ODUJINRIN & ADEFULU ENERGY BRIEFING NOTE JUNE 2012

Nigerias proposed oil and gas licensing round: two key legislations for DPR to consider
Dr Adeoye Adefulu

1. Introduction
The Department of Petroleum Resources (DPR), through its director, Mr Osten Olorunsola recently announced the governments intention to hold a new licensing round before the end of the year.1 It is not yet clear whether the licensing round will be focused only on marginal fields, full acreages or both. Whatever the focus, DPR will need to consider the legal implications of at least two federal legislations which have been signed into law since the last licensing round in 2007 the Nigerian Oil and Gas Industry Content Development Act 2010 (the Local Content Act) and the Public Procurement Act 2007. This Note will consider the effect of provisions of these Acts on the proposed licensing round(s) and suggest steps which the DPR may take to ensure its compliance in the process. The Note begins by reviewing the relevant provisions of the Local Content Act, before analysing the effect of the Public Procurement Act and drawing general conclusions for DPR.

2. The Local Content Act

2.1.Background
The Local Content Act was signed into law in April 2010, with the objective of fostering the development of Nigerian Content2 in the Nigerian oil and gas industry. The Act imposes targets for the use of various oil industry services, sets compliance obligations and establishes the Nigerian Content Development and Monitoring Board (the NCDMB) to monitor and implement the provisions of the Act. The Local Content Act applies to all matters pertaining to Nigerian content in respect of all operations or transactions carried out in or connected with the Nigerian oil and gas industry.3 This Note focuses on three important provisions in the Local Content Act, which may have implications on the conduct of the forthcoming bid round. These are: the requirements under section 3 to give first consideration to

Sweet Crude, Nigeria plans new licensing round http://sweetcrudereports.com/2012/03/05/nigeria-plans-newlicensing-round/, last visited on the 27th of April, 2012, Chika Amanze-Nwachukwu, Finally, FG to hold Oil Licensing Round this Year, http://www.thisdaylive.com/articles/finally-fg-to-hold-oil-licensing-round-thisyear/110676/ last visited on the 27th of April, 2012. 2 Nigerian content is defined as the quantum of composite value added to or created in the Nigerian economy by a systematic development of capacity and capabilities through the deliberate utilization of Nigerian human, material resources and services in the Nigerian oil and gas industry. See section 106 of the Local Content Act. 3 See section 1 of the Local Content Act.

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Nigerian operators; for Nigerian content to be utilized as a criterion in license awards; and the provisions relating to Nigerian Content Plans.

2.2. First Consideration to Nigerian Operators

Section 3(1) of the Local Content Act provides that Nigerian independent operators shall be given first consideration in the award of oil blocks4, oil field licences, oil lifting licences and in all projects for which contract (sic) is to be awarded in the Nigerian oil and gas industry subject to the fulfilment of such conditions as may be specified by the Minister. These provisions clearly apply to the proposed licensing round and DPR will need to consider its implications. 2.2.1. Who is a Nigerian Independent Operator? The provisions in section 3(1) are for the benefit of the Nigerian independent operator. This phrase is however not defined under the Local Content Act and raises ambiguities as to whom it applies. We are not aware of any judicial interpretation of the phrase and the NCDMB has not issued any guidelines which provide a clear definition of a Nigerian independent operator. The phrase Nigerian company is however defined, but not utilized through the Act. A Nigerian company is defined as a company formed and registered in Nigeria in accordance with the provision of the Companies and Allied Matters Act with not less than 51% equity shares held by Nigerians.5 In view of the overall objective of the Act, which is to increase the involvement of Nigerians in the oil and gas industry, it is submitted that a Nigerian independent operator may validly be interpreted as a Nigerian company, as defined under the Local Content Act, carrying out upstream activities in the Nigerian oil and gas industry. 2.2.2. What is First Consideration and how is it applied? Again the concept of first consideration which is used a number of times in the Local Content Act is not defined under the Act and no guidelines have been issued to clarify how it is to be treated. In the absence of such definition or guidelines, the DPR will need to apply the literal interpretation of the phrase in determining what first consideration means. This will therefore mean that in seeking to award acreage, DPR is required to first look at bids made by Nigerian independent operators. This may be done by opening bids only to Nigerian companies at first and where these bids have proven insufficient for any reason, to then open up bids to non-Nigerian companies (in the sense of the definition under the Act). DPR may also be guided by the treatment of this concept in other jurisdictions. In Canada, two of its jurisdictions require the application of first consideration principles to local content matters in the oil and gas industry the provinces of Nova Scotia and Newfoundland & Labrador.6 We will examine the Nova Scotia treatment of first consideration here. Under the CanadaNova Scotia Offshore Petroleum Resources Accord Implementation (Nova Scotia) Act 7 (Accord Act), an operator is required to commit to providing first consideration to the residents of Nova Scotia in

