A MILLENNIAL’S GUIDE TO ENERGY LAW – EPISODE 2 (OIL AND GAS OWNERSHIP, RIGHTS AND PERMITS IN NIGERIA)
The Organization of Petroleum Exporting Countries (OPEC), made up of fourteen oil rich countries reported that world oil demand has been projected to rise by 1.29 million barrels per day (b/d) in 2019. As a result, total world oil demand is anticipated to reach 100.8million b/d. Nigeria is the sixth largest oil producing country in the world.
Oil is Nigeria’s greatest source of energy. After its discovery in the ‘50s near Oloibri village, Rivers State by Shell D’Arcy, an Anglo/Dutch company, it has become an in integral part of the economy and accounts for 80% of total government revenue. Crude oil produced in Nigeria is essentially for export, as the US and UK are the largest importers of Nigerian crude oil, although in recent years reports have discovered a decline in the demand due to the shale oil revolution in US and Europe. The crude oil produced in Nigeria is sought after as it is light and low in sulphur hence the premium prices.
Traditionally, the government’s stake in the sector of these oil producing countries was limited to the collection of taxes and royalty. The agitation by these countries for control of their natural resources which were in the hands of their colonial masters led to the RESOLUTION ON PERMANENT SOVERIGNTY OVER NATURAL RESOURCES adopted by a majority of the General Assembly of the United Nations in 1962.The resolution stated that the right of people to freely use and exploit their natural wealth and resources is inherent in their sovereignty. In this vane, the Petroleum Act was enacted which vested the control of petroleum in Nigeria located under the territorial waters, continental shelf or EEZ Zone in the State, Section 1(1) Petroleum Act. OPEC has also mandated the government of member countries to participate through state entities.
The Nigerian government participates by entering into contracts and agreements with multinational companies like Exxon Mobil, Chevron/Texaco, and Agip through the Nigerian National Corporation (NNOC) before the Nigerian National Petroleum Corporation (NNPC) came to be.
Gas is also one of Nigeria’s great exports; it is converted to Liquefied Natural Gas (LNG) and exported to countries like Belgium, Italy, México, Portugal, Spain and the US. There has been a recurring issue of gas flaring in petroleum production which is dangerous to humans and the environment. Since the 1980s, there has been increasing utilization of gas in Nigeria for power generation, industrial heating, fertilizer and petrochemical manufacturing and as feedstock for direct steel reduction.
The Department of Petroleum Resources (DPR), an arm of the Ministry of Petroleum Resources, regulates the extraction of oil and gas. It monitors the operation of oil companies, enforces environmental standards, collects royalty and rents, issues licenses and permits and ensures that there is strict compliance with industry regulation. The Petroleum Act, Deep Offshore and Inland Basin Production Sharing Contracts Act, Nigerian Oil and Gas Industry Content Development Act 2010, Petroleum Profits Tax Act all regulate the Oil and Gas sector.
Before any oil production must take place in Nigeria, certain permits must be taken from the appropriate authority, this occurs in the form of licenses or lease. These licenses can be revoked by the Minister in the occurrence of certain events contained in paragraph 23 (1) of Schedule 1 of the Act. The permits are Oil exploration license (OEL), Oil prospecting license (OPL), Oil mining lease (OML). The Petroleum Act provides in Section 2(1); that the Minister of Petroleum may grant any of the licenses or lease created subject to the provisions of the Act. Section 2(3) also provides that a license or lease may be granted only to a company incorporated in Nigeria. A company must first obtain an OEL if it is interested in exploration; to explore the concession area, which is valid for a year and can be renewed for an additional one-year period if certain conditions have been met. If the OEL expires, the company can apply for it to be converted to an Oil prospecting license (OPL) so it can explore, carry away and dispose petroleum. The OPL shall not exceed five years, and the company can apply for the OPL to be converted to an Oil mining lease (OML). An OML allows the company to win, get, work, store, carry away, transport, export or otherwise treat petroleum discovered in or under the licensed area. The term of an OML is twenty years which can be renewed after obligations have been performed.
The rights in an Oil prospecting license or Oil mining lease can be transferred subject to the terms of the license. Transfer of interest in an OPL and OML is only available to companies incorporated in Nigeria and not foreign companies. Transfer of rights is checkmated by the 2014 Guidelines and Procedures for obtaining the Minister’s Consent to Assignment of Oil and Gas Assets or Interest. This gives instances when rights or interest in license or lease can be transferred. The rights can be transferred by an assignment, a mortgage or charge, in the process of mergers, acquisition or takeover, by divestment, or by transactions that can change the ownership, equity, rights or interests of the assigning parties. Ministerial consent and payment of the applicable fee is required before the holder of an OPL or an OML can transfer its interest to a third party.
To read Episode 1, click here.
ABOUT THE WRITER
Karen Okoro is a graduate of Benson Idahosa University and the Nigerian Law School. She is passionate about Energy Law, particularly the Oil and Gas sector. She is also interested in Commercial Law. Karen believes young and prospective lawyers who explore the energy space can be groundbreaking professionals in the field and can help create better policies. Karen enjoys writing and traveling.
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