Regulatory Update: New Guidelines on the Minister’s Consent to Assignment of Interests in Oil and Gas Assets (Part I)
Yemisi Awonuga, Bernard Ehigiamusor and Kamilah Alegeh
Recently, the Department of Petroleum Resources (regulator of Nigeria’s petroleum industry) issued the ”Guidelines and Procedures for Obtaining the Minister’s Consent to the Assignment of Interest in Oil and Gas Assets, 2021” (the “New Guidelines”). The New Guidelines repealed and replaced the Guidelines and Procedures for obtaining the Minister’s Consent issued in 2014 (the “Repealed Guidelines”).
The Update highlights the signiﬁcant changes and the practical implication on assignment of oil and gas assets.
What Constitutes an Assignment??
Assignment is deﬁned in the New Guidelines as the transfer of:
- an oil prospecting licence (”OPL”), an oil mining lease (”OML”), marginal ﬁeld (”MF”), an oil or gas pipeline (”OGPL”); or
- an interest, power or right in an OML, OPL, MF or OGPL.
Who can Assign?
Any company or person with equity, participating, contractual or working interest (”Interest”) in the OPL, OML, MF or OGPL (”Licence or Lease”) may assign such Interest.
What Constitutes an Interest in a Licence or Lease?
It is instructive to note, per the Guidelines, each of the following may qualify as an ”Interest” in a Licence or Lease:
- Interest of a Production Sharing Contractor in a Production Sharing Contract.
- Interest of a Party in a Production Sharing Agreement.
- Interest of a Concessionaire as a Participant in an OML, OPL, MF, or OGPL.
- Interest of a Farmee or Farmor in a Marginal Field.
- Interest of a Sole Risk Concessionaire in an OML, OPL, or MF.
- Interest of a Service Contractor in a Risk Service Contractor or perhaps, a Strategic Alliance
In addition to the foregoing and similar to the provisions of the Repealed Guidelines, there is an ambiguous category which deems any other business arrangement (by which a right, privilege, power, beneﬁt, gain or advantage in a Licence or Lease is transferred to or conferred either directly or indirectly on a third party) as an Interest in a Licence or lease.
Importantly, charges and liens are now included in the deﬁnition of Interest which will have a signiﬁcant impact on existing and future ﬁnancing of upstream assets…
Again, the Department of Petroleum Resources (”DPR”) missed the opportunity to clarify the uncertainties that have bedeviled the interpretation of other business arrangements that confer a right, privilege, power, beneﬁt, gain or advantage in a Licence or Lease. What does this mean exactly? Would it include the interest of a funding and technical services provider under a Funding and Technical Services Agreement purely because the services provider is entitled to a beneﬁt, an exclusive funding privilege or a ﬁrst ranking right to the cash-ﬂow? Would it include the interest of a strategic alliance partner under a strategic alliance agreement? The questions are endless.
Another complication is the inclusion of charges and liens in the deﬁnition of Interest as the creation of security (including ﬂoating charges) over an OPL, OML, MF and OGPL may now require the consent of the Minister at the point of creating the charge as opposed to market practice of deferring the procurement of consent to the point of enforcement of the security interest.
These issues above are expected to heighten completion risks in upstream oil and gas ﬁnancings and increase ﬁnancing and transaction costs.
Forms of Assignment
Similar to the Repealed Guidelines, the New Guidelines provide a list which is by no means exhaustive but gives an indication of the forms of assignment. These include assignment by way of exchange or transfer of shares; private placement or public listing, merger, acquisition, business combination, acquisition, take over, divestment, internal re-organisation, devolution of shares by operation of law or testamentary device.
The New Guidelines state that the appointment of a receiver, receiver/manager or administrator under the Companies and Allied Matters Act or any other comparable legislation in a foreign jurisdiction constitutes a form of assignment. This introduces another complexity as t the consent of the Minister will be required to eﬀect the appointment of a receiver, receiver/manager or administrator (such being an assignment) and perhaps, validate the steps taken by such oﬃcers afterwards. If required, this will result in an elongated timeline for completing the engagement of these oﬃcers. It is also not clear what the reference to any other comparable foreign legislation denotes.
In relation to the assignment of Interest by a parent, and akin to the Repealed Guidelines, the New Guidelines do not assume that every transfer of shares or Interests by the parent or aﬃliate of a participating interest holder constitutes an assignment. The DPR is obligated to lift the veil and come to a determination on the nature of the transaction and whether it constitutes an assignment. However, the New Guidelines provide no guidance on how the the veil lifting exercise will be initiated. Should the parent or aﬃliate self-report or seek a negative clearance to avoid such intrusive veil lifting after the consummation of the transaction? There are no objective indices for coming to such determination. Where does the DPR draw the line – at the ”parent- subsidiary level” or at the ”intermediate company level” or will this go as far as clawing at a transfer of shares that occurs at the ultimate beneﬁciary’s level? These are grey areas the market would have expected the New Guidelines to resolve.
Reassignment is an entirely new construct introduced by the New Guidelines It is deﬁned as a situation where there has been consent to an assignment of Interest and the parties subsequently, whether by mutual consent or by operation of law, sever their relationship and the assignor wishes to obtain the consent of the Minister to revert the interest. A reassignment, under these circumstances, can only be made to the original assignor and not a third party. The instances that readily come to mind are instances where the Minister has consented to the creation of a mortgage, charge or lien over an OPL, OML, MF or OGPL and the security provider (i.e. the assignor of the security interest) following full and ﬁnal repayment of the underlying debt, seeks the release of the security interest created. It is not clear if a Reassignment will attract the consent fee and the New Guidelines do not outline the process for seeking the consent of the Minister for a Reassignment. If the Interest is being reassigned to the original assignor, the process should be less rigorous than that stipulated for an assignment and the consent fee should also be negligible.
Protecting New Entrants
The New Guidelines introduce some concepts which are aimed at protecting the interest of new entrants and the NNPC speciﬁcally in assignment involving a direct transfer of the licence or the lease.
- Crude Handling / Crude Purchase Agreements
In a bid to protect new entrants from inheriting legacy contracts and assuming legacy liabilities, the New Guidelines prohibit an assignor from imposing a crude handling or crude purchase agreement on the prospective assignee as a condition for the consummation of an assignment amongst other conditions that may impede the takeover and / or operation of the asset in a business-like manner.
The New Guidelines also require that where the assignment is by way of a direct transfer of the participating interest held in a joint venture with the Nigerian National Petroleum Corporation (NNPC) and such transaction involves the execution of a crude handling or crude purchase agreement, the assignor must submit a copy of the draft agreement to the DPR before execution. This adds to the documents required to be submitted in connection with divestments by IOCS… It also subjects the agreements to the scrutiny of the regulator and may thus strengthen the prospective assignee’s bargaining power and ability to push back on unfairly balanced provisions in the legacy agreements. Typically, direct asset transfer by IOCs would involve the execution of crude handling and oﬀtake agreements.
- Asset Valuation
The New Guidelines provide certain directions in the valuation of an asset by the assignor and assignee. For instance, where the investment on surface facilities has been fully amortised through cost recovery, the assignor shall not include such facilities as part of its valuation of the asset. This is aimed at ensuring that assignors who have recouped their capital investment through the cost recovery provisions of their relevant operating contracts do not earn additional revenues on the relevant capital assets from the assignment transaction.
Further and similar to the Repealed Guidelines, the DPR is required as part of its due diligence, to consider the pricing of the asset to ensure that there is no adverse eﬀect on the revenue of the Federation and the reference value of an asset shall be the book value. Put diﬀerently, where the asset valuation for the assignment transaction does not reﬂect the book value, the DPR may refer to the book value in the determination of the consent fee (5% – 10% of the transaction purse) to ensure that the Government’s revenue from the assignment transaction is not eroded through the creativity of the transacting parties.
- Abandonment and Decommissioning Liabilities
To ensure that abandonment and decommissioning liabilities (albeit contingent at the time of the transaction) are not fully dumped on the new entrant and the NNPC, the assignor has a mandatory obligation pursuant to the New Guidelines to submit to the DPR an agreement between the transacting parties on the treatment of the assignor’s abandonment and decommissioning liabilities. The agreement is expected to quantify the cost of the abandonment and decommissioning liabilities and such cost is expected to be deducted from the transaction purse. This is an unprecedented development and clarity is required on the following: the methodology for computing the cost of the liabilities, the tax treatment of the cost deducted from the transaction purse, the provisioning and the custodial arrangement for the abandonment and decommissioning funds, etc.
Yemisi Awonuga is a Partner at Templars Law Firm. Bernard Ehigiamusor and Kamilah Alegeh are associates of the firm.