OVERVIEW OF THE LAWS AND REGULATIONS RELATING TO THE OPERATION OF MARGINAL FIELDS IN NIGERIA.


Introduction

The oil and gas sector remains the mainstay of Nigeria’s economy, accounting for 75% of the country’s revenue and 90% of its total export earnings.[1] However, despite boasting a large oil and gas reserves base, there remains several undeveloped oil and gas assets.[2]

A key policy of government in tackling this underdevelopment, has been the indigenization policy of the Federal Government of Nigeria (FGN) under which participatory rights to oil acreages were allocated by the President to indigenous companies on a sole risk basis, thereby entitling them to carry out sole risk petroleum operations under Oil Mining Leases (OMLs) held by the NNPC on one hand, and the marginal fields policy passed into law pursuant to the Petroleum (Amendment) Decree of 1996[3].  

The FGN’s oil and gas indigenization policy was essentially aimed at ensuring that the ownership and control of concessions and/or acreages are provided to Nigerians, in a bid to encourage growth in local participation in the exploration and development of oil and gas resources.  The aim of the marginal field program was to open up the upstream oil and gas sector to more indigenous participation, in a manner that positively impacts and contributes to the expansion of Nigeria’s oil production reserves, encourage economic development through revenue generation, promotion of indigenous participation in oil and gas sector and discouragement of the abandonment of depleting oil fields in Nigeria.

In this regard, Paragraph 17 of the First Schedule of the Petroleum Act (as amended) [4] provides that:

“(1)      The holder of an oil mining lease may, with the consent of and on such terms and conditions as may be approved by the President, farm out any marginal field which lies within the leased area.

(2)        The President may cause the farm-out of a marginal field if the marginal field has been left unattended for a period of not less than ten years from the date of the first discovery of the marginal field.

(3)        The President shall not give his consent to a farm-out or cause the farm-out of a marginal field unless he is satisfied- 

  • that it is in the public interest so to do, and, in addition, in the case of a non- producing marginal field, that the marginal field has been left unattended for an unreasonable time, not being less than ten years; and  
  • that the parties to the farm-out are in all respects acceptable to the Federal Government. 

(4)        For the purposes of this paragraph-

“farm-out” means an agreement between the holder of an oil mining lease and a third party which permits the third party to explore, prospect, win, work and carry away any petroleum encountered in a specified area during the validity of the lease.

The broad objectives for the award of marginal fields include[5]:

  • Increasing indigenous participation in the upstream sector of the Nigerian petroleum industry.
  • Increasing oil and gas reserves and production volumes through aggressive exploration and development effort;
  • Generating additional revenue for the federal government;
  • Fostering technological transfer to Nigerians;
  • Providing opportunity to gainfully engage the pool of high level technically competent Nigerians in the oil & gas sector;
  • Promoting common usage of oil and gas assets/facilities to ensure optimum utilization of available capacities;
  • Attracting investment into the Nigerian oil and gas sector;
  • Providing opportunities for portfolio rationalization.

In pursuance of the above objectives and as part of its efforts to reach its three million barrel per day output target by 2023, the FGN, on 1 June 2020, through the Department of Petroleum Resources (DPR), announced the launch of a new marginal field bid round for fifty-seven available marginal fields. The DPR also released the Guidelines for Farm-out and Operation of Marginal Fields 2020 (the “Guidelines”) covering the bid process, the award and farm-out of the marginal fields.

As in all previous guidelines before it, Paragraph 5.4.6 and 5.4.8 of the Guidelines provides for only indigenous ownership of marginal fields, while paragraph 12.8 of the Guidelines requires that awardees operate the asset at their “sole risk”, independent of the government, but with the understanding that the government reserves the right to a participating interest at any time.

With the enactment of Nigerian Oil and Gas Industry Content Development Act 2010 (NOGICD Act), it has become easier to ascertain what makes a company an “indigenous company”. Section 106 of the NOGICD Act defines a ‘Nigerian Company” as “a company formed and registered in Nigeria in accordance with the provision of Companies and Allied Matters Act with not less than 51 % equity shares by Nigerians”.

