Federal Government Proposed Sale of Joint Venture Oil Assets: Matters Arising
This article by Sola Adepetun, discusses the matters arising from the Government’s decision to boost its revenue generation, by reducing its stakes in the petroleum arrangements in which it holds direct proprietary interests, through NNPC and its subsidiaries
In view of the frailties of her economy, Nigeria faces a challenging economic future. The Nigerian Government (“FGN”) requires large funding to boost revenue generation and promote operational efficiency in the oil and gas industry, which is a critical component of her economy. One of the ways the FGN intends to achieve this, is by reducing its stakes generally in the petroleum arrangements in which it holds direct proprietary interests through the NNPC and/or its subsidiaries. Its considerations would include, the traditional JV arrangements (“TJV”) (between the NNPC and the major IOCs), or the joint venture agreements entered into between the NNPC/NPDC (an NNPC subsidiary) and Nigerian independent oil and gas companies, following the 2010/2013 asset divestments by the IOCs in oil and gas assets (“NJVs”).
Traditional Joint Venture Arrangements
TJVs have been in existence for many years, and have been between the NNPC and IOCs, including the Nigerian subsidiaries of the Royal Dutch Shell Group (Shell), ExxonMobil, ENI/ Agip, Chevron and Total. The TJVs are particularly unique, due to their peculiar historical development and strategic importance in the Industry.
The FGN first indicated its readiness to increase revenue by reducing its stake in its TJV oil assets and other non-oil assets in February 2017, under the Economic Growth and Recovery Plan for 2017-2020 which was released by the Ministry of Budget and National Planning. The 2019 Appropriation Bill, further shows the FGN’s commitment to this goal. While presenting the 2019 executive budget, the erstwhile Minister for Budget and National Planning, Senator Udo Udoma, disclosed the FGN’s aim to reduce its stakes in TJV oil assets, to 40% this year.
This is not an entirely distinctive proposal, as there is precedent for the sale of the government equity in oil assets. In 1989, the FGN divested 20% of its interests in the TJV among the NNPC, Shell, AGIP and Elf (Nigeria) Limited (“Elf”) (now Total) (the “ShellNNPC TJV”) to Shell and Elf. In 1993, the FGN further reduced its stake in the Shell-NNPC TJV, by selling 5% of its interest to Total. This resulted in the current structure of the Shell-NNPC TJV being NNPC 55%, Shell 30%, Total 10%, and Agip 5%.
Apart from the FGN’s direct reference to its proposed divestment of interests in the TJVs, it is likely that such divestments will to extend to the NJVs, although this has not been specifically announced.
Be that as it may, while the proposed sale of FGN’s interests in JV arrangements may be an attractive prospect for oil producers/financiers, the practical modalities and the procedure for the divestment would ultimately determine the viability of the acquisition.
Rights and Obligations under the Joint Operating Agreement (“JOA”)
Based on the example of the Shell-NNPC TJV, it is clear that, the contractual arrangements which govern the TJVs are critical in determining how an FGN divestment should occur. The legal relationship among concurrent owners of an oil asset, is usually governed by a JOA which details defining rules and procedures for the joint development of the underlying asset. Therefore, any proposed sale of stakes in a TJV asset, would be subject to the provisions of the relevant JOA between the NNPC and the applicable IOCs.
A particularly illustrative TJV JOA is the Shell-NNPC TJV JOA of 1991 (the “1991 JOA”). While the 1991 JOA provides that each party shall have the right at any time to divest itself of its proprietary interest in the asset, including its rights, title, interests, benefits, duties and obligations, the exercise of this right is subject to certain conditions including that:
(i) No party may transfer or assign its interest without the prior written consent and approval of the nonassigning parties to the TJV, which consent shall not be unreasonably withheld.
(ii) Where a party receives an offer from a third-party, which it desires to accept, the non-assigning parties have preferential rights and first option to acquire the equity to be transferred. The assigning party shall first give notice to the non-assigning parties specifying the name and address of the third-party and the terms and conditions of the proposed assignment. Upon receiving the notice, a non-assigning party may within 30 days, request the assignment of such equity to it. However, where the nonassigning parties fail to request for the assignment, the assigning party may assign or transfer the equity interest to the third-party not later than one year from the date of the notice to the
“.....WHERE THE SALE PROCESS IS CARRIED OUT IN A TRANSPARENT, OPEN, AND COMPETITIVE MANNER, AND THE PROVISIONS OF THE GOVERNING JOA’S ARE COMPLIED WITH, THE SALE OF NATIONAL ASSETS IS NOT, IN ITSELF, UNCONSTITUTIONAL, NOR WOULD IT PREJUDICE THE RIGHTS OF NIGERIA OR ITS CITIZENS”
non-assigning party.
