DPR PERMIT RENEWAL COMPLETED

Bloomfield is please to announce the renewal of it’s license to operate as a service provider in the Nigerian oil industry.

An exposé of some Commercial & Legal Aspects of the Nigerian Petroleum Industry Bill Part2-Rejigging the Fiscal Toolbox

Indeed, one of the three issues considered the “pillars” upon which upstream oil and gas investments are based is the fiscal regime of the host State. In other words, an investor in an international petroleum transaction intending to invest in a petroleum regime would conduct its due diligence before committing risk capital by looking at, amongst other things, the issue of ‘government take’ versus ‘ investor take’.

The Nigerian upstream fiscal tool box consists of taxes, bonuses (signature and production), rents, fees and royalties. Currently, in the Nigerian upstream oil and gas sector, taxes are paid upon profits derived from petroleum operations after making some allowable deductions, rents are also paid based on factors including size of the contract area and whether production has begun or not.

The signature bonus is paid when the instrument of grant/ the Host Government Contract such as the Production Sharing Contract (PSC) is signed or the letter of award is issued. A production bonus may also be payable when a production threshold is reached or a pre-determined cumulative production is achieved.

Royalties which are a part of production and are payable in actual production(crude oil) or cash equivalents are calculated based on a sliding scale depending on certain factors which include the location of the contract area (whether it is deep offshore or onshore/shallow offshore and the depth of the contract area if deep offshore), whether it is a marginal field or an Oil Mining Lease/Oil Prospecting Licence and with modern trends, recent Nigerian PSCs have introduced the concept of  an R-Factor. International market prices and volume of production also determine the Royalties payable.

Additionally, PSC Holders get tax rebates in form of Investment Tax Credits or Investment Tax Allowances depending on whether the PSCs were signed prior to or after July 1^st 1998.  The difference in practice is that an ITC creates a much lower tax liability on the part of an investor, than an ITA.

The gazetted version of the PIB proposes to maintain the current tax rates for crude oil operations applicable while increasing tax rates for gas operations by 5-10%. Interestingly, during the July 2009 public hearing on the PIB, an interagency committee comprising of the NNPC, tax authorities and the Ministry of Petroleum amongst others submitted a memo promoting the idea that upstream companies be charged a flat corporate tax rate as well as an additional “hydrocarbon tax” and/or “windfall tax” thereby significantly increasing taxes payable on upstream activities.

The interagency version also makes provision for the payment of Royalty based on value and production in order for the government to cream off windfall profits. This structure, which creams-off windfall profits is regarded by international petroleum transaction experts as a ‘progressive fiscal regime system’ because government take increases as crude oil prices increase in the international market.

Importantly, the PIB also seeks to alter the current cost recovery mechanisms now in practice by reducing the quantum of recoverable expenses by as much as 20% by for example reducing foreign related costs recoverable to 80%.

To further tighten the screws, the PIB also proposes to discard the use of Investment tax Credit and Investment Tax Allowances which were key fiscal incentives in getting the IOCs to consider exploring ultra deep water acreages. In its stead, the PIB seeks to introduce a petroleum investment allowance which rates are currently uncertain.

The fiscal regime as proposed is likely to challenge the viability of smaller discoveries particularly considering that these fields are marginally economic under existing terms due to the high development costs in Nigeria.

The members of the Oil Producers Trade Section of the Lagos Chamber of Commerce and Industry (the “OPTS”), have argued that the overall effect of the changes in the PIB would be to make investment in Nigeria’s upstream oil and gas unattractive and could increase government take from its current 92% to 98% thereby reducing investor take to 2% from 8%. This they argue would make Nigeria’s already onerous fiscal regime worse. The OPTS is therefore engaging the government in this regard.

It should be noted that the provisions reviewed above are proposals contained in draft legislation. These provisions may remain unchanged, be altered or even removed when the final version is passed into law as the industry stakeholders are currently engaging the Nigerian parliament  in this regard.

In spite of the caveat above, the Nigerian government has expressed (and demonstrated) its intention to push through the new law; so notwithstanding that there is an expectation that the stakeholders input will be reflected in the final version of the law, the Nigerian petroleum industry will never be the same again.