Thus, only a ‘Nigerian company’ within the context of the NOGICD Act is eligible to participate in the 2020 Bid Round.

This Article seeks to give its reader an overview of the Marginal Field terrain in Nigeria and the pertinent laws awardees must take note of.

What is a Marginal Field?

Paragraph 16A of the First Schedule of the Petroleum Act (as amended) provides that a marginal filed is such fields as the President may from time to time identify as Marginal Fields”.[6] The President is thus vested with the powers to designate marginal fields.

Under the Guidelines, a marginal field is “any field that has reserves reported annually to the Department of Petroleum Resources (DPR) and has remained un-produced for a period of over 10 years”.[7] The filed in question must also have one or more of the following characteristics[8] to be considered “marginal”:

  • field not considered by its license holders for development because of assumed marginal economics under prevailing fiscal and market terms;
  • field with at least one exploration well drilled and have been reported as oil and or gas discovery for more than 10 years with no follow up appraisal or development effort;
  • field with crude oil characteristics different from current streams (such as crude with very high viscosity and low API gravity), which cannot be produced through conventional methods or current technology;
  • field with high gas and low oil reserves;
  • field that has been abandoned by the leaseholders for upwards of three years for economic or operational reasons; or
  • field that the present leaseholders may consider for farmout as part of portfolio rationalization programmes.

Thus, from the above, marginal fields can be said to be oil fields discovered by major international oil companies (IOCs) in Nigeria with reported reserves and production potential, which are however deemed marginal for a variety of reasons including having remained undeveloped for more than 10 years.

Award of Marginal Fields

Marginal fields are essentially fields that are “farmed out” of an oil mining lease. According to Paragraph 17(4) of the Petroleum Act,  “farm-out” means an agreement between the holder of an oil mining lease and a third party which permits the third party to explore, prospect, win, work and carry away any petroleum encountered in a specified area during the validity of the lease.” Effectively, the nature of a marginal field award is similar to that of a sub-lease whereby a lessee (in this case, the OML holder) creates a sub-lease between itself (as farmor) and the marginal field awardee (as farmee), with the consent of the head lessor (the federal government). Like the typical sub-lease, such sublease must devolve from, and be in accordance with the interest conveyed in the head lease.[9]

The terms of the sub-lease will be recorded in a farm-out agreement to be negotiated with the original OML holder, which will allocate responsibilities and liabilities as between the area holders, as well as the royalty payable and terms for accessing infrastructure.

In essence, the conduction of bidding rounds for the marginal fields by the Department of Petroleum Resources will lead to the negotiation of a farm-out agreement, whereby the OML holder, as farmor, and under the supervision of the FGN, farms out his field under its lease to the marginal field awardee.

The Legal Framework for Marginal Fields in Nigeria

Several laws govern oil and gas exploration and production in Nigeria, including the operation of marginal fields.  Upon winning an award, a marginal field awardee becomes subject to these laws and regulations, namely the:

  • Petroleum Act[10];
  • Nigerian Oil and Gas Industry Content Development Act 2010
  • Oil Pipelines Act[11];
  • Petroleum Profits Tax Act[12];
  • Mineral Oils (Safety) Regulations, 1997;
  • Petroleum (Drilling and Production) Regulations[13];
  • Nigerian National Petroleum Corporation Act[14];
  • Associated Gas Re-injection Act[15]; and
  • Deep Offshore and Inland Basin Production Sharing Contract Act[16].
  • Marginal Fields Operations (Fiscal Regime) Regulations, 2005.
  • Oil Block Allocation to Companies (Back – in-Rights) Regulation 2019

The Petroleum Act[17]

The Petroleum Act is the principal legislation for petroleum activities in Nigeria. It was created for the purpose of regulating the exploration of petroleum from the territorial waters and the continental shelf of Nigeria and, and contains provisions which vests the ownership of, and all on-shore and off-shore revenue from petroleum resources derivable therefrom in the Federal Government, and for all other matters incidental thereto. As mentioned previously, the power to designate and farm out marginal fields is vested in the President of Nigeria under the Petroleum Act.

