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THE NIGERIAN OIL AND GAS INDUSTRY & ITS CHANGING INVESTMENT CLIMATE By Sola Adepetun Managing Partner International Bar Association African Regional Forum 6th – 8th November , 2013 Lagos, Nigeria
INTRODUCTION “Any change, even a change for the better, is always accompanied by drawbacks and discomforts” -Arnold Bennet
OUTLINE • I. Introduction • Nigerian oil & gas industry statistics • Recognisable legal environment and investment climate to prolonged reforms and uncertainty • The emerging environment for petroleum operations • II. Where were we • The Pre-Reform Era: Established upstream legal and regulatory framework • The Pre-Reform Era: Contractual framework • The Pre-Reform Era: Upstream fiscal regime • Where are we • Emerging trends • The Reforms and the PIB Debate • The Emerging Law and Changing Practice • A paradox of Divestments and Opportunities • Where are we going: an uncertain future? • Recent Global Developments • Concluding questions
1.1 Nigerian Oil & Gas Industry Statistics • Facts & Figures • 37.2 million barrels of proven oil reserves; 42.1% oil reserves-to-production ratio as at 2012; the second largest proven oil reserves in Africa (Source: BP statistical Review of World Energy, 2013) • Current oil production- 2.2 million barrels per day (bbl/d); potential for over 3 million bbl/d (Source: PWC Oil and Gas Review, June 2013) • Over 182 trillion cubic feet (Tcf.) of proven gas reserves. The largest in Africa and the 9th largest in the world (Source: BP statistical Review of World Energy, 2013) • Petroleum sector accounts for more than 95% of export earnings and more than 75% of Federal Government revenue
1.2. From a stable legal environment and investment climate to prolonged reforms and uncertainty
1.3. The emerging environment for petroleum operations • “…Uncertainties in Nigeria's investment policies and regulatory framework have caused a slowdown in oil and gas exploration activity, and delays in project development... However, the long-awaited and delayed Petroleum Industry Bill (PIB) could potentially iron out investment uncertainties and set a regulatory framework for the country's oil and gas industry…” [emphasis added] • Source: US Energy Information Administration (EIA), 2012 Country Analysis on Nigeria • Is the current investment climate sustainable or not? • What are the relevant legal and policy issues? • What are the emerging trends?
2.1. The Pre-Reform Era: Established upstream legal and regulatory framework • A recognisable upstream regulatory framework • OEL: non-exclusive license to explore. Expires 31st December of the year granted • OPL: exclusive rights to exploration/production. Duration: 5years (onshore and shallow waters); 10 years (deep offshore and inland basins), including period of renewals • OML: exclusive rights to win, get, work, store, carry away, transport, export or otherwise treat petroleum discovered. Duration- 20 years. To be renewed as provided by the Act and Regulations • Other issues covered- assignments; revocations; farm outs; regulation for fees, rents and royalties; field development, drilling and production operations etc • Ancillary regulations include: the Mineral Oils (Safety) Regulations, Petroleum Refining Regulations, and the National Domestic Gas Supply and Pricing Regulations 2008, etc
2.3. The Pre-Reform Era: Upstream fiscal regime • Tried and tested upstream fiscal regime- Outdated? • PPT applied to the chargeable profits of companies engaged in upstream petroleum operations as provided in the PPTA • A general PPT of 85%. A PPT rate of 65.75% for first five years of petroleum operations • PPT applicable to PSCs is 50% flat rate for the contract area • The Regulations and the DOI-PSCs Act deal with royalties • The DOI-PSCs has a fixed royalty rate of 20% for onshore PSCs (with production above 10,000 bpd) and a sliding scale of royalties (based of water depth) for offshore PSCs • Rents and fees are dealt with in the Regulations • Signature and production bonuses are required for PSCs and other concessions
WHERE ARE WE? What have the reforms or the “PIB” got to do with it?
3.1. Emerging Trends • Nigeria’s 2011 crude oil and condensate: • Production reduced by 3% from 2010 • Domestic and export lifting reduced by 4% from 2010 • Source: NNPC, Annual Statistical Bulletin, 2011 • Petroleum exploration activity levels: • At their lowest in 10 years. • Only 3 exploratory wells drilled in 2011 compared to over 20 wells drilled in 2005 • Source: EIA, 2012 Country Analysis on Nigeria • Security Challenges: • Crude oil theft – over US$6 billion lost annually • Source: Thisday, April 1, 2013, Pg 12 • Refined products theft- over N105 billion lost annually • Source: Thisday, April 1, 2013. Pg 12 • Pipeline sabotage • Piracy • Kidnapping • Rash of Divestments: • British Gas- 100% • SPDC- 30% stake in OMLs 4, 38, 41, 42 etc. • Total- 20% stake in OML 138 • ConocoPhilips- 100% • Petrobras- 100%??? • Chevron -OMLs 83 and 85. Plans to divest interests in OMLs 52, 53 and 55 • SPDC- again?
3.3The Emerging Law and Changing Practice • Existing legal and institutional framework • PIB considered ambitious and time consuming • Resultant state of flux!! • Drawback- development of practice rules outside the framework • Nigerian Oil and Gas Industry Content Development Act, 2010 (“Local Content Act”) • Applies to all matters pertaining to local content • Supremacy issues; major reference document • Drafting and clarity issues • Interpretation issues e.g. Nigerian subsidiary of international or multinationals- S.41(2) • The lacuna and the unclear legislation • “Regulatory discretion” • OML renewals • Arbitrary extensions • Material changes • “Wait for the PIB” • Resort to case law • The MoniPulo case • Acquisition of controlling shares in concession owning company requires prior ministerial consent • Sections 194(1) & (2), PIB • The Famfa Case • Supreme Court- government must follow due process of negotiation before exercising back-in-rights
3.4. A Paradox of Divestments and Opportunities • State of flux- negative impact on investment climate • Heightened investment risk profile • Disincentive to oil and gas project development • Discouraging industry statistics • IOC divestments • Fresh investment opportunities created by divestments • “Dumped” concessions being snapped up • Emerging indigenous powerhouses • OANDO, Sahara, SEPLAT, AFREN, Midwestern, NECONDE, First E&P; Atlantic, etc
4.1. Recent Global Developments • Competitive global markets • (Cheaper) shale oil and gas explosion • East and West African discoveries • Kenya, Uganda, Tanzania, Mozambique, Ghana, etc • Dire need for favourable investment climate • Full throttle production • “Make hay while the sun shines” • Investments in new and existing oil and gas projects required
CONCLUDING QUESTIONS • Is there anything we can do to improve the investment climate while we wait for the PIB to be passed? • Strengthen the Local Content Act? • When will the PIB be passed??? • Politicization • Stagnation • Political will- can this bill be shelved? • Yet another change??? • “To improve is to change; to be perfect is to change often” • - Winston Churchill
ADEPETUN CAXTON-MARTINS AGBOR & SEGUN CONTACT DETAILS: