A Comparative Analysis of Insolvency Issues in respect of Oil and Gas Assets in Other Jurisdictions Similar to Nigeria [Part 5] – Peter Olalere

Energy & Natural Resources

23rd October 2019.

 

Peter Olaoye Olalere, Esq[1]

 

A COMPARATIVE ANALYSIS OF INSOLVENCY ISSUES IN RESPECT OF

OIL AND GAS ASSETS IN OTHER JURISDICTIONS SIMILAR TO NIGERIA [PART 5]

 

In this part of the paper, the focus is on a comparative review of the laws and practice of other petroleum producing jurisdictions similar to Nigeria in terms of ownership structure, resources sharing methods, and procedure of operation among federating units with a view to highlighting areas where the Nigerian law and practice is inadequate or where better practice can be adapted from those jurisdictions. We will now briefly consider relevant areas for 3 countries in this regard.

I. BRAZIL:

Like Nigeria, the federal government is the owner of all mineral resources in situ (that is, before exploitation), whether the oil and gas is located onshore or offshore by virtue of Article 3 chapter III, section 1 of Law 9478/97.  Oil and gas exploration and productive activities are a federal monopoly through Petrobras, but these activities may now be delegated by the federal government to state-owned or private oil and gas companies through the concession regime.  The law created the National Council for Energy Policy (“NCEP”) chaired by the Minister of Mines and Energy (“MME”) with the duty to prepare energy policies and guidelines and the National Oil Agency (“NOA”), an entity in charge of regulation, engagement and inspection of economic activities of the oil and gas and bio-fuels industry.

Lease/Licence/Concession Term – The concession and production sharing regimes are divided into two phases: exploration and production. Explorative phase ends when commerciality of a designated area is presented to the Petroleum Agency (Agência Nacional de Petróleo, Gás Natural e Biocombustíveis) (“ANP”) pursuant to Law 12,351/10. As a rule, concession contracts and Production Sharing Agreements (“PSAs”) are awarded through public bids promoted by the ANP.

Transfer/Divestment of Concession Contract Rights This is permitted either totally or partially, except for the rights granted to Petrobras under the onerous assignment regime which cannot be assigned to any third parties.  However, the assignee must comply with both technical and legal and financial requirements established by the ANP, in accordance with ANP Ordinance 126/2016 as is being revised by the ANP, as per public consultation No. 28/2018 for areas under a PSA or a concession agreement, respectively. Spin-off transactions change of operators, substitution or exemption of performance guarantee (parent company guarantees) are also deemed as transfer by the ANP.  Likewise, the foreclosure of any guarantees.

Revocation or Amendment of a Licensees InterestBoth the concession contract and the PSAs contain provisions that allow the federal government to terminate the respective granting instrument in deserving situations. Reasons for termination/revocation includes: lapse of the contract’s term; completion of the exploration phase[2] without performance of the minimum exploration programme/no commercial discovery; the contractors fully relinquish the contracted area; upon failure to deliver the FDP within the term established by ANP; and upon refusal of the consortium members to execute, in whole or in part, the unitization agreement after ANP’s decision on that matter.

The federal government may also revoke the interest of any given concessionaire that enters into judicial or extrajudicial reorganization, with no submission of an approved reorganization plan able to demonstrate to ANP its economic and financial capacity to fully perform all contractual and regulatory obligations. The Regulator can also revoke operatorship of an asset by removing the operator in case of failure to comply with any of its obligations under the contract and if it does not cure its default within 90 days of receipt of the notice from ANP indicating the default, regardless of the potential revocation of the licensee’s interests under the concession agreement.

Deemed approval of Work ProgrammeArticle 26 of Law 9478/97 is worthy of note.  It provides that if exploration is successful, the concessionaire shall submit the development and production plans and projects to the ANP and the ANP shall issue its opinion on the plans and projects mentioned above within one hundred and eighty days.  Upon the expiration of the 180 days, and without manifestation of the ANP, the plans and projects shall be considered as automatically approved.

II. UNITED KINGDOM:

Ownership of Rights to Oil and Gas –  By section 2 of the Petroleum Act 1998, the rights to oil and gas belongs to Her Majesty or the Duchy of Cornwall; to a government department; or is held in trust for Her Majesty for the purposes of a government department.  Exploration for and production of petroleum in the UK and on the United Kingdom Continental Shelf (“UKCS”) can only be undertaken under the terms of licences issued by the Secretary of State and Oil & Gas Authority (OGA).

Licences in the UK – There are many types: Seaward Production Licences, runs for three successive periods/terms (the initial term, the exploration and the third- production); Landward Production Licences – Formerly known as Petroleum Exploration and Development Licences (PEDLs). There are many other types of licences e.g. Offshore Innovate Licences, Exploration Licences etc.

Assignment of Interests –  Any transaction that results in a company joining a licence or a company leaving or withdrawing from a licence is deemed to be a licence assignment and requires prior consent from the OGA. Offshore licence assignments are processed through the Petroleum E-Business Assignments and Relinquishment system (PEARS), which forms part of the online UK energy portal. In assessing an application, the OGA will consider the technical capability of the transferee; the financial resources available to the transferee. PEARS lasts for 3 months before lapsing.

