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19 April 2021
Longstanding Nigerian oil and gas policy dating from the award of oil and gas blocs to indigenous companies in the early 1990s specified in the letters of award that an awardee could not farm out more than a 40% equity interest in the asset to a foreign-owned company. This led to the general regulatory practice that a foreign-owned company could have an economic interest higher than 40% in a licence or lease, but not a higher equity interest. An additional layer of indigenous preference policy was added by Section 3 of the Oil and Gas Industry Content Development Act 2010, which provides that Nigerian independent operators will be given first consideration in the award of, among other things, oil blocs and oilfield licences. The act also defines a 'Nigerian company' as one that has no more than 49% foreign ownership. These indigenous preference policies will not be affected by the passage of the Petroleum Industry Bill.
The indigenous preference provisions have worked in tandem to spur the growth of Nigerian companies as oil and gas exploration and production (E&P) players, and several of these companies have had foreigners as their minority shareholders, as permitted by the act. These Nigerian companies have, in practice, been given not just first, but exclusive consideration in divestments by international oil companies since the enactment of the act. Following acquisitions or awards of assets by Nigerian companies, it has been unclear whether a foreign company can then buy a majority stake in the Nigerian company, especially where the equity stake of the Nigerian company in any underlying licence or lease does not exceed 40%. In some circumstances, the indigenous preference provisions may disadvantage the Nigerian economy as a whole and its oil and gas sector in particular. This article considers the current state of the law, policy and practice and argues that, in principle, there is no law forbidding or penalising the acquisition of majority stakes in Nigerian oil and gas E&P companies which qualify as Nigerian companies by foreign companies. In some circumstances, such acquisitions should even be encouraged because they may support the government in achieving what should be a more important objective.
Many Nigerian oil and gas E&P companies have provisions in their shareholders' agreements committing their shareholders to the preservation of their 'Nigerian company' status, as defined by the act. This a wholly contractual provision, largely for the benefit of the Nigerian shareholders. The advantage of such status lies only in the preference that such companies receive in grants and awards of licences and in divestments by international oil companies. With regard to divestments by other Nigerian companies, the main advantage of being a Nigerian company seeking to acquire such a company or its underlying licence or lease is that a Nigerian company has no policy limitations to the equity stake that it may acquire in the divesting company or its licence or lease. However, strictly speaking, there is no legal barrier or penalty for losing Nigerian company status. There would therefore be no breach of any law in forgoing the status and the preference that it bestows. The only barrier to such transactions at this time appears to be uncertainty as to how they would be regarded by the minister of petroleum resources and the Department of Petroleum Resources (DPR) – the industry regulator.
In principle, based on the act and the equity interest cap policy, a foreign company could acquire up to 100% of the shares of a Nigerian company, especially where the Nigerian company's equity interests in the underlying assets do not exceed 40%. The 40% equity interest restriction has never been interpreted to preclude the acquisition by foreign companies through the assignment or farm in of production sharing contract interests exceeding 40%, as shown by the CNOOC/Sapetro and Addax/Sinopec transactions. In some circumstances – such as loan default, insolvency or requirement for significant funding of exploration and development – the Nigerian authorities should arguably also allow the 40% equity cap to be exceeded by foreign companies.
As far as is known, the acquisition of a majority stake in a Nigerian company by a foreign company has not occurred in Nigeria since 2010, when the Oil and Gas Industry Content Development Act was enacted. There is therefore no known precedent for how the DPR and the minister of petroleum resources would respond. Parties contemplating such a transaction should engage in pre-transaction contacts with the DPR before proceeding. The minister and regulator may be persuaded to issue guidelines on their treatment of transactions in which Nigerian company status will be lost. There are benefits of clarifying the policy position on this issue in an era of transition away from fossil fuels in which a resource-laden Nigeria should want to maximise its fossil fuel endowment. The case for allowing such transactions during this period is compelling.
For further information on this topic please contact Chiagozie Hilary-Nwokonko or Gloria Biem at Streamsowers & Köhn by telephone (+234 1 271 2276) or email (firstname.lastname@example.org or email@example.com). The Streamsowers & Köhn website can be accessed at www.sskohn.com.
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