian LCP and DSO obligations are not as detailed as other jurisdictions. Rather than conclude that the Tanzanian legislation will remain as it is, we predict that this is just the beginning of the LCP and DSO story in Tanzania. Government may decide to enact a Local Contact Act for example, which goes across sectors. The local content policy certainly hinted at this. Or alternatively, regulations may be enacted in support of PA 2015 which will impact LCP and DSO.

Whichever route is eventually chosen, there will no doubt be further clarification and certainly further obligations for the private sector to adhere to in Tanzania. A comparison with other African jurisdictions which are further down the road in this area is of assistance in predicting the type of future obligations which may come into force once a Local Content Act or regulations are completed.

Local Content Policies

Section 219 of PA 2015 states that licence holders, contractors and sub-contractors should give preference to goods which are produced or available in Tanzania and seek services from Tanzanian companies or citizens. Where such services or goods cannot be locally sourced, they must be sourced from a company in a joint venture with a local company. Section 219 (3) states that the local company must own at least 25% of the joint venture. A local company is defined at section 219 (9) as one which is either (i) 100% owned by Tanzanian citizens or (ii) a company which is in a joint venture with a Tanzanian citizen or citizens "whose participating share is not less that fifteen percent". This is a surprisingly low threshold. Generally, we would expect that a joint venture would be required to be at least 51% owned by local citizens for the company to be considered indigenous.

Section 219 (4) contains the requirement for licence holders, contractors and subcontractors to report to the Petroleum Upstream Regulatory Authority (PURA) with a local content procurement plan in relation to financial, legal, accounts and health matters. Section 219 (5) – (8) requires licence holders, contractors and subcontractors to notify PURA in relation to various standards, including adherence to local content plans at the end of each calendar year. 

Sections 220 – 221 require a licence holder and contractor to submit to PURA a detailed programme for recruitment and training of Tanzanians, as well as a specific report in relation to training and technology transfer. Surprisingly, there are currently no minimum quotas that licence holders and contractors need to meet. It is possible that this policy may change in time, given the quotas used in other jurisdictions. It is also important to note that these provisions are currently very vague. There is no guidance on the practical implementation of the provisions, such as to whom at PURA one would need to submit reports. This would presumably be contained in regulations.

Section 222 deals with corporate social responsibility (CSR). A licence holder and contractor are to prepare a CSR report annually, in relation to environment, social, economic and cultural activities. It has been left to local authorities to approve such reports and to provide guidelines in relation to CSR and oversee the implementation of such plans. This is an area which will be subjective and dependent on the guidelines produced by the relevant local government authorities. There is currently a great risk associated with the ability of a licence holder or contractor to comply with such discretionary guidelines. Do the local authorities have sufficient capacity and experience to deliver guidelines? Will there be delays?

Section 223 introduces the integrity pledge; licence holders and contractors must note that a great deal of risk is associated with compliance with the integrity pledge. The integrity pledge requires licence holders and contractors to, among other things, conduct regulated activities with "utmost integrity", "desist to engage in any arrangement that undermines or is any manner prejudicial to the country's financial and monetary systems" and "disengage in any arrangement that is inconsistent with the country's economic objectives, policies and strategies". These provisions have been drafted incredibly widely. Further, any person who fails to comply with the integrity pledge will be deemed to have breached the conditions of their licence and can have their licence withdrawn or cancelled. This places licence holders and contractors at significant risk of potentially being unable to continue business, for noncompliance with a subjective and discretionary provision. 

Domestic Supply Obligations

Section 97 of PA 2015 states that a licence holder and  contractor shall have the obligation to satisfy the domestic market in Tanzania from their proportional share of production. Section 97 (2) states that the volume of crude oil or natural gas to be sold will not exceed the "share of profit oil or gas of a licence holder and contractor". It is not completely clear what this drafting means. Who is to determine the proportional shares of production? Exactly how will the profit of a licence holder or contractor be determined in relation to DSO? The current drafting of these provisions will leave companies unaware of their proportional DSO contributions, which will have a significant impact on the ability of the companies to make annual financial predictions.

Section 98 states that the domestic gas price shall be determined based on the "strategic nature of the project to be undertaken by the Government". This is again highly subjective and will not give licence holders and contractors any certainty as to how much they may be able to sell domestic gas for. Section 98 (2) states that the volume of crude oil or natural gas which a licence holder or contractor is required to supply to meet the domestic market obligation will be "determined by the parties in mutual agreement and on pro rata basis with other producers in Mainland Tanzania".

Section 99 states that the fair market price of Tanzania's crude oil shall be determined in the manner "prescribed in the regulations", but it is unclear which regulations this refers to, presumably, yet unpublished future regulations. It is clear, in particular given the discussion of the Nigerian laws below, that this is an area which will need further regulation and guidance to clarify these provisions.

Section 253 (1) covers the supply of domestic gas and petroleum products where there is a shortfall. The minister responsible for petroleum affairs may direct a licensee to make supplies or deliveries to cover such a shortfall. Section 253 (2) states that the minister may require a licence holder or contractor to supply all or part of the petroleum produced to the Government of Tanzania in the case of war or emergency.

Section 254 states that in the case of natural disaster or other extraordinary crisis; the minister may direct the licensee to place gas commodities at the disposal of the state. This broad-brush drafting does not detail specifically what will happen in such situations, but merely states that the minister can require licence holders and contractors to contribute.

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.

