FARM-OUTS OF MARGINAL FIELDS IN THE NIGERIAN OIL AND GAS INDUSTRY: A LEGAL OVERVIEW
On the 5th of May, the Group Managing Director of the Nigerian National Petroleum Corporation, Mallam Mele Kyari, announced that the Federal Government was set to conduct bidding rounds for marginal fields. Subsequently, this announcement was affirmed by other officials in the oil and gas industry. Should the bidding rounds be conducted, 56 marginal fields would be up for bidding– and it would mark the first national bidding round for marginal fields since 2003, and the second in the history of Nigeria.
The Petroleum Act defines a farm-out as an agreement between the holder of an oil mining lease and a third party, which permits the third party to explore, prospect, win, work or carry away any petroleum encountered in a specified area, during the validity of the lease” (emphasis is mine). Marginal fields, on the other hand, are defined by the Department of Petroleum Resources’ Guidelines for Farmout of Marginal Fields, 2013 as fields which possess oil and gas reserves, and which have remained unproduced for a period of over ten years. These fields are usually characterised by relatively low oil or gas reserves, low viscosity or high API gravity, and oil wells which are close to abandonment or plugging.
NATURE OF FARM-OUT AGREEMENTS
In a farm-out agreement, there are usually two parties– the farmor and the farmee. The farmor farms out his lease by granting interest, whilst the farmee farms in by acquiring interest in the lease. In essence, in virtually every farm out agreement, there is the farmor who, usually due to shortage of funds and the availability of acreage, wishes to farm out his interest in a lease. Then, there’s the farmee, who has enough funds, but is in need of acreage. This is the backdrop for farmout agreements.
According to Paragraph 17 of the First Schedule of the Petroleum Act, 1969(as amended), farm-out agreements may be conducted in two ways:
• Voluntary farm-out of a marginal field by an Oil Mining Lease (OML) holder, subject to the conditions as may be approved by the President.
• The conduction of bidding rounds for marginal fields by the President (through the Department of Petroleum Resources), provided that such marginal fields have been left unproduced, undeveloped or unattended to, for more than 10 years. (See Sub-paragraph 2 of the Schedule).
Where bidding rounds are conducted by the Department of Petroleum Resources, guidelines are usually issued to prospective bidders. These guidelines would include information on payments, eligibility, timeline of the process, method of selection, and proposals. After a winner is picked, the winner may proceed to pay a signature bonus– a one-off amount paid by working interest owners in order to seal the acquision of an interest– and then negotiate with the farmor on necessary terms and conditions of the agreement.
TERMINATION & RENEWAL
Para. 17 of the Guidelines for Farmout and Operations of Marginal Fields, 2013, states that a farmout agreement may be terminated on two grounds. The first is where after 60 months of the approval of the agreement, the marginal field operator cannot provide concrete or verifiable proof of the considerable development and operation of the field. The second is where the parties voluntarily agree to terminate the agreement, after which the farmee would be mandated to provide a written notice of not less than 90 days to the Department of Petroleum Resources.
Para. 18, however, states that where the marginal field operator provides solid evidence of satisfactory development in the field, the farm-out may be renewed “in accordance with the law”. The law referred to in this provision is rather unclear. Also, there are other contentious issues that may arise. One of such issues is where an OML expires before or right after the 60 months benchmark for assessment of marginal fields. There is also the question of what would become the rights of a farmee, where the Oil Mining Lease– the crux of the farm-out agreement– is revoked.
FISCAL TERMS
Most farm-out agreements take the form of a sublease. The OML holder, acquires the license from the Minister (through the Department of Petroleum Resources); the interest in the licence is then farmed out by the OML holder (the farmor), to a third party (the farmee). Regulation 2 of the Marginal Fields Operations (Fiscal Regime) Regulations, 2005, states categories of royalties due to the government, according to the level of production undertaken in marginal fields. For productions below 5,000 bopd (barrels of oil per day), the farmee is mandated 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 between 10,000 and 15,000bopd, and 18.5% for between 15,000 and 25,000 bopd. However, under this arrangement, there are still additional lease burdens. The farmor possesses an overriding royalty interest. What this means is that just as the farmee is mandated to pay royalties to the government (the mineral rights owner), the farmee must also pay a certain percentage as royalties to the farmor– based on a percentage agreed between both parties. Hence, the presence of an overriding royalty interest.
CONCLUSION
In conclusion, although farm-out agreements are a viable tool for encouraging local participation, they have proved ineffective over the years. A large number of the marginal fields awarded during the 2003 bidding rounds, have laid fallow and unproductive. This disturbing state of affairs can be rectified through a more transparent bidding process, and an amendment to the Petroleum Act in order to reflect a mandatory conduction of marginal field bidding rounds, every ten years. Also, it is pertinent to ensure the effective implementation of marginal field guidelines issued by the Department of Petroleum Resources. All farm-out agreements for marginal fields which have been unproductive should be compulsorily terminated with the interests sold to other parties. This would in turn, sharpen the effectiveness of marginal fields and give more small scale oil and gas companies, the opportunity to expand production on acreages and reserves.
REFERENCES
Adedapo Adesanya, FG to Auction Small Oil Fieldsʼ (Business Post, 6 May 2020) <https://www.google.com/amp/s/businesspost.ng/economy/fg-to-auction-small-oil-fields/> accessed on 11 May 2020
Department of Petroleum Resources (DPR), 2018 Nigerian Oil and Gas Industry Annual Report, DPR: Abuja, Nigeria.
Guidelines for Farmout and Operations of Marginal Fields, 2013
Isaac Anyaogu,Marginal Fields, Major Headachesʼ (Business Day, 18 June 2019) https://businessday.ng/energy/article/marginal-fields-major-headaches/amp/ accessed on 9 May 2020
Marginal Fields Operations (Fiscal Regime) Regulations, 2005
Petroleum Act, Cap P10, LFN 2004
AUTHOR
Oyin Komolafe is a third-year law student of the University of Ibadan. Her interests cut across oil and gas law, maritime law, as well as sexual and reproductive health law. She is currently a Prosecutor of the Faculty of Law, University of Ibadan.