LECTURE 5 CONCESSION LICENCES

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1 LECTURE 5 CONCESSION LICENCES Kato Gogo Kingston, PhD Associate Professor of Energy & Natural Resources Law: Oil and Gas Faculty of Law, Rivers State University, Nigeria Historically, interests or rights in oil and gas were granted by means of concessions which authorises a company to prospect/explore, develop and market oil and gas for a specified number of years. One of the earliest recorded concession licence is the concession which William D Arcy obtained from the Shah of Persia (the present Iran) in 1901 which covered 500,000 square miles, almost covered the entire country with the exception of some areas in the northern region. Abu Dhabi and Kuwait granted concessions that covered the entire lands in their countries. The concession originally granted by Saudi Arabia to Standard Oil of California, subsequently assigned to Aramco, covered an area of approximately 371,000 square miles and was further extended in 1939 to about 496,000 square miles. 1 Furthermore, all these concessions were granted for long number of years and were held by a small number of large IOCs at the time, including British Petroleum, Shell, Standard Oil, Jersey Standard, Gulf Oil, Texaco and Mobil Oil, to name a few. Under the concession contracts, the home nation wishing to have its resources developed, but lacks the capital and the technical know-how to carry out the program itself, grants exclusive rights to the international oil company covering an identified area for long number of years, which is usually between 10 to 99 years. Once concession licence is granted, the foreign oil company bears all the costs and risks of developing the field and exercises ownership rights in the extracted minerals. Under the routine terms of the concession licence, the International Oil Company agrees to pay the host government production-based royalties or a combination of royalties and taxes as the stipulated by the host country. 1 Kamal Hossain, Law and Policy in Petroleum Development: Changing Relations between Transnationals and Governments, (Frances Pinter (Publishers) Ltd, London, 1979). 1

2 The host country does not participate in the decision-making processes of the international oil company with regards to how they explore and when they start using the licence. In essence, once the concession licence is granted, it is the sole responsibility of the international oil company to formulate all policies as to production, processing, marketing and all downstream operations. Hence, the rights granted to oil company are enormous and usually covered large area of land. TYPES OF CONCESSION Section 2(1)(a-c) of the Petroleum Act 1969 provides for three types of licence namely: a) Oil exploration licence (OEL) b) Oil prospecting licence (OPL) c) Oil mining lease (OML) OIL EXPLORATION LICENCE Section 2(1)(a) of the Petroleum Act 1969 empowers the Minister of Petroleum to grant oil exploration license (OEL) to Oil companies. This license is a non-exclusive and granted in respect of areas of unproven reserves for the exploration of petroleum. It expires on December 31 in the year that it was granted. THE FIRST SCHEDULE OF THE PA 1969 Paragraph 1 An oil exploration licence shall apply to the area specified therein which may be any area on which a premium has not been placed by the Minister, and shall authorise the licensee to undertake exploration for petroleum in the area of the licence, excluding land in respect of which the grant of an oil prospecting licence or oil mining lease has been approved by the Minister and land in respect of which an oil prospecting licence or oil mining lease is in force. 2

3 Paragraph 2 An oil exploration licence shall not confer any exclusive rights over the area of the licence, and the grant of an oil exploration licence in respect of any area shall not preclude the grant of another oil exploration licence or of an oil prospecting licence or oil mining lease over the same area or any part thereof. Paragraph 3 An oil exploration licence shall terminate on 31 December next following the date on which it was granted, but the licensee shall have an option to renew the licence for one further year if (a) he has fulfilled in respect of the licence, all obligations imposed upon him by this Act or otherwise; (b) the Minister is satisfied with work done and the reports submitted by the licensee in pursuance of the licence; and (c) an application for renewal has been made at least three months before the date of expiry of the licence. Paragraph 4 An oil exploration licence shall not confer any right to the grant of an oil prospecting licence or an oil mining lease. 3

4 OIL PROSPECTING LICENCE Section 2(1)(b) of the Petroleum Act 1969 empowers the Minister of Petroleum to grant oil prospecting license (OPL) to Oil companies. This license is an exclusive license, granted for any period determined by the minister of petroleum resources of up to five years for onshore areas and shallow waters and up to 10 years for deep offshore and inland basins. The oil prospecting license permits the licensee to conduct more extensive exploration activities and remove and dispose of petroleum discovered while prospecting. THE FIRST SCHEDULEOF THE PA 1969 Paragraph 5 The holder of an oil prospecting licence shall have the exclusive right to explore and prospect for petroleum within the area of his licence. Paragraph 6 The duration of an oil prospecting licence shall be determined by the Minister, but shall not exceed five years (including any periods of renewal). Paragraph 7 The holder of an oil prospecting licence may carry away and dispose of petroleum won during prospecting operations, subject to the fulfilment of obligations imposed upon him by or under this Act (including any special terms or conditions imposed under paragraph 34 of this Schedule) or by the Petroleum Profits Tax Act or any other law imposing taxation in respect of petroleum. 4