Nigerian Oil and Gas Industry Content Development Act 2010

In furtherance of the indigenization framework provided by the Petroleum Act, the Nigerian Oil and Gas Industry Content Development Act 2010 was passed to further the FGN policy objectives for the development of local content by Nigerian companies in the petroleum industry.

Based on the definition of a ‘Nigerian Company” under the NOGICD Act, a Nigerian company that enters into a joint venture with a foreign company for the purpose of winning a marginal field award, shall retain a minimum of 51% ownership interest in the JV.[18].

This allows marginal field owners to partner with foreign companies with the requisite technology, technical expertise and buoyant balance sheet to farm into their operations to develop their respective assets. They also have the liberty to enter a Joint Venture (JV) with local companies or foreign companies to develop their respective assets.

Furthermore, marginal field awardees are expected to adhere to the local content requirement in terms of involvement of competent Nigerians in their management as well as commitment to training and growth of indigenous capability, manpower and local input in the provision of materials and services to the industry.[19]

Oil Pipelines Act[20]

As mentioned above, a “farm-out” grants the rightsto “explore, prospect, win, work and carry away any petroleum”, and transportation of such petroleum won is thus relevant to holders of a marginal filed. Thus, the Oil Pipelines Act provides as follows:

“The Minister may, subject to the provisions of this Act grant- (a) permits to survey routes for oil pipelines; and (b) licences to construct, maintain and operate oil pipelines. Provided that each licence shall be issued in respect of and authorise this construction, maintenance and operation of one pipeline only”.[21]

Section 11 goes further to provide that:

For the purpose of this Act, an oil pipeline means a pipeline for the conveyance of mineral oils, natural gas and any of their derivatives or components, and also any substance (including steam and water) used or intended to be used in the production or refining or conveying of mineral oils, natural gas, and any of their derivatives or components.”

Once granted, a permit to survey shall entitle a marginal field awardee to use the necessary equipment and vehicles, to enter the awarded field, in order to survey and take levels of the land, dig and bore into the soil and to cut or remove such trees and other vegetation as may impede the transportation process[22]. Upon successful conclusion of a survey, an application may be made to the Minister for the grant of an oil pipeline licence to construct and operate oil pipelines.[23] It is however the industry practice for a marginal field awardee to negotiate with for the use of an OML holder’s existing infrastructure.

Nonetheless, such actions carry with them legal, social and environmental implications, and for this reason, there is the requirement that the marginal field awardee takes all reasonable steps to avoid unnecessary damage to any land entered upon and any buildings, crops or profitable trees thereon,  and shall make compensation to the owners or occupiers for any damage done under such authority and not made good.[24] This obligation extends to land not covered in the licence, albeit, such claim must be for compensation and not damages or any other relief.[25]

It is to be noted also that where such an offence is proved to have been committed with the consent or connivance of or to be attributable to any neglect on the part of, any director manager, secretary, or other similar officer of the body corporate, or any person purporting to act in any such capacity, he, as well as the body corporate, shall be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.[26]

Petroleum Profits Tax Act[27]

The Petroleum Profits Tax Act (as amended) (PPT Act) makes provisions for the determination of the tax payable on the chargeable profits of companies involved in the upstream activities of exploration, drilling, extraction and transportation of crude oil.

It goes further to provide that[28];

“1)     The assessable tax for any accounting period of a company shall be an amount equal to 85% of its chargeable profits of that period.

 (2)    Where a company has not qualified for treatment under paragraph 6 (4) of the Second Schedule to this Act, that is to say, where a company has not yet commenced to make a sale or bulk disposal of chargeable oil under a programme of continuous production and sales as at 1 April 1977, its assessable tax for any accounting period during which it has not fully amortised all pre-production capitalised expenditure due to it less the amount to be retained in the book as provided for in paragraph 6 of the Second Schedule to this Act shall be 65.75% of the chargeable profits for that period”.