Creation of Security Rights over Licences – Requires the consent of the OGA.  If the holder of a charge wishes to enforce the security interest it is a licence assignment and the normal licence assignment procedure will apply.  Every charge or assignment whether between affiliated companies, between sister companies, a single group of companies or withdrawal from a licence, must be registered with the OGA. If the holder of a charge wishes to enforce the security interest it is a licence assignment and the normal licence assignment procedure will apply.[3]

Revocation of licence on Insolvency of a Licensee: Clause 41 of Petroleum Licensing (Production) (Seaward Areas) Regulations 2008, SI 2008/225 gives the Secretary of State for the Department of Energy and Climate Change (the “Secretary of State”) certain discretionary powers of revocation under the terms of oil and gas production licences Reasons for Secretary of State to revoke the licence include: the making of any arrangement or composition with the company’s creditors (this would include Company Voluntary Arrangements), the appointment of a receiver, the appointment of an administrator, compulsory or voluntary liquidation. Insolvency is a reason for revocation, whether the event occurs in Great Britain or a substantially corresponding event occurs in another jurisdiction. In a change of control of the licensee situation, the Secretary of State may serve a notice on the licensee that it proposes to revoke the licence unless the licensee effects a further change of control as is specified in the Secretary of State’s notice. Except default is rectified in 3 months of the notice, licence will be revoked. Subsections (2) and (4) to (6) of section 416 of the Income and Corporation Taxes Act 1988 (as modified by the model clauses) apply for the purpose of determining whether a person has or had control over the licensee.

There is a joint licence regime in the UK and if there is revocation it affects the non-defaulting licensees rights and obligations too. But there is now Partial revocation under the Energy Act 2008:  Section 77 (Part 4) and Schedule 3 of the Energy Act 2008 which came into force on 26th January 2009 which, applies only to the relevant revocation event happening after 26th January 2009.[4]

III. CANADA:

It would seem that the insolvency laws in Canada and the USA vis-à-vis the petroleum ownership structure is different from that of Nigeria; and thus, the creditor may not have identical difficulties in taking over or controlling the oil and gas asset in the event the licence or lease holder becomes insolvent.

Canada – Alberta: Operating agreements for oil and gas assets typically contemplate the immediate replacement of the operator by another working interest owner in the event of the operator’s insolvency. The interest here is limited to the Immediate replacement concept. However, these provisions often become practically unenforceable because, once proceedings are commenced under either the Companies Creditors’ Arrangement Act, RSC 1970, C-25 [CCAA] or the Bankruptcy and Insolvency Act, RSC 1985, c B-3 [BIA], stays are imposed that prevent creditors from exercising any remedies against the insolvent operator, including these “immediate replacement” provisions between partners to the operating agreement.

The recent decision in Bank of Montreal v Bumper Development Corporation Ltd, 2016 ABQB 363 [Bumper] indicates that immediate replacement clauses may be given effect in proceedings under the BIA, although, whether immediate replacement clauses will be given effect in CCAA proceedings remains uncertain.

Bumper, Eagle was able to secure an agreement from the receiver not to seek to assign operatorship to the successful bidder in this case.

Any application to assume operatorship is likely to be highly fact-specific; non-operators wishing to assume operatorship under the guise of an immediate replacement clause would be best advised to make their position known as soon as possible, in writing. The implication of this decision, among others, is that non-operators should take note of how and when they can enforce such provisions in light of Canadian insolvency legislation. Any application to assume operatorship is likely to be highly fact-specific; non-operators wishing to assume operatorship under the guise of an immediate replacement clause would be best advised to make their position known as soon as possible, in writing.[5]

It should be noted that in Brazil, apart from prior approval for transfer of interest, insolvency is a statutory reason for revocation and there is also ‘deemed approval of work programme’. In the UK, every charge of an interest must be registered with the regulator, there is also a regime for joint ownership of licence, and thus partial revocation of licence post January 2009, while the statute also provides that license can be revoked based on insolvency. In Canada, the unique provision for “immediate replacement” of an operator under the BIA will, in my view, add value to ensuring that the petroleum asset is operated continuously, and stakeholders are better able to achieve their targets.

In the next and final part of this work entitled “Recommendations for addressing Identified Issue(s) in insolvency of an Oil and Gas Asset Holder in the Nigerian Petroleum Industry”, we will summarise the identified issues with insolvency situation of an oil and gas asset holder and make some recommendations for the Nigerian petroleum industry – drawing from the provisions of the laws and practice in other jurisdictions earlier examined. Questions around what steps the DPR and the Nigerian Minister (and Ministry) of Petroleum Resources should be taking will be addressed as well.

 

For further information on this article and area of law, please contact Peter Olaoye Olalere at: S. P. A. Ajibade & Co., Lagos by telephone (+234 1 472 9890), fax (+234 1 4605092) mobile (+234 815 979 4216) or email (oolalere@spaajibade.com).

www.spaajibade.com

 

[1]        Notary Public for Nigeria and Senior Associate with the Dispute Resolution Department of S. P. A. Ajibade & Co., Lagos Office, Nigeria.

[2] Accessed at: https://www.shareweb.ch/site/DDLGN/Documents/OIL%20_%20GAS%20in%20federal%20countries%20(2014)_G%20Anderson.pdf on 23rd July 2019.

 

[3] https://thelawreviews.co.uk/edition/the-oil-and-gas-law-review-edition-6/1176234/united-kingdom and https://www.ogauthority.co.uk/onshore/licence-assignments-and-relinquishments/ accessed on 2nd August 2019.

[4] https://www.cms-lawnow.com/ealerts/2009/02/revocation-of-production-licence-on-an-insolvency-event?cc_lang=en accessed on 31st July 2019.

 

[5]https://www.bennettjones.com/Blogs-Section/Transfer-of-Operatorship-of-Oil-and-Gas-Assets-Upon-Insolvency accessed on 16/07/19.

 

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