The Department of Petroleum Resources (DPR) recently circulated “Guidelines and Procedures for Obtaining Minister’s Consent to the Assignment of Interest in Oil and Gas Assets” (Guidelines) to establish the procedure for obtaining consent of the Minister of Petroleum Resources (Minister) to the assignment of rights, powers or interests in an oil prospecting license (OPL), oil mining lease (OML), marginal field, or oil and gas pipeline license (Assets).
In light of the ongoing divestments of interests in oil and gas assets by International Oil Companies (IOCs), the Guidelines ostensibly address various challenges faced by industry participants in their attempt to obtain ministerial consent in compliance with Paragraph 14 – 16 of the First Schedule to the Petroleum Act Cap P10 Laws of the Federation of Nigeria (LFN) 2004 and Section 17 (5) (d) of the Oil Pipelines Act Cap O7 LFN 2004.
This newsletter analyses the principal provisions of the Guidelines from the perspective of an acquirer and an acquisition financier and suggests pragmatic solutions to certain identified challenges:
Further to the passage of the Guidelines, it has become essential that all industry players audit ongoing and future Asset acquisition strategies to ensure that their commercial objectives are tailored to comply with DPR’s requirements. In this regard, noteworthy provisions of the Guidelines are discussed below.
The Escrow Arrangement
The Guidelines provide that upon execution of a Sales Purchase Agreement (SPA) between the parties to an assignment transaction, “all proceeds from the interest being transferred must from the date of the SPA be paid into an Escrow Account to be opened by the assignor pending the procurement of the consent of the Minister on the transfer.”
A significant loophole in the Guidelines is its silence on the beneficiary of these escrowed funds; a major issue which needs to be clarified by DPR is whether the assignee or the assignor is the beneficiary of escrowed funds. This current uncertainty gives room for conflicting interpretations. On one hand, assignors have argued that the Assets and any funds derived therefrom statutorily belong to the assignor until such a time as Minister’s consent is obtained. On the other hand, assignees have canvassed that in light of the “pro-assignee” wording of the Guidelines in general, the escrowed funds are meant for the assignee’s benefit.
Operating on the assumption that the escrowed funds are for the assignee’s benefit, these funds may provide comfort to lenders by improving assignee’s debt service capability. Where DPR’s clarification affirms a pro-assignee interpretation, it can be reasonably predicted that IOC’s will in future ensure that SPAs impose shorter timelines within which ministerial consent should be obtained.
Crude Sale/Purchase Agreements
Recent divestments have been characterised by mandatory offtake of crude and gas produced from the divested assets. Such offtake is usually in favour of the assignor or its associated entity, on an exclusive basis. The Guidelines have imposed clear restrictions in this regard by providing that “the assignor shall not impose on the assignee, crude sale/purchase agreement as a condition for the consummation of the transaction”.
Offtake arrangements with assignors are not altogether unbeneficial to the assignee; such arrangements are often considered by the assignee as a guaranteed source of revenue and acquisition lenders will also typically look to offtake proceeds as a source of repayment. However, the contracting liberty afforded by the Guidelines is beneficial to assignees (and ultimately the acquisition lenders), as it affords assignees an opportunity to negotiate the offtake based on commercial terms as opposed to being strong-armed into unfavourably priced contracts.
An important financial consideration which has hitherto been surrounded by uncertainty is the amount of fees or premium payable to the federal government pursuant to Paragraph 15 of the First Schedule to the Petroleum Act in respect of divestment transactions. In the past, parties typically presumed a percentage of the purchase price and factored such percentage into the relevant financial models as part of the acquisition costs.
Clarity has now been provided; as the Guidelines state that “the Minister reserves the right to impose a Fee or Premium or both which shall range from 1 to 5% of the total value of the transaction”. This will undoubtedly aid accurate financial modelling by acquisition financiers and most likely lean towards the higher end of the range.
