Marginal Fields in Nigeria evolved from the Petroleum Amendment Act 1996, which introduced paragraph 16A into the First Schedule to the Petroleum Act.
Paragraph 16A of the amended Petroleum Act reads as follows:
16A. (1) The holder of an oil mining lease may, with the consent of and on such terms and conditions as may be approved by the President, farm-out any marginal field which lies within the leased area.
(2) The President may cause the farm-out of a marginal field if the marginal field has been left unattended for a period of not less than 10 years from the date of the first discovery of the marginal field.
(3)The President shall not give his consent to a farm out or cause the farm – out of a marginal field unless he is satisfied –
(a) that it is in the public interest so to do, and in addition, in the case of a non producing field, that the marginal field has been left unattended for an unreasonable time, not being less than 10 years; and
(b) that the parties to the farm-out are in all respect acceptable to the Federal Government.
(4) For the purpose of this paragraph –
“Farm-out” means an agreement between the holder of an oil mining lease and a third party which permits the third party to explore, prospect, win, work and carry away any petroleum encountered in a specified area during the validity of the leases;
“Marginal field means such field as the President may, from time to time, identify as a marginal field.”
This amendment provides that the holder of an OML can farm out any marginal field which lies within the OML; Also, under the amendment, the President may cause the farm-out of a marginal field which has been left unattended for a period of not less than 10 years from the date of the first discovery of the marginal field. For there to be a valid Farm - out , there must be the consent of the President of the Federal Republic of Nigeria.
The Marginal Fields programme was introduced to encourage indigenous participation in the oil industry and also to increase government’s take on undeveloped acreages. The programme was developed to discourage continuous holding of undeveloped fields by International Oil Companies (IOCs). Thus, the creation of marginal fields was to reduce the rates of abandonment of depleting fields and assure the Government’s take in acreages that would otherwise have become unproductive.
From the provisions of Petroleum (Amendment) Act 1996, it appears that the holder of an OML can farm-out a marginal field, however, historically from the special licensing round conducted by the DPR in 2002 in respect of marginal fields (which is the only licensing round for marginal fields up to the date of writing this paper), the farm – out of marginal fields has been conducted by the Nigerian Government. Thus, upon being a successful bidder in the marginal field bidding round, a bidder is empowered to enter into negotiation for farm –out with an OML holder. As a result, the role of an holder of an OML is limited to only negotiation of the farm-out agreement.
Nature of title under marginal fields
The nature of title of marginal fields can be likened to a sub lease in which there is a head lease between the Government as lessor and the OML holder as lessee on the one hand and a sub lease between the OML holder (the “farmor”) and a marginal field holder (the “farmee”) on the other hand. Generally, a lease is a contract between parties which grants exclusive possession of land or part of it to hold for a term of years. A sublease like any other lease also confers interest in land which must be in accordance with the terms of the head lease.
From the foregoing, it can be said that a farmee of a marginal field is a sub-lessee of the head lessee who is the OML holder. This can be further buttressed by typical provisions of farm out agreements which provide that:
“As between the farmor and farmee, the farmor shall retain all ownership rights to the OML, and the rights, title and interest or estate of the Farmee shall be equivalent to those of a sub-lessee in accordance with the terms of this Agreement.” (Emphasis mine)
Generally, under leases, after the term of years for which the lease has been granted, the right to possession at the end of the term reverts to the lessee. This position of the law is also exemplified in the provisions of Paragraph 21.0 of the Guidelines for Farm - out and Operation of Marginal Fields 2001 (the “Guidelines”) which deals with end of production of marginal fields; this paragraph provides as follows:
“The field(s) shall revert back to the marginal field pool of the Farmor 24 calendar months after the end of production operation on the field.....” (Emphasis mine)
It is however doubtful that the reversionary interest principle is applicable to marginal fields. This is based on the provisions of Paragraph 19.0 of the same Guidelines which provides that:
“If at end of 24 months of consent to the farm-out agreement, a farmee shows verifiable evidence of efforts made to progress the work on the fields according to approved plan and the DPR is so satisfied, the farm - out shall be renewed for the reaming life span of the field” (Emphasis mine).
The possibility of a farm - out to be renewed indefinitely is not in tandem with the reversionary principle as such a farm - out agreement cannot be described as a clear cut sublease.
