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A Critique of the sanctity of OPL & OML within the context of the NNPC -

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Monday, October 28, 2013 13:39 PM / Theophilus Olusegun Obayemi II

 

A CRITIQUE OF THE SANCTITY OF OIL PROSPECTING LICENSES (“OPL”) AND OIL MINING LEASES (“OML”) IN NIGERIA: WITHIN THE CONTEXT OF NIGERIAN NATIONAL PETROLEUM CORPORATION (NNPC) VS FAMFA OIL LIMITED, (2012) 17 N.W.L.R. Pt 148/(2012) C.L.R. 5(a)(SC)

 

Dr. Theophilus Olusegun OBAYEMI, II*

 

“The clear intention of the legislature is that negotiations should take place between the Minister of petroleum and the applicant of the OML. The reasoning of the legislature is that the Minister while negotiating must take into account the huge sums of money spent by the applicant drilling for oil, and ensure that 50% stake of the Federal Government in the OML is well taken care of in terms acceptable to the Government.

 

The question to be answered is did the Minister for Petroleum negotiate with the applicant?”

 

See Hon Bode Rhodes-Vivour, JSC in NNPC vs Famfa Oil, (2012) C.L.R. 5(a)(SC) at p. 27.

 

I.         Introduction

 

Our concluding thesis in this paper is to argue that the 2012 Draft Nigerian Petroleum Industry Bill (PIB) falls short of affording due process rights to both foreign and local oil industry investors.

 

We also adopt United States Supreme Court Justice John Alito’s opinion in Koontz v. St. Johns River Water Management District, 570 U.S. ___, No. 11-1447, slip op. (June 25, 2013) by the United States Supreme Court which now expands the scope of the Takings Clause of the Fifth Amendment:

 

“Extortionate demands for property in the land-use permitting context run afoul of the Takings Clause not because they take property but because they impermissibly burden the right not to have property taken without just compensation.

 

International wealth discuss evinces that the Nigerian fashion designer and oil magnate Folorunsho Alakija is the richest black woman in the world, with a net worth at $7.5 billion. Few are aware that Alakija took the Nigerian federal government to 3-tiers of courts and prevailed. Alakija owns FAMFA OIL Nigeria Limited (“Famfa”). In NIGERIAN NATIONAL PETROLEUM CORPORATION (NNPC) VS FAMFA OIL LIMITED, (2012) 17 N.W.L.R. Pt 148/(2012) C.L.R. 5(a)(SC), the Nigerian Supreme Court laid down the rules governing the scope of the powers conferred on the Nigerian Minister of Petroleum under the Deep Water Block Allocations to Companies (Back-in-Rights) Regulations 2003—(the Regulations).

 

As will be seen below, the decision in NNPC vs Famfa ultimately turned on an administrative law issue: i.e., whether the Nigerian Minister of Petroleum can disregard the provisions of a principal legislation (in this case an Act made by the Federal Legislature) where the principal legislation conflicts with the provisions of a subsidiary/secondary relation made by the Minister under the powers conferred by the federal legislation?

 

It does not take a degree in nuclear science to recognize that a principal legislation takes precedence over and above the subsidiary legislation where there is a conflict. Stated in another way, the provisions laid down under the Nigerian Petroleum Act supercede the powers conferred on the Nigerian Minister of Petroleum under the Deep Water Block Allocations to Companies (Back-in-Rights) Regulations 2003—(the Regulations).

 

This point was succinctly laid down by Hon Rhodes-Vivour, JSC thus:

 

The Back-in-Right Regulation 2003 is a subsidiary legislation promulgated by the Minister under Section 9 (a) and (h) of the Petroleum Act. The Petroleum Act is substantive or Principal Law. It is the principal law that provides subsidiary legislation the source of its existence. Without Principal Law, there can be no subsidiary legislation, and so subsidiary legislation must conform with the principal law.

 

The Petroleum Act is principal law, a statute. Where it prescribes a particular method of exercising statutory power, the procedure so laid down must be followed without any deviation whatsoever. See F.G.N v. Zebra Energy Ltd. (2002) 18 NWLR (Pt. 798) p. 162; Ogulaji v. A.G. Rivers State (1997) 6 NWLR (Pt. 508) p. 209; UNTHMB v. Nnoli (1994) 5 NWLR (Pt. 363) p. 376.

 

If any provision of the Regulations are inconsistent with the provisions of the Act/Statute the provisions of the Regulation shall to the extent of the inconsistency be declared void.

