With the gradual shift away from Nigeria’s shallow waters to deep offshore fields by the oil majors, as has been further highlighted by recent press reports of the potential divestments of assets by Shell and Chevron, it is safe to say that there will be an increase in the activities of energy lawyers who are involved in the sale and purchase of such assets.
As such, below is a brief outline of some of the transactional and regulatory compliance issues that need to be considered with regard to the sale and purchase of oil and gas assets particularly from a Nigerian perspective.
A prospective buyer should always engage a legal practitioner to conduct a due diligence exercise so as to confirm the true ownership of the asset on sale. This would ideally involve a corporate search at the Corporate Affairs Commission and an enquiry at the Department of Petroleum Resources to determine the authenticity of the ownership interest in the licence.
Host Government Contract
It is imperative to have a working knowledge of the types of host contracts that are in use in Nigeria and which govern the particular licence that is to be acquired. The buyer will ideally need to determine if the interest to be acquired is governed by a Joint Operating Agreement (JOA) or a Production Sharing Contract (PSC).
Key Upstream Legislation
Some important legislative instruments for the buyer to familiarise itself with asides from the Petroleum Act include;
- the Petroleum Profit Tax Act
- the Companies Income Tax Act
- the Deep Offshore and Inland Basin Production Sharing Contract Act
- the Deep Water Allocation to Companies (Back In Rights) Regulations
- the Local Content Act and
- the Oil Prospecting Licences (Conversion to Oil Mining Leases etc) Regulations
Another point to note is that there is an impending Petroleum Industry Bill which, as at the time of writing, is yet to be passed by the Legislature. However, a thorough understanding of the potential impacts of the various sections of the Bill is very crucial.
Farm In/Farm Out
When it comes to the transaction itself, an initial consideration is usually as to how to go about obtaining the asset. An option to be considered might be a farm in/farm out. If the transaction is intended to be a farm out/farm in, then it is imperative for the farmee to ensure that the prospective farmor is not in breach of its minimum work obligations as a failure to meet such obligations is a ground for revocation under the oil and gas legislation in Nigeria.
Sale and Purchase
On the other hand, the prospective buyer may prefer to resort to an outright sale and purchase. If the transaction is intended to be a sale and purchase then a key consideration for the prospective buyer, where it has the option, is to decide whether it would prefer to acquire the assets or the shares of the seller. There are several advantages of the latter approach, for instance in a share acquisition, capital gains tax is not applicable. Furthermore, share acquisitions are usually an easier method of acquiring licence interests in terms of dealing with documentation.
JOA’s in Nigeria contain pre-emption rights clauses. As such, it is likely that the buyer will have to encounter these rights in some form during the transaction. Such issues must be clarified by the buyer prior to it making a full commitment to acquiring the assets.
Consent from the Minister of Petroleum Resources
It is also imperative to know the procedure for obtaining consent, as the Nigerian law provides that without the prior consent of the Minister, the holder of an OPL or OML shall not assign the license, lease, right, power or any interest therein.
Review of Documentation
It is usually the case that the seller will intend to part with only its share of a larger interest in the licence. It is therefore also imperative to review all the agreements that govern the relationships between all the existing owners of the entire interest so as to ascertain that there are no obligations or issues that might affect the buyer once it has acquired the seller’s part of the interest. Furthermore, there are certain forms of technical service agreements/economic interests’ agreements which are entered into where a party does not have direct interest in the assets but instead has an interest in the proceeds. As such it is crucial to determine from the agreements that the selling party actually has both legal and beneficial interest in the portion it wants to sell.
It is usually the case that financial documentation for asset acquisition transactions will be handled by the foreign solicitors to the foreign banks providing the credit facilities, as relatively few Nigerian banks provide financing for oil and gas acquisitions. However, it is important for foreign solicitors to work in tandem with indigenous legal practitioners so as to get a holistic view of the transaction in the long term from a Nigerian perspective.
It must be noted that the above is a mere guide and should in no way be construed as definitive. As such, all prospective buyers are advised to ensure that they are up to speed with the relevant regulations and procedures as they apply to Nigeria and solicit experienced professionals to enable them achieve their goals adequately and satisfactorily.
*Noma Garrick is a lawyer and consultant with extensive experience in oil and gas and energy related matters.