Also, the Presidential Consent to a farm - out agreement between an OML holder and the Marginal Field Operator by virtue of Paragraph 16(A) (3) of the Petroleum (Amendment) Act 1996 can be said to have conferred legal title on Marginal Field holders. This is predicated on the fact that the Presidential Consent under the Petroleum Amendment Act is similar to the Consent of the Governor under Section 22 of the Land Use Act (Cap L5, LFN 2004). By virtue of Section 22 of the Land Use Act, any form of transfer or assignment of land confers legal title to the transferee of assignee of such land. The sustainability of this argument may be challenged on the basis that under Farm - out agreements, there are provisions which gives the farmor the right to participate or “back-in” in the development of additional reservoirs. This clause no doubt fetters with the title of a farmee as legal title should not be subject to any other superior right. In as much as there is the freedom to contract between parties, the ability of this provision to pass the legal test is doubtful on the grounds that the rights conferred on a farmee is a legal right by virtue of Presidential Consent and a legal title should not be subjected to any other superior right.
Provisions in the Guidelines also support the fact that a marginal field is treated as separate and distinct from an OML. The Guidelines provide that upon a farm – out, the Marginal Field owner assumes the legal rights and obligations of the OML holder as it relates to the marginal field. Paragraph 20 (Rights and Obligations) of the Guidelines provides as follows:
“i) The Farmee shall have all the right of the OML leaseholder in respect of the Farm-out Area containing the fields once the farm-out is concluded and all the rights interests and duties of the previous leaseholder shall be transferred to the new leaseholder;
ii) Farmee shall have the right/obligation to deal directly with the DPR and other administrative authorities as the new leaseholder; and
iii) All rights ,interests, obligations and liabilities of the Farmor in respect of the Farm-out Area containing the fileds shall automatically transfer to the Farmee and the Farmor shall be relieved of the same as from the date of the execution of the Farm-out Agreement.”
Practically, based on the provisions of Paragraph 20(i) of the Guidelines stated above, regulatory authorities such as the Department of Petroleum Resources (DPR) tend to treat a marginal field as separate and distinct from an OML. This no doubt lays credence to the fact that the holder of a marginal field has some form of legal interest in the field which is separate from the interest conferred on an OML holder.
Typically in farm - out agreements between the holder of an OML and a Marginal Filed Operator there are clauses/covenants which tend to describe a farmee as a sub-lessee thereby suggesting that the farmor (i.e. OML holder) is the legal owner of the Marginal Field. An example of such provision is as follows:
“Notwithstanding anything contrary, as between the Farmor and Farmee, the Farmor shall retain all ownership rights to the OML, and the rights, title and interest or estate of the Farmee shall be equivalent to those of a sub-lease in accordance with the terms of this Agreement.”
The validity of clauses such as this is doubtful in light of the fact that the Field has been excised from the original OML and Presidential consent has been obtained for the farm - out area which ultimately confers legal title on the farmee.
Also, marginal fields are not entirely governed by agreement of contracting parties but also regulated by the provisions of legislation, the Marginal Field Guidelines, the practice and directives of the DPR in connection with the guidelines. When all these are examined holistically, it is arguable that a marginal field is separate and distinct from an OML.
Despite the “seemingly” flawless arguments above, taking a cursory look at the definition of a “farm – out” in the Petroleum (Amendment) Act 1996, which defines a farm – out as “an agreement between the holder of an oil mining lease and a third party which permits the third party to explore, prospect, win, work and carry away any petroleum encountered in a specified area during the validity of the leases” (emphasis mine).
This definition clearly suggests that the right acquired under a farm-out agreement by a farmee is the right to explore, prospect, win, work and carry away any petroleum encountered in a specified area during the validity of an OML. As a result, the legal status of a marginal field is dependent on the validity of an OML. This is a clear statutory interpretation which ought to be adhered based on the literal rule of statutory interpretation.
In conclusion, the ownership of a marginal field may be vested in the farmee due to excision of the field from the original OML however; the interest vested is subject to the validity of the OML as provided expressly in the Petroleum (Amendment) Act. This no doubt creates some level of uncertainty and insecurity as to what happens in the event that an OML under which a field falls expires.
The hard position of the law using the statutory rule of interpretation is that the once the validity of an OML is affected the field automatically stands affected. This position no doubt appears scary for marginal field operators which has necessitated the practical approach of regulatory authorities like the DPR to be of the view that a marginal field should not be affected by the validity or expiration of an OML. This approach no doubt mitigates the perceived “hardship” in adopting a strict interpretation of the Petroleum (Amendment) Act 1996. This notwithstanding, this approach may not be in accordance with the clear provisions of the legislation as the Act clearly creates a “legal placenta” between the OML and a marginal field.