The draft conversion regulations – Assessing the requirements for renewal of expiring oil mining leases

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Introduction

Since the enactment of the Petroleum Industry Act in 2021 which became effective on 16 August 2021 (“PIA”), the Nigerian Petroleum Industry (the “Industry”) stakeholders have continued to consider the implication of the provisions of the PIA on the various interests in the Industry. One of the main highlights of the PIA which has stirred up intellectual discourse is the provision regarding the application of the PIA to existing oil mining leases (“OMLs”) and oil prospecting leases (“OPLs”) – especially in relation to the voluntary and mandatory conversion of these existing OMLs and OPLs to the PIA regime.

In this Newsletter, we consider the application of the PIA to existing OMLs vis a vis the requirement for the renewals of OMLs under the PIA.

Conversion Requirements under the PIA

Although the PIA became effective on 16 August 2021, its grandfathering provisions limit its application regarding existing OMLs. The entire provisions of the PIA will only apply to an existing OML voluntarily, based on the election of the leaseholder(s) by entering into a conversion contract, or mandatorily, following the termination, expiration, or renewal of the OML.1 Specifically, Section 303(1) of the PIA provides as follows:

The provisions of this Act shall not apply to holders of an oil prospecting licence or oil mining lease who do not enter into a conversion contract until the termination or expiration of the respective oil prospecting licence or lease save for the provisions of section 311 and paragraphs 10 and 11 of the Seventh Schedule to this Act which shall apply to licences and leases awarded to indigenous Nigerian companies on a sole risk basis under the Petroleum Act, on which the Government has successfully exercised its back-in rights prior to the effective date of this Act but any renewal of an oil mining lease shall be based on this Act.” (Our emphasis and underlining.)

In this regard, unless and until the leaseholder(s) elect to convert to the PIA regime or the OML is terminated, expires, or is renewed, the provisions of PIA will not apply to such OML. However, renewals of any OML must mandatorily be in accordance with the provisions of the PIA.

Renewal of an OML

As noted above, any renewal of an OML must be in accordance with the PIA. However, the PIA does not provide for the renewal process for an OML. While the PIA contains renewal provisions in section 87 of the PIA, these provisions appear to only relate to the conditions for the renewal of a Petroleum Mining Lease (“PML”) and not an OML. Therefore, the provisions of section 87 of the PIA as drafted are not applicable to the renewal of an OML.

Prior to the enactment of the PIA, the renewal of an OML was generally governed by the provisions of the Petroleum Act Cap P10, Laws of Federation of Nigeria, 2004 (“Petroleum Act”). The provisions of the Petroleum Act contain the process and conditions for the renewal of an OML. However, and as already stated above, the provisions of the Petroleum Act will cease to apply to an expired OML. Renewal of such OML will be subject to the provisions of the PIA.2

The Draft Conversion Regulations

To address the issues in the PIA regarding the process for the renewal of an OML, the Nigerian Upstream Petroleum Regulatory Commission (the “Commission”) issued a draft of the Conversion and Renewal (Oil Prospecting Licences & Oil Mining Leases) Regulations (“Conversion Regulations”). The Conversion Regulations was issued by the Commission pursuant to its powers under the PIA to issue guidelines in respect of upstream petroleum operations. The provisions of the Conversion Regulations apply to conversion provisions in the PIA and renewal of OMLs. We highlight below some of the provisions of the Conversion Regulations in relation to the renewal of an OML.

Application for renewal – Regarding renewal of an OML, the Conversion Regulations provide that application for renewal of an OML must be made to the Commission by the concessionaire or jointly by all the concessionaires, as the case may be – this includes production sharing contract assets, sole risk assets that the Federal Government of Nigeria (“FGN”) has backed into, sole risk assets that the FGN has not backed into and joint venture assets. With respect to sole risk assets that the FGN has not backed into, the application must be submitted by the concessionaire and the assignees jointly.3

Regarding PSC assets, it is not clear from the Conversion Regulations if references to ‘concessionaire’ is intended to mean the contractor to Nigerian National Petroleum Commission (“NNPC”) under the PSC. Generally, under PSC arrangements, NNPC is the sole concessionaire. Therefore, the implication of the provisions of the Conversion Regulations is that the application for the renewal of an OML under a PSC arrangement must be submitted by the NNPC. There is a need for the Commission to provide clarity in this regard.

Requirements for renewal – With respect to the requirements for renewal of an OML, the Conversion Regulations provide that application for renewal shall be made at least 12 (twelve) months before the expiration of the OML.4 This is consistent with the provisions of the Petroleum Act. The application is required to be accompanied by supporting documentation as stated in Paragraph 3.2 of the Conversion Regulations.