Source: www.mondaq.com

THE NIGERIAN CONTENT DEVELOPMENT FUND (NCDF) AND THE TREASURY SINGLE ACCOUNT THROUGH THE EYES OF THE CONSTITUTION

On the 7^th of August, 2015 the Federal Government via circular HCSF/428/S.1/120 directed all MDAs, to pay all receipts due to the Federal Government or any of her agencies into the Treasury Single Account (TSA) maintained in the Central Bank of Nigeria. The MDAs affected include all MDAs funded through the Federal Government Budget, MDAs partially funded through the Federal Government Budget and which generate additional revenues, MDAs not funded through the Federal Budget but which are expected to pay operating surplus /25% of Gross Earnings to the Consolidated Revenue Fund (CRF), MDAs that are funded from the Federation Account, Agencies funded through special accounts (levies), profit oriented public corporations/business enterprises, revenue generated under Public Private Partnership, and MDAs with revolving funds and project accounts.

The directive is to take effect from the date of the circular, which is 7^th August, 2015 and non-compliance will attract serious sanctions. In compliance with this directive, all government Ministries, Departments and Agencies (MDAs) have complied or have taken steps to comply and have moved their revenues to the Central Bank of Nigeria, unless those that were granted exceptions. The Nigerian Content Development and Monitoring Board (NCDMB) is not one of those granted exceptions and as such is expected to pay all its revenue into the TSA. The government further directed that the Nigerian Content Development Fund (NCDF), which technically is an industry fund held in trust for the industry by the NCDMB, be paid into the TSA. The question agitating the mind of industry stakeholders is whether the NCDF is government’s revenue that should be paid into the Treasury Single Account.

The NCDF is established pursuant to section 104 of the Nigerian Oil and Gas Industry Content Development Act, 2010 (NOGIC Act). For ease of reference, the section provides as follows:

104(1): A Fund to be known as the Nigerian Content Development Fund (the “Fund”) is established for purposes of funding the implementation of Nigeria content development in the Nigeria oil and gas industry.

104(2): The sum of one per cent of every contract awarded to any operator, contractor, subcontractor, alliance partner or any other entity involved in any project, operation, activity or transaction in the upstream sector of the Nigeria oil and gas industry shall be deducted at source and paid into the Fund.

104(3): The Fund shall be managed by the Nigerian Content Development Board and employed for projects, programmes, and activities directed at increasing Nigerian content in the oil and gas industry.

To answer the question subject matter of this piece, it is important to find out what are the revenues required to be paid into the TSA by the Constitution.

The relevant sections pursuant to which the circular was issued are sections 80 and 162 of the 1999 Constitution of the Federal Republic of Nigeria (As Amended). Also, the sections are quoted for ease of reference.

Section 80(1): All revenues or other moneys raised or received by the Federation (not being revenues or other moneys payable under this Constitution or any Act of the National Assembly into any other public fund of the Federation established for a specific purpose) shall be paid into and form one Consolidated Revenue Fund of the Federation”.

Section 162(1): The Federation shall maintain a special account to be called “the Federation Account” into which shall be paid all revenues collected by the Government of the Federation, except the proceeds from the personal income tax of the personnel of the armed forces of the Federation, the Nigeria Police Force, the Ministry or department of government charged with responsibility for Foreign Affairs and the residents of the Federal Capital Territory, Abuja.

Section 162(10) defines “revenue” for purposes of that section to include any receipt, however described, arising from the operation of any law; any return, however described, arising from or in respect of any property held by the Government of the Federation; and any return by way of interest on loans and dividends in respect of shares or interest held by the Government of the Federation in any company or statutory body.

Does the NCDF qualify as “revenue” by the government or a “public fund” and as such payable into the TSA? To answer these questions we have to make recourse to the NOGIC Act. Section 104(1) of the NOGIC Act expressly shows that the funds payable into the NCDF are not collected by the government. It is a fund independent of the government. It is a pool of fund put together by the industry players for the sole purpose of developing local content in the Nigerian oil and gas industry. Section 162(10) of the Constitution which defines “revenue” as meaning any receipt, however described, arising from the operation of any law must refer to any receipt by the government. Is the government receiving the NCDF? The answer is an emphatic No! The monies in the NCDF are of the industry, by the industry and for the industry, only to be managed by the NCDMB. It is an industry fund, not a government fund.

Importantly also, all monies in the Federation Account and the Consolidated Revenue Fund is not spent at will, but can only be spent by the federal government for purposes stated in the Constitution. To this end, section 162(3) of the Constitution mandates that the monies in the Federation Account be shared between the three tiers of government. With respect to the Consolidated Revenue Fund, section 80(2) of the Constitution forbids the withdrawal of any money therefrom except to meet an expenditure charged on the fund by the Constitution, or where it is approved for budgetary purposes. It follows that once the NCDF is put into the TSA, withdrawal therefrom for the purposes for which it was established by the Act becomes unconstitutional, as the said withdrawal is not pursuant to the Constitution, is not to fund the budget and is not to share among the three tiers of government. In other words, withdrawing the funds to fund the implementation of Nigerian content in the oil and gas industry (the purpose for which the fund was established) becomes unconstitutional. It must be noted that the NCDF cannot be used for any other purpose other than funding the implementation of Nigerian content in the Nigerian oil and gas industry as provided by section 104(1) of the NOGIC Act. Once it goes into the TSA, it must be used only as stipulated in sections 80 and 162 of the 1999 Constitution.

It is thus clear that it is unconstitutional to pay the NCDF into the TSA as the NCDF is not revenues received or collected by the government of the Federation or the Federation. It is an industry fund meant for the industry but managed by the NCDMB. The money does not go into NCDMB’s account, it goes into the NCDF which is a separate account maintained in the custodian banks.

Other issues like access to the NCDF and the willingness of industry players to contribute to the fund also arise from the directive of the federal government that the NCDF be paid into the TSA. While those issues are genuine and justified, this piece focuses on the constitutionality of the directive with respect to the NCDF. 

Harrison Declan is an energy lawyer, and author of the book “Local Content in Africa’s Petroleum States: Law and Policy”.

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