The Oil and Gas Sector remains the mainstay of the Nigerian economy, accounting for a majority of its revenue and its total exporting earnings. Consequent to this, a plethora of laws and regulations have been put in place to regularise this all important sector.
The exploration and production of Oil and Gas in Nigeria in the past, has largely involved the Federal Government as a majority stakeholder, to whom all reserves by law belongs and International Oil Companies as the major participating companies in the industry. In discovering a large Oil and Gas reserve base within its borders, and the need to redistribute the wealth within the industry and improve the socioeconomic conditions of the citizenry, it became necessary to implement a program that encouraged and allowed for active local involvement of Nigerian investors to ensure that the sector maximally profits Nigeria and her citizens, hence the introduction of the Marginal Field Program in 2001, with the sole objective of opening up the upstream sector of the Oil and Gas industry for a more extensive indigenous participation.
That year, the first marginal bid round was held and 17 licences were awarded to sole operators and 7, awarded to joint-venture operators. To that end, a total of 24 licenses were awarded to 31 indigenous companies. The awarded licenses to the 31 indigenous companies does not necessarily indicate that the field were fully optimized, largely due to the in-fighting between awardees and the inability to come together and agree on the model suitable to their forced circumstance.
The Federal Government of Nigeria on the 1st of June 2020, through the Department of Petroleum Resources (DPR), announced the launch of a new Marginal Field Bid Round for fifty-seven (57) available Marginal Fields, if successful, will make this bid round, the second successful round in Nigeria’s history, and hopefully one, that all participants can fully benefit from.
The DPR released the Guidelines for Farm-Out and Operation of Marginal Fields 2020 (the “Guidelines”) which enunciates the Bid Process, the Award and Farm-Out of the Marginal Fields. Rule 5 of the Guidelines provides that, for a company to be entitled to participate in the Marginal Fields program via bidding, it is required to submit an application and seek approval. Companies upon prequalification are then evaluated by the DPR and required to then submit, field-specific technical and commercial bids to the Department. It is also important to note, that priority will be given to companies bidding in some consortia, who are able to demonstrate the requisite technical and financial capabilities to operate an awarded field.
Upon due evaluation and appraisal by the Department on the strengths and weaknesses of each bid, the Department is required to send it to the Minister of Petroleum Resources for onward consideration and assent by the President of the Federal Republic of Nigeria, in which instance, the President, occupies both roles.
At the end of a bidding round, every company or consortia typically expects that the blocks they have bided for, are allocated to them in the form in which their bid was tendered, either as sole operators or under a joint venture arrangement.
However, at the end of bidding rounds, the government reserves the right to allocate a field to several companies thereby, occasioning instances of ‘forced marriages’ between companies of which there can be only 2 (Two) outcomes, to wit; is the merging of companies in well-structured consortia that includes; technical partners with the experience/requisite technical know-how and finance partners or; an improperly constituted consortium with totally unaligned interests and perspectives, with either a finance or technical partner absent.
On the face of it, a forced merger of bidders is without question a harbinger of doom, with a potential for complex issues and if not properly resolved and managed, can lead to the entire failure of the operations of such allotted marginal fields.
There are various models of operating a consortium birthed by a “forced marriage” over an awarded marginal field. It is germane to note that the suitability of a model is heavily dependent on the peculiarity of each circumstance (forced marriage), the commitment to the viability of the field and a willingness to succeed and it all boils down to the contractual framework to which each party is willing to adopt to achieve its ultimate goal.
Whether it be an arrangement where investors who through an understanding, form an independent company for the operation of the field and a corporate governance structure also created that have different key positions occupied by the primary bidders in that company, as is the structure of major upstream and downstream companies in the Oil and Gas Industry. The purpose under this union is to create a structure, where each party in the consortium holds a position that clearly defines its role of operation with a view to attaining a successful application of each party’s services and expertise and ultimately achieving common shared goals.
Another option amongst a plethora available, is a model that sees to the appointment of an independent contractor to carry out the day–to-day operation and activities on the field on behalf of the primary bidders or the appointment of a bidder in the forced merger as a primary operator of the field.
The incomplete nature of an improperly constituted “forced marriage” over an awarded marginal field is typically the first challenge that parties would have to navigate and, owing to the inherent lack of technical capacity or a financier of the operations or both, the probable outcome can almost be assured because one can almost guarantee delays or outright failure in the operations, let alone the productivity of the marginal field.
Nonetheless, there are a number of effective remedies which have overtime proven to be effective, in ensuring that an improperly constituted merger for awarded marginal fields has a chance at success.
Needless to say, whatever the outcome may be, the idea of a “forced marriage” need not be the end of the concept to transact.
Opportunities clearly exists in Nigeria’s 2020 Marginal Field Bid Rounds and regardless of the outcome, no matter how complex and unpleasant it may appear, success can still be attained, on the hills that this transaction is an opportunity to generate revenue, and increase the participation of indigenous players in the Oil and Gas Sector and by extension the growth of the Nigerian Economy.
OYETOLA MUYIWA ATOYEBI, SAN is the Managing Partner at OMAPLEX Law Firm, a full serviced Law Firm with outstanding track records from both local and international corporations, he is one of the foremost Senior Advocates of Nigeria with Local Content expertise, specializing in the acquisition and disposal of Petroleum Assets, Oil and Gas Financing, farm-ins, farm-outs as well as Legal, Regulatory and Policy issues impacting the natural resources sector with a special fiscal expertise on Oil and Gas, and Renewable Energy and Technology. He holds the record of the youngest legal practitioner in history to be conferred with the prestigious rank of Senior Advocate of Nigeria.
Onyinye Chikwendu-Ikechebelu heads the OMAPLEX Law Firm Energy, Infrastructure, Project and Asset Finance Group. Her practice focuses on International Corporate and Commercial transactions, including asset-based structured financings, company restructuring, project financing and related capital markets transactions in the Oil and Gas, Petrochemical and Power sectors.
Festus Ibude focuses on complex international arbitration cases involving investment and commercial claims. He handles international arbitration and litigation matters involving Africa and North America, and a variety of sectors, including Oil and Gas, Power, Construction and Infrastructure. His vast knowledge enables him to offer clients comprehensive legal advice on a broad spectrum of complex issues.
Moyosore Mustapha is the head of the global Mergers & Acquisition and Corporate Practice Group of the Firm. Moyosore’s practice focusses on commercial and corporate finance transactions with a particular emphasis on corporate due diligence, cross border mergers & acquisitions, joint ventures, transaction negotiation, contract management, expert restructurings and leverage buyouts.