Investing in Marginal Fields – Key Considerations for Financiers – Part I

Olusina Sipasi

0 108

Winners of the ‘2021 Marginal Field’ bid round (hereinafter referred to as grantee(s)) have emerged. As grantees and potential financiers contemplate how to raise capital for the development of each field, they also need to consider certain issues that arise from the marginal field award process and other peculiarities of a marginal field.

Any bid for a government asset in Nigeria is keenly contested. They attract a long list of bidders, including skilled commercial and technical operators and others who know little about the asset to be sold or the sector within which the asset operates. The 2021 Marginal Field bid round is no different. The fact that the assets being considered for sale are oil and gas assets has further intensified the competition, which is characteristic of the sale of a public energy asset in Nigeria.

It was not surprising that upon the invitation by Department of Petroleum Resources (“DPR”) for submission of Expression of Intent (“EoIs”), hundreds of aspiring companies responded. At the end of the bidding process, the DPR awarded 57 marginal field assets to 161 companies by grouping together different bidders as winners of specific marginal field assets.

The manner of the award of the marginal fields, by DPR, with its amalgamation of bidders for some assets, throw up unique issues and challenges that the grantees and their potential investors must consider. This article discusses the issues that parties need to consider when seeking to invest in the new marginal fields.

The Integrity of the Bid Process

The Marginal Fields Bid Round Portal published the bid process as consisting of nine steps beginning with registration and pre-qualification and ending in the execution of a farm-out agreement between the leaseholder and the grantee. The DPR published Guidelines for The Award and Operations of Marginal Fields in Nigeria (“the Guidelines”) to guide the process. The Guidelines contained extensive provisions on the award process and the criteria for evaluation and selection of the winning bids. The principles that undergird the award process are (i) that prequalified bidders must bid for specific fields, (ii) that each bid is separate and would succeed or fail on its own account.

The first principle can be gleaned from Paragraph 5.3 of the Guidelines, which required bidders to pay fees announced by the DPR for activities which includes data prying, data leasing, competent persons report and fields specific reports. The applicable fees for these activities are published in the appendix to the Guidelines. The items that bidders paid for, provide the bidders with the required information that would assist each bidder in deciding on the specific field to bid for, the bid price for that specific field, the signature fees for that specific field, etc. In addition, Paragraph 5.4.7 of the Guidelines requires each bidder to indicate in its bid the specific field or fields it is interested in. Thus, a fundamental assumption underlying the bid process is that bidders would submit bids for specific marginal field(s).

The second principle becomes obvious from Paragraph 6.3 of the Guidelines, which provides that the bid round will be based on competitive participation by interested companies (emphasis mine). Since each bidder is required to submit a bid for a specific field, interested companies would be those companies that submitted a bid for the field. The competitive participation for a particular field would be expected to be amongst bidders who submitted bids for that field.

It appears that, the DPR, in the award of the marginal field assets, has adopted a different procedure from what was advertised under the Guidelines. Grantees and potential investors should, therefore, expect that there would be bidders aggrieved by the award process adopted by the DPR. Such aggrieved bidder(s) may challenge the award of a marginal field on the ground that the bid procedure as advertised to the bidders was not followed.

Critical questions that a court would need to answer, and which should be considered by all asset winners and investors, are (i) is the Guidelines a statutory instrument which stipulates a process that DPR is required to follow; and (ii) does the Guidelines constitute a contract, or is it merely an invitation to receive offers?

Is the Guidelines a statutory instrument?

Section 9 of the Petroleum Act gives the Minister of Petroleum the right to make regulations prescribing anything requiring to be prescribed for the purpose of the Act.

By virtue of Section 10 of the Nigerian National Petroleum Corporation Act (“the NNPC Act”), the Minister has the power to delegate to the chief executive of the Inspectorate (which later transformed into the DPR) those powers conferred on the Minister under the Petroleum Act (amongst other enactments). In addition, section 10 of the NNPC Act provides that any regulatory function conferred on the Minister of Petroleum, under any enactment (and this will include the power to issue regulations) is deemed to have been conferred upon and may be discharged by the chief executive of the Inspectorate (i.e., the Director DPR).

From the foregoing, it is evident that the director of the DPR has, via statutory fiat, been delegated by the Minister to issue regulations including guidelines, standards, and procedure guides for purposes of the Petroleum Act.

‘Regulations’ is defined to mean “the act of regulating; a rule or order, having legal force, usually issued by an administrative agency; also termed agency regulation; subordinate legislation; delegated legislation”.  The inference drawn from the above definition is that regulations, where issued by an administrative agency that has been statutorily authorised to so issue, is a subordinate legislation having legal force.  Consequently, the Guidelines issued by the DPR for the award and operations of marginal fields is a statutory instrument.

Since the Guidelines is a form of subsidiary legislation, it can be taken as a statutory instrument that has stipulated the procedure to be adopted by both the bidders and the DPR for the administration of the bid process. Thus, if an aggrieved bidder can show that DPR has not followed its own Guidelines, it may be a ground to challenge and upturn the award of a marginal field.

Is the Guidelines a contract?

Another ground on which an aggrieved bidder may challenge the recent awards of marginal fields is that the Guidelines constitute a contract, that is, a process contract between each bidder and the DPR.

Although there is no decided matter on the nature of a Request for Proposal (RfP) or EoI in Nigeria, the trend in many common law jurisdictions is that RfPs and EoIs do not constitute a contract. They are considered an invitation to treat, an advertisement to receive offer, which will culminate in a contract when accepted by the principal.

However, there are several judicial decisions in many common law countries that, whilst affirming that an RfP/EoI is not a contract, have held that an RfP/EoI creates an underlying contract within the procurement process – a process contract. A process contract is an implied contract between the issuer of an RfP and the tenderer. The issuer commits to run a tender adhering to a specified process and to evaluate the bids using specified evaluation criteria.

In Hughes Aircraft Systems International v Airservices Australia, the party that issued a tender changed the advertised procedure for conducting the tender. In that case, the court decided that the party that issued the tender breached a process contract and that the aggrieved party was entitled to both damages and equitable remedies. The basis of the court’s decision was, amongst others, that the tender document established a legally binding process between the principal and each tenderer and that the principal ought to follow the process and act in good faith.

Courts in other common law countries have made similar decisions. In Pratt Contractors Ltd v Palmerston North City Council, the court held that an issuer breached the requirement to accept the lowest conforming tender, while in Onyx Group Ltd v Auckland City Council. the court held that the issuer breached an implied term that tenders would be assessed on a fair and even-handed basis. The rationale adopted in deciding that an RfP/EoI may constitute a process contract may persuade Nigerian courts to reach a similar decision.

Please watch out for part 2, where we will continue the examination of issues financiers need to consider when investing in the new marginal fields.

 

 

 


Olusina Sipasi is a Partner at AELEX.

 

Ælex is a full service Commercial & Dispute resolution law firm with offices in Nigeria and Ghana. Contact us: www.aelex.com; @aelexpartners on LinkedInTwitterInstagram and Facebook[email protected]

Ælex Notes is a dedicated column, managed by Ælex Legal Practitioners and Arbitrators, featuring legal developments and insights. 

 

 

 

Leave A Reply

Your email address will not be published.