Oil and gas exploration and development are characterised by huge capital expenditures, high technological expertise and the ability to manage investment risks, Consequently, two major contractual arrangements emerge from the petroleum development rights, that is, joint venture arrangement (JV) and production sharing contracts (under the contractual agreement). In