In addition to the supporting documentation for the application, the applicant is specifically required to provide the following with respect to the renewal of an OML:

  1. evidence of payment of the applicable rent,
  2. the appliable work commitment guarantee, and
  3. the applicable parent company guarantee.5

Timeline for consideration of an application for renewal of an OML – the Conversion Regulations require the Commission to, within 90 (ninety) days upon receipt of an application for renewal of an OML, make a recommendation to the Minister of Petroleum Resources to grant a PML after determining that the application for renewal has merit and has met the requirements for conversion as stipulated in the PIA and the Conversion Regulations.6

Renewal Bonus – another important point to note is that the PIA is silent on the payment of a renewal bonus upon renewal of an OML. While section 87(3) of the PIA provides that a lessee of a PML shall pay a renewal bonus of an amount to be specified by the Commission, the provisions of section 87(3) of the PIA only relate to the conditions for the renewal of a PML and not an OML. However, the Conversion Regulations have now expressly provided, in relation to an OML, that a renewal bonus shall apply upon renewal of the OML.7 The renewal bonus is based on the percentage of the market value on the renewal date prescribed in the regulations to be issued by the Commission.8

Other Fiscal Adjustments – in addition to the renewal bonus, the Conversion Regulations contain other provisions on fiscal adjustments upon renewal of an OML, including provisions relating to taxation upon renewal, consolidation of taxes, and tax provisions applicable to PSCs following renewal.

Relinquishment Obligations under the PIA

The PIA imposes relinquishment obligations on the holder of an OML at the time of the renewal of the relevant OML.9 On the date of the renewal, an OML holder is required to select areas or zones within the OML that fall within the following categories:

  1. areas and zones, which in the opinion of the holder, merit appraisal and for which the holder is prepared to present an appraisal programme as required by the PIA;
  2. areas and zones in respect of which the holder is prepared to make a declaration of a commercial discovery and submit a field development plan to the Commission in line with the provisions of the PIA;
  3. areas and zones in respect of which the holder is prepared to make a declaration of a significant gas discovery or a significant crude oil discovery and submit an application for approval of a retention area as required under the PIA;
  4. areas and zones in respect of which development of a field is underway based on prior approvals after having declared the discovery commercial or if no declaration was made, after making a final investment decision to develop the field; and
  5. areas and zones in respect of which regular commercial production is occurring.

The PIA provides that where the total acreage of the areas or zones designated by the holder is less than 40% (forty percent) of the OML area, the holder may select additional areas covered by the OML up to a total of 40% (forty percent) of the OML area.10 However, where the total acreage initially selected by the holder is more than 40% (forty percent), the holder will be entitled to keep such a larger area, consisting solely of the selected areas.

An OML holder will be awarded PMLs in respect of areas and zones selected under (d) and (e) above.11 That is, PMLs will be awarded for areas and zones in respect of which field development is underway or regular commercial production is occurring. In such a case, the fiscal terms applicable under the PIA will apply to the PMLs granted.

A Petroleum Prospecting Licence (“PPL”) will be awarded for the areas and zones that fall within paragraphs ‎(a), (b), and (c) above and (where applicable) for the additional areas selected to be operated in accordance with the requirements of the PIA.12 In such a case, the fiscal terms applicable under the PIA will apply to the PPL granted. All other areas not selected are required to be relinquished by the OML holder.13

Other provisions of the Conversion Regulations

In addition to the provisions of the Conversion Regulations that we have highlighted above, the Conversion Regulations also provide for the following:

  1. detailed procedure in respect of the voluntary conversion process for an OPL and OML where holders of an OPL or OML elect to convert to the PIA regime;
  2. the compulsory conversion process for a marginal field;
  3. contributions to funds created under the PIA upon conversion;
  4. the requirement for the sign-off of the Nigerian National Petroleum Company Limited for conversion; and
  5. provisions relating to the model conversion contract to be issued by the Commission.

Section 216 (1) of the PIA requires the Commission to consult with stakeholders prior to finalizing any regulations or amendments to regulations. Accordingly, the Commission hosted a stakeholders’ consultation in April 2022 to receive inputs on all the drafts of the regulations to be issued by the Commission including the Conversion Regulations. In a statement credited to the Executive Commissioner, Economic Regulation & Strategic Planning of the Commission, the new regulations (including the Conversion Regulations) were expected to be gazetted by the end of June 2022 and become operational accordingly.14 We understand from enquiries at the Commission that this is yet to be done.

Conclusion

While we await the gazetted Conversion Regulations, it is important to point out that the Conversion Regulations provide the much-needed clarifications on the process and principles that will govern renewals of OMLs. It also provides guidance on the voluntary conversion process. This is a welcome development as it ensures that investors in the Industry will have a degree of certainty about the regulatory regime governing their respective investments.

  1. Sections 92(1) – (5), 92(6), 303(1), 311(2)(c) and 311(9) of the PIA.
  2. Section 311(9) of the PIA.
  3. Paragraph 2(1) of the Conversion Regulations.
  4. Paragraph 5(2) of the Conversion Regulations.
  5. Paragraph 11 of the Conversion Regulations.
  6. Paragraph 7(3) of the Conversion Regulations.
  7. Paragraph 14(1)(b) of the Conversion Regulations.
  8. See draft Upstream Petroleum Fees and Rent Regulation issued by the Commission.
  9. Section 93(1) of the PIA.
  10. Section 93(2) of the PIA. The PIA (section 93(3)) provides that the additional areas selected shall be based on parcels. Under the PIA, the basic unit of the grid system for acreage management shall be a parcel of one square kilometer, subject to adjustment of the zones and national boundary – section 69(4).
  11. Section 93(6)(b) of the PIA.
  12. Section 93(6)(a) of the PIA.
  13. Section 93(4)(5) of the PIA.
  14. https://punchng.com/fg-to-unveil-host-community-trust-regulations-tuesday/

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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