Thus, the PPT Act imposes tax upon profits from petroleum proceeds in Nigeria to the tune of 85% of its chargeable profits for that period[29], with a reduced rate of 65.75% payable within the first five years, therefore allowing all pre-production capital expenses to be fully paid off.

It is the profits generated by companies that engage the winning of, obtaining and transportation of petroleum or chargeable oil in Nigeria by or on behalf of a company for its own account by any drilling, extracting or other like operations or process, not including refining at a refinery, in the course of a business carried on by the company engaged in such operations and all operations incidental thereto and any sale or any disposal of chargeable oil by or on behalf of the company.[30]

Section 60 of the PPT Act previously provided that dividends received from after-tax profits of upstream petroleum operations were exempt from such taxes as follows:[31]

“No tax shall be charged under the provisions of the Personal Income Tax Act or any other Act in respect of any income or dividends paid out of any profits which are taken into account, under the provisions of this Act, in the calculation of the amount of any chargeable profits upon which tax is charged, assessed and paid under the provisions of this Act.”

However, by reason of deletion of this provision under section 24 of the Finance Act 2019, marginal field awardees will now be required to withhold tax from dividends paid to their shareholders. Also, Personal Income Tax Act and other tax laws can now be levied on the income or dividends paid out of any profits to which the PPT Act applies. Investee companies involved in upstream petroleum operations will now be required to deduct withholding tax prior to distributing such dividends to investors. This is likely to therefore impact the amount available as returns to investors/shareholders of marginal field awardees.

Mineral Oils (Safety) Regulations, 1997[32]

The Mineral Oils (Safety)Regulations (Regulations) was made under section 9 of the Petroleum Act which grants the Minister the power to make subsidiary regulations pursuant to the provisions therein.

The Regulations provide for precautions to be taken by all Licensees and Lessees in their oil fields for the safe drilling, production, storage and handling of mineral oils.[33]

Therefore, all operations of marginal field awardees are required to be in accordance with this Regulations by ensuring that any field development plan proposed for the production of a marginal field shall provide for the safe conduct of all operations and the safety and health of employees. 

Additionally, it is required that every drilling, production and other operation carried out by a marginal field awardee shall conform with good oil field practice which, for the purpose of these Regulations, shall be considered to be adequate if it conforms with the appropriate current Institute of Petroleum Safety Codes; or the American Petroleum Institute Codes; or the American Society of Mechanical Engineers Codes; or any other internationally recognized and accepted systems.[34]

Petroleum (Drilling and Production) Regulations, 2006[35]

The Petroleum (Drilling and Production) Regulations (as amended)[36] provides that applications for an oil exploration license, oil prospecting license or oil mining lease shall be made to the Minister in writing. This is clear from the wording of section 7 of the regulation which states that:

“The holder of an oil exploration licence, oil prospecting licence or oil mining lease may not export samples or specimens abroad except with the written permission of the Director of Petroleum Resources and subject to such conditions as he may prescribe.

Accordingly, since a marginal field devolves from an OML, a marginal field awardee is bound by the above law and is not permitted to export any sample or specimen of petroleum abroad without the prior written consent of the DPR.[37]  

The Regulations also make it an obligation for a marginal farm awardee to submit a detailed program for the recruitment and training of Nigerians.[38]  These requirements have now been given more scope under the NOGICD Act.

Additionally, there is the requirement to comply with all existing safety regulations and all such instructions as may, from time to time, be given in writing by the DPR for securing the health and safety of persons engaged on or in connection with operations under his license or lease.[39]

It is also noted that within 21 days after the end of each month to the Director of Petroleum Resources and Director of Geological Survey, in a form from time to time approved by the DPR,  a marginal field awardee is obligated to submit a report of the progress of its operations containing particulars of the contents of the record required to be kept under these Regulations, and in addition a statement of the areas in which the licensee or lessee has carried out any geological or geophysical work and an account of the work in question.[40]

Nigerian National Petroleum Corporation Act[41]

The Nigerian National Petroleum Corporation Act established the Nigerian National Petroleum Corporation (NNPC)to engage in all commercial activities relating to the Petroleum industry and to enforce all regulatory measures relating to the general control of the Petroleum sector through its Petroleum Inspectorate department.[42]

Under Section 10 of this Act, the Department of Petroleum Resources is created as an integral part of the NNPC and entrusted with the regulation of the petroleum industry.

