PUL 822 Advanced Oil & Gas Law II Course Guide PDF

COURSE GUIDE PUL822 ADVANCED OIL & GASL LAW II Course Team Dr. Irekpitan Okukpon (Course Developer/Writer)-Nigerian Institute of Advanced Legal Studies (NIALS) Lagos State, Nigeria Prof. Patrick Oche (Course Editor)- University of Jos Dr. Ernest O. Ugbejeh (Dean)-NOUN Mrs. Nancy C. Ugochi (Copy Editor)- NOUN NATIONAL OPEN UNIVERSITY OF NIGERIA © 2022 by NOUN Press National Open University of Nigeria Headquarters University Village Plot 91, Cadastral Zone Nnamdi Azikiwe Expressway Jabi, Abuja Lagos Office 14/16 Ahmadu Bello Way, Victoria Island, Lagos e-mail: [email protected] URL: www.nou.edu.ng Printed 2022 ISBN: 978-978-058-493-1 All rights reserved. No part of this book may be reproduced, in any form or by any means, without permission in writing from the publisher ii CONTENT PAGE Introduction …………………………………. iv Course Learning Outcomes………………… iv Working through this Course ……………… iv Course Materials…………………………… iv Modules and Units…………………………. iv References/Further Reading………………… vi Assessment…………………………………… vi Self-Assessment Exercises………………….. vi Final Examination and Grading…………… vi Course Score Distribution ………………… vi How to get the most from this course……… vii Tutors and Tutorials……………………….. vii Summary............................................................... viii iii PUL 822 COURSE GUIDE INTRODUCTION Generally, oil and gas law is concerned primarily with the impacts and damages by oil spillage and the compensation to those affected. It deals also, with the exploitation, production and funding of petroleum products. Our discussion in this semester will focus on the impacts of oil pollution and compensation for oil spillages in Nigeria. We will also look at exploitation, production, funding as well as taxation regimes on oil and gas in Nigeria. The application of environmental laws is also in focus. COURSE LEARNING OUTCOMES At the end of the study in this unit, you should be able to: 1) Explain oil and gas law 2) Discuss the legal regimes on oil and gas 3) Appreciate the impact and compensation for oil spillage WORKING THROUGH THIS COURSE To complete this course, you are advised to read the study units, recommended books, relevant cases and other materials provided by NOUN. Each unit contains a Self-Assessment Exercise, and at points in the course you are required to submit assignments for assessment purposes. At the end of the course there is a final examination. The course should take you about 11 weeks to complete. You will find all the components of the course listed below. You need to make out time for each unit in order to complete the course successfully and on time. COURSE MATERIALS The major components of the course are. a) Course guide. b) Study Units. c) Textbooks d) Assignment file/Seminar Paper e) Presentation schedule. MODULES AND STUDY UNITS The discussion in this course is broken down to 13 (thirteen) study units that are broadly divided into FOUR modules as follows: iv Module 1 Impacts of Oil Pollution and Compensation for Oil Spillage in Nigeria Unit 1 Impact of Oil Pollution in Nigeria Unit 2 Compensation for Oil Pollution Damage in Nigeria Module 2 Exploration and Production: Financing Arrangements Unit 1 Funding of Oil and Gas Exploration Unit 2 Funding of Oil and Gas Development Unit 3 Oil and Gas Financing Structure Unit 4 Alternative Funding Module 3 Taxation and Fiscal Regimes of Oil and Gas Unit 1 Nature of Petroleum Profits Tax Unit 2 Indirect Taxation Unit 3 Taxation in the Joint Development Zone Unit 4 Local Content Law Module 4 Exploration and Production: Environmental Laws and Practices Unit 1 General Environmental Law Legislation applicable to Oil and Gas in Nigeria Unit 2 The Petroleum Industry Bill Unit 3 Regulatory Institutions Unit 4 Decommissioning of Oil and Gas Platforms and Facilities Unit 5 Trade in Crude Oil and Products All these Units are demanding. They also deal with basic principles and values, which merit your attention and thought. Tackle them in separate study periods. You may require several hours for each. We suggest that the Modules be studied one after the other, since they are linked by a common theme. You will gain more from them if you have first carried out work on the law of sea. You will then have a clearer picture into which to paint these topics. Subsequent units are written on the assumption that you have completed previous units. Each study unit consists of one week’s work and includes specific Learning Outcomes, directions for study, reading materials and Self- Assessment Exercises (SAE). Together, these exercises will assist you in achieving the stated Learning Outcomes of the individual units and of the course. v PUL 822 COURSE GUIDE REFERENCES/FURTHER READING Certain books have been recommended in the course. You should read them where so directed before attempting the exercise. ASSESSMENT There are two aspects of the assessment of this course, the Tutor Marked Assignments and a written examination. In doing these assignments you are expected to apply knowledge acquired during the course. The assignments must be submitted to your tutor for formal assessment in accordance with the deadlines stated in the presentation schedule and the Assignment file. The work that you submit to your tutor for assessment will count for 30% of your total score. SELF-ASSESSMENT EXERCISES There is a self-assessment exercise at the end for every unit. You are required to attempt all the assignments. You will be assessed on all of them, but the best three performances will be used for assessment. The assignments carry 10% each. Extensions will not be granted after the due date unless under exceptional circumstances. FINAL EXAMINATION AND GRADING The duration of the final examination for this course is three hours and will carry 70% of the total course grade. The examination will consist of questions, which reflect the kinds of self- assessment exercises and the tutor marked problems you have previously encountered. All aspects of the course will be assessed. You should use the time between completing the last unit and taking the examination to revise the entire course. You may find it useful to review yourself assessment exercises and tutor marked assignments before the examination. COURSE SCORE DISTRIBUTION The following table lays out how the actual course marking is broken down. Assessment Marks Assignments 1-4 (the best three of Four assignments. Best three all the assignments submitted) marks of the four counts at 30% of course marks. Final examination 70% of overall course score Total 100% of course score. vi HOW TO GET THE MOST FROM THIS COURSE In distance learning, the study units replace the lecturer. The advantage is that you can read and work through the study materials at your pace, and at a time and place that suits you best. Think of it as reading the lecture instead of listening to a lecturer. Just as a lecturer might give you in-class exercise, your study units provide exercises for you to do at appropriate times. Each of the study units follows the same format. The first item is an introduction to the subject matter of the unit and how a particular unit is integrated with other units and the course as a whole. Next is a set of learning objectives. These objectives let you know what you should be able to do by the time you have completed the unit. You should use these objectives to guide your study. When you have finished the unit, you should go back and check whether you have achieved the objectives. If you make a habit of doing this, you will significantly improve your chances of passing the course. Self-Assessment Exercises are interspersed throughout the units. Working through these tests will help you to achieve the objectives of the unit and prepare you for the assignments and the examination. You should do each Self-Assessment Exercise as you come to it in the study unit. Examples are given in the study units. Work through these when you have come to them. TUTORS AND TUTORIALS There are 11 hours of tutorials provided in support of this course. You will be notified of the dates, times and location of the tutorials, together with the name and phone number of your tutor, as soon as you are allocated a tutorial group. Your tutor will mark and comment on your assignments. Keep a close watch on your progress and on any difficulties you might encounter. Your tutor may help and provide assistance to you during the course. You must send your Tutor Marked Assignments to your tutor well before the due date. They will be marked by your tutor and returned to you as soon as possible. Please do not hesitate to contact your tutor by telephone or e-mail if:  You do not understand any part of the study units or the assigned readings.  You have difficulty with the self-assessment exercises.  You have a question or a problem with an assignment, with your tutor’s comments on an assignment or with the grading of an assignment. You should try your best to attend the tutorials. This is the only chance to have face to face contact with your tutor and ask questions which are vii PUL 822 COURSE GUIDE answered instantly. You can raise any problem encountered in the course of your study. To gain the maximum benefit from course tutorials, prepare a question list before attending them. You will gain a lot from participating actively. SUMMARY As we can see shortly, an oil spill caused by human interference happens when liquid petroleum is released into the environment by vehicle, vessel or pipeline. It happens on a large scale and is mostly seen in water bodies. It happens due to human negligence and is a major form of pollution. The sources of the spill are many. For instance, crude oil can be released by tankers on land or by vandals or saboteurs. In water bodies, the spill can occur due to drilling rigs, offshore oil platforms and well. viii CONTENT Module 1 Impacts of Oil Pollution and Compensation for Oil Spillage in Nigeria…………… 1 Unit 1 Impact of Oil Pollution in Nigeria………………… 1 Unit 2 Compensation for Oil Pollution Damage in Nigeria. 7 Module 2 Exploration and Production: Financing Arrangements……………………………………. 15 Unit 1 Funding of Oil and Gas Exploration……………. 15 Unit 2 Funding of Oil and Gas Development……………. 21 Unit 3 Oil and Gas Financing Structure……………….. 27 Unit 4 Alternative Funding…………………………….. 31 Module 3 Taxation and Fiscal Regimes of Oil and Gas.. 35 Unit 1 Nature of Petroleum Profits Tax……………… 35 Unit 2 Indirect Taxation……………………………... 43 Unit 3 Taxation in the Joint Development Zone……. 47 Unit 4 Local Content Law……………………………. 53 Module 4 Exploration and Production: Environmental Laws and Practices…………………………… 60 Unit 1 General Environmental Law Legislation applicable to Oil and Gas in Nigeria…………………………… 60 Unit 2 The Petroleum Industry Bill………………………. 