Last week we reported that the President withheld his assent to the Petroleum Industry Governance Bill (PIGB). At the time of our report, the news coverage had focused on the President rejecting the Bill because it “whittled down his powers.” Since then, there have been various reports on the refusal of the President to assent to the first of four bills seeking to reform the Nigerian oil and gas industry. We review some of these reports here. Continue reading “PIGB Assent: What has Happened Since?”
In a recent article, it was announced that President Buhari had given the Nigerian Petroleum Development Company (“NPDC”) the approval to corporatise its joint venture assets and convert them into Incorporated Joint Ventures (“IJV”). The IJV structure has been floated at least since 2008 when the first draft of the Petroleum Industry Bill (“PIB”) was issued. That draft of the Bill mandated the formation of IJVs with respect to joint ventures between the Nigerian National Petroleum Corporation (“NNPC”) and its partners (mostly international oil companies). The IJV was seen as a solution to the perennial difficulties faced by NNPC in financing its share of the joint venture cash calls. This was based on the theory that an IJV was likely to be in a better position to raise money from loan and equity markets. This concept, loosely based on the NLNG model, was resisted by the joint venture partners for a variety of reasons and was removed from subsequent drafts of the PIB.
The recent proposal is a bit different. Firstly, it is targeted at companies in joint ventures with NPDC, a subsidiary of NNPC. These companies are typically Nigerian owned and/or Nigerian-led companies. The assets recommended for conversion into IJV status are detailed in the table below:
|Asset||Joint Venture Partner||Key shareholders*|
|OML 30||Shoreline Natural Resources Nigeria Ltd||Shoreline (indigenous) & Heritage (foreign)|
|OML 26||First Hydrocarbon Nigeria Ltd||Afren (foreign)|
|OML 34||ND Western Ltd||NDPR (indigenous), Petrolin (foreign), First E & P (indigenous), WalterSmith (indigenous)|
|OML 40||Elcrest E & P Nigeria Ltd||Eland(foreign) & Starcrest (indigenous)|
|OML 42||Neconde Energy Ltd||Nestoil (indigenous) & Kulcyzk (foreign)|
|OMLs 71 & 72||West African Exploration & Production Company Ltd||Dangote & First E & P (both indigenous)|
*from publicly available data and news reports
It is not clear whether NNPC/NPDC believes that the local companies are soft targets for implementing the IJV strategy or whether this is a first step which may be extended to all companies in a joint venture with NNPC. Whatever the case, it is worth noting that unlike the IOCs, most of these companies are single asset companies, which means two things. One, the success of the asset means everything to the company, its owners and its employees. Therefore, these stakeholders will be averse to any change which they consider may affect the economic potentials of the company. Two, most of the companies and/or its owners are substantially leveraged from the acquisition of the assets and the lending banks will have a say in any proposed reforms.
There is no indication (at least not yet), that these companies would be compelled by law, as previously proposed under the 2008 PIB draft, to enter into these IJVs. This allows for detailed negotiations on the form and substance of the IJV structure which may emerge.
This brief paper will not be examining the merits or demerits of the IJV structure. It only seeks to enunciate two options, which may be taken by the NPDC and the joint venture partners in achieving the IJV structure. In doing this, we show that the process of conversion itself is not that simple and requires all parties to put a lot of thought to the issues likely to be faced.
Before looking at the options available, it would be useful to comment on the characteristics of the current unincorporated joint venture structure, which may impact on its conversion.
Rights to explore for, develop and produce petroleum are granted in Nigeria through the award of Oil Prospecting Licences (“OPL”) and Oil Mining Leases (“OML”). Typically, two or more parties would become the licensee and enter into a joint venture governed by a joint operating agreement (“JOA”). The JOA, amongst others, spells out the participating interest (or the share of costs and oil) to which each party is entitled. Each joint venture party holds its participating interest as an asset on its own books and is entitled to assign the asset (subject to certain controls) and to pledge the asset. It is worth mentioning that the pledge of OML/OPL assets is not typical in Nigeria due to the requirement for ministerial consent and the time it takes to achieve such consent.
Option 1 – Reverse Takeover
This is not an RTO in the technical sense where a private company takes over a (dormant) public company. Under this structure, NPDC transfers its rights in the underlying OML in exchange for shares in the indigenous company. The indigenous company would be required to substantially increase its share capital in order to allot the requisite shares to NPDC. This option, therefore, requires a thorough valuation of the assets and the liabilities of the indigenous company as well as that of NPDC’s interest in order to determine the appropriate level of shareholding to be allocated.
