OIL AND GAS BUSINESS LAW

Ibibia Lucky Worika Ph.D. (Dundee); LL.M (Lagos); BL; LL.B (Hons)
Visiting Professor to Emerald Energy Institute
Dean, Faculty of Law
University of Port Harcourt
Choba Port Harcourt
OUTLINE
 BACKGROUND
 With approximately, 80% of government revenues, 90% of
foreign exchange earnings, 95% of export receipts, oil revenues
are essential to the social and economic development of Nigeria;
 Yet the petroleum industry barely accounts for 40% of GDP;

 Law as an instrument of social change

 Reject uniqueness of law – simply one method of social
control
 Reject jurisprudence of concepts – law is not a closed logical
order
 Skeptical of textbook rules – interested in law in action
 Reject the belief in naturalism, but that reality is socially
constructed
 Harness social science and sociological research to construct
a new science of law
 Abiding concern with social justice
 BACKGROUND
 Oil is a non-renewable natural resource
 geological
 Economic
 competing alternative energy sources
 Oil is a strategic commodity
 Oil is the leading energy source; it is dominant in the captive transportation sector
 Reserves are mainly located far from main consuming areas, leading to a global industry
 Geopolitics: security of demand vs. security of supply
 OPEC MCs’ economies rely heavily on oil exports earnings
 High risks and rewards
 The risks involved in upstream activities are huge
 Upfront investments are large with long payback
 Uncertainties over the future demand for OPEC oil
 But potential rewards are commensurate
CONCEPTUAL CLARIFICATION

What is Law?
What is Oil and Gas Business Law?
What is the rationale for Oil and Gas Business Law?
Jurisprudential basis for law
Law as an instrument of social change
Municipal v. International Law
 IMPLICATIONS OF INTERNATIONAL LAW
 UN General Assembly Resolution 1820 (extract):
1. The right of peoples and nations to permanent sovereignty over their
natural wealth and resources must be exercised in the interest of
their national development and of the well-being of the people of the
state concerned
2. The exploration, development and disposition of such resources, as
well as the import of the foreign capital required for these purposes,
should be in conformity with the rules and conditions which the
peoples and nations freely consider to be necessary or desirable with
regard to the authorization, restriction or prohibition of such activities
 OPEC Era
 OPEC Resolution XVI.90 (1968)
 International Treaties: WTO, ECT
 Regional Agreements: EU, NAFTA, etc.
 Bilateral Investment Agreements
PETROLEUM INDUSTRY
Petroleum Industry Segments

Elements of Upstream and Downstream

LEGAL FRAMEWORK FOR PETROLEUM
DEVELOPMENT

• The legal framework comprises the policy,

laws, subsidiary instruments, licensing and
contractual arrangements, including
institutions that are set up to regulate oil
and gas resources.
PETROLEUM REGULATORY REGIME

INSTITUTIONS
STRUCTURE OF OIL AND GAS
RESOURCES MANAGEMENT

Policy

Regulations

Business
TYPICAL PARTIES TO PETROLEUM
INVESTMENT
TYPICAL STAKEHOLDERS TO PETROLEUM
INVESTMENT
OIL AND GAS POLICY OBJECTIVES
 CONSTITUTION

• Section 44(3) of the Nigerian Constitution

1999
• (3) Notwithstanding the foregoing provisions of
this section, the entire property in and control of
all minerals, mineral oils and natural gas in under
or upon any land in Nigeria or in, under or upon
the territorial waters and the Exclusive Economic
Zone of Nigeria shall vest in the Government of
the Federation and shall be managed in such
manner as may be prescribed by the National
Assembly
 Nigeria’s Oil and Gas