67 Unit 3 Regulatory Institutions…………………………… 74 Unit 4 Decommissioning of Oil and Gas Platforms and Facilities………………………………………… 78 Unit 5 Trade in Crude Oil and Products………………… 84 PUL 822 MODULE 1 MODULE 1 IMPACTS OF OIL POLLUTION AND COMPENSATION FOR OIL SPILLAGE IN NIGERIA UNIT 1 Impacts of Oil Pollution/Spillage in Nigeria Unit Structure 1.1 Introduction 1.2 Learning Outcomes 1.3 Impacts of Oil Pollution/Spillage in Nigeria 1.3.1 Effects of Oil Spills/Pipeline Vandalism 1.4 Summary 1.5 References/Further Readings/Web Sources 1.6 Possible Answers to Self-Assessment Exercise(s) 1.1 Introduction An oil spill caused by human interference happens when liquid petroleum is released into the environment by vehicle, vessel or pipeline. It happens on a large scale and is mostly seen in water bodies. It happens due to human negligence and is a major form of pollution. The sources of the spill are many. For instance, crude oil can be released by tankers on land or by vandals or saboteurs. In water bodies, the spill can occur due to drilling rigs, offshore oil platforms and well. Oil spills and their effects can also be experienced with refined petroleum or even waste oil from large scale industries. What is common in all of them is that the damage caused by them is permanent and takes a long time to clean up. 1.2 Learning Outcomes By the end of this unit, you will be able to:  define the term ‘oil spills and pollution’;  analyse the impacts of oil pollution on our environment; and  explain the general effect of oil pollution. 1.3 Impacts of Oil Pollution/Spillage in Nigeria The shiny substance that is seen sometimes on top layer of large bodies of water such as rivers is nothing but oil, which makes it difficult for plants and sea animals to survive. As such, the cleaning up of oil spill is no easy task as various factors need to be considered before carrying out cleaning operations. Such factors include the amount of oil spilled, temperature of water, type of beaches and many more. 1 PUL 822 ADVANCED OIL & GAS II The United States Fish and Wildlife Service classify oil spills into five categories, namely: very light oil, light oil, medium oil, heavy oil and very heavy oil. Of particular importance to this module are the light oil and very heavy oil which is common in Nigeria. Light oil such as crude oil in its raw form can be cleaned effectively. (What circumstances make cleaning up of oil spill difficult?). However, they do not evaporate quickly and are capable of devastating entire marine communities and areas between high and low waters. On the other hand, very heavy oils have the capacity to hover and diffuse into water and they affect living organisms on the ocean floor. Though they are not as toxic as the lighter oils, they are difficult to find and clean up, can prove fatal for plant, animal and human life. The impacts of oil pollution include; habitat degradation, pollution from gas flaring and these are cumulative and have acted synergistically with other environmental stresses to impair ecosystems and severely compromise human livelihoods and health. Oil spill penetrates into the plumage and fur of birds, breaks down the insulating capabilities of feather which makes them heavier, disallow them to fly and kill them via poisoning or hypothermia. Even though the public attention towards oil spills has grown in the last three decades, they have been happening for over a century. Since the coming of the industrial revolution, such accidents have been happening. However, the large-scale problems that follow oil spills, pipe lines vandalism and sabotage and their effects are more obvious to us today. MNOCs in Nigeria appear to deliberately understate incidents of oil pollution perhaps to escape public outcry and official reprimand. As such, the causes of oil spill in Nigeria are varied and include corrosion of pipes and tanks, pipeline and tanker accidents, sabotage and inadequate or non- functional production equipment. Self-Assessment Exercises 1. List at least three types of effects of oil spill and pipeline vandalism in Nigeria 2. Briefly explain the effects of oil spill and pipeline vandalism on tourism industry 2 PUL 822 MODULE 1 1.3.1 Effects of Oil Spills/Pipeline Vandalism There are four main types of effects of oil spill or pipeline vandalization in Nigeria: i. Environmental Effect: First of these is the environmental effect. The animal life that lives in the water or near the shore are the ones most affected by the spill. In most cases, the oil simply chokes the animals to death. Others that live face a number of other problems. The oil works its way into the fur and plumage of the animals. As a result, both birds and mammals find it harder to float in the water or regulate their body temperatures. Many baby animals and birds starve to death, since their parents cannot detect their natural body scent. Birds that preen themselves to get rid of the oil accidentally swallow the oil and die due to the toxic effects. In many cases, the animals become blind due to repeated exposure to the oil. Dolphins, sea otters, fish, countless species of birds and many oceanic mammals face these consequences. Countering these effects and cleaning the oil can take anywhere between a few weeks to many years, depending on the damage caused. ii. Effect on the Economy: The second major effect of the oil spill is seen on the economy. When precious crude oil or refined petroleum is lost, it affects the amount of petroleum and gas available for use. This means more barrels have to be imported from other countries. Then comes the process of cleaning the oil spill, which requires a lot of financing. Although the company responsible for the oil spills and their effects has to clean it up, a lot of government help will be required. The workers that are brought on board to clean up the spill face tremendous health problems later in life as well. Their medical treatment has to be paid for and becomes the responsibility of the government. Putting all the methods of recovery into place and monitoring them takes away resources from other more important work and hits the economy in subtle but powerful ways. For instance, the BP oil spill that flowed for three months at the Mexican Gulf. The spill was stopped after it had released about 4.9 million barrels of crude oil. An estimated 53,000 barrels per day escaped from the well just before it was capped. iii. Effect on Tourism Industry: The local tourism industry suffers a huge setback as most of the tourists stay away from such places. Dead birds, sticky oil and huge tar balls become common sight. Due to this, various activities such as sailing, swimming, rafting, fishing, parachute gliding cannot be performed. Industries that rely on sea water to carry on their day-to-day activities halt their 3 PUL 822 ADVANCED OIL & GAS II operations till it gets cleaned. One of the biggest oil spills seen in history happened during Gulf war when approximate of 240 to 336 million gallons of crude oil flowed into the Persian Gulf. It was considered one of the worst disasters, beating the Ixtoc 1 Oil spill in Mexico. Recent major oil spill happened when oil rigs, Deepwater Horizon sank in the Gulf of Mexico. The spill released somewhere between 172 to 180 million gallons of crude oil into the environment. In the year 2010 alone, six oil spills were seen in the USA. Oil spills have happened in Canada, Nigeria, France, United Kingdom and China. While the long-term issue caused by oil pollution and their effects is yet to be fully observed, the daily problems are clear. However, most corporations still do not have a solid plan in place for when this emergency may strike. iv. Effect on human life and activities: The effect of oil pollution on humans cannot be overemphasized as this can be clearly seen from the state of environmental degradation of the Niger Delta region of Nigeria. As the spilled oil flow into their rivers, they lack adequate and clean water for consumption. The professional fishermen have all lost their jobs. Recently, it was proven that people from that region were prone to lungs cancer as a result of the contaminated water and sea food they consume. And they are also prone to diseases associated with lack of protein because sea food being a major source of protein in Nigeria has been destroyed. (Discuss the various effects of oil spill in Nigeria). Oil pollution and spillage in Nigeria is an issue that spans over two centuries as these issues of spillage have occurred as far back as the 1960s and 70s. Nevertheless, the subsequent unit examines legal approach to oil pollution management in Nigeria and concerted efforts by government to protect the environment. 1.4 Summary Oil spill is one of the main sources of environmental degradation and it affects all aspects of human life. As can be seen from their impacts above, they take a long time to clear and are most times permanent. 4 PUL 822 MODULE 1 1.5 References/Further Readings/Web Sources Jehwo Yalaju Laws Regulating Oil Pollution in Nigeria: A reappraisal, available at http://www.legaloil.com/download%20file/laws- regulating-oil-pollution-in-nigeria.pdf, accessed 23 March 2020 Ugbe, R. O. and Ekpoudo, A. (2017). ‘Legal Approach to Causes and Consequences of Oil Spillage in Nigeria’. The Nigerian Law Journal 20 (1) 150. Anzaki, M. B. (2010). ‘Oil Spillage: Liability and Regulatory Framework Baird, J. (2010). ‘Oil Shame in Africa’ Newsweek, July 26, 2010, p 27. Nwilo, P. C. and Badejo, O. T. (2001). ‘Impacts of Oil Spills along the Nigerian Coast. The Association of Environmental Health and Sciences Patrick Ndubisi oche op. cit 5 PUL 822 ADVANCED OIL & GAS II 1.6 Possible Answers to Self-Assessment Exercise(s) 1. Types of effects of oil spill and pipeline vandalism in Nigeria include: environmental effect, effect on economy, effect on tourism and effect on human activities. 2. An oil spill is when liquid petroleum is released into the environment by vehicle, vessel or pipeline, caused by human activities. It happens on a large scale and is mostly seen on water bodies. This is due to human negligence and is a major form of pollution. 6 PUL 822 MODULE 1 UNIT 2 Compensation for Oil Pollution in Nigeria Unit Structure 2.1 Introduction 2.2 Learning Outcomes 2.3 Compensation for Oil Pollution in Nigeria 2.3.1 Legal Framework on Compensation in Nigeria 2.3.2 Factors Affecting Compensation for Victims of Oil Spillage in Nigeria 2.3.3 Towards a New Oil Spill Compensation Regime in Nigeria 2.3.4 The Role of the National Oil Spill Detection and Response Agency (Establishment) (NOSDRA) Act 2006 2.4 Summary 2.5 References/Further Readings/Web Sources 2.6 Possible Answers to Self-Assessment Exercise(s) 2.1 Introduction The downside of petroleum development has left profound adverse effect on the global environment whilst countries around the world promote economic growth, at the same time, most of them have committed themselves to reduce environmental impacts and to reverse global environmental deterioration. Generally speaking, in the face of conflicting economic and environmental goals, it is often hard to reconcile new developments with environmental protection and nature conservation. In order to encourage sustainability of development projects and to maintain current levels of natural capital, among other things, it is necessary to innovatively use planning and decision-making tools. In this context, environmental assessment (EA) has emerged as an important support tool. Whilst it is an instrument that ultimately seeks to avoid environmental impacts and to enhance positive effects, in practice its main role has often been to reduce and mitigate, and at times to compensate for negative environmental impacts. This chapter therefore looks at the mitigation and compensation elements of EA. 2.2 Learning Outcomes By the end of this unit, you will be able to: discuss compensation principles in Nigeria; analyse the compensation methods in Nigeria; and explain the Legal Framework on Compensation. 