Also, the Minister is responsible for issuing permits and licenses for all activities connected with petroleum exploration, exploitation, refining, storage, marketing, transportation and distribution[43].

Associated Gas Re-injection Act[44]

The Associated Gas Re-Injection Act places a duty on companies producing oil and gas in Nigeria to submit detailed plans for implementation of gas re-injection and to prohibit gas flaring.[45]

Amongst others, it provides that no company engaged in the production of oil or gas shall after 1 January 1984 flare gas produced in association with oil without the permission in writing of the Minister.[46] Thus, marginal fields may only flare gas in particular fields upon application for same and receipt of a certificate issued by the Minister to that effect.

Such certificates are issued upon payment of the required sum as the Minister may from time to time prescribe for every 28.317 standard cubic metre (SCM) of gas flared.[47] The payment shall be made in the same manner and be subject to the same procedure as for the payment of royalties to the Federal Government by companies engaged in the production of oil.[48]

It should be noted that where a marginal field awardee fails to comply with the provisions of this Act, the concessions granted to him in the particular field or fields may be forfeited[49].

The said provision states as follows:

“ 4. (1) Where any person commits an offence under section 3 of this Act, the person concerned shall forfeit the concessions granted to him in the particular field or fields in relation to which the offence was committed.

(2) In addition to the penalty specified in subsection (1) of this section, the Minister may order the withholding of all or part of any entitlements of any offending person towards the cost of completion or implementation of a desirable re-injection scheme, or the repair or restoration of any reservoir in the field in accordance with good oil-field practice.”

The Minister may also order the withholding of all or part of any entitlements of any person towards the cost of completion or implementation of a desirable re-injection scheme or the repair or restoration of any reservoir in the field in accordance with good oil-field practice.[50]

Deep Offshore and Inland Basin Production Sharing Contract Act[51].

The Deep Offshore and Inland Basin Production Sharing Contracts Act 2019 (DOIBPSCA) is the extant law for charging royalties in the deep offshore areas.

The DOIBPSCA establishes the legal framework for deep offshore and inland oil activities, including the applicable royalties and key fiscal terms, with its key objective being to maximize government’s revenue from Production Sharing Contracts (PSCs) in the face of changing prices of oil and gas.

By virtue of its 2019 amendment, the DOIBPSCA now provides for the following:
1.       Flat offshore royalty rate: A 10% royalty will apply on production from fields with a water depth of greater than 200 metres.
2.       Reduced rate for frontier and inland basins: Frontier and inland basins will be subject to a 7.5% royalty.

3.       Oil price royalty: The amendment also imposes an additional royalty rate to account for increase in price of crude in excess of $20 per barrel. A new royalty is also payable on the basis of the oil price with an additional rate payable of 2.5% for an oil price of US$ 20 – 60 per barrel; 4% for an oil price of US$ 61 – 100 per barrel; 8% for an oil price of US$ 101 – 150 per barrel; and 10% above US$ 150.

It is important to note that under section 18 of the amended  DOIBPSCA, a marginal field awardee who does not comply with any provision therein commits an offence and will be liabl[SF1] [SF032] e on conviction to a fine not below N500, 000, 000.00 (Five hundred million Naira) and/or at least a 5 year imprisonment.

Furthermore, the DOIBPSCA provides that all PSCs shall be reviewed every 8 years.[52]

Marginal Fields Operations (Fiscal Regime) Regulations, 2005.

The Marginal Fields Operations (Fiscal Regime) Regulations, 2005[53] was passed under section 9 (1) (a) and (b) of the Petroleum Act to provide for royalty rates which apply in all marginal field operations in Nigeria.

