Last Friday, President Muhammadu Buhari took a major step to save the country from a diplomatic dispute with the Chinese Government by overriding the revocation made by the Department of Petroleum Resources on four oil blocks.
The oil licences affected are OMLs 123, 124, 126 and 137.
The action of the President saved the country from being embarrassed both locally and internationally particularly at a time when the government is working very hard to attract the much-needed investments to stimulate the economy and reposition it to the path of growth.
As a background, the NNPC/Ashland Production Sharing Contracts (PSCs) on OMLs 123/124 (formerly OPL 98) and 126/137 (Former OPL 118) signed in 1973 was terminated after 25 years of operation.
Thereafter, the NNPC signed another PSC with Addax in 1998 on the same OMLs which were guided by the Petroleum Act and the Petroleum Profit Tax Act. The Addax PSC is premised on OMLs 123 and 124 considered as one Contract Area and OMLs 126 and 137 considered as one Contract Area.
In August 2009, Sinopec spent the sum of $7.24bn to acquire the Switzerland-based Addax Petroleum as its largest-ever foreign oil acquisition. These acquired assets include the referenced assets, OMLs 124/124 and 126/137 (in Nigeria) and other assets in Gabon, Cameroon, and Iraq.
Interestingly, OMLs 123, 124 & 126 are currently producing while OML 137 is a green field. The portfolio has 2P oil reserves of about 452 million barrels and 5 Trillion standard cubic feet of gas.
The current oil and gas production is about 25kbopd and 63MMscfd, respectively. Addax, being a PSC in the onshore and shallow waters did not enjoy the more attractive fiscal system for Deep-Water PSC which has a lower tax rate of 50 percent and higher ITA of 50 percent compared with the higher tax rate of 85 percent and lower Investment Allowance of 5-10 percent obtainable in the onshore/Shallow water.
To address these less favourable terms, the concession in 2001 secured incentives that were effectively retroactive from January 01, 2000 vide a Side Letter from the Office of the Presidential Adviser on Petroleum and Energy Matters to the effect that PPT rate reduced from 85 percent to 60 percent, Investment Tax Allowance increased from 5 per cent/10 per cent (onshore/offshore) to 25 percent/40 percent and royalty changed from sliding scale based on total production to tranches based varying royalty rates.
Therefore, the Side Letter took effect from 2000 until 2012 when DPR and the Federal Inland Revenue Service advised that Petroleum Act and the Petroleum Profit Tax Act should govern the PSCs on the premise that a Side letter without an act of legislation could not amend a law and NNPC implemented this directive effective 2013.
Dissatisfied by this development, ADDAX filed a suit against DPR and FIRS in the Federal High Court and joined NNPC as co-defendant to restrain the Agencies from applying PA and PPTA. The FHC issued an Interim Order in January 2015 for parties to maintain ‘Status-Quo’ pending the outcome of the suit.
In May 2015, the FHC ruled that parties to the suit should conduct a reconciliation exercise to determine the under/over lift position and establish a framework for recovery. Subsequently, there was a Presidential Approval that the Addax Side Letter should be terminated by December of that year (2015).
To implement the Presidential directive, a revised settlement agreement was developed by parties to the PSCs in a meeting attended by NNPC, Addax, DPR, FIRS, Ministry of Petroleum Resources, Office of the Auditor General of the Federation, Office of the Attorney General of the Federation, and all parties endorsed the settlement agreement except the FIRS.
The non-endorsement of the Agreement by the FIRS affected the vacation of the initial FHC ruling and the full implementation of the Presidential directive and this paved an opportunity for Addax to initiate the current Notice of enforcement of the FHC ruling of May 27, 2015 that seeks to uphold the applicability of the side letter.
Since then, Addax has significantly reduced spending on the blocks and has been consistent in requesting for fiscal and/or commercial incentives to develop new fields.
While revoking the oil block license on April 7, the Department of Petroleum Resources claimed that it took the action because of the non-development of the assets by the petroleum company.