7 PUL 822 ADVANCED OIL & GAS II 2.3 Compensation for Oil Pollution in Nigeria Compensation can be distinguished from ‘mitigation’ in the sense that it involves undertaking measures to replace lost or adversely impacted environmental values that should have similar functions equaling existing environmental values. Environmental compensation can be defined as the provision of positive environmental measures to correct, balance or otherwise atone for the loss of environmental resources. (What is the difference between compensation and mitigation with regard to oil pollution?). Compensation may be viewed in terms of the creation of new values, which are equal to the lost values if the lost values are irreplaceable. Compensation concerns the creation of values which are as similar as possible. In the USA, for the purposes of the Clean Water Act, under which wetland permits are issued, mitigation is defined as: ‘sequentially avoiding and minimizing impacts and compensating for remaining unavoidable impacts.’ This sequential approach is also favoured by Canada. Compensation may take either the form of a restoration project implemented by the Responsible Party (RP), a cash settlement to be used by Trustees for project implementation, or a combination of both. The objective of both restoration projects and cash settlements is to restore or rehabilitate the injured natural resources, or, if that is not possible, to replace or acquire the equivalent of those natural resources and services which were lost or impaired. Compensation in environmental assessment normally aims at biological functions and other aspects, such as landscapes and non-biotic factors are not covered. In case no adequate functional compensation can be found, most systems that have compensation rules in place allow for monetary compensation. An element that is recognized as a form of compensation is enhancement which distinguishes those compensation measures that result in greater or better environmental values than those replaced. Under international law, there are different compensation schemes for the damage caused by oil pollution from oil tankers, most notably the Civil Liability Convention (CLC) and the Fund Convention. The extent to which oiled wildlife response can be compensated for, is assessed on a case-by-case basis and the CLC and Fund Conventions provide the necessary guidance to make this assessment. The capture, cleaning and rehabilitation of wildlife and also wildlife impact assessment are activities that can be compensated for. 8 PUL 822 MODULE 1 Self-Assessment Exercises 1. What is your observation about the legal framework on compensation in Nigeria? 2. Name at least three factors affecting compensation for oil spillage victims in Nigeria Factors to consider The cogent question to be asked at this juncture is, who bears the responsibilities of compensating victims of oil spill when it is due to the activities of pipeline vandals and oil thieves; would it be the oil company or the government – (local, state or federal) or who? So many Nigerians have lost their lives in the struggle to ensure adequate compensation to oil spill victims. 2.3.1 Legal Framework on Compensation in Nigeria Although Nigeria has a number of statutes that provide for compensation in matters relating to land or landed property acquisition, only the Oil Pipelines Act Cap 07, LFN 2004 contains provisions that are directly related to compensation arising from oil spillage. Other statutes such as the Land Use Act Cap L5, LFN 2004 and Petroleum Act Cap P10, LFN 2004, Mining and Mining Act 20 of 2007, Oil in Navigational Waters Act Cap 06, LFN 2004. These statutes make only tangential reference to compensation for oil spillage as they deal primarily with acquisition rather than injurious affection. The latter does not transfer interest in land in any way. The Oil Pipelines Act (Cap 145 LFN 1990) Section 11(5); of the Oil Pipeline Act provides that the holder of a 1icence shall pay compensation to any person whose land or interest in land is injuriously affected by the exercise of the right conferred by the license, for any such injurious affection not otherwise made good: and any person suffering damage as a consequence of any breakage of or leakage from the pipeline or an ancillary installation, for such damage not otherwise made good. Damages arising from sabotage and malicious acts of third parties are exempted. Section 11 of the Act further provides that where the amount of such compensation cannot be agreed between any such person and the licensee, it shall be fixed by a court in accordance with the relevant section of the Act. According to Section 20 of the Act, the court may award such 9 PUL 822 ADVANCED OIL & GAS II compensation as it considers just, having regards to: a. any damage done to any buildings, crops, or profitable trees by the holder of the license; b. any disturbance caused by the holder the exercise of such right; c. any damage suffered by any person as a consequence of any breakage of or leakage from the pipeline or an ancillary installation and the loss (if any) in value of the land or interests in land by reason of the exercise as aforesaid. (Highlight the relevant laws on compensation in Nigeria) Furthermore, Section 20 (3) provides that in determining the loss in value of land and or interest in land of a claimant, the court shall assess the value of the land or the interest injuriously affected at the site immediately before the grant of the license and shall access the residual value of the claimant of the same land of interest consequent upon and at the date of the grant of the license and shall determine the loss suffered by the claimant as the difference between the values so found, if such residual value is a lesser sum. Compensation shall not be awarded for unoccupied land as defined in the Land Use Act, except to the extent and in the circumstances specified in the (Act Section 20(4)). Section 20(5) stipulates that in determining compensation in accordance with the provisions of this section, the court shall apply the provisions of the Land Use Act as far as they are applicable and not in conflict with anything in the Act as if the land or interests concerned were land or interests acquired by the President for a public purpose. Section (29) of the Land Use Act provides for calculation of compensation according to rent, building, installation or other improvement thereon 2.3.2 Factors Affecting Compensation for Victims of Oil Spillage in Nigeria Some factors limiting the compensatory rights of victims of oil pollution are set out below: a). The issue of pipeline vandalization by saboteurs, vandals and oil thieves Section 15 (c) of the Oil Pipelines Act states that any person who suffers damage as a result of his own fault or the act of the third party, is not liable to compensation. It is recommended here that a compensation fund be set up by the federal government to ensure award of compensation to victims of oil spill resulting from sabotage. However, the question that rises is: how can a group of people deliberately sabotage oil pipelines and expect the victims which may be other community members to be compensated. The community needs to be reoriented on the disadvantages of this unpatriotic act of sabotage. 10 PUL 822 MODULE 1 b). The lack of legal cost: The lack of funds by victims of oil spill to seek compensation from court is a major factor. c). Complex and protracted class action litigation in Nigeria and limitation of time: The Ejamah-Abube Community V Royal Dutch/Shell case was in court for over 33 years due to all these procedural hitches. Also, under the Limitation Law of Lagos State 1994, an action founded on tort shall not be brought after the expiration of six years from the date on which the cause of action accrued. In deciding whether or not a statute of limitation applies to an action, two factors are considered by the court: is there a cause of action and when did the cause of action arise? Once the cause of action accrues, time continues to run. However, time shall not continue to run when parties to a dispute engage in negotiation for the purpose of settling a dispute. See Eboige v NNPC (1994) 5 NWLR (Pt 347) 660, per Adio JSC. In Gulf Oil (Nig.) Ltd v Oluba (2002) NWLR (Pt 780) 92, the respondents/plaintiffs brought an action against the appellant/defendant in 1986 to recover damages for pollution of their lands, fishing ponds, swamps, channels and lakes as a result of seismic and other oil exploratory activities within their community in 1973. The Court of Appeal held that the cause of action was statute-barred. 2.3.3 Towards a New Oil Spill Compensation Regime in Nigeria A detailed analysis of the major global legislation on compensation from oil pollution from the International Convention on Civil Liability for Oil Pollution Damage via the US Oil Pollution Act, to the latest EC Directive on the subject, concludes that there is no standardised compensation rate internationally. (State the important steps to having strong compensation regime in Nigeria). It does however show that the major compensation schemes do have a number of principles in common. 1. Damage to property tends to be calculated by reference to the actual cost of repairing or replacing the property, or the difference between the value before and after the spill; 2. Compensation for damage to natural resources (where this is provided for) tends to be calculated by reference to the cost of remediating or replacing the lost or damaged natural resources. The compensation schemes do not generally provide for additional, independent compensation for damage to natural resources; 3. Damages for loss of subsistence use of natural resources can be included; 11 PUL 822 ADVANCED OIL & GAS II 4. Compensation for consequential losses and pure economic losses (such as loss of income) are generally provided; 5. It can include the cost of bringing a claim, including the use of advisers where appropriate; 6. The heads of loss identified in the compensation schemes are generally not exhaustive or exclusive: for example, the French court awarded damages for non-pecuniary losses in addition to those provided for by the International Convention on Civil Liability for Oil Pollution Damage 1992; similarly, the American OPA does not contain damages for personal injury but these can be claimed under state or admiralty law; 7. Non-pecuniary losses (save to the extent that these might be recoverable as damage to natural resources of loss of subsistence use) and punitive damages are generally not expressly recoverable under the compensation schemes. 