What’s the fuss about the Nigerian Petroleum Industry Bill

 

These are interesting times in the West African Emergent Cretaceous Petroleum Play Fairway. This is no less so in the Nigeria’s petroleum regime for a couple of reasons, chief amongst which are the current review of the Petroleum Industry legal and regulatory regime and the global economic melt-down. The global economic melt-down makes these times interesting because it creates an opportunity for discerning investors to acquire oil and gas assets with future high rate of returns at far less than their real value. Before investing however, a review of the legal regime is important.

Like every investor considering investing in any petroleum regime, three issues are considered the “pillars” upon which such investments are based. In other words, an investor in an international petroleum transaction intending to invest in a petroleum regime would conduct its due diligence before committing risk capital by looking at the geology, the fiscal terms and its legal regime.

The legal regime is the focal point of this article as it plays a key role in determining whether international oil companies and their lenders in particular would expend risk capital in a petroleum regime. The legal regime for example makes provisions regarding both the Government take and the returns to be made on investment by the relevant international oil company. This two part series explores some commercial and legal aspects of the Nigerian PIB.

State of the Nigerian Petroleum Legal Regime

Currently, the Nigerian oil and gas industry is primarily regulated by the Petroleum Act, Cap P10 Laws of the Federation of Nigeria (“LFN”) 2004 and the Petroleum Profits Tax Act, Cap P13 LFN 2004 (“PPTA”) both of which were enacted prior to 1970 (1969 and 1958 respectively).

Although the Petroleum Act at present has seven (7) regulations and both statutes have been amended severally over the past forty (40) years, nonetheless, both legislation remain substantially in the original forms in which they were enacted. The circumstances are therefore such that the primary laws regulating the industry, the Petroleum Act, Cap P10 LFN 2004 (and its Regulations), the Petroleum Profits Tax Act Cap P13 LFN 2004 and the NNPC Act Cap N123 LFN 2004 are 40, 50 and 32 years old respectively.

The fact that these legislation are out-of-date means that sectors and aspects of the industry (such as natural gas utilization and environmental issues), which have gained prominence over the last forty (40) years have remained outside their purview and are therefore subject to the arbitrariness of regulatory authorities.

The above being the case, change appears to be a welcome development.

The PIB

The PIB, a draft law currently under consideration by the Nigerian National Assembly which seeks to consolidate and/or repeal a number of existing legislation in the petroleum industry(the PIB replaces 16 different laws and amendments in an omnibus manner), was a key deliverable of the Oil & Gas Reforms Implementation Committee (OGIC). The PIB is also the primary vehicle for achieving the broader objectives stated in the OGIC report of July 2008 which include:

• Maximization of the nation’s economic rent from the Oil and Gas Sector while not jeopardizing the growth and development of the industry
• Separation and clarity of roles between the different public agencies operating in the industry
• Infusion of strict commercial orientation in all relevant aspects of the industry
• Fostering an enabling business environment with minimal political interference
• Reposition the nation’s Oil and Gas industry in view of contemporary challenges within the sector both globally and in the domestic sphere
• Meeting the nation’s needs for fuels at a competitive price
• Maximization of local content and development of Nigerian capacity

There are, however, issues in the PIB which this article seeks to throw up. Although there are press reports that there are up to three (3) versions of the PIB, the object of this article is that which was gazetted in the National Assembly Journal, No. 47, Vol. 5 of December 29, 2008

Incorporation of the Traditional Un-incorporated Joint Ventures

The Nigerian Government’s desire to participate actively in the petroleum sector led to the popularity and growth of the Traditional Joint Venture (“the TJV”) as they are usually tagged. Participation of the Government through the TJV meant Government was a participant in the day to day activities, derived all accruing benefits and bore all necessary costs corresponding to its interests through what is termed a “cash call”.

With the competition for funding which is shared by the three tiers of the Government under the federal system of governance operational in Nigeria, namely the Federal, State and local Governments; the idea of an incorporated joint venture appears welcome. The decision of the Nigerian Apex court stating that the NNPC joint ventures and priority funding could no longer be drawn in priority to the revenue allocations made in favor of the tiers of Government, has further exacerbated the funding challenge.