“Nigeria’s Oil & Gas Strategy in the Next Five Years; Ministry of Petroleum Resource At Nigerian
Oil & Gas Conference (NOG13) delivered by then Hon. Minister of Petroleum, Mrs. Deziani
Alison-Madueke, February 19th 2013
•The policy has been in the works since the year 2000, covers all aspects of the oil and gas
industry from upstream to downstream distribution in the country.
•The policy is the product of a five-year effort by the Oil and Gas Sector Reform Implementation
Committee (OGIC) inaugurated in April 2000.
•The policy provides for a review of operating agreements, contracts, and memorandums of
understanding governing the operations of the upstream oil and gas sector with a view to
ensuring that oil and gas business gains to the nation are maximized.
•The policy also makes recommendations for upgrading local content and indigenous
participation in the oil and gas reform.
•It highlighted issues of health and safety and environmental responsibilities of all stakeholders in
the oil and gas industry as well as community issues.
 Nigeria’s Oil and Gas Policy
As at 2013, Nigeria’s production stood at an average of 2.5 million barrels per day with proven reserves of 36
billion barrels expected to last about forty six years. However, Nigeria set for itself ambitious targets of achieving 4
million barrels of production by 2020.
The strategies to achieve this target were said to be:
More attractive fiscal terms for investors in onshore and shallow water areas;
Higher profitability for fields in deep water areas with specific new fiscal incentives to encourage re-investment in
Nigeria;
More acreage availability through mandatory relinquishment of unused acreage. This will enable the Government
to attract large scale new investment through new bidding rounds;  and
Strong work commitments and effective acreage management on new PPLs through the application of the “drill or
drop” system.
This production target was to be met through investments in oil production, while significantly reducing gas flares
through gas utilization and reservoir maintenance strategies.

•
Challenges to Oil and Gas Policy
implementation
Cost of environmental remediation from years of militancy and pipeline
vandalism.
Maintaining the level of government investment in oil and gas while
meeting pressing social needs.
Funding required to achieve gas flare out is significant and grows with
increased oil production.
Ageing oil production facilities built in the early and mid-seventies
requiring modernization.
Building indigenous technology capability in complex deep water
environments.
Indigenous participation and the pace of human capacity development
(Institutional development and organisational strengthening).
Crude oil and petroleum product theft
Nigeria’s Gas Utilization Policies

• The country’s gas utilization policies are in three

strategic areas namely:
1.Gas to power to deliver at least three folds increase in
power generating capacity by 2015.(12,000MW)
2.Deliver on the President’s gas revolution agenda by
1. creating industrial hubs for gas based industries (fertilizer
and petrochemicals) and
2. Establishing better linkages between the gas sector and
the domestic economy.
3.Consolidating Nigeria’s position and market share in
the export markets through regional gas pipelines and
LNG.
Nigeria’s Gas Utilization Policies
• The enabling policy interventions with respect to gas domestication are being
implemented including the following:
• Domestic supply obligation to jump start gas availability in the short and medium
terms.
• The provision of bankable commercial framework reforms in pricing and revenue
securitization to enable sustainable investment in domestic gas supply.
• The development of a national gas infrastructure blueprint for which supply
flexibility through the use of open access rules will be encouraged.
• In the case of oil development the policy interventions include:
• Amnesty programme
• Fiscal rules of general application for the upstream, midstream and downstream
sectors (PIB).
• Deregulation of product prices and the opening up of the downstream petroleum
sector.
 Nigeria’s Petroleum Industry Bill

 The objectives of the PIB are therefore as follows:

 To enhance exploration and exploitation of petroleum resources
 To significantly increase domestic gas supplies  especially for power and industry
 To create competitive  business environment for the exploitation of oil and gas
 To establish fiscal framework that is flexible, stable and competitively attractive
 To create commercially viable national oil company
 To create strong and effective regulatory institutions
 To promote Nigerian content and
 To promote and protect health safety and environment
 The proposed reforms in the PIB can broadly be divided into two; non-fiscal and fiscal reforms. 
Non-fiscal reforms relate to institutional and policy re-orientation.
Institutional Policy Reforms
• The building blocks of these institutional and policy reforms are
as follows:
• The Unbundling of NNPC as presently constituted through the
Creation of a National Oil Company that promotes indigenous
operational capacity development
• The Creation an Asset Management Limited Liability Company
to manage the JV assets on behalf of the federation
• The excision of Nigerian Gas Company (NGC) from NNPC as
a separate partially privatised entity to cater for domestic gas
marketing and gas infrastructure development.  The intention
here is to accelerate national gas infrastructure development
for effective gas supply to power and industrial sectors of the
economy.  This will be realised through private equity
participation of up to 49%.
Fiscal Policy Reform

•The PIB represents the largest overhaul of the

government petroleum revenue system in the
last four decades. This overhaul has four
central objectives:
 