2.3.4 The Role of the National Oil Spill Detection and Response Agency (Establishment) (NOSDRA) Act 2006 The most significant and forefront agency regarding oil spillages within the Nigerian context is the National Oil Spill Detection and Response Agency. The agency is mandated with the statutory responsibility for preparedness, detection, response and investigation to all oil spillages in Nigeria under section 1(1). However, Olawale observes that most oil spill investigations are headed by oil multinationals instead of NOSDRA and or combinations of both organisations, and thereby hinders the supply of accurate technical data from spill site. This further contributes to inaccuracy of information regarding the extent of damage and number of incidences reported. For example, the National Oil Spill Detection and Response Agency certified 327 oil impacted sites in 2006, while in 2007, 253 oil spill incidents were reported, 588 incidents reported and 419 oil spills reported in the first two quarters of 2008. Between 2012 and 2015, Nigerian experienced 1,527 incidents recorded, with numerous unrecorded incidents. While in the same vein, the oil multinationals reported 400 incidences with preventive measures to stop investigation from the responsible agencies, making the joint investigation process reliant on the oil multinational corporations. According to NOSDRA “the progressing trend of the sad incidents of oil spill is indicative of a grave danger ahead as a nation, in terms of polluted environment and its poor health index as well as colossal loss of revenue which is aptly required for economic and physical development”. (Briefly examine the responsibility of the National Oil Spill Detection and Response Agency (Establishment) (NOSDRA) Act 2006). The incidents pose challenges to the agency in terms of clean-up, remediation and rehabilitation due to the frequencies. Hence, the agency has commenced 12 PUL 822 MODULE 1 action on the development of a National Oil Spill Compensation Rate (NOSCR) which will serve as guide for oil industry arriving at acceptable and appropriate compensation to host and transit oil communities. There remains little or no physical/practical evidences and intermediary measures in relation to oil spill impacts and environmental devastation reductions and or compensations for the affected. It is necessary to emphasise that, among the numerous legislations provided for the environment and the oil and gas sector, section 102,103 of the PI Act, the Oil Pipeline Act, Cap 145, LFN 1990 is the only Act that contains provision directly related to compensation occurring from oil spillage. Compensation for oil spill damages should be an integral part of a coherent and rational environment policy. 2.4 Summary The Nigerian regime on compensation for oil spills and oil pollution is set out clearly under the Oil Pipelines Act and the NOSDRA Act. As such, you should be able to effectively advise a future client on the steps to take if he/she intends to institute a class action suit on behalf of his community. It is also important to read up on more cases pertaining to oil pollution and compensation in Nigeria 2.5 References/Further Readings/Web Sources Gabriel, K.B. (2013).‘Emerging Issues in Compensation Valuation for Oil Spillage in the Niger Delta of Nigeria.’ Journal of Reviews on Global Economics. Oludayo, G. A. (2004). Environmental Law and Practice in Nigeria. Lagos: University of Lagos Press 676-678. Oshienemen, N. A., Dilanthi, A. and Richard, P. H. (2018). ‘Environmental Policies within the Context of Compensation for Oil Spill Disaster Impacts: A Literature Synthesis’ Procedia Engineering 212 1183 -1184. NOSDRA ‘Towards a New Oil Spill Compensation System in Nigeria – Summary’ pp 6-7, accessed 06 April 2020. Olawale, A. (2015). An Overview of the Legal Framework for Oil Pollution in Nigeria. 13 PUL 822 ADVANCED OIL & GAS II Ayawei and Abila (2015). The Law and Policy of Environmental Protection in the Niger Delta. 2.6 Possible Answers to Self-Assessment Exercise(s) 1. Despite the fact that Nigeria has a number of statutes that provide for compensation in matters relating to land or landed property acquisition, only the Oil Pipelines Act Cap 07, LFN, 2004 contains provisions that are directly related to compensation arising from oil spillage. 2. Factors affecting compensation for oil spillage victims in Nigeria are: lack of legal cost, limitation of time and complex and protracted litigation in Nigerian justice system 14 PUL 822 MODULE 2 MODULE 2 EXPLORATION AND PRODUCTION: FINANCING ARRANGEMENTS UNIT 1 Funding of Oil and Gas Exploration Unit Structure 1.1 Introduction 1.2 Learning Outcomes 1.3 Funding of Oil and Gas Exploration 1.3.1 Private Equity 1.3.2 Reserve-Based Lending 1.3.3 Capital Markets/Initial Public Offer 1.4 Summary 1.5 References/Further Readings/Web Sources 1.6 Possible Answers to Self-Assessment Exercise(s) 1.1 Introduction Oil and gas exploration and production by multinational oil companies (MNOCs) is an expensive venture which cannot be solely funded. Funding remains one of the major challenges faced by the MNOCS. In financing an oil and gas upstream project, most financial institutions especially the foreign institutions put weighty consideration on factors such as the risks and the price of oil which determines the feasibility and rate of return on the investment. The ability of the borrower to repay is also taken into account, and the lender may require a form of security such as take or pay contracts for gas projects. Although there are various sources for project finance, most of the funds obtained for projects in Nigeria have been sourced from foreign banks. Previously, the local banks were not capable of providing the amount of funds required for such projects but in recent times have seemed able to do so by means of loan syndication. 1.2 Learning Outcomes By the end of this unit, you will be able to: discuss how sectors of petroleum industry are financed; and explain how oil and gas exploration is funded. 15 PUL 822 ADVANCED OIL & GAS II 1.3 Funding of Oil and Gas Exploration There are various ways in which oil and gas exploration can be funded and these include; through private equity, reserve-base lending and initial public offers (IPO). Self-Assessment Exercises 1. Briefly discuss the term ‘reserve-based lending’ 2. What is ‘initial public offer’? 1.3.1 Private Equity This involves a group of investors - usually institutional or private investors, committing their funds to a private company or buy-out and delisting of a public company in order to realise a profit at the exit point. Equity issuance is often the first or only option for pure-play exploration companies, which lack tangible assets but offer material upside in the event of exploration success. (How does MNOCs operate?). These companies generally have low debt capacity due to a lack of proved reserves and cash flow. Investors took flight from perceived riskier stocks in the aftermath of the financial crisis and confidence in exploration companies in particular, has yet to fully return. MNOCs will look to their own balance sheets to source funds or alternatively seek corporate loans or high-yield debt. Their proven track record means that they are more likely to be able to raise unsecured corporate debt. A smaller to mid-cap player will not, however, have this option and will typically either seek third party secured financing, to bring in additional partners to acquire a stake in the field, or inject further equity. However, private equity is not a popular means of financing in Nigeria. 1.3.2 Reserve-Based Lending A common source of financing employed in the upstream sector is reserve-based lending (RBL), which enables the raising of debt across a number of assets at various development stages and retention of a degree of operational flexibility. Independent oil and gas companies are the largest users of reserve-based lending (RBL) facilities. These players typically use RBL structures for development financing and general corporate purposes. Structures have developed differently between the longer standing (Explain the main features of Reserve-Based Lending RBL). North American markets and those financed internationally. This product is often used in a refinancing context. 16 PUL 822 MODULE 2 The key features of RBL in an international project context are: a. Commercial banks make funds available to cover capital expenditure, operating expenditure and the development costs of a number of specified assets (in doing so they spread the risk) and for general corporate or working capital purposes. In addition, drawings may cover the refinancing of existing equity/debt (including bridge financing) or the finance of an acquisition. b. Available loan commitments usually fluctuate on a six-monthly basis by reference to the "borrowing base amount", calculated using the most recently delivered banking case that covers each of the included oil and gas fields and identifies: the net present value (NPV) of future cashflows from each field, taking into account their current status (producing, non-producing or undeveloped); availability of sponsor collateral; and concentration limits on the borrower. c. As commodity prices fluctuate, also does the available loan commitment. If key ratios are breached, the borrower must prepay a corresponding proportion of its loan. d. RBL lenders consider only proven and probable reserves (not possible and contingent reserves) and the extent to which projected production figures enable debt service. ("Proven reserves" means those with a 90% (known as a P90) chance of recovery and "proven and probable reserves" constitute those with a 50% (known as a P50) chance of recovery.) Banks typically require: loan tenors to match production profiles as lenders seek full repayment by the earlier Reserves Tail Date and a short-to-medium term maturity of five to seven years; maintenance of coverage ratios: loan life cover, project life cover and debt service coverage ratios (see for example, RBL coverage ratios); fixed amortisation schedule and prepayment of cash (a cash sweep) to the extent that the outstanding of a loan facility exceed the borrowing base amount; secured project accounts (including those of the sponsor party to the Joint Operating Agreement (JOA) through which revenues are to pass in accordance with a payment waterfall; restrictions on further indebtedness; security including over borrower shares, collection and collateral accounts, borrower and group assets (including licences, JOAs, production sharing contracts, project documents), accounts, 17 PUL 822 ADVANCED OIL & GAS II insurances, hedge agreements, cross-guarantees by the companies owning the relevant assets; and an ability to add, or dispose of, the field assets on which the borrowing base is founded, subject to various conditions being met, including in relation to the provision of security and ability to service debt. Sponsor support may be required in the event that the offtake arrangements do not match the field's production capacity and, in a gas field context, long term gas sale and purchase agreements are usually required. 