Under the unincorporated joint ventures each partner owns its own share of the hydrocarbon licenses. This means that all revenue generated by NNPC’s share of crude oil sales are deposited directly into the Federation Account and used by FGN for its budgetary needs. This therefore makes funds unavailable to the NNPC to meet its cash call obligations despite the huge revenue available to the corporation. In fact, as a result of shortage of funds, very little Joint Venture exploration has taken place in the last few years with a very negative impact on reserves replacement. New production projects have proceeded very slowly and have had to be financed by industry via alternative funding solutions as provided by the private sector operator.

With the change to an incorporated joint venture, revenues will go to the Incorporated Joint Venture and all shareholders inclusive of the NOC will be paid dividends that will be subject to the new 10% withholding dividend tax. NOC dividends will be paid into the Federation Account. However the majority of the Government’s cash flows will still be generated through taxes and royalties.

Although the introduction of an incorporated joint venture is laudable, issues that impact the bankability of such I-JVs and its ability to obtain independent funding, such as the World Bank negative pledge need to be properly addressed either by legislation or by agreement between the parties to the I-JVs. Additionally, government legislative requirements also impact bankability and key principles such as the right to independent dispute resolution are imperative. Appropriation of sufficient funds from all the shareholders (including the NOC) for the transition and start up period of the I-JVs until the earnings of the I-JVs are able to support external financings is also an issue that should be given prime consideration. A transition period that supports business continuity and does not threaten the integrity of the core production and cash flows is essential. Given the challenges in complex organizational transformational processes, it can take a reasonable length of time to set up the I-JV. Considering that the conversion is made obligatory by law and not on the election of the parties, a waiver of the potential capital gains, stamp duties and other transfer taxes and charges that may accrue on the transfer of assets to the IJV is also encouraged.

For more details please contact:

Oluseun Sodunke on 234 1 738 8369, 234 1 791 07 02

Email: oluseun.sodunke@bloomfield-law.com

Kunle Obebe on 234 1 738 8369, 234 1 791 07 02

Email: kunleobebe@bloomfield-law.com

Encouraging Investments in Nigerian Gas and Power through the Partial Risk Guarantee Mechanism

Preamble

It is typical for power industry experts to emphasize the importance of gas as a veritable source of fuel for the Nigerian electric power sector. This importance, for example, is buttressed by the fact that the Nigerian Electricity Regulatory Commission, the chief regulator of the electric power sector in Nigeria, has determined that the lowest-cost and most efficient new entrant generator in the power sector is an open cycle gas turbine (OCGT) power generator, using natural gas as fuel.

It would therefore appear to be the case that any investor in power generation wishing to run its business efficiently and at a profit should take a keen interest in the gas subsector of the Nigerian economy.

The Gas to Power Challenge

In spite of Nigeria’s large gas reserves there are claims that a number of power plants have been either completed or nearing completion but have no gas to ‘fire’ them. It is thus, a paradoxical situation that a country which has an abundance of gas (at over 184tcf P90) has insufficient domestic use.

It is on the premise of lack of sufficient supply of gas despite the country’s huge reserves and potentials, that the Federal Government of Nigeria (the “FGN”) has initiated a number of programs including the Nigerian Gas Master plan to deal with the challenge of achieving a gas driven economic growth with emphasis on gas to power. In furtherance of the overall policy, there is a domestic gas supply obligation for all gas suppliers with emphasis on supply of gas to government owned power plants for electricity generation.

Despite the FGN’s efforts, it has been difficult to achieve success, as every gas producer in the country is wary of the lack of credit worthiness of government owned entities, the Power Holding Company of Nigeria Plc and its proposed successor generator companies in particular. As a result of this, the FGN has been in talks with the World Bank to help initiate programs and products that would give comfort to gas producers who by the way, are willing to do business in Nigeria if the FGN provides the enabling environment.

