by Adeoye Adefulu & Lateef Bamidele
The Petroleum Industry Act 2021 (“PIA” or “Act”) introduced changes across the Nigerian petroleum industry, and one of such changes is the overhaul of the administration of marginal field assets. The Act set a deadline of 18 months (February 15, 2023) for the transition of the existing marginal field assets into the PIA terms[1] and put an end to the regime[2] which has hitherto enabled small and indigenous players to participate in the industry for about two decades. This article examines the transition mechanisms for this category of assets and what it portends for the industry operators.
HOW DOES THE ACT DEFINE A MARGINAL FIELD?
The Act defines a marginal field as a field or discovery which has been declared a marginal field prior to 1st January 2021 or which has been lying fallow without activity for 7 years after its discovery prior to the effective date of the PIA.[3] The Act further distinguishes between producing and non-producing marginal fields and provides for the transition of such fields into petroleum mining leases and petroleum prospecting licences respectively. In essence, the PIA makes a distinction between three types of marginal fields as follows:
- Producing marginal fields[4];
- Non-Producing Marginal fields “transferred” to government and declared as marginal fields prior to January 1, 2021[5];
- Non-Producing Marginal fields not transferred to government[6].
RATIONALE FOR THE TRANSITION
Marginal fields are undeveloped fields within the lease areas of existing lessees. The driver for the award of these fields is to ensure its development by smaller players who, because of their size, are better able to achieve commercial development. This arrangement, documented in a Farmout Agreement, subjects the lessees and the marginal field holders (also called “Farmor and Farmee”) to a relationship akin to a landlord and tenant relationship.
On the Farmee side, at least two pain points arise in this relationship. The requirement to pay royalties to both the government and the Farmor and the termination of the marginal field when the lease of the Farmor expires. Whilst it is clear in the Farmout Agreement that this is the case, it has been complicated by “life of the field” extensions which have been issued by the defunct Department of Petroleum Resources in the past. Such “extensions” suggested that the marginal fields tenure was independent of the original lease contrary to the Farmout Agreement.
On the part of the Farmor, as the fields remained a part of the lease, there are questions as to liability, both from a statutory/regulatory perspective and a social perspective for defaults occurring within the marginal fields. Whilst some of these are addressed under the Marginal Field Agreements, in the form of indemnities, who will affected communities point to where there is an oil spill from a marginal field?
The PIA aims to eliminate these controversies by creating a direct relationship with the government. The transition is also affected by the wider changes in the licensing framework under the PIA which provides for an efficient acreage management system with the holders of Petroleum Mining Leases (PML) now restricted to a discovery-based lease area[7] as opposed to the situation under the Petroleum Act, where a lease area could hold several discovered fields.
The transition framework provided by the PIA in respect of each category of marginal fields listed above however raises some issues for determination by the new regulator. We hope that these issues will be resolved by regulations and guidelines to be issued by the regulator.
Status of Producing Marginal Field
Under the PIA, a producing marginal field will continue to operate under the Farmout Agreement executed with the Farmor, even as it is mandated to convert to a PML.[8] The Farmee is required to convert the field to a PML within 18 months, failing which the marginal field will automatically be converted to a PML.
While the conversion to a PML may be incentivised by a favourable fiscal terms of a reduced tax rate from 85% of petroleum profit tax to a combined 45% of hydrocarbon tax and company income tax, the same cannot be said for the ambiguous royalty provisions. On one hand the PIA allows producing marginal fields to retain the existing royalty rates and on the other hand provides for royalty rates for marginal fields in paragraph 10(4) of part III of the seventh schedule to the PIA.[9] This ambiguity needs to be clarified.
Furthermore, the PIA does not provide any direction as to transition from the terms of the Farmout Agreement after conversion to a PML. This is because the PIA requires the Farmee, now a PML holder, to directly undertake certain obligations which hitherto were governed by the terms of the Farmout Agreement with the Farmor. Such obligations include but are not limited to decommissioning and abandonment obligations, host community obligations and other environmental obligations which are now standalone obligations under the PIA.
It therefore seems that without a clear regulatory guidance, this category of assets, upon conversion to PML, may be governed by a dual regime of the PIA and Farmout Agreement.