4 5

Emphasis added Section 106 of the Local Content Act 6 See www.cnsopb.ns.ca and www.cnlopb.nl.ca for details on the local content regimes in Nova Scotia and Newfoundland & Labrador Provinces respectively. 7 See <http://www.cnsopb.ns.ca/pdfs/ProvAct.pdf> last visited on the 9th of May 2012.

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employment and training opportunities and the supply of goods and services.8 In the guidelines issued by the Canada-Nova Scotia Offshore Petroleum Board (CNSOPB) for the preparation of Benefits Plans9 by operators, the CNSOPB does not define first consideration but requires operators in applying this principle to employment, to first establish the requirements for employment and once these are established, the operators must look first to the Nova Scotia labour market to meet its human resources needs. Any resident of Nova Scotia who meets the requirements must be given preference over nonresidents. In application to the proposed bidding round, DPR may first set out requirements or conditions for potential licensees and where DPR has established these requirements, it must look first to Nigerian independent operators in assessing the bids. Where Nigerian independent operators are able to meet the requirements, preferential treatment must be granted to such companies. It should be noted that Section 3(1) allows the Minister of Petroleum Resources to specify conditions under which Nigerian independent operators may be given first consideration. The Act does not provide any details as to the mechanics of this process, nor does it provide guidelines as to the content of such conditions. The Minister may therefore issue the conditions entirely at his discretion. The Minister is yet to issue conditions under section 3(1).

2.3. Nigerian Content as Award Criterion

Section 3(3) of the Local Content Act provides that compliance with the provisions of this Act and promotion of Nigerian content development shall be a major criterion for award of licences, permits and any other interest in bidding for oil exploration, production, transportation and development and any other operations (sic) in Nigerian oil and gas industry. Under Section 2 of the Petroleum Act 1969, the Minister has absolute discretion to issue exploration and production licences. The provisions of section 3(3) appear to curtail this discretion by requiring that the award of licences must require at least one criterion compliance with the provisions of the Local Content Act and the promotion of Nigerian content development. The effect is that where the Minister or his delegate(DPR), exercises discretionary power to award licences under the Petroleum Act without considering the provisions of section 3(3) of the Local Content Act, such an award may be validly challenged in a court of law. In preparation for the forthcoming bid rounds therefore, the DPR must include past local content compliance and promotion in its award criteria, and explicitly consider how it proposes to assess this criterion. The bid documentation must include the necessary details to demonstrate DPRs compliance with this legal obligation.

2.4. Nigerian Content Plans

The Local Content Act in section 7 requires operators10 to submit Nigerian Content Plans to the NCDMB demonstrating compliance with the Act in bidding for any licence, permit or interest and before carrying out any project in the Nigerian oil and gas industry. The provisions are broad and appear to suggest that bidders must submit a Nigerian Content Plan even when bidding for an acreage licence. It should be

8 9

See section 45(3) of the Accord Act Benefits Plans are the equivalent of the Nigerian Content Plan. 10 Operator is broadly defined as including any Nigerian, foreign or international oil and gas company operating in the Nigerian oil and gas industry under any petroleum arrangement. See section 106 of the Local Content Act.

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noted that in considering Nigerian Content Plans, the NCDMB may conduct a public review.11 The Nigerian Content Plan must contain provisions that ensure that first consideration shall be given to services provided from within Nigeria and to goods manufactured in Nigeria. Additionally, it must include provisions that ensure that Nigerians are provided first consideration for training and employment.12 The requirement for submission and approval of Nigerian Content Plans has practical implications for any bidding process organized by DPR. Sufficient time would need to be provided for Nigerian Content Plans to be prepared by bidders and for NCDMB to consider and issue certificates of authorizations as required under section 8 of the Local Content Act.

