There is a flurry of activities respecting the potential sale of upstream oil and gas assets of one of the major exploration and production companies operating in Nigeria. It also appears from press reports that the major exploration and production company is not alone in this regard. There is, therefore, little wonder that some advisors, including lawyers, particularly those reputable in oil and gas assets acquisition are quite busy at the moment.
The above being the case, it is important to determine what issues particularly from a Nigerian perspective, require reasonable consideration taking the peculiarity of the Nigerian oil and gas sector into consideration. Indeed, the aim of this paper is to throw up a few of these issues which lawyers in particular need to consider in order to properly act for their clients from a practical point of view.
Issues to be considered for Upstream Oil & Gas Acquisition in Nigeria:
There are quite a number of issues that require consideration including a good understanding of the legal regime-there is a myriad of legislation regulating oil and gas in Nigeria. Issues such as type of host government contract as well as consent, fulfilment of minimum work obligations and confirmation of ownership.
Legislation/Host Government Contract Type(s):
The Nigerian oil and gas sector is such that there are; at least till the Petroleum Industry Bill is passed, so many statutory instruments governing it.
Some of these are not readily known to non-oil and gas lawyers or even oil and gas lawyers with little transactional experience. It is therefore good to understand the legal regime as it determines so many issues. One very important one, is the determination of whether the interest of a prospective seller is liable to some form of governmental take-over in what is termed a “back-in-right” under a largely unknown set of regulations; the Deep Water Block Allocation to Companies (Back-in-Rights) Regulations 2003. I had for example been involved in a few deals where the Nigerian Government’s right to back-in fifth-sixth of the Nigerian Joint Venture partner, was in issue. The interpretation given to this provision is that the right to back-in is restricted to the portion of Nigerian ownership and would not affect foreign ownership.
The understanding of the legal regime would only be appreciated if one is familiar with the types of host government contract(s) involved as the Nigerian petroleum regime relishes in various types of grants with varying rules. Another legislation that currently requires review is the Local Content Act.
It is really also important to know how to obtain consent and situations requiring consent or mere notification. A purported acquisition without consent is at best inchoate. There has been at least one situation I am aware of, where government had revoked a grant based on the non-obtaining of consent before the consummation of the transaction. The timelines for this could be as short as 6 weeks or as long as 8 months.
Minimum Work Obligations:
It is also important to be sure that the prospective seller is not in breach of its minimum work obligations as failure to meet the minimum work obligations pursuant to the Nigerian oil and gas legal & regulatory regime is a ground for revocation. So it would be discreet to consider this so that a party does not buy an asset about to be repossessed by government.
From a transactional point of view though, a party may want to take this risk and negotiate a downward review of the purchase price knowing that it may be able to negotiate an extension with the regulatory body. There is in fact, a provision in Nigerian law which gives this leeway to seek extension, although this provision is relatively unknown, which I have seen used in a transaction.
Confirmation of Ownership:
It is really very vital to confirm ownership by means of searches and enquiries at the Department of Petroleum Resources (DPR) and company’s house. This helps to throw up material contracts which may ordinarily not be disclosed. Anyway, warranties and indemnities are always important in the relevant transfer agreements.
The share sale/asset sale debate:
A party also needs to, where it has the choice, decide whether it prefers a share or assets acquisition. The prospective buyer may want to buy the assets indirectly by buying the shares of the special purpose or project specific vehicle or directly acquire the assets. One of the advantages of a share sale is that Capital Gains tax is not payable. Additionally, and stamp duty will be payable on the share transfer instrument will not be payable on any gains arising upon the sale of shares. There are also other advantages of one over the other.
It is also necessary to review the Joint Operating Agreement (“the JOA”), the Technical Services Agreement (“the TSA”) and other such agreements which have the potential of reducing the proposed seller’s interest in the acreage, but which may not be readily visible. In Nigeria, a way to go round the need for acquisition is to enter into a TSA or some sort of agreement where a party does not directly have interest in the assets (some form of economic interest agreement) but interests in the proceeds. It is therefore important to review these; to be sure that party actually has both legal and beneficial interest in the portion it wants to sell.
Also in drafting the contracts, it should be noted that for certain agreements the government, through the DPR or National Petroleum Investment Management Services (NAPIMS) has template which they insist must be used.
Prospective foreign investors and legal advisors should also keep abreast of laws, particularly those related to corruption having extra-territorial reach and relating to the prospective investor’s country.
It should be noted this paper is not exhaustive; therefore, experienced energy lawyers need to be consulted prior to beginning the negotiation of any acquisition of upstream oil & gas assets in Nigeria.