Non-Producing Marginal fields transferred to the Government and declared as marginal fields prior to January 1, 2021
The PIA also requires discoveries declared as marginal fields prior to 1st January 2021 and not producing to convert to petroleum prospecting licences (PPL) and governed by the terms of the PIA. It further provides that such fields having been “transferred” to the Nigerian government may be offered by the Nigerian Upstream Regulatory Commission (Commission) via bid rounds.[10]
These provisions apply to the marginal fields awarded under the 2020 Marginal Field Bid Round. Like the producing marginal fields, they are equally subject to favourable fiscal terms upon application for PPLs. The PIA neither mandates nor requires these fields to execute a Farmout Agreement as would ordinarily be the case prior to the passage of the PIA. However, from the draft conversion regulations issued by the Commission, the regulator does not intend for the Farmout Agreement to apply to these assets.
This presents some issues, first, the fields are awarded from the existing fields held by some Farmors who have been mandated to enter into Farmout Agreements with the awardees by the Guidelines for Farm Out and Operations of Marginal Fields, 2020 (“2020 Guidelines”). Secondly, it appears that this view was taken because these fields are said under the PIA to have been “transferred to government”. This suggests the deprivation of the Farmors’ property rights over these marginal fields.
This view runs contrary to the provisions of the Petroleum Act 1969 and the 2020 Guidelines, both preserved by the PIA[11] as well as the property rights contained in chapter 4 of the Constitution of the Federal Republic of Nigeria.[12] Under the Petroleum Act, the Farmor does not lose its property rights to the marginal field. There is no requirement to “transfer” the marginal field to the government but to enter a Farmout Agreement, which presents the terms and conditions under which the Farmee may operate the marginal field. The Farmout Agreement also typically includes terms which evidence the rights of property of the Farmor, for example the entitlement to overriding royalties by the Farmor.
Under Nigerian law, “a statute does not retrospectively abrogate vested rights or take away proprietary rights without making provision for compensation”.[13] The provisions of the PIA do not explicitly provide for compensation for the original license holders, therefore should not be interpreted to deprive these holders of their proprietary rights.
The regulator’s view to dispense with the Farmout Agreement has ultimately raised certain issues chief of which would be the requirement to pay adequate compensation to the Farmors.
Non-Producing Marginal fields not transferred to the Government
The transition framework for this category of marginal field is clear, within three years of the passage of the PIA, the leaseholder of these fields has the following options:
- Present a field development plan to the Commission;
- Farm out the discovery with the consent of the Commission;
- Relinquish the field.
Under the first and second options, the leaseholder retains the rights over the field and when farming out the discovery under the second option, it may do so under a Farmout Agreement. The Farmout Agreement may require the Farmee to pay overriding royalties. Where the leaseholder chooses the third option, its rights over the field is extinguished and there will be no future claim to the field.
Conclusion
The objective of the PIA is to eliminate the controversies surrounding the status of marginal fields within a defined lease area, particularly at the expiration of such lease, and therefore create direct relationships between the marginal field awardees and the Nigerian government. While this approach is commendable, it is important that the process for facilitating this transition is fair, balanced and provides justice to all parties to be impacted by the changes. The regulator has a role to play in ensuring that the best possible approach in line with the extant law is adopted in the overall interest of the industry.
[1] Section 94 (1) of the Petroleum Industry Act 2021
[2] Section 94 (9) of the Petroleum Industry Act 2021
[3] Section 94 (8)(a) of the Petroleum Industry Act 2021
[4] Section 94 (1) of the Petroleum Industry Act 2021
[5] Section 94 (2) & (3) of the Petroleum Industry Act 2021
[6] Section 94 (4) of the Petroleum Industry Act 2021
[7] Section 81 (1) of the Petroleum Industry Act 2021
[8] Section 94 (1) of the Petroleum Industry Act 2021
[9] Royalties for onshore fields and shallow water fields, including marginal fields, with crude oil and condensate production not more than 10,000 bopd during a month shall be at a rate per centum of the chargeable volume of the crude oil and condensates produced from the field area per production day during a month on tranched basis as follows— (a) for the first 5,000 bopd 5% ; and (b) for the next 5,000 bopd, for the share of production over 5000 bopd 7.5%
[10] Section 94 (2) & (3) of the Petroleum Industry Act 2021
[11] Section 311(1) of the Petroleum Industry Act 2021
[12] Section 44 (1) of the 1999 Constitution of the Federal Republic of Nigeria, as amended.
[13] Afolabi & Ors Vs. Governor of Oyo State & Ors supra, & Attorney General of the Federation Vs. ANPP & Ors. (2003) LPELR 630 (SC).