 

See Hon Bode Rhodes-Vivour, JSC in NNPC vs Famfa Oil, (2012) C.L.R. 5(a)(SC) at p. 36.

 

This is also in accord with Section 44(3) of the Constitution of the Federal Republic of Nigeria (1999)

 

Section 44…

                             ***

(3) Notwithstanding the foregoing provisions of this section, the entire property in and control of all minerals, mineral oils and natural gas in under or upon any land in Nigeria or in, under or upon the territorial waters and the Exclusive Economic Zone of Nigeria shall vest in the Government of the Federation and shall be managed in such manner as may be prescribed by the National Assembly. (emphasis added).

 

II.       Background

 

As a starting point, all property law practitioners know that Section 44(1) of the Nigerian Constitution, 1999 (“the Nigerian Constitution”) and Section 25 of the Nigerian Investment Promotion Commission Act (“NIPC”), CAP N117 Laws of the Federation of Nigeria, 2004, both expressly prohibit expropriation without compensation.

 

Nigerian petroleum law practitioners will readily inform you that, the Petroleum Act 1969 (the “Petroleum Act”) (1969 Cap. P10 LFN 2004) also makes provisions for a process of negotiation before the Federal Government can acquire participating interest in a venture in which an oil mining lease (“OML”) is implicated. The law is clear that where the government exercises its “takings” and “acquisition” supposedly in the public’s interest, it is mandated to negotiate the terms with previous grantee.

 

We further analyze the provisions of the Nigerian Petroleum Act and those of the Nigerian Land Use Act 1976 (“the LUA”) (Cap. 202 LFN 2004) within the context of other common law jurisdictions. We examine and critique the power of the Nigerian governments to exercise “taking and acquisition” of vested property rights, together with restrictions imposed under the law.

 

III.      A Brief Explanation of the “Nigerian” Factor: Ms. Folorunsho Alakija and the Babangida Connection

 

The genesis of Alakija’s wealth is traceable to the gap-toothed evil genius—General Ibrahim Badamasi Babangida and his late elegant and beautiful wife—Hajia Maryam Babangida. Born into a wealthy, polygamous Nigerian family, Alakija was a secretary at the International Merchant Bank of Nigeria. In the early 80s, she quit her job and went on to study Fashion design in England. She returned to Nigeria shortly afterwards to start Supreme Stitches, a premium Nigerian fashion label that catered exclusively to upscale clientele, including Maryam Babangida. Like sunlight following night darkness, Alakija leveraged on this proximity to power, and so acquired an oil prospecting license – the basis of her enormous fortune today. Just like that!!!

 

For instance, in March 2013, Petrobas, a Brazilian oil company that owns an 8 percent working interest in OML 127 in which Alakija owns 60 percent, announced that it was actively looking to dispose of its stake for a figure in the region of $1.5 – $2.5 billion. To be as conservative as possible, taking the low-end and assuming that they will fetch $1billion for the stake. If the 8% working interest fetches Petrobas $1 billion, then Alakija’s 60 percent is worth over $7.3 billion.

 

Alakija also owns a Bombardier Jet as well as a large collection of prime real estate in Nigeria and London.

 

This author, a rabid believer in Late Chief Gani Fawehinmi and Dr. Tai Solarin is disillusioned. What does it profit to antagonize the powers that be in Nigeria? $7.5 billion versus Senior Advocate of the Masses? I remember the disciples of the dogged human rights advocate (Fawehinmi) of yore—I do not see them in the battle front again. I talk about Leke Sanusi, Tayo Oyetibo, Rotimi Jacobs, Festus Keyamo etc. In fact, at the last remembrance of the Nigerain masses’ hero (Fawehinmi) the only recognized ones were Odumakin and non-lawyers.

 

Change, they say, is the only constant thing.

 

Let us return to NNPC vs Famfa.

 

IV.       Rules Governing the Grant of Oil Exploration Licenses (“OEL”), Oil Prospecting Licenses (“OPL”) and Oil Mining Leases (“OML”) in Nigeria

 

According to Yinka Omorogbe, in her treatise—Oil and Gas Law in Nigeria (Simplified) (2003 ed.) at page 1, “Petroleum” is a compound mainly composed of hydrogen and carbon, and is commonly called hydrocarbon, and that such can exist in gaseous, coal, shale, tar sands or bitumen. In liquid form, it is referred to as Crude Oil. Hydrocarbons in gaseous form are known as natural gas. Omorogbe went on to state that the most commonly known hydrocarbon is crude oil, which is also referred to by many as petroleum, while noting that, strictly speaking, this term – petroleum - covers other types of hydrocarbons.

 

The Nigerian federal government has the right to participate in oil concessions since the ownership of oil and gas assets within the Nigerian territory. Thus, according to Godfrey Etikerentse in his book—Nigerian Petroleum Law, (1985 ed. MacMillan), at page 1, “Petroleum” is defined both in a standard Nigerian Oil Mining Lease and in Section 14(1) of the Nigerian Petroleum Act of 1969 as “…mineral oil (or any related hydrocarbon) or natural gas as it exists in its natural state in strata, and does not include coal or bituminous shales or other stratified deposits from which oil can be extracted by destructive distillation.”

 

In Nigeria, an Oil Exploration Licence (“OEL”) is a license granted by the government to explore for petroleum;

 

An Oil Prospecting Licence (“OPL”) is a license granted by the government to prospect for petroleum

 

An Oil Mining Lease, (“OML”) is a lease granted by the government to search for, win, work, carry away and dispose of petroleum.

 

Under the Petroleum Act 1969 the entire ownership and control of all petroleum products in Nigeria is vested in the Federal Government of Nigeria. Consequently, all licenses and leases for the exploration, prospecting or mining of petroleum are granted by the Federal Government.

 

This is the same as in the United States, where the Federal and/or State governments have rights to "overriding royalties." An "overriding royalty" is a fractional interest in gross production of oil and gas under lease. Hininger v. Kaiser, 738 P.2d 137, 140 (Okla. 1987). It is free and clear of expenses incident to production and the sale of oil and gas from the leasehold. O'Neill v. American Quasar Petroleum Co., 617 P.2d 181, 184 (Okla. 1980). See also, 8 Williams & Meyers, "Oil & Gas Law - Manual of Terms," p. 65 (Matthew Bender 1987).

 

In explicit terms, the Petroleum Act states in its Preamble that it is:

 

An Act to provide for the exploration of petroleum from territorial waters and the continental shelf of Nigeria and to vest the ownership of, and all on-shore and off-shore revenue from petroleum resources derivable therefrom in the Federal Government and for other matter incidental thereto.

 

          See, the Preamble to the Petroleum Act states 1969

 

In particular, Section 1, of the Petroleum Act states 1969 provides thus:

 

(1) The entire ownership and control of all petroleum in, under or upon any lands to which this section applies shall be vested in the State.

(2) This section applies to all land (including land covered by water)

which-

(a) is in Nigeria; or

(b) is under the territorial waters of Nigeria; or

(c) forms part of the continental shelf; or

(d) forms part of the Exclusive Economic Zone of Nigeria

(3) In this section, references to "territorial waters" are references to the expression as defined in the Territorial Waters Act.

 

As to the granting of Oil exploration licences, oil prospecting licences and oil mining leases, Section 2, of the Petroleum Act states 1969 further provides thus:

 

2. (1) Subject to this Act, the Minister may grant –

(a) a licence, to be known as an oil exploration licence to explore for petroleum;

(b) a licence, to be known as an oil prospecting licence to prospect for petroleum; and

(c) a lease, to be known as an oil mining lease, to search for, win, work, carry away and dispose of petroleum.

(2)A licence or lease under this section may be granted only to--

(b) A company incorporated in Nigeria under the Companies and Allied Matters Act or any corresponding law.

(3) The provisions of the First Schedule to this Act shall, in so far as they are applicable, have effect in relation to licences and leases granted under this section.

 

Further, Paragraph 35 of the 1st Schedule to the Petroleum Act gives the Minister of Petroleum the power to impose terms on OELs, OPLs, and/or OMLs thus:

Paragraph 35.       If he considers it to be in the public interest, the Minister may impose on a licence or lease to which this Schedule applies special terms and conditions not inconsistent with this Act including (without prejudice to the generality of the foregoing) terms and conditions as to—

(a)        participation by the Federal Government in the venture to which the licence or lease relates, on terms to be negotiated between the Minister and the applicant for the licence or lease; and

        (b)        special provisions applying to any natural gas discovered, which provisions shall include—

(i)         the right of the Federal Government to take natural gas produced with crude oil by the licensee or lessee free of cost at the flare or at an agreed cost and without payment of royalty;

 (ii)        the obligation of the licensee or lessee to obtain the approval of the Federal Government as to the price at which natural gas produced by the licensee or lessee (and not taken by the Federal Government) is sold; and

                 (iii)       a requirement for the payment by the licensee or lessee of royalty on natural gas produced and sold.