Paragraph 2 of the Regulations provides categories of royalties due to the government, based on the level of production undertaken in marginal fields. For productions below 5,000 barrels of oil per day (bopd), the marginal field awardee is required to supply cost-free royalty to the government at 2.5% of production proceeds. Production between 5,000 and 10,000 bopd attracts a royalty of 7.5%, 12.5% for production between 10,000 and 15,000bopd, and 18.5% for production between 15,000 and 25,000 bopd.

Paragraph 3 of the Regulations also permits the commingling of fluid production from two or more reservoirs, following the approval of the DPR, and based on the compatibility of the reservoir fluids and pressures.

Oil Block Allocation to Companies (Back – in-Rights) Regulation 2019

The Oil Block Allocation to Companies (Back–in-Rights) Regulation 2019[54] was passed under the powers of the President in the Petroleum Act, to provide a legal framework for the participation of the FGN in oil blocks.[55] The Regulations apply to all oil prospecting licences and oil mining leases as may be granted from time to time in respect of an application for an award, conversion or renewal of an oil prospecting license or oil mining lease.[56]

Paragraph 2 of the Regulations provide that the FGN;

“(а) shall exercise its right to participate in any venture to which an oil prospecting license or oil mining lease relates by acquiring up to five-sixths of the interest of the applicant (rounded up to the nearest whole percentage point of total interest in such license or lease) in the relevant oil prospecting license or oil mining lease; and

(b) may exercise its right to participate at the commencement of a license, or upon conversion of the license to a lease or at the renewal of a license or a lease.

3. (1) Prior to the acquisition referred to in regulation 2 of these Regulations, the Minister shall invite the applicant for the award, conversion or renewal of a license or a lease for negotiations in respect of the terms for the acquisition of the participating interest by the Federal Government in the license or lease, provided that the applicant for the license or lease shall be given at least 14 days’ notice of the date, time and venue of such negotiations with the Minister.

It is noted that in NNPC v Famfa Oil Ltd.[57] the Supreme Court held that the intention of the legislature is that negotiations should take place between the Minister and the applicant of the OML. This is because the Minister while negotiating must take into consideration, the huge sums of money spent by the applicant drilling for oil, and ensure that 50% stake of the FGN in the OML is well taken care of in acceptable terms.

It was however held that the provisions of paragraph 2 of the Deep Water Block Allocation to Companies (Back – in-Rights) Regulation 2003 (now revoked by the 2019 Regulations) which gives the Federal Government the arbitrary right to acquire five-sixth of an OPL or OML interest is invalid to the extent that it is inconsistent with paragraph 35 of First Schedule to the Petroleum Act which stipulates that such participation or acquisition must be made on terms to be negotiated between the FGN and the holder or the holders of the OPL or OML.[58]

To this extent, the FGN will be required to negotiate such with the marginal field awardee before taking any action that would lead to a substantial reduction of an awardee’s interest and supposed erosion of the company’s rights.

Conclusion

The first award of marginal fields in Nigeria was in 2001, with a total of 24 licenses awarded to 31 companies which comprised of sole operators and joint-venture operators. This was followed by the 2013 Marginal Fields Licensing Round which consisted of 31 marginal fields, and now the latest bid rounds of 57 licenses which are set to be issued.

In awarding these marginal fields to indigenous operators, the government hopes to not only increase oil production, but also encourage indigenous capacity building in the upstream petroleum sector.

However, more still needs to be done, and many factors have constrained the activities of marginal field operators, especially in relation to the lack of funding, inadequate technical expertise, and government policies on royalties and petroleum taxes.

The 2020 marginal field bid round, however, remains a welcome development and it is hoped that the additional production from these fields will boost the nation’s daily crude production output and government revenue, for the benefit of us all.

The information and opinions in this publication are provided for general information only. They are not intended to constitute legal or other professional advice. If you would like additional information, please contact the author at [email protected]

© All Rights Reserved. Sefton Fross is a leading full-service law firm in Nigeria internationally recognised for its expertise in corporate, commercial and mergers and acquisitions.


Leave a Comment

Your email address will not be published. Required fields are marked *