This process is likely to lead to NPDC holding majority shares in the indigenous companies (hence the RTO) and where the shareholdings of the companies are already relatively fragmented, NPDC would be the largest shareholder by a significant margin. This may raise concerns from the existing shareholders in terms of their ability to influence the operations of the new entity. A number of these concerns may be dealt with by putting in place a robust shareholders’ agreement which addresses voting rights, pass mark issues and other minority protection mechanisms.
NPDC may also be concerned that at the end of this process, it would have only transferred assets and not achieved the capacity building objectives of this exercise. This concern may be ameliorated by allowing the process to accommodate the transfer of staff.
Regulatory & Other Considerations
The transfer of assets from NPDC under this option would require the consent of the Minister, which is unlikely to be a problem, given that this initiative is being driven by the government side. The process may also require the approval of the Securities and Exchange Commission as it is likely to fall under the mergers and acquisitions rules of the Investments and Securities Act. Further, the required increase in share capital by the indigenous companies would incur fees at the Corporate Affairs Commission as well as stamp duty fees. Banks and other lenders to the indigenous companies as well as those of its existing shareholders may also need to approve the transaction under the terms of their existing loan arrangements.
Option 2 – Transfer to A New Company
A second option which may be utilised to achieve the IJV structure is for both parties – NPDC and the indigenous companies, to transfer their assets and liabilities with respect to that OML to a newly created entity. In this scenario, the shareholders in the new company would be NPDC and the existing indigenous company. The post-transaction shareholding structure should broadly reflect the current participating interest ratio between NPDC and the indigenous company on the asset. This may provide some level of comfort for the indigenous shareholders as they may act as one block, reducing NPDC’s influence as the majority shareholder. It will still be necessary to put in place a shareholders’ agreement which addresses minority protection rights.
In adopting this structure, however, there may be concerns about the tax exposure of the shareholders of the indigenous company. Under the current arrangements, the indigenous company pays petroleum profits tax (“PPT”) after which its shareholders may take dividends from the remainder profit. The dividends are not subject to the payment of tax under Nigerian law although the company which receives the dividends may be further subject to companies income tax (“CIT”) on any profits it makes. The addition of another layer through the establishment of this new company may subject the current shareholders in the indigenous company to additional tax, potentially whittling down profits.
Regulatory & Other Considerations
The transfer of assets from NPDC under this option would also require the consent of the Minister. As the option would require the incorporation of a new company with sufficient share capital to accommodate the assets being transferred, there are likely to be substantial CAC fees as well as stamp duty fees. Banks and other lenders to the indigenous companies and/or its existing shareholders may also need to approve the transaction under the terms of their existing loan arrangements. The process is unlikely to require SEC approval.
There are a number of questions which need to be asked around the desirability of the proposed conversion to IJV status. As private sector entities, concerns may be raised around governance of such an institution, incorporation of politics into the affairs of the organisation and public procurement obligations amongst other issues. Even where these hurdles are scaled, the fulfillment of the process requires both NNPC/NPDC and the private companies to think through how to implement the change. That process will not be straightforward and may take a number of years to reach an agreement.
During that period, however, the NNPC/NPDC and its joint venture partners must come to an agreement on appropriate structures to enhance the efficiency of these joint venture operations. This means agreeing on alternative finance structures and how operations are managed and this would involve at the very least executing new joint operating agreements.
In the first part of this article, we highlighted two reforms which the government and NNPC may undertake prior to the passage of the Petroleum Industry Bill – internal reforms of NNPC & resolution of JV cash call issues. This paper examines two more reform initiatives available to the government pending the passage of the PIB. These are Downstream Sector Deregulation and the institution of Domestic Gas Market Reforms.
1. Downstream Sector Deregulation
Nigeria provides subsidies for the consumption of petroleum products like premium motor spirit (“PMS”)and kerosene. The current PMS pricing template (September 2015) of the Petroleum Products Pricing Regulatory Authority (“PPPRA”) indicates that the government is currently subsidising PMS consumption by N 20.56 per litre. The subsidy regime has come under scrutiny in recent years, with allegations of fraud and mismanagement. Beyond those allegations, however, there lies the questions whether, given the economic climate, the government should be in the business of subsidising consumption of petroleum products and whether such subsidies efficiently target the less privileged in society who need them the most. Various studies, including this one by the International Monetary Fund, suggest that petroleum products subsidies are costly and inequitable, with the subsidies more likely to benefit the rich and the middle class in real terms than the less advantaged. For a more detailed analysis of the subsidy regime in Nigeria and why it should be removed, see our infographic which may be found here and these two reports by Nextier Advisory which may be found here and here.
The recent fall in crude oil prices actually provides Nigeria with an opportunity to remove its fuel subsidies. Oil producing countries such as the United Arab Emirates (“UAE”) and Indonesia have already taken advantage of the crude oil price climate and removed their fuel subsidies recently. Indeed, the NNPC GMD, Dr. Kachikwu has argued that Nigeria’s fuel subsidy regime is unsustainable.