The nature of the rights conferred on a grantee of an OPL or an OML are stated under Paragraph 36 of the 1st Schedule to the Petroleum Act thus:

Paragraph 36.       The holder of an oil prospecting licence or oil mining lease shall—

 (a)        have a general right to enter and remain on the licensed or leased lands and do such things as are authorised by the licence or lease; and

(b)        shall comply with any enactment relating to town or country planning or regulating the construction, alteration, repair or demolition of buildings, or providing for similar matters, which affects him in carrying out the operations authorised by the licence or lease.

 In addition, the nature of the rights conferred on a grantee of an OEL are stated under Paragraph 37 of the 1st Schedule to the Petroleum Act thus:

Paragraph 37.       The holder of an oil exploration licence, oil prospecting licence or oil mining lease shall, in addition to any liability for compensation to which he may be subject under any other provision of this Act, be liable to pay fair and adequate compensation for the disturbance of surface or other rights to any person who owns or is in lawful occupation of the licensed or leased lands.

 From the provisions of Paragraph 35(a) of the 1st Schedule of the Petroleum Act 1969 Cap. P10 LFN 2004 quoted above, it is mandatory for the Minister of Petroleum and the applicant to negotiate the terms and conditions for the OPL license or the OML lease.

V.        The Deep Water Block Allocations to Companies (Back-in-Rights) Regulations 2003 (“the Back-in-Rights Regulations”).

 

The administrative law flavor to the decision in NNPC vs Famfa arose from the fact that the Nigerian Petroleum Act also vests powers in the Minister to make Regulations which are necessary for giving effect to the Act.

 

In detail, Section 9 of the Nigerian Petroleum Act provides thus:

 

9.         (1)        The Minister may make regulations—

            

(a)        prescribing anything requiring to be prescribed for the purposes of this Act;

(b)       providing generally for matters relating to licences and leases granted under this Act and operations carried on thereunder, including—

                             (i)         safe working;

                                  (ii)        the conservation of petroleum resources;

                                  (iii)       the prevention of pollution of water courses and the atmosphere;

(iv)       the making of reports and returns (including the reporting of accidents);

                                  (v)        inquiries into accidents;

(vi)       the keeping and inspection of records, books, statistics, accounts and plans;

                                  (vii)      the measurement of production; and

                                  (viii)     the measurement of crude oil delivered to refineries;

(c)        regulating the construction, maintenance and operation of installations used in pursuance of this Act;

(d)       regulating refineries and refining operations, and, where two or more refineries are in operation, specifying—

(i)         the proportion or quantity of crude oil to be supplied to each refinery;

                                  (ii)        the share of each refinery in the total market; and

                                  (iii)       the prices of refinery products;

(e)        regulating the importation, handling, storage and distribution of petroleum, petroleum products and other flammable oils and liquids, and in particular (without prejudice to the generality of the foregoing)—

(i)         prohibiting the importation or exportation of petroleum or petroleum products except at specified ports or places;

(ii)        prescribing the notice to be given (and the person by whom the same shall be given) on the arrival at a port of a ship carrying petroleum or petroleum products as cargo;

(iii)       defining dangerous petroleum and dangerous petroleum products, prescribing anchorages for ships carrying dangerous petroleum or dangerous petroleum products as cargo and requiring those ships to proceed to and remain at those anchorages;

(iv)       regulating the loading, unloading, transport within a port, landing, trans-shipment and shipment of petroleum and petroleum products;

(v)        providing for the licensing of lighters and other craft to carry petroleum and petroleum products within a port;

(vi)       prescribing conditions and restrictions to be imposed upon vessels arriving at a port after having carried petroleum, petroleum products, dangerous petroleum or dangerous petroleum products;

(vii)      providing for the examination and testing of petroleum and petroleum products, and prescribing the tests to be applied to ascertain its flash-point and the method of applying those tests;

 

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Tags: Theophilus Olusegun Obayemi II,  OIL,  OML,  NIGERIAN NATIONAL PETROLEUM CORPORATION,  NNPC,  FAMFA OIL LIMITED,  N.W.L.R.,  C.L.R,  Koontz v. St. Johns,  River Water ,  Hon Rhodes-Vivour,  JSC, 


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