•To simplify the collection of government
revenues,
•To cream off windfall profits in case of high oil
prices
•To collect more revenues from large profitable
fields in the deep offshore waters, and 
•To create Nigerian employment and business
opportunities, by encouraging investment in
small oil and gas fields.
SELECTED PETROLEUM LAWS AND REGULATIONS
PETROLEUM LAWS AND REGULATIONS

Petroleum Act 1969

• An Act to provide for the exploration
of petroleum from the territorial
waters and the continental shelf of
Nigeria and to vest the ownership of,
and all onshore and off-shore revenue
from petroleum resources derivable
therefrom in the Federal Government
and for all other matters incidental
thereto.
 PETROLEUM ACT
ARRANGEMENT OF SECTIONS

1. Vesting of petroleum in the State, etc. 11. Settlement of disputes by arbitration.

12. Delegation of powers.
2. Oil exploration licences, oil prospecting 13. Offences.
licences and oil mining leases. 14. Repeals, amendments, transitional and savings
3. Refineries. provisions.
15. Interpretation.
4. Control of petroleum products. 16. Short title and commencement.
5. Offences in connection with the distribution SCHEDULES
of petroleum products. FIRST SCHEDULE
Oil exploration licences; oil prospecting licences; and, oil
6. Price control. mining leases
7. Rights of pre-emption. 8. Power and duties SECOND SCHEDULE
of public officers. Rights of pre-emption
THIRD SCHEDULE
9. Regulations. Repeals
10. Discharge of obligation to make payments. FOURTH SCHEDULE
Transitional and savings provisions
 PETROLEUM (DRILLING AND PRODUCTION) REGULATIONS
[L.N. 69 of 1969.]
ARRANGEMENT OF REGULATIONS
REGULATION PART II
Oil exploration licences
1.Form of applications, etc.
2. Areas. 10. Form.
3.Withdrawal of applications. 11. Powers.
4.Applications for assignment. 12. Commencement of exploration.
5.Publication. 13. Reports.
6.Samples and specimens.
7.Samples and specimens: control of PART III
export. Oil prospecting licences and oil mining
8.Registration. leases Form, rights and powers
9.Appointment of manager.
14. Form.
15. Rights and powers.
16. Reservations and exclusi
LAWS AND REGULATIONS ON NIGERIAN CONTENT
Petroleum Act 1969

• The primary intent and objective of the PA is to provide for the

exploration of petroleum from the territorial waters and continental
shelf of Nigeria and to vest the ownership of/and all onshore and
offshore revenues from petroleum resources derivable therefrom in
the Federal Government.
• Section 2(3) incorporates the First Schedule to the PA as applicable
to all licenses and leases granted under the section.
• Para. 37 of the First Schedule provides that: the holder of an OML
shall ensure that within 10 years from the grant of his lease, the
number of Nigerians employed by him in managerial, professional
and supervisory grades (or any corresponding) grades shall reach at
least 75% of the total number of persons employed by him; and that
the number of Nigerians in any one of such grades shall not be less
than 60% of the total.
• Additionally, all skilled, semi-skilled and unskilled workers are
citizens of Nigeria.
Petroleum (Drilling and Production) Regulations 1969

• Regulation 26 obliges the licensee of an OPL within 12

months of the grant of a license and the lessee of an
OML, on the grant of a lease to submit for the
Minister’s approval, a detailed programme for the
recruitment and training of Nigerians. The programme
shall provide for the training of Nigerians in all phases
of petroleum operations whether the phases are
handled directly by the lessee or through agents and
contractors.
• Any scholarship schemes prepared to proposed to be
awarded, by the licensee or lessee shall be submitted
to the Minister for approval under Regulation 27.
• Once any such programme for the training of Nigerians
or the award of scholarship is approved by the
Minister, it may not be varied.
• Reports on the progress of implementation of such
programmes for training of Nigerians shall be
submitted by the licensee or lessee at or about the end
of June and December every calendar year.
NIGERIAN OIL AND GAS INDUSTRY CONTENT
DEVELOPNMENT ACT 2010
• General obligations – Sections 3, 7 and
11
• Overall Policy Objectives – Section 3
• Focus of the Act – Nigerian content
concerning obligations on “Operator” –
Section 106
• Preference for Nigerian companies “with
demonstrable capacity to perform” –
Sections 3, 11, 15-16.
• Benefits in Bid Evaluation
• Benefits in Regulation
• Technology Transfer
• Minimum Nigerian content set out in
Schedule – Section 11
NIGERIAN OIL AND GAS INDUSTRY CONTENT DEVELOPNMENT
ACT 2010

• Nigerian Content Plan – Section 7

• Bid Evaluation – Sections 14, 15 and 16.
Projects in excess of $1m are subject to an
extensive reporting programme – sections 17-
24
• Primary considerations the Board will have in mind
are “Nigerian manufactured goods”, “Nigerian
services” and ‘Nigerian Indigenous contractors and
companies” – see sections 12, 13, 15 and 17.
• Employment and Training – Sections 28-35
• Research and Development – Sections 37, 38
and 39
• Regulations – Sections 40, 42 and 47
• Technology Transfer – Section 43 and 45
NIGERIAN OIL AND GAS INDUSTRY CONTENT
DEVELOPNMENT ACT 2010

• Services
• Insurance services – Sections 49 and
50
• Legal Services – Section 51
• Financial Services Section 52
• Prohibition of imported welded products –
Section 53
Measures to Promote Petroleum Exploration

• No signature bonuses
• No high rentals during exploration
• Reasonable taxation and royalties
• 100% cost recovery for exploration and development
• High cost recovery limit
• Import duty exemption for exploration and development
• Assured contract validity and duration without unilateral
change of terms
 LICENSING AND CONTRACTS

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Concession
JOINT VENTURE
 Production Sharing Contract

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Service Contract
Hybrids
 Table Comparing Contracts
TYPES OF AGREEMENTS CONTRACTOR NATION STATE
CONCESSION  Takes all the risks and reward;  Reward is dependent on production
 Operator has exclusive right to and price
explore and produce  Operator has ownership of
production
JOINT VENTURE  Shares in the risks and reward  Shares in risks and reward
 Exclusive right to E&P is shared  Ownership of production is shared

PRODUCTION SHARING  Takes exploration risk, but shares  State Shares in Reward
CONTRACT reward  State has ownership of production
 Operator has Exclusive right to E&P

SERVICE CONTRACT  No risks to Contractor;  Takes all the risks and reward
 State has exclusive E&P right through  State has ownership of production
Contractor
HYBRID • Mixed  Mixed grill
• Exclusive right to E&P is mixed  Ownership of production is mixed
 ADVANTAGES AND DISADVANTAGES

CONCESSION
ADVANTAGES DISADVANTAGES
In the event of production government earns royalty State may be short-changed through considerable
and profits tax, which are based on the quantity exploration over very large areas
produced and price sold.
One who wins the bid pays the bidder price (signature Operators may be risk averse by avoiding to explore
bonus and license fee) areas with little or no prospects and therefore not
suitable for frontier countries.
JOINT VENTURE
State is not alone in decision-making and risks on Since risks and costs are shared between State and JV
project partner, not suitable for countries with financial
constraints
State relies on operator’s expertise, which may be Joint responsibility is accompanied with potential
lacking locally environmental and other legal liablilities
State shares royalties and taxes as well as profits
 ADVANTAGES AND DISADVANTAGES

PRODUCTION SHARING CONTRACT

ADVANTAGES DISADVANTAGES
Regarded as the most time-tested model for attracting Contract provisions are usually standard terms and less open
foreign risk capital and technology to explore hither to flexibility in terms of new and emergent situations.
unexplored areas in developing countries
Contractor is given considerable independence and
autonomy to use best expertise and skills to ensure success
of operation in order to recover costs.
SERVICE CONTRACTS
Payment is made at a rate that is pre-determined or ahead of Suitable for long established and geologically producing
the operations. assets and regions
Earnings being more limited, most IOCS are unwilling to ‘sell’
technology for a turnkey service contract
ADVANTAGES AND DISADVANTAGES

HYBRIDS
ADVANTAGES DISADVANTAGES
Comprises the very best of all models – These diverse and intricately complex models
Concession, Joint Ventures, Production Sharing bring with them their peculiar implementation
Contracts, Risk Service Contracts challenges and therefore much more difficult to
assess State/Contractor take to achieve
maximum equilibrium or equity for both parties
Requires considerable expertise and negotiation
skills which are missing in most developing
countries.
INSTITUTIONAL ARRANGEMENT WITH
CONTRACTUAL INTERACTIONS