1.3.3 Capital Markets/Initial Public Offer This involves raising funds for the project through the issuing of securities. This can be on the primary or secondary market by trading in equity or debt securities. Equity involves the selling of ordinary and preference shares in the capital market. It is regarded as an Initial Public Offer (IPO) it is the company’s first time of selling shares. Subsequent sales are referred to as Public Offers. Listing on the Stock Exchange has several advantages for companies, in that it provides an easy access to funds from the public and also gives the company prominence and credibility. Nevertheless, only ten oil companies are listed on the Nigerian Stock Exchange and the only MNOC among them is Oando, which is an indigenous integrated oil and gas company. (What does the Nigerian Stock Exchange (NSE) require for new company to be listed?). The capitalisation of the oil and gas sector is N235,170,000,000 representing 1.49 percent of the total market capitalisation. The listing requirements of the Nigerian Stock Exchange (NSE) can be daunting for new companies. It stipulates that in order for a company to be listed, it must submit its financial statements and business records for the past five years with audited accounts of not more than nine months. Furthermore, the level of liquidity of the NSE is too low to finance oil and gas projects. Recently, MNOCs involved in exploration and production activities began listing their companies on foreign stock exchanges in order to fund their projects. These companies include Afren Oil, Heritage Oil, Eland Oil and Gas, Lekoil, Mart Resources and MP Nigeria which are listed on the London Stock Exchange (LSE) and the Alternative Investment Market (AIM). Lekoil in recent times raised the sum of £50,000,000 on the LSE to finance its oil exploration and production activities in Nigeria. 18 PUL 822 MODULE 2 1.4 Summary Opportunities exist in the industry to finance MNOCS and their affiliations with the NNPC and the Nigerian government. However, parties to agreements must be able to identify the best possible option for funding Oil and Gas activities before commencing any legally binding arrangement. You have been introduced in this unit to various corporate financing terms which will further improve your knowledge of this course. 1.5 References/Further Readings/Web Sources EY ‘Funding Challenges in the oil and gas sector: Innovative financing solutions for oil and gas companies’ pp 3-5. accessed 13 March 2020 Suzanne Szczetnikowicz and John Dewar ‘Financing options in the oil and gas industry’ pp. 11-12 accessed 13 March 2020 Michael Eboh Energy Financing: Nigerian banks come of age, Vanguard Newspaper 04 February 2014, accessed 5 February 2020 Ronke Alonge Funmilayo ‘Financing Oil and Gas Projects in Nigeria’ LLM Dissertation, University of Cape Town, pp 58-62. accessed 13 March 2020 19 PUL 822 ADVANCED OIL & GAS II 1.6 Possible Answers to Self-Assessment Exercise(s) 1. Reserve-based lending (RBL) is a common source of financing employed in the upstream sector which enables the raising of debt across a number of assets at various development stages and retention of a degree of operational flexibility 2. Initial Public Offer involves raising funds for the company through the issuing of securities. This can be on the primary or secondary market by trading in equity or debt securities. 20 PUL 822 MODULE 2 UNIT 2 Funding of Oil and Gas Development Unit Structure 2.1 Introduction 2.2 Learning Outcomes 2.3 Funding of Oil and Gas Exploration in Nigeria 2.3.1 Bonds 2.3.2 Multilateral Development Banks 2.4 Summary 2.5 References/Further Readings/Web Sources 2.6 Possible Answers to Self-Assessment Exercise(s) 2.1 Introduction Opportunities for MNOCs to optimise financing exist worldwide, including Nigeria. However, the benefits and drawbacks of each funding option must be carefully considered before embarking on same. For oil and gas development, funding usually requires reliance on bonds, bank loans and multilateral development banks. 2.2 Learning Outcomes By the end of this unit, you will be able to: discuss the funding measures utilised in the petroleum industry; explain the term ‘bond’; and analyse other funding mechanisms. This unit discusses the possible funding measures utilised in the downstream sector of the petroleum industry. 2.3 Funding of Oil and Gas Exploration in Nigeria The key sources of oil and gas funding in its development and production include public bonds/retail bonds and multilateral development banks. Self-Assessment Exercises 1. What is the use of bonds? 2. Explain the ways in which loan from World Bank can occur. 21 PUL 822 ADVANCED OIL & GAS II 2.3.1 Bonds Bond markets are increasingly being accessed to finance new development opportunities within the mid-cap exploration and production (E&P) sector. Bonds provide capital with fewer continuing obligations than bank loans. Most bonds are issued in the public bond market and this will continue to be the case, although the private placement market also provides an important liquidity source. Companies are increasingly using private transactions to place subordinated notes with selected investors. The attraction of private placement is around flexibility on maturity and greater certainty around execution. Retail bonds are also likely to be more widely used by small to mid-cap companies looking to diversify from traditional bank funding at the same time as extending repayment periods. This could be an alternative option for companies where issue sizes have been too small to access the wholesale bond market. However, there is a risk that if a company publicly states how much it wants to raise and then fails to reach that target, this may negatively impact investor sentiment. Also, retail bond demand can be volatile, with many governments seeking to maximise in-country value. 2.3.2 Multilateral Development Banks Multilateral Development Banks offer financial assistance and analogous professional advice for developing countries. They are very essential in funding projects in developing countries as they are prominent participants in privatisation policies, provide financial assistance in countries with high political risk, and encourage financing in the private sector. a. International Bank for Reconstruction and Development (IBRD) The IBRD which is otherwise known as the World Bank was established in 1944 and caters for developing countries with average income and high credibility. It provides long-term finance for infrastructural projects. The World Bank assists in creating a conducive environment to encourage financing by the private sector. This is done through provision of loans, guarantees, technical assistance and rendering of advice on diverse issues. Furthermore, it assists in financing oil and gas projects by providing guarantees for the loans from the lenders against the country’s political and economic risk. For the World Bank to lend money for a project, it must be considered successful; that is, must have a ten percent rate of economic return. The World Bank also ensures adherence to best environmental practices and requires the host country (HC) to maintain 22 PUL 822 MODULE 2 transparency in the management of the oil revenue and protection of the public interest. b. The World Bank The World Bank is better suited to deal with political risk better than commercial banks. Loans from the World Bank can occur in two forms. Firstly, it can be directly to the project company. It can also lend funds to the host country (HC) which re-lends it to the project company. The direct lending to a project company entails a loan agreement between the World Bank and the project company while the HC acts as a guarantor. The World Bank also offers partial risk guarantees (PRGs) to countries eligible for borrowing from the International Bank for Reconstruction and Development (IBRD) and International Development Agency (IDA). They are used in private sector investments to protect lenders against political risk. It guards against risks by government of the HC such as currency convertibility, expropriation, change of law and breach of contract. In return, the government of the HC covers risks such as political violence, war and expropriation and indemnifies the IBRD for the repayment of any advances made to the lenders under the PRG. This is set out in a government support agreement. This guarantee is not popular in project finance as it is mostly accessible to investors who are in financing agreements with the government or special purpose vehicle (SPV) guaranteed by the government. Currently, the World Bank does the following, including:  Assisting governments in the environmental clean-up of existing oil and gas facilities and in establishing standards and institutions required for monitoring the environmental impacts of oil and gas projects.  Facilitating international trade projects (mainly gas pipelines but also liquefied natural gas projects and oil pipelines). Gas pipeline projects may particularly benefit from Bank support because, as investments with long payback periods, no alternative uses, and often uncertain local markets, they are seen by private investors as relatively risky. World Bank participation as a facilitator is warranted in projects that are very complex and that require direct participation by the state or a state company.  Financing urgent, economically sound projects in oil development, processing, transmission and distribution - but only in the absence of sufficient private sector resources. 23 PUL 822 ADVANCED OIL & GAS II c. The African Development Bank The AfDB provides financial assistance to both the public and private sector through loans, equity investments of either ordinary or preferred shares in a SPV and provision of PRGs to private investors to cover government risks. In addition, it also renders technical assistance and advisory services. The AfDB has provided financial support for few oil and gas projects in Africa. In 2010, the AfDB financed the Hasdrubal oil and gas field development project in Tunisia with a $150,000,000 corporate loan. (Discuss the major sources of oil and gas funding in Nigeria). The loan agreement was entered into and signed by the AfDB Group and the Enterprise Tunisienne d'Activités Pétrolières (ETAP) which is the Tunisia State Oil Corporation and the project includes the construction of a stand-alone gas, condensate and oil production system, an offshore gas pipeline and six offshore horizontal producing wells. The project is a joint venture by British Gas Tunisia Limited and ETAP and is expected to be a source of revenue for the government. The AfDB has been supportive towards some of its infrastructural and agricultural projects. In 2002, the AfDB granted a 10-year term loan to NLNG expansion project. 