One of the unstated objectives of the Petroleum Industry Bill (PIB) 2020 is the clarification of the law and practice of ministerial consent for assignments of interest in upstream oil and gas licences and leases.(1) This article addresses the extent to which this objective has been achieved.(2)
Ministerial consent under Petroleum Act
The Petroleum Act's provision on the assignment of upstream oil and gas licences and leases appears straightforward. Paragraph 14 of the First Schedule to the act provides that:
Without the prior consent of the Minister, the holder of an oil prospecting licence or an oil mining lease shall not assign his licence or lease, or any right, power or interest therein or thereunder.
However, following the onset of M&A, initially among international oil companies, the Department of Petroleum Resources (DPR) – the Nigerian oil and gas industry regulator – sought to use Paragraph 14 to assert control over offshore changes of control by asserting control over the process of local integration of the new combinations. The DPR did this by arguing that this offshore M&A was tantamount to assignments of interest in the underlying licences and leases and was thus subject to prior ministerial consent. As the international oil companies were unconvinced by the DPR's suasion, the minister of petroleum resources effected a change in the Petroleum (Drilling and Production) Regulations whereby the word 'takeover' was inserted into the category of transactions requiring prior ministerial consent. By the DPR's reasoning, a 'takeover' was a form of assignment which required prior ministerial consent. This manoeuvre did not immediately ensure compliance by companies involved in such transactions or even strict enforcement by the DPR. The reality was that both the regulator and the regulated seemed to accept that the Petroleum Act did not clearly provide for share transactions or changes of control to be subject to prior ministerial consent.
It is also difficult to argue that this was an unintended gap in the Petroleum Act. Paragraph 24 of the First Schedule to the act provides that certain changes of control can be a ground for revocation of a licence or lease. This paragraph evidences that the Petroleum Act demonstrates an awareness of the distinction between an assignment of an interest in a licence or lease and a change of control in the ownership of a licensee, lessee or its holding company. In practice, during this period, the regulator and parties to change of control transactions negotiated the regulatory treatment of such transactions on a case-by-case basis.
However, that practice changed in the aftermath of Moni Pulo, wherein the Federal High Court decided that a purchase of all of the shares of an interest holder in a lease or licence is the same as an assignment of the licence or lease and is therefore subject to prior ministerial consent. The Moni Pulo decision remains unchallenged. The DPR took advantage of the judicial authority provided by Moni Pulo to issue the Guidelines for Obtaining Ministerial Consent to the Assignment of Interests in Oil and Gas Assets. The guidelines expanded the scope of transactions and transfers requiring prior ministerial consent and provided for a consent process. Eligible transactions for prior ministerial consent now include:
- transfers of interests in production sharing contracts, risk service contracts and service agreements, including strategic alliance agreements;
- transfers of shares in companies holding such interests regardless of how far removed such share transactions are from the actual interest holders; and
- devolutions of interest by operation of law or testamentary bequest.
The current position for ministerial consent to transfers of upstream oil and gas interests under the Petroleum Act is a legally contradictory and arguably ultra vires framework. It is a structure that has been built on using subsidiary legislation and guidelines to subvert the clear intention of primary legislation in an effort to support an arguably laudable policy goal – regulatory control of changes of control.
Ministerial consent under PIB 2020
The PIB 2020 attempts to clarify the uncertainties surrounding prior ministerial consent for changes of control in several ways, including by:
- clearly stating that changes of control are to be regarded as assignments for the purposes of the PIB 2020 (Section 95(3)); and
- defining 'change of control' as the acquisition of direct or indirect beneficial ownership of a percentage of the voting power of the outstanding voting securities of the holder, by contract or otherwise, that exceeds 50% at any time (Section 95(14)).
However, these clarifications have not resolved all of the contradictions and uncertainties surrounding the issue of ministerial consent. For example, there is no clarification of the basis for the inclusion of transfers of interests in production sharing contracts, risk service contracts and strategic alliance agreements in the category of transfers subject to prior ministerial. There is no provision in the PIB 2020 deeming such interests to be interests in licences and leases. It appears that the commission, the new upstream regulator that will emerge under the PIB 2020, may continue to assume (as the DPR assumed in the guidelines) that such interests are interests in licences and leases. Such an assumption is clearly wrong, as longstanding industry practice and even a cursory legal analysis demonstrates otherwise.
Further, the continued inclusion of interests obtained by devolution by way of law or testamentary devise in what constitutes an assignment also creates a likelihood of expropriation by refusal of ministerial consent. Such expropriation would lead to a claim for fair compensation under the Constitution.
The PIB 2020 does not resolve the contradiction inherent in assessing transfers of interests in licences and leases and changes of control on the same criteria. Section 95(11) of the PIB 2020 prescribes sufficient technical knowledge, experience and financial resources to enable the carrying out of the responsibilities of a licensee or lessee as key criteria for a grant of ministerial consent to a transfer. A mere shareholder (even a majority shareholder), as distinct from the licensee or lessee, should not have to satisfy all of these criteria to be allowed to hold equity in a licensee, lessee or its parent companies. An insistence on satisfying all of these criteria would mean, for example, that a financial institution such as a bank or private equity company could not take a majority stake in a licensee, lessee or its parent companies. If this provision is interpreted logically, it could affect the ability of a lender to realise its security and therefore the ability of a licensee or lessee to raise debt capital. The best way out of this would be to provide an exception to the criteria which accommodates these concerns. Alternatively, the commission could interpret this provision in regulations to accommodate these concerns.
As is the case in other areas which it has sought to clarify, the PIB 2020 brings some welcome change but arguably does not go far enough on the issue of ministerial consent for transfers and changes of control. The main clarifications are the inclusion of changes of control in the definition of 'assignment' and the specification of which changes of control are subject to prior ministerial consent. However, it leaves unresolved and unaddressed various other issues, such as the application of criteria for a grant of consent. Some of these issues may be amenable to clarification by regulations.
Endnotes
(1) All references to 'licences' in this article exclude exploration licences.
(2) This is the second article in a series on the Petroleum Industry Bill 2020. For the first article, please see "Minister's powers under Petroleum Industry Bill 2020".