(iii) The assigning party must have fully performed all its duties and obligations under the JOA, up to the effective date of the assignment or transfer.
Important Considerations under the JOA
While the 1991 JOA is merely an example, and the relevant TJV may have other specific terms relevant to divestment, it is however, standard for every model JOA to contain restrictions and general provisions for divestment of proprietary interests in an oil asset.
Under the referenced provisions of the 1991 JOA for instance, the existence of preferential rights means that the NNPC is contractually obliged to first offer equity interests to the other TJV parties, before it can assign or transfer its equity to any third-party. This comes with an inherent complication, as interested third parties may be reluctant to place offers or seriously negotiate on terms, for an asset acquisition that is already subject to the prerogative of an existing JV party exercising a right of first refusal.
Furthermore, an assigning party is expected to resolve all outstanding contractual obligations under the JOA, up to the date of the assignment. Notwithstanding this requirement, there have been cases where the NNPC has assigned its equity to a JV partner, despite being in default of cash call obligations under the JOA – but it is not clear how third-party purchasers will consider this legacy obligation.
The Constitution There has been some discussion surrounding whether the sale of national oil assets, is constitutional. Specifically, it has been argued that, the sale of national oil assets violates Sections 16(2) and 44(3) of the Constitution of the Federal Republic of Nigeria 1999 (as amended) (the “Constitution”).
Section 16(2)(c) of the Constitution provides as follows:
“The State shall direct its policy towards ensuring... that the economic system is not operated in such a manner as to permit the concentration of wealth or the means of production and exchange in the hands of few individuals or of a group...”
The argument has been made that, the sale of national oil assets to private companies may result in the concentration of wealth in the hands of a few individuals or of a group, in breach of Section 16(2) (c). While it is understood that the sale of national assets should not in any case be to the detriment of the people of Nigeria, it may not be correct to suggest that any proposed sale of national assets is inherently disadvantageous to the country and citizenry, especially in light of the legislative requirement for transparency in the award of oil and gas assets, and where the revenue generated from such disposals are deployed into sustainable development projects such as infrastructure, housing, employment opportunities, etc, it will directly benefit the citizens of Nigeria.
The Nigerian National Petroleum Policy of 2017 (“NNPP 2017”)
The NNPP 2017, which was released by the Ministry of Petroleum Resources and approved by the Federal Executive Council, stipulates under Paragraph 7.3.2 that all petroleum blocks, licences, leases, licence renewals and licence extensions will be awarded following a transparent competitive process. Consequently, the bidding process for any sale of the FGN’s equity, must be conducted in a transparent and competitive manner. It is noteworthy that, even where a third-party emerges as the preferred bidder, the NNPC cannot resile from its contractual obligations (AG Rivers State v AG Akwa Ibom State & Anor (2011) 8 NWLR (PT 1249) 31), and therefore, remains subject to the obligation to grant first rights of refusal to existing JV partners. JV partners are typically entitled to acquire the assignment of such proprietary interest on the same, or better terms as those agreed with any such third- party preferred bidder.
It should be mentioned that, the NNPP 2017 also contemplates the transition from the current JV model to an incorporated joint venture (“IJV”) model. While this transition may require the termination of the existing JOAs, JV partners would still need to provide their consent, and it would be well within their interest to insist that their pre-emption rights are carried over into and maintained under the IJV regime.
Having considered the provisions set out above, it can be argued that, where the sale process is carried out in a transparent, open, and competitive manner, and the provisions of the governing JOA’s are complied with, the sale of national assets is not, in itself, unconstitutional, nor would it prejudice the rights of Nigeria or its citizens.
Conclusion
The proposed sale of part of the FGN’s stake in various JV assets is an attractive proposition, as the FGN is in urgent need of capital to execute its policy objectives. It is also not an unprecedented act, and as such, should not bring about much cause for concern, as long as it is conducted in accordance with the provisions of: (i) the agreements and procedures which govern the operation of the said assets; and (ii) the NNPP 2017, as it relates to bidding and award processes.