2.4 Summary The use of bonds and multilateral development banks as a source of funding for oil and gas development in Nigeria has its drawbacks which include greater ancillary business requirements, timeline for repayments, etc. Nevertheless, these options remain the most popular for oil and gas industry. This unit further introduces you to financial terms and requires further study of the student on these financial alternatives utilised in the oil and gas industry. 2.5 References/Further Readings/Web Sources Hossein Razavi ‘Financing Oil and Gas Projects in Developing Countries’ (1996) /finance and Development, pp 4-5, accessed 16 March 2020 Oil and Gas Policy Issues, available at accessed 16 March 2020. 24 PUL 822 MODULE 2 World Bank Guarantees: ‘Countries and Project Eligibility’, accessed 11 March 2020 World Bank :Affiliates, accessed 13 March 2020. Ronke Alonge Funmilayo ‘Financing Oil and Gas Projects in Nigeria’ LLM /dissertation, university of cape town, pp 66-70-71. accessed 13 March 2020 EY ‘Funding Challenges in the oil and gas sector: Innovative financing solutions for oil and gas companies’ pp 2-3, 5-6. accessed 13 March 2020 Suzanne Szczetnikowicz and John Dewar ‘Financing options in the oil and gas industry’ pp. 28 accessed 13 March 2020 25 PUL 822 ADVANCED OIL & GAS II 2.6 Possible Answers to Self-Assessment Exercise(s) 1. Bonds provide capital with fewer continuing obligations than bank loans. 2. Loans from the World Bank can occur in two forms. Firstly, it can be directly to the project company. It can also lend funds to the host country (HC) which re-lends it to the project company. 26 PUL 822 MODULE 2 UNIT 3 Oil and Gas Financing Structure Unit Structure 3.1 Introduction 3.2 Learning Outcomes 3.3 Oil and Gas Financing Structure in Nigeria 3.3.1 Challenges Associated with the Financing Structure 3.4 Summary 3.5 References/Further Readings/Web Sources 3.6 Possible Answers to Self-Assessment Exercise(s) 3.1 Introduction The oil and gas sector in Nigeria remains the major source of revenue in Nigeria. Despite fluctuating prices of oil and gas in the global market, it is still a major source of economic development all around the world. However, it is important to identify and understand the nature of the financing structure in the oil and gas industry in Nigeria, which is the purport of this unit. 3.2 Learning Outcomes By the end of this unit, you will be able to: discuss the funding structure of oil and gas industry in Nigeria; and analyse the challenges associated with the structure. 3.3 Oil and Gas Financing Structure in Nigeria The financing structure for the upstream oil and gas sector in Nigeria consists of the following: a. Joint Venture: This is a financing arrangement where the Nigerian Government represented by the NNPC and MNOCS contribute to funding oil operations and share crude oil discovered in the same ratio. b. Production Sharing Contracts: This is a financing arrangement where the NNPC engages the MNOCS as a contractor on behalf of itself and the NNPC. The contractor is entitled to recover cost of operation upon successful completion. 27 PUL 822 ADVANCED OIL & GAS II c. Service Contract: Under this financing arrangement, the NNPC engages the MNOCs as a contractor solely on behalf of NNPC with NNPC retaining ownership of the concessionary right. The financing structure for the downstream oil and gas sector in Nigeria is as follows: a. Refineries are publicly owned. b. Bank loans or other financing alternative are used in financing importation of crude oil. c. Government fixes the prices of fuel rather than allow for the market to determine the price. d. Subsidy on fuel prices. Self-Assessment Exercises 1. Identify the challenges of the financing structure 2. How can these challenges be tackled? 3.3.1 Challenges Associated with the Financing Structure i. Upstream Sector: The challenges associated with financing in this sector include the following: insufficient funding by Government failing to honor the financing terms of the contract promptly; unavailability of long-term financing; and financing structure does not give room for development of other ancillary sectors. For example, development of rail and pipelines for transportation of crude oil, multiple tax and tax evasion. ii. Downstream Sector: The challenges associated with financing this sector include the following: bank loans are short term; poor financing as loans is usually expensive; subsidy does not allow room for competition; government involvement crowds out private investors; and viability of financing infrastructure projects. (Discuss the challenges associated with Oil and Gas Financing Structure in Nigeria) The solutions to these challenges include: switching from public private partnership to private public partnership; private investors being more proactive with regards to oil and gas financing with the government providing the conducive environment for same; and government adopting a risk mechanism framework which facilitates private financing. 28 PUL 822 MODULE 2 3.4 Summary The financing structure of the oil and gas industry in Nigeria varies according to the requirements of the MNOCs, players in the industry and the Nigerian government. This unit has identified the financing structure of the upstream and downstream sector of the oil and gas industry and challenges associated with same. You should be able to effectively discuss these among yourselves and identify other possible solutions to these challenges 3.5 References/Further Readings/Web Sources ‘Financing the Oil and Gas Sector in Nigeria – A critical evaluation’ accessed 13 March 2020 29 PUL 822 ADVANCED OIL & GAS II 3.6 Possible Answers to Self-Assessment Exercise(s) 1. The challenges include: insufficient funding by Government failing to honor the financing terms of the contract promptly and unavailability of long-term financing. 2. There should be a switch from public private partnership to private public partnership. 30 PUL 822 MODULE 2 UNIT 4 Alternative Funding Unit Structure 4.1 Introduction 4.2 Learning Outcomes 4.3 Alternative Funding 4.3.1 Expansion Financing 4.3.2 Refinancing 4.4 Summary 4.5 References/Further Readings/Web Sources 4.6 Possible Answers to Self-Assessment Exercise(s) 4.1 Introduction The sourcing of funds for oil and gas development and financing is not usually an easy task, as has been identified in the previous three Units of this Module. However, there are additional sources of funding which could be considered by parties who seek to become involved in the oil and gas industry. 4.2 Learning Outcomes By the end of this unit, you will be able to: discuss the alternative funding; explain the term ‘refinancing’; and analyse expansion financing. 4.3 Alternative Funding Self-Assessment Exercises 1. Discuss the term ‘expansion financing’ 2. What is refinancing? 4.3.1 Expansion Financing It is not uncommon in an oil and gas financing context for the sponsors to seek a change in project scope, whether by way of neighbouring field development for which the sponsor already has permits and licences, or whether by constructing a new complementary unit within an existing complex. Production from complex petrochemical plants or refineries can be enhanced through a process known as "debottlenecking", through 31 PUL 822 ADVANCED OIL & GAS II which existing operating components of the project are modified to enable them to run more efficiently. The loan agreements will often permit a pre- agreed quantum of project revenues to be applied from the project company's accounts waterfall for debottlenecking, but only after first meeting any principal and financing cost payment, prepayment obligations and ahead of the making of any distributions. Such expansion projects can also be achieved through the application of the project's revenue streams, but the finance documents may specifically provide for expansions. Existing third-party financiers will be concerned to ensure that there is no material impact on the existing operations to the detriment of the cashflow applied to meet the project's debt service obligations. In a downstream project financing context, the sponsors may agree upfront with their financiers that the documents provide for such potential expansion, subject to various conditions being fulfilled including that: it will not occur until completion of construction and there is an identified acceptable offtake arrangement for products from the expansion facilities. The lenders may allow the project to incur further secured debt from the existing banking group or, alternatively, the sponsor parties may consider refinancing in full if more favourable or cheaper terms are available in the market. Hedging typically, minimum and maximum hedging requirements are specified in the terms of the finance documents. The commodity hedging element of this is particularly important in an oil and gas context to the extent that the offtake (and therefore the borrower and its ability to service debt) is exposed to changing commodities prices (that is, external market forces over which the borrower has little or no control) without any floor. (Compare and contrast ‘expansion financing’ and ‘refinancing’ as aspects of alternative funding). The inclusion of commodity hedging within a financing structure will be in addition to: any interest rate hedging that may be required to mitigate the extent of floating rate facilities and any currency hedging in respect of the offtake arrangements, which may be payable in an alternative currency to that of the loan repayments. It is critical also in an RBL context that the calculation of the borrowing base amount should be negotiated to take into account any hedging payments or receipts, and that the lenders are protected from the borrower over-hedging (that is, hedging an amount greater than the total risk exposure). 4.3.2 Refinancing As noted in a number of sections above, it is not uncommon for the financing of an oil and gas developmental project to contemplate or even incentivise refinancing at a later juncture through step-up adjustments to 32 PUL 822 MODULE 2 margin over time (a margin “ratchet”) and often using alternative financing structures. Project bonds have been used to refinance loan facilities in the midstream and upstream sectors. Once construction is complete, the sponsors may consider refinancing on more advantageous terms due to the lower risk associated with operational projects and investors no longer having to assume construction risk, but market terms may, at that point, not be sufficiently favourable or the conditions as liquid to provide an attractive financing alternative. One option for the generation of cash when a project is operational is to transfer all or part of a sponsor's shareholding or working interest in the project, subject to the existing transfer restrictions in the constitutive documents and any third party financing documents already in place. Pension funds and insurers, for example, have long-term investment horizons but seek to minimise volatility of returns, which means that operational assets will tend to be more attractive to them. 4.4 Summary These alternative sources of funding in the oil and gas industry merely serve to broaden the realm of possibilities for players in the industry, and a consideration of the risks associated with a proposed project. Overall, these funding sources help to facilitate growth of the industry and provide scope for government and potential investors to participate in industry. This unit contains financial terms associated with financing of the oil and gas industry. It serves to expose you to terms beyond law which are an inextricable part of the industry. 