5 OIL MINING LEASE Section 2(1)(a) of the Petroleum Act 1969 empowers the Minister of Petroleum to grant oil mining lease (OML) to Oil companies. This license allows full-scale commercial production in a lease area. It is granted to oil prospecting license holders on the discovery of oil in commercial quantities (at least 10,000 barrels per day). It grants the lessee an exclusive right to prospect, explore, produce and undertake marketing activities in connection with the specified acreage for a period of 20 years. An oil, mining lease may be renewed subject to the fulfillment of certain conditions. Paragraph 8: An oil mining lease may be granted only to the holder of an oil prospecting licence who has (a) satisfied all the conditions imposed on the licence or otherwise imposed on him by this Act; and (b) discovered oil in commercial quantities. Paragraph 9. For the purposes of paragraph 8 of this Schedule, oil shall be deemed to have been discovered in commercial quantities by the holder of an oil prospecting licence if the Minister, upon evidence adduced by the licensee, is satisfied that the licensee is capable of producing at least 10,000 barrels per day of crude oil from the licensed area. Paragraph 10. The term of an oil mining lease shall not exceed twenty years, but may be renewed in accordance with this Act. Paragraph 11. Subject to this Act and any special terms or conditions imposed under paragraph 34 of this Schedule, the lessee of an oil mining lease shall have the exclusive right within the leased area to conduct exploration and prospecting operations and to win, get, work, store, carry away, transport, export or otherwise treat petroleum discovered in or under the leased area. 5

6 Paragraph 12 (1) Ten years after the grant of an oil mining lease, one half of the area of the lease shall be relinquished. Paragraph 13 (1) The lessee of an oil mining lease shall be entitled to apply in writing to the Minister, not less than twelve months before the expiration of the lease, for a renewal of the lease either in respect of the whole of the leased area or any particular part thereof; and the renewal shall be granted if the lessee has paid all rent and royalties due and has otherwise performed all his obligations under the lease. Paragraph 14. Without the prior consent of the Minister, the holder of an oil prospecting licence or an oil mining lease shall not assign his licence or lease, or any right, power or interest therein or thereunder. FARM OUT LICENCE Section 17 Petroleum Act 1969 empowers the president to farm out a marginal field that has been left unattended for at least 10 years from its first discovery to a third party (farmee). The farmee enters into a farm-out agreement with the holder of the oil mining lease, which permits the farmee to explore, prospect, win, work and remove petroleum during the validity of the lease. Paragraph 17(1) of the First Schedule 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. Paragraph 17 (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. 6

7 Paragraph 17 (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 Paragraph 17 (3) (a) That it is in the public interest so to do, and, in addition, in the case of a nonproducing marginal field, that the marginal field has been left unattended for an unreasonable time, not being less than ten years; and Paragraph 17 (3)(b) That the parties to the farm-out are in all respects acceptable to the Federal Government. CRITERIA TO BE MET BY THE OIL COMPANIES FOR GRANT OF CONCESSION The minister of petroleum has absolute discretion under the Petroleum Act to grant oil exploration, prospecting and mining licenses to companies incorporated in Nigeria. The following conditions must be met: (a) Section 2(2) of the Petroleum Act requires all companies seeking to obtain any of the three licenses to be incorporated in Nigeria under the Companies and Allied Matters Act or any corresponding law. (b) Section 54 of the Companies and Allied Matters Act (CAMA) 2004 require that every foreign company incorporated outside Nigeria, and having the intention of carrying on business in Nigeria, shall take all steps necessary to obtain incorporation as a separate entity in Nigeria for that purpose, but until so incorporated, the foreign company shall not carry on business in Nigeria or exercise any of the powers of a registered company and shall not have a place of business or an address for service of documents or processes in Nigeria for any purpose other than the receipt of notices and other documents, as matters preliminary to incorporation. (c) The Petroleum (Drilling and Production) Regulations 1969 outline the application process and submission requirements, including evidence 7

8 of the licensee s financial status and technical competence and details of: The proposed work programme of the operations; The annual expenditure; The start date of the operations; The schemes for recruiting and training Nigerians; The licensee s capacity to market petroleum; Annual reports on the licensee s exploration and production activities; and Any other information that the minister of petroleum may require. BIDDING ROUNDS The government awards exploration and production rights (including marginal field and production sharing contract awards) through competitive bidding processes known as licensing rounds. The criteria for such awards vary, but are published by the ministry in pre-licensing round guidance notes and include: 1. Evidence of financial and technical capacity; 2. The applicable premium (ie, signature, prospectivity and production bonuses); and 3. Evidence of the commitment to projects of strategic national interest and minimum work programme commitments. In addition to the above, the Nigerian Oil and Gas Industry Content Development Act entrenches the principle of according first consideration to Nigerian operators in the award of oil blocks, oil field licences, oil lifting licences and contracts for the execution of projects in the Nigerian oil and gas industry. 8

9 TRANSFERABILITY OF LICENCE AND EXPLORATION RIGHTS Oil prospecting licence and oil mining lease holders are prohibited from assigning their licences or leases, or any right, power or interest therein, without the prior consent of the minister of petroleum. Further, the Petroleum (Drilling and Production) Regulations require that the takeover of an oil prospecting licence or oil mining lease is subject to the minister of petroleum s consent. This was confirmed by the Federal High Court in Moni Pulo Limited v Brass Exploration Unlimited CLRN 153, where the court confirmed that an indirect transfer of interest in an oil mining lease (by way of the sale of shares of a lessee resulting in a change of control) requires ministerial consent. The Department of Petroleum Resources Guidelines and Procedures for Obtaining the Minister's Consent for the Assignment of Interests in Oil and Gas Assets, aim to include (albeit not exhaustively) descriptions of transactions that constitute assignments requiring ministerial consent, including: Assignments by way of an exchange or transfer of shares; Share listings; Mergers or acquisitions to directly or indirectly take over or acquire the whole rights or interests in an underlying petroleum asset. 9