3. The Public Procurement Act

The Public Procurement Act was signed into law in June 2007. The objective of the legislation was to regulate the Federal Government and related agencies procurement process. The general aim of the Act is to ensure that procurement is conducted to achieve value for money for the Nigerian government. The Act establishes the Bureau of Public Procurement (the Bureau) and the National Council of Public Procurement (the Council), which oversee the implementation of the Act.13 For the purpose of this discussion, the Act also includes provisions regulating the disposal of public property.

3.1. The Public Procurement Act and the Disposal of Public Property
Sections 55 and 56 specifically provide for the disposal of public property. Section 55 provides that open competitive bidding shall be the primary source of receiving offers for the purchase of any public property offered for sale.14 The section also grants the Bureau certain powers in relation to the disposal of public property, subject to the approval of the Council. Such powers include: The ability to determine the applicable policies and practices with respect to the disposal of all public property; and The power to issue guidelines which detail operational principles and modalities to be adopted by all procuring entities engaged in the disposal of public properties.15

For the purposes of the Public Procurement Act, a procuring entity shall also be a disposing entity. 16 Procuring entities have been defined as any public body engaged in procurement and includes a

11 12

Section 9 of the Local Content Act Section 10 of the Local Content Act 13 Since the passage of the Public Procurement Act in 2007, the Council has yet to be inaugurated. See News Diary, Senate urges Jonathan to inaugurate National Council on Public Procurement, <http://newsdiaryonline.com/senate-urges-jonathan-to-constitute-national-council-on-public-procurement/>, last visited on the 9th of May 2012. 14 See subsection 3. 15 See subsection 4. 16 Section 55(2) of the Public Procurement Act

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Ministry, Extra-Ministerial office, government agency, parastatal and corporation.17 This definition thus applies to DPR.

3.2. What is Public Property?

Section 55(5) defines public property as resources in the form of tangible and non-tangible assets (ranging from serviceable to the unserviceable) (a) (b) (c) (d) (e) created through public expenditure acquired as a gift or through deeds acquired in respect of intellectual or proprietary rights acquired on financial instruments (including shares, stocks, bonds, etc.); and acquired by good will and any other gifts of the Federal Government.

The most appropriate heading with respect to oil acreage is 55(5c) and in particular the proprietary rights element of the subsection. Proprietary rights denote entitlements that accrue from ownership. 3.2.1. Disposal under the Procurement Act The Public Procurement Act provides for the means of disposal of public property to include: (a) (b) (c) (d) (e) sale and rental; lease and hire purchase; licenses and tenancies; franchise and auction ; transfers from one government department to another with or without financial adjustments; and (f) offer to the public at an authorized variation. 3.2.2. Oil Acreage as Public Property Under the Nigerian constitution and the Petroleum Act 1969, ownership of petroleum on Land, Territorial Waters, Continental Shelf and the Exclusive Economic Zone is held by the Federal Government. The Federal Government thus has ownership or proprietary rights over petroleum in situ. The DPRs right to award acreage derives from the Ministers powers under section 2 of the Petroleum Act. Under the Act, the Minister may grant a licence or a lease to, amongst others, prospect and exploit petroleum in situ. The licence/lease is an exclusive right over a fixed period to find, develop and carry away, petroleum which otherwise would have belonged to the Federal Government. The licensing of acreage for development by private investors may thus be validly regarded as the disposal of public property.

17

Section 60 of the Public Procurement Act

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3.3. Effect of Public Procurement Act on the Licensing Round

ODUJINRIN & ADEFULU ENERGY BRIEFING NOTE JUNE 2012

The Public Procurement Act imposes a number of obligations on the Procuring Entity and provides certain rights for bidders in relation to the disposal of public property. (a) Open Competitive Bidding: As previously stated Section 55(3) provides that open competitive bidding shall be the primary source of receiving offers for the purchase of any public property offered for sale.18 This provision recognizes that public property may be disposed by other methods. Where other methods are to be used in a licensing round however, DPR as the procuring entity would need to show, at a minimum, that it has explicitly considered using open competitive bidding and that for good reasons, this method would not be satisfactory. Where such an explicit process is not undertaken, the entire round may be open to an administrative review as discussed below.