4.5 References/Further Readings/Web Sources Suzanne Szczetnikowicz and John Dewar ‘Financing options in the oil and gas industry’ pp. 28 - 30 accessed 13 March 2020 33 PUL 822 ADVANCED OIL & GAS II 4.6 Possible Answers to Self-Assessment Exercise(s) 1. An oil and gas sponsors can seek expansion through financing context for the sponsors to seek a change in project scope, whether by way of neighbouring field development for which the sponsor already has permits and licences, or whether by constructing a new complementary unit within an existing complex through which existing operating components of the project are modified to enable them to run more efficiently, called debottlenecking through a loan agreement. 2. Refinancing - for the financing of an oil and gas developmental project to contemplate or even incentivise refinancings at a later juncture through step-up adjustments to margin over time and often using alternative financing structures; sponsors consider refinancing on more advantageous terms due to the lower risk associated with operational projects and investors no longer having to assume construction risk, but market terms may, at that point, not be sufficiently favourable or the conditions as liquid to provide an attractive financing alternative. 34 PUL 822 MODULE 3 MODULE 3 TAXATION AND FISCAL REGIMES OF OIL AND GAS UNIT 1 Nature of Petroleum Profit Tax Unit Structure 1.1 Introduction 1.2 Learning Outcomes 1.3 Nature of Petroleum Profit Tax 1.4 Summary 1.5 References/Further Readings/Web Sources 1.6 Possible Answers to Self-Assessment Exercise(s) 1.1 Introduction A tax is defined as an involuntary fee that is levied on corporate organisations and individuals and is enforced by a government entity to finance government activities. The imposition of tax by the government is one of the ways that government can finance its expenditure which includes public debt, printing of currency, sale of assets, and drawing down of cash reserve with the Central Bank. A tax system offers itself as one of the most effective means of mobilising a nation’s internal resources and it lends itself to creating an environment conducive to the promotion of economic growth. Oil is the dominant source of government revenue, accounting for about 90 percent of total exports, and this approximates to 80% of total government revenues. This unit thus examines the nature of petroleum profit tax in Nigeria in relation to the oil and gas industry. 1.2 Learning Outcomes By the end of this unit, you will be able to: identify and explain petroleum profit tax; discuss its applicability to the petroleum industry in Nigeria; and understand the objectives of petroleum taxation in Nigeria. 1.3 Nature of Petroleum Profit Tax Definition of Petroleum Profit Tax Petroleum Profit Tax (PPT) is a tax applicable to upstream operations in the oil industry. It is particularly related to rents, royalties, margins and 35 PUL 822 ADVANCED OIL & GAS II profit-sharing elements associated with oil mining, prospecting and exploration leases. It is the most important tax in Nigeria in terms of its share of total revenue contributing 70 and 95 percent of foreign exchange earnings and government revenue, respectively. Self-Assessment Exercises 1. What do you understand by petroleum profit tax? 2. Discuss the benefits of the Petroleum Profit Tax Act to the oil and gas industry in Nigeria. Objectives of Petroleum Taxation in Nigeria The following are the objectives of petroleum taxation in Nigeria: a. To achieve government’s objective of exercising right and control over the public asset, government imposes very high tax as a way of regulating the number of participants in the industry and discouraging its rapid depletion in order to conserve some of it for future generation. This in effect will achieve government’s aim of controlling the petroleum sector development. b. The high profit profile of a successful investment in the oil industry makes it a veritable source for satisfying government objective of raising money to meet its socio-political and economic obligations to the citizenry. c. To redistribute wealth between the wealthy and industrialised economics represented by the multinational organisations, who own the technology, expertise and capital needed to develop the industry, and the poor and emerging economies from where the petroleum resources are extracted. d. The high potential for environmental pollution and degradation stemming from industry activities makes it a target for environmental taxation, as a way of regulating its activity and promoting government quest for a cleaner and healthy environment. e. Cleaner production may be achieved by imposing tax on it for pollution and environmental offences. Under the Petroleum Profits Tax Act Cap P13, LFN 2004 an oil company, in computing its taxable profits from petroleum operations, is entitled to deduct all outgoings and expenses which are wholly, exclusively and necessarily incurred by such company for the purpose of such petroleum operations. (Enumerate the Objectives of Petroleum Taxation in Nigeria) The petroleum tax system has also been designed to provide neutrality, so that an investment project which is profitable for an investor before tax 36 PUL 822 MODULE 3 will also be profitable after tax. This makes it possible to harmonise the desire to secure significant revenues for the community with the requirement to provide sufficient post-tax profitability for the companies. Nigerian Legislation on Petroleum Profit Tax Petroleum Profits Tax Act (PPTA) The Petroleum Profits Tax Act (PPTA) is the primary legislation that deals with the taxation of petroleum activities in the upstream petroleum sector. The Act subjects exploration and production companies to pay the rate of 85% of their assessable profits to the government. The key points addressed in the legislation are as follows. i. Pursuant to Section 21, assessable tax is charged at 85% of the chargeable profits of the company for an accounting period. However, for companies that have not fully amortised their pre- production capitalised expenditure, the PPTA imposes a tax rate of 65.75%. ii. Under Section 9, a mechanism for the ascertainment of adjusted, assessable and chargeable profits is provided. iii. The Act provides for the deductions allowable in ascertaining the adjusted, assessable and chargeable profits of a company. Such deductions include: i. rents incurred by the company in respect of land or buildings occupied under an oil prospecting license OPL or an OML; ii. royalties payable by the company on the chargeable value of natural gas, crude oil and casing-head petroleum spirit produced in Nigeria; iii. interest payable on amounts borrowed where such sums borrowed are used in the carrying on of petroleum operations; and iv. expenses incurred in the repair of premises, plant, machinery or fixtures for the carrying on of petroleum operations. Current rates under the PPTA are as follows: a. 85 percent on onshore operations (but 65.75 percent of the chargeable profits for the first five accounting periods of a new company); b. 50 percent on offshore operations in territorial waters and continental shelf area up to and including 1,000m water depth; 37 PUL 822 ADVANCED OIL & GAS II c. Under The Deep Offshore (and Inland Basin) Production Sharing Contract’ d. (i) 50 percent investment tax credit (ITC) for PSC signed before 1999. Companies operating under a PSC with NNPC can claim ITC as an offset against tax in accordance with the provisions of the PSC. The ITC rate applicable to the contract area shall be 50 percent flat of the chargeable profit for the duration of the PSC; and (ii) 50 percent investment tax allowance for contracts signed post-1999. Sections 11 and 12 provide the incentives for companies engaged in the utilisation of associated and non-associated gas. Note that there is a bill (Petroleum Industry Fiscal Bill) pending before the national assembly that, if passed, will repeal the PPTA. PPTA and the Gas Sector Section 11 of the PPTA sets out provisions as to the incentives available for utilisation of associated gas. Although the primary purpose of these incentives is to encourage companies already carrying out petroleum operations to utilise rather than flare the associated gas encountered in the course of oil production, these incentives are also applicable to non- associated gas-utilisation projects. (Discuss the relevance of PPTA in relation to gas sector in Nigeria). The incentives are allowable expenses for upstream operations (investment for separating crude oil and gas from a reservoir into usable products are treated as part of oil field development and therefore treated as an allowable expense); and investment in gas infrastructure (treatment of capital investment on facilities equipment to deliver gas in usable form as part of capital investment for oil development, therefore, is tax deductible). Critique of the Petroleum Tax Administration in Nigeria The institutional capacity to administer petroleum taxes effectively is woefully lacking. Procedures, reinforced by third party audits, appear to ensure that taxes are paid and received albeit with potentially serious and costly internal lags. However, Nigeria lacks capacity (a) to assess the reasonableness of the returns submitted by taxpayers, including costs; (b) to develop petroleum tax policy; or (c) to assess or negotiate proposals for change. Staffing, skills, pay scales, other funding, computer and IT infrastructure are all issues that need to be addressed urgently. These comments apply to each of the several agencies involved in oil and gas tax administration: FIRS, CBN, NAPIMS, DPR, and the Ministry of Petroleum Resources. 