The Director/Chief Executive Officer, DPR, Mr. Sarki Auwalu, had told journalists in Lagos that it was discovered that over 50 percent of the assets had remained underdeveloped.
He alleged that the non-development of the assets had led to the loss of revenue by the Federal Government.
But the revocation by the DPR which was done without the necessary due process has serious legal, commercial and diplomatic implications for Nigeria.
Curiously, in carrying out the revocation, the DPR failed to highlight during the revocation of the license the fact that Addax has not been investing in capital projects, development drilling and exploration activities due to the dispute on applicable fiscal terms on its blocks.
Surprisingly, the revocation is coming few months after Addax had last year pledged to invest between $3.5bn and $5bn in Drilling and Associated Facilities Development contingent on securing contract extension under a viable economic, fiscal, and commercial term.
Interestingly, from the legal perspective, the DPR erred in law because its action was not done in line with the provisions of Paragraph 25 (1) of the First schedule of the Petroleum Act which states that the revocation of an oil mining lease is within the purview of the Honourable Minister of Petroleum Resources.
Based on the provision of the Act, the Minister of Petroleum Resources through the regulator (DPR) is to inform the Licensee of the infractions and give the Licensee time to respond or rectify the situation prior to such revocation.
Curiously, based on available information, from sources in the Oil Industry in respect of the revocation, the stipulated provision was not adhered to by the DPR as the NNPC being the licensee only got to know about the revocation from a rumour that started in social media then subsequently confirmed by a letter from the DPR addressed to Addax.
According to the Petroleum Act, DPR ought to inform NNPC of any infractions in relation to the operation of lease and give adequate time to provide appropriate explanations on the said infractions as well as reasonable time to remedy the alleged infractions.
Undoubtedly, based on the provision of the law, the proper procedure for revocation would have been to direct the revocation to NNPC, then the Corporation will be obligated to properly communicate the situation to the PSC Contractor and terminate the PSC on the basis that the underlying leases have been revoked.
From all indications, the revocation action of the DPR could be likened to a case of transferring an asset from the commonwealth to a chosen private estate. Industry watchers are of the view that if this procedural error was allowed to stand, it could have led to a serious legal dispute if Addax had commenced legal action against NNPC and the Federal Government.
Even if Addax does not contest the legality of the revocation process, they may still have grounds to make claims in respect of cost recovery of outstanding expenditure or consequential losses such as profit against NNPC and thus indirectly the Government.
From the diplomatic perspective, it should also be noted that if the President had not intervened, the revocation by DPR would have affected the very good diplomatic relationship between Nigeria and China.
This is because China which is the parent country of Addax is the largest trading partner of Nigeria, representing over 20 percent of international trade and almost three times the next largest trading partner.
In addition, China has also provided financing for key infrastructural projects like the railways, Abuja -Kaduna -Kano Pipeline amongst others. The implication of the revocation action is that the realisation of these critical projects could be threatened.
In terms of the commercial implications, it should be noted that with three of the blocks actively producing and incurring costs, Addax may still have grounds to make claims in respect of cost recovery of outstanding expenditure. This is because the licenses of OMLs 123 and 124 will expire on July 1, 2022 while that of OML 126 will expire on November 24, 2024.
Also, it is a known fact that renewal negotiations and Head of Terms discussions are currently ongoing. Therefore, revocation at this time presents a hard bargaining point for the Corporation during negotiations as the Contractors may likely seek more stringent guarantees.
With such development, the NNPC would have required at least $1bn to settle the outstanding cost of oil liability, consequential losses such as profit, plus other liabilities such as severance for employees, abandonment, decommissioning and amortized capital expenses.
But thankfully, President Buhari’s intervention saved the nation from another embarrassment after the 2017 Korea National Oil Corporation’s case where the Supreme Court ruled that the decision of the Federal Government under President Yar Adua to void the allocation of Oil Prospecting Licenses 321 and 323 to the KNOC and re-award the oil blocks to ONGC/Owel Petroleum Consortium as illegal, procedurally unfair, unreasonable, and against the legitimate expectation of KNOC.