The Act defines open competitive bidding as the offer of prices by individuals or firms competing for a contract, privilege or right to supply specified goods, works, construction or services.19 This definition appears to apply to procurement as opposed to disposals by a procuring entity. An additional description of open competitive bidding may be found in section 24(2), which provides that Any reference to open competitive bidding in this Act means the process by which a procuring entity based on previously defined criteria, effects public procurements by offering to every interested bidder equal simultaneous information and opportunity to offer the goods and works needed. Whilst this description appears also skewed in favour of a procurement exercise, the purport of the provisions for a disposal process may be elicited. In relation to a disposal exercise, open competitive bidding will require: Previously defined criteria by the procuring entity; and Equal, simultaneous information and opportunity to, in this case, acquire a license/lease

Where either of those two factors is absent, open competitive bidding under this Act has not taken place.

(b) Independent valuation: Section 56 of the Public Procurement Act requires the Accounting Officer20 of the procuring entity to authorize the preparation of a valuation report by an independent evaluator or any professional with the appropriate competence to carry out the evaluation of the public property to be disposed. DPR will need to assess the value of the acreage to be disposed before carrying out a bidding round.

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Emphasis added Section 60 of the Public Procurement Act 20 The Accounting Officer is defined as, the person charged with line supervision or the conduct of all

procurement processes. See section 60 of the Public Procurement Act. 6

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(c) Maximisation of Revenue: Section 56 also requires that the disposal of assets shall be timed to take place when the most advantageous returns can be obtained for the asset in order to maximize revenue for the government. The provision is mandatory therefore DPR must explicitly take this factor into consideration in determining when to hold a licensing round. (d) Administrative Review: Section 54 of the Public Procurement Act provides bidders with an appeal process. A bidder may seek an administrative review where there has been an omission or breach of the Act, regulations, guidelines or the provisions of the bidding documents. The complaint may first be submitted to the accounting officer of the disposing entity, after which it may be escalated to the Bureau of Public Procurement. The Bureau may suspend any further action on the matter pending its resolution of the matter. It may also nullify in whole or in part any unlawful act taken by the disposing entity as well as revise or substitute an improper decision taken by the disposing entity. A further appeal may lie to the Federal High Court, where the bidder is dissatisfied with the process. This provides bidders in an oil licensing round with a process by which any perceived violations of the Act or indeed of its own bid documents by DPR or its officials may be heard. (e) Powers of the Bureau: In addition to the powers of the Bureau detailed above in relation to the appeal process, it is also vested with additional powers under the Act. These include the power to recommend to the Council to: suspend officers concerned with the disposal proceeding in issue;21 the replacement of the head or any members of the disposal unit of any entity;22 the temporary transfer of the disposal functions of a disposing entity to another agency or consultant.23

(f) Obligations on procurement officers: The Public Procurement Act places obligations and responsibilities on public officers involved in the disposal of public property. These include: an obligation to act on the basis of the principles of honesty, transparency, accountability, fairness and equity in the disposal of public property.24 A responsibility to ensure that there is adequate time to prepare offers and to act in accordance with the provisions of the Act and any derivative regulations.25 A requirement to maintain the highest standards of ethics in their relationships with bidders.26

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Section 6(I)(i) of the Public Procurement Act Section 6(I)(ii) of the Public Procurement Act 23 Section 6(I)(iv) of the Public Procurement Act 24 Section 57(5) of the Public Procurement Act 25 Section 57(7) of the Public Procurement Act 26 Section 57(8) of the Public Procurement Act

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An obligation on public officers to avoid conflict of interests.27

4. Concluding Remarks
The provisions of the legislations discussed above impose binding legal obligations, which DPR and its officers must consider in preparing for future licensing rounds. They limit the absolute discretionary power which the Minister had hitherto held regarding acreage awards, and help to foster transparency and accountability in the award process. Additionally, the provisions will help to encourage indigenous participation in exploration and production activities in the oil and gas industry. The powers of the Minister under section 3(1) of the Local Content Act also provide an opportunity to facilitate the emergence of a crop of indigenous companies with the financial and technical expertise to carry out oil and gas operations. It should be noted that DPR officials may be subject to penalties under the Public Procurement Act for any breach. Additionally, the failure to fulfil the obligations under both Acts may lead to a cancellation of the process by the Bureau or to intervention by NCDMB. The Acts also provide a foundation for aggrieved bidders to seek judicial and or administrative review of the actions of government officials.

We hope you find the information contained herein useful. This Note is for general purposes and guidance only and should not be regarded as legal or professional advice. Any questions, comments or clarifications may be directed to:

Dr Adeoye Adefulu Partner, Energy Practice Team 08022240888 adeoye.adefulu@odujinrinadefulu.com

27

Section 57(9), (10), (11) & (13) of the Public Procurement Act

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