The Petroleum Act empowers the Minister to fix petroleum product prices, which power is expressed in discretionary terms. The Minister may, therefore, choose not to fix petroleum products prices. The Price Control Act (“PCA”), which has fallen into disuse, provides for the establishment of a Price Control Board to fix the prices of certain commodities including petroleum products. The price control mechanism under the PCA requires the recognition of cost and profit in fixing prices. As far as we are aware, a Price Control Board has not been inaugurated in several years and has certainly not been involved in petroleum products pricing. More recently, the Petroleum Products Pricing Regulatory Authority Act established the PPPRA to “determine the pricing policy of petroleum products” and “…periodically approve benchmark prices for all petroleum products…”.
Whilst the legislations discussed above seek to grant powers to different authorities to regulate petroleum product prices, none of them imposes an obligation on the government to subsidise petroleum products pricing. It is therefore within the remit of this government to act to remove petroleum subsidies without requiring legislative amendments.
Responsibility: President Buhari, Minister of Petroleum, PPPRA
2. Domestic Gas Market Reforms
The development of Nigeria’s natural gas resources is critical to the nation’s economic growth. A functional domestic gas market would provide fuel for gas-powered plants and feedstock for job-creating industries. The domestic gas market has historically suffered from neglect. Existing legislations have treated gas utilisation as an afterthought, leading to a haphazard development of the industry. There is no clearly defined commercial and regulatory framework, no recognition of the constituent elements of the gas sector value chain and gas price controls. All of which have not incentivised the development of natural gas projects.
It is only fairly recently that a number of initiatives have been introduced to develop the sector including the National Gas Policy – which provides the policy framework for the development of the industry; the Natural Gas Supply Pricing Regulations – which provides the framework for determining gas pricing across various sectors; the establishment of the Gas Aggregator – the entity responsible for matching domestic gas suppliers with buyers; and the formulation of the Nigerian Gas Masterplan – which sets out the plan for developing the domestic gas market.
These well-meaning initiatives are yet to achieve the aims of fostering the domestic gas market, extending gas penetration in the domestic market and encouraging private sector investment. This is in part due to the failure to pass legislation which creates the appropriate market structures. A central piece of the reform initiatives had been the passage of the Downstream Gas Bill. The Downstream Gas Bill provided for the establishment of a regulatory agency responsible for regulating the domestic gas sector. The Gas Regulatory Commission (“GRC”) had the power to license the various participants in the gas sector value chain, which the Bill recognises as Supply; Transportation Network Operation; Transportation Pipeline Ownership; and Distribution.
The bill also provided for the principles of commercial regulation of the gas network including for gas transportation tariff, third-party access rules, competition and market power and the gas network code. It further sought to unbundle NNPC’s Nigerian Gas Company by separating it into two companies – a transportation (transmission) focused entity and a marketing company focused on distribution and sales of natural gas. The Bill, however, became a victim of the Petroleum Industry Bill when it was consolidated into that document. Uncontroversial by itself, it suffered from the disputes surrounding other elements of the PIB, which delayed its passage as well as from an inelegant consolidation which led to a loss of coherence.
A critical examination of the Bill, however, suggests that most of its elements may be implemented without the passage of the PIB or any other legislation. The Minister may, by virtue of the powers given to him under the Petroleum Act, immediately issue regulations “providing for such other matters as in his opinion may be necessary or desirable in order to give proper effect to this Act”. The wide ambit given to the Minister would entitle him to create regulations, which:
- Recognises and requires licenses for different elements of the gas sector value chain;
- Provides competition rules;
- Mandates the Network Code;
- Defines the elements of gas transportation tariffs; and
- Assigns the responsibility for carrying out these activities to a department (such as the DPR) under his Ministry.
The NNPC Board and management may also restructure NGC through its internal governance regimes in the way it is proposing for the Petroleum Pipelines and Marketing Company Limited.
The Minister may however not have the power to create the GRC as an independent regulatory agency as intended under the Bill. Given the ten year delay to the passage of the Bill, on its own and as consolidated into the PIB, this is a small price to pay to commence the establishment of the domestic gas sector framework.
Responsibility: President Buhari; Minister of Petroleum, NNPC Board & Management
The final part of the paper will examine Institutional Reforms and Reforms to the Ministerial Consent process.
ThisDay reports that Senate President, David Mark, and Deputy Leader of the House of Representatives, Leo Oguweh Ogor, have reassured the public of the National Assembly’s commitment to pass the Petroleum Industry Bill (“PIB”) before the tenure of the current assembly ends in June 2015.
The relevant committees of both houses are yet to present their reports on the Bill subsequent to the public hearings conducted in 2013.