38 PUL 822 MODULE 3 Companies Income Tax Act The Companies Income Tax Act is the primary legislation governing the taxation of companies in Nigeria and applies to companies operating in the downstream petroleum sector. The current companies’ income tax rate is 30% of the profits of a company. Oil Pipelines Act The Oil Pipelines Act 1965 provides the framework for the establishment and maintenance of pipelines incidental and supplementary to oilfields and oil mining. The key points addressed in this legislation include (i) the power of the Minister to grant permits to survey routes for oil pipelines and (ii) the power of the Minister to grant licences to construct, maintain and operate oil pipelines. Deep Offshore and Inland Basin Production Sharing Contract The Deep Offshore and Inland Basin Production Sharing Contract Act 1993 provides for the fiscal terms and incentives given to companies operating in the deep offshore and inland basin area under PSCs with the NNPC. The applicable petroleum profit tax rate for these companies is a flat rate of 50% of the chargeable profits made for the duration of the PSC. Other applicable taxes The NDDC tax requires the payment to the Commission of 3 percent of the total annual budget of any oil-producing company operating, onshore and offshore, in the Niger Delta Area; including gas processing companies for the development of the region. The Education Tax Act provides for the imposition of annual taxes at 2 percent of assessable profits on oil and gas companies for the development of Nigeria's educational sector. Royalty is also charged at a graduated rate of zero percent in areas beyond 1,000 metres water depth to 20 percent in onshore areas of operations. The National Petroleum Fiscal Policy provides a flat royalty rate of 5 percent to small fields. Royalties can be paid in cash or by delivery of an equivalent volume of petroleum. Applicable Tax authority The Board of Inland Revenue of the Federal Inland Revenue Service is the policymaking body that administers matters of federal tax and has exclusive jurisdiction over petroleum taxation in Nigeria. (Briefly evaluate the petroleum, tax administration in Nigeria). 39 PUL 822 ADVANCED OIL & GAS II 1.4 Summary The Petroleum Profits Tax regime in Nigeria is well provided for, with a significant impact on the revenue and economic development in Nigeria. As such, this regime must be continually monitored to prevent corruption in the petroleum profit tax administration. This unit introduces you to the various types of taxes utilised or charged in the petroleum industry in Nigeria and the attendant legislations. 1.5 References/Further Readings/Web Sources Oyebisi, M. O. et al (2017). ‘Impact of Direct and Indirect Tax on the Nigerian Economic Growth’ Binus Business Review 8 (3) 215. Onaolapo A. Abdul-Rahamoh, Fasina Taiwo and Adegbite Adejare ‘The Analysis of the Effect of Petroleum Profit Tax on the Nigerian Economy’ pp 26, 28, 30 accessed 20 March 2020 Nwete, B. O. (2004).“How can Tax Allowances Promote Investment in Nigerian Petroleum Industry’. Odusola, A. (2006). “Tax policy reforms in Nigeria”, World Institute for Development Economics and Research, Research Paper No. 2006/03. accessed 20 March 2020 Kjell, L. and Petter, O. (2011). ‘Petroleum Taxation: Experience and Issues’. Israel Aye, Laura Alakija, Olaoluwa Duntoye and Uche Odigili ‘Nigeria’ (2019) The Oil and Gas Law Review - Edition 7 accessed 10 February 2020 Chambers and Partners ‘Energy: Oil and Gas 2019’ accessed 20 March 2020 ‘The Procedure for Oil Prospecting License in Nigeria’ accessed 20 March 2020 40 PUL 822 MODULE 3 Joint UNDP/World Bank Energy Sector Management Assistance Programme (ESMAP) ‘Taxation and State Participation in Nigeria’s Oil and Gas Sector’ (International Bank for Reconstruction and Development/The World Bank: Washington DC, USA, August 2004) pp 49. accessed 16 March 2020 Patrick Ndubisi Oche op.cit 41 PUL 822 ADVANCED OIL & GAS II 1.6 Possible Answers to Self-Assessment Exercises 1. Petroleum Profit Tax - is the primary legislation that deals with the taxation of petroleum activities in the upstream petroleum sector. 2. The Act subjects exploration and production companies to pay the rate of 85% of their assessable profits to the government. It is particularly related to rents, royalties, margins and profit-sharing elements associated with oil mining, prospecting and exploration leases. 42 PUL 822 MODULE 3 UNIT 2 Indirect Taxation Unit Structure 2.1 Introduction 2.2 Learning outcomes 2.3 Indirect Taxation 2.4 Summary 2.5 References/Further Readings/Web Sources 2.6 Possible Answers to Self-Assessment Exercise(s) 2.1 Introduction Every modern state or nation requires a lot of revenue to provide and maintain essential services for its citizens. One of the sources of revenue for the government is through the imposition of tax. The primary function of a tax system is to raise enough revenue to finance essential expenditures on the goods and services provided by government; and tax remains one of the best instruments to boost the potentials for public sector performance and repayment of public debt. In Nigeria, there are two types of taxation system: direct taxation and indirect tax (i.e. sales tax, per unit tax, valued added tax VAT or goods and services tax (GST)). The direct taxes are usually collected by government from the persons (legal or natural) on whom it is imposed, while the indirect tax is paid indirectly by the final consumer of goods and services while paying for the purchase of goods or for enjoying services. 2.2 Learning outcomes By the end of this unit, you will be able to:  discuss the nature of indirect taxes in Nigeria;  explain the types of indirect tax; and  differentiate indirect tax from the petroleum profits tax. 2.3 Indirect Taxation The various types of indirect tax are set out below. Value Added Tax is a consumption tax levied on the increase in value of goods and services in the course of their production or supply. Value Added Tax (VAT) was introduced in Nigeria by the recommendation of a study group. This group recommended that VAT should be administered by an independent committee which was inaugurated by the government 43 PUL 822 ADVANCED OIL & GAS II under the decree 102 of 1993. This marked the passing out of sales tax decree no 7 of 1986. The decree took effect from the 1st of December 1993 but due to the administration’s arrangement involving tax purposes, the implementation of VAT did not commence until 1st January 1994. The announcement on the implementation was delivered by the then Head of state, Late Gen. Sani Abacha, during a budget broadcast. The general administration of VAT in Nigeria is placed under the administration of the Federal Inland Revenue service (FIRS). The aim of this tax was to increase the revenue base of government and make funds available for developmental purposes. It is currently charged at 10% of the value of all taxable goods and services in Nigeria, compared to the usual 5%. Self-Assessment Exercises 1. What are the advantages of Value Added Tax to the Nigerian economy? 2. Explain the term ‘Customs and Export Duties’ Requirement of Registration for VAT Every person that qualifies as a taxable person under the VAT Act is required to register with the Federal Inland Revenue Service (FIRS). A taxable person is defined by the VAT Act as any person who carries out economic activity in a place for the purpose of obtaining income by way of trade or business. (Define with examples, the term ‘indirect tax’). This would include resident and non-resident companies, partnerships, sole proprietorships, etc. The registration should be completed upon registration of a business entity in Nigeria. Monthly Returns on VAT This is required to be submitted monthly, or before the twenty-first day of the month following the tax period. Penalties for Non-compliance with provisions of the VAT Act In the event of non-compliance, the following penalties are charged:  NGN10,000 for non-registration the first month and NGN5,000 for each subsequent month not registered;  NGN5,000 per month for late submission and outstanding returns;  5 percent and interest at the prevailing commercial lending rate (currently about 21 percent per annum) for non-payment of VAT; 44 PUL 822 MODULE 3  50 percent of the cost of the goods or services for which tax invoices were not issued; and  150 percent of VAT not collected by a registered person and 5 percent interest above the Central Bank rate. Customs and Export Duties (CED) Custom duties are commodity taxes on imports and exports. Custom duties are the highest yielding indirect tax. Customs duty is based generally on the value of goods or upon the weight, dimensions, or some other criteria that will be determined by the state. The tax is administered by the Nigerian Custom Services (NCS). It is believed that duties on imports are against the principle of comparative cost thereby restricts the full development of international trade. Import duties are also used in protecting infant industries in the country. The burden of export duties is passed on to the foreign country in form of increased prices. The burden of import duties falls on the consumers of the goods and services that it is levied on. Excise duties are commodity taxes levied on goods manufactured within the country. They are charged either as a percentage of the value of import or a fixed amount on specific quantity. This indirect tax does not only serve the purpose of raising revenue for the country but also to discourage the consumption of certain goods. 2.4 Summary Indirect taxes are very relevant in Nigeria’s economy. VAT affects a larger spectrum of the society because it is based on consumption. The introduction of the Value Added Tax to replace the former sales tax is very good, since it has a great impact on government revenue which has made significant attempts to increase revenue for the society. This unit highlights briefly the kinds of indirect taxes which obtains in Nigeria. You are now properly acquainted with nature of VAT and CED tax in Nigeria 2.5 References/Further Readings/Web Sources Ikeokwu, Q. C. and Leyira, C. M. (2019). ‘Indirect Taxes and Economic Growth in Nigeria’. Advance Journal of Management, Accounting and Finance 4 (4) pp 13 – 17. Fasoranti, M.M. (2013). Tax productivity and economic growth. Lorem Journal of Business and Economics, 1(1), 1-10 at 10. 45 PUL 822 ADVANCED OIL & GAS II KPMG ‘Nigeria – Indirect Tax Guide’ accessed 20 March 2020 ‘The Effect of Indirect Taxation on Consumption in Nigeria’ accessed 20 March 2020 Peter, O. I. and Adesina, O. O. (2015). ‘Indirect Taxes and Economic Growth in Nigeria’. pp 346, 349, 351. 2.6 Possible Answers to Self-Assessment Exercise(s) 1. The Advantages of VAT is to increase the revenue base of government and make funds available for developmental purposes, currently charged at 10% of the value of all taxable goods and services in Nigeria, compared to the usual 5%. 2. Custom and excise duties - Custom duties are commodity taxes on imports and exports. They are the highest yielding indirect tax. Customs duty is based generally on the value of goods or upon the weight, dimensions, or some other criteria that will be determined by the state. 46 PUL 822 MODULE 3 47 PUL 822 ADVANCED OIL & GAS II UNIT 3 Taxation in the Joint Development Zone (JDZ) Unit Structure 3.1 Introduction 3.2 Learning outcomes 3.3 Taxation in Joint Development Zones 3.3.1 Taxation under the Joint Development 3.4 Summary 3.5 References/Further Readings/Web Sources 3.6 Possible Answers to Self-Assessment Exercise(s) 3.1 Introduction The Treaty between the Federal Republic of Nigeria and the

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