Closely related to the determination of applicable fees or premium is the uncertainty regarding the party responsible for making the relevant payments. The Guidelines place the responsibility for payment on assignors. However, in an attempt to guarantee the liberty of the parties to determine the terms of their contract, the Guidelines permit a contractual departure from this provision on such terms as may be agreed between the parties.
What constitutes an Assignment?
In the past, some industry participants have restricted the interpretation of the need for Minister’s consent to legal assignments or transfer of interests in the relevant Assets. The implication of such restriction is that the need for ministerial consent (and the attendant costs) is avoided in transactions such as share transfers, share charges and other contractual manoeuvres which availed third parties with indirect benefits.
In an attempt to curb this practice and in seeming affirmation of the Federal High Court’s decision in the case of Moni Pulo Limited v. Brass Exploration Unlimited & 7 Others, the Guidelines describe an “assignment” as involving “the transfer of a licence, lease or marginal field or an interest, power or right therein by any company with equity, participating, contractual or working interest in the said OPL, OML or marginal field in Nigeria, through merger, acquisition, take-over, divestment or any such transaction that may alter the ownership, equity, rights or interest of the assigning company in question, not minding the nature of upstream arrangement that the assigning company may be involved in, including but not limited to Joint Venture (JV), Production Sharing Contract (PSC), Service Contract, Sole Risk (SR) or Marginal Fields operation”.
Although the definition of “assignment” tows the line of the decision in Moni Pulo’s Case, the Guidelines extend instances of assignment to cover exchange or transfer of shares, private or public listings, mergers, corporate restructuring transfers by operation of law (i.e. a judgement of a competent court of law or an award from an arbitration panel) and testamentary device (i.e. transfer of shares through a will, letters of administration or a deed of gift).
Procedure for Acquisition of Oil and Gas Assets
The Guidelines provide clarity as to transaction procedures and steps to be followed in acquisition of oil and gas assets in Nigeria. The steps are outlined below:
a. Prior to commencement of any assignment process, the holder of a licence, lease or marginal field notifies and seeks authorisation from DPR;
b. The Assignor shall not advertise, publish or make press release in respect of the assignment without the prior approval of the DPR;
c. The pre-commencement notification to DPR states the reason for the proposed assignment, the method for the conduct of the assignment (i.e. whether open bidding process, selective tendering or negotiated transfer), and the possible technical and economic value such assignment would bring to the Assets. The notification also includes a plan for ensuring that Nigerian indigenous companies are given first consideration in the proposed assignment in accordance with the Nigerian Oil and Gas Industry Content Development Act, 2010;
d. Upon completion of the technical evaluation of candidates for the assignment, the assignor submits a list of the qualified candidates for preliminary due diligence to ensure acceptability of the companies to the federal government.
e. DPR considers the pricing of the asset to ensure that there is no adverse effect on the revenue of the Federation. Ordinarily, reference value of the asset should be the book value;
f. After submission above, the assignor proceeds to the commercial stage of the bidding process;
g. The assignee subject to respective arrangements i.e. Joint Venture, Production Sharing Contract etc. seeks the waiver of non-assigning parties to the assignment in the manner provided in the relevant documents;
h. Upon completion of the process outlined above and meeting all other conditions in the Guidelines, the assignee submits a written application to the DPR requesting for the Minister’s consent.
The structured acquisition procedure established by the Guidelines is a welcome development which will aid transaction planning in that transaction roadmaps and timelines can be moulded in alignment with DPR’s processes.
The acquisition procedure also provides DPR with an oversight function over the entire acquisition process and most importantly, ensures that DPR vets all proposed assignees for technical competence prior to negotiations of commercial terms.
The Guidelines introduce a greater level of certainty in many respects. However, the DPR still has a major role to play in terms of effective implementation of the Guidelines. Also, it will be interesting to see if the Petroleum Industry Bill (PIB) will be passed before the next IOC divestments and how the complexion of the Guidelines will change upon the advent of the PIB.