The Partial Risk Guarantee (PRG) is therefore the mechanism expected to be utilized in the domestic gas sector to give comfort or “securitization” to gas producers under the Gas to Power policy of the FGN.  Although, the term “Securitization” traditionally has a single generally understood meaning to most lawyers and commercial persons, it has derived an additional meaning in the Nigerian energy lexicon. In Nigeria, the term is also understood to mean a credit risk management arrangement which gives comfort to investors in Nigeria’s energy sector.

What is the PRG?

The PRG is a Partial Risk Guarantee given by the World Bank (or “the Bank”) to protect private lenders or private sector investors against the risk of a government or a government-owned entity failing to perform its contractual obligations as regards a private project. The PRG is generally available to countries eligible to borrow from the International Bank for Reconstruction and Development (the “IBRD”) and the International Development Association (the “IDA”).

Since its first use by the Bank, in the Hub Power Project the Bank has considered the PRG together with its sister product, the Partial Credit Guarantee, a veritable tool in the Bank’s effort to increase private sector investment in infrastructure particularly in developing and less developed countries.

Simply put the PRG backstops government’s payment obligations to a private investor / lender. In this case, a private investor renders services to a government entity with the latter expected to make payment subsequent to the receipt or enjoyment of such services. The PRG tends to ensure that such an investor gets paid through the involvement of the World Bank which assures the private investor/lender of a payment by the Bank upon a payment default by the government entity.

How to obtain offshore safety permits in Nigeria

INTRODUCTION
The Permanent Secretary of the Nigerian Petroleum Ministry (the “Minister”), Engr.
Sheikh Musa Goni on behalf of the Minister of Petroleum Resources in the third
quarter of the year 2011, launched the Nigerian Petroleum Industry Offshore Safety
Permit (“OSP”). The launch of the OSP, was in furtherance of the Federal
Government’s resolve to ensure that the Nigerian Oil and Gas Industry is provided
with enforceable regulations, guidelines and standards among others for the primary
objective of ensuring its sustainability.

Very recently, however, the Department of Petroleum Resources (“DPR”) on behalf
of the Ministry, began the issuance of the OSP in connection with new safety and
personnel accountability measures in the offshore areas of the Nigerian oil and gas
industry (the “Petroleum Industry”). The OSPs are being issued pursuant to the powers
of the DPR by virtue of the Petroleum (Drilling & Production) Regulations and the
Mineral Oils (Safety) Regulations.

All Exploration and Production Companies, as well as Oil Services Companies
working in offshore areas of the Petroleum Industry are now obligated to obtain OSPs
in respect of personnel working offshore. The issuance of the OSPs is calculated to
guard against the loss of lives through effective training and also, to ensure
compliance with the provisions of the Nigerian Petroleum Industry regulations,
international standards and best practices to achieve the vision of zero offshore
incidents.

It is expected that further requirements will be introduced as the system develops,
including the requirement for eligible personnel to undergo basic safety offshore
training and certification. We are aware that the requirement for safety certification
will not be implemented until about the year 2016.

The DPR has appointed a company as its agent for the administration of the OSP
issuance process and for maintaining the requisite personnel safety records. The DPR agent shall also be responsible for issuing the OSPs, as well as maintaining Personnel on Board tracking system for the Petroleum Industry. OSPs are to be issued upon completion of the relevant information such as the offshore worker’s bio-data and employment information contained in the application form and payment of prescribed fees. The OSP is valid for a one (1) year period and is renewable every year.

The current application fee of Nine Hundred and Thirty Five United States Dollars
(US$935.00) is payable on each initial application. Subsequent renewals will attract a
renewal fee of One Hundred and Thirty Five United States Dollars (US$135.00).

For enquiries and assistance with the registration process, please contact:
Mr. Kunle Obebe
Partner and Head of Energy and Natural Resources Practice Group,
Bloomfield- Advocates & Solicitors
200 Muritala Mohammed Road,
Yaba, Lagos
Nigeria
Tel: 234 1 738 8369, 234 1 791 07 02
Fax: 234 1 496 0466
Email: kunleobebe@bloomfield-law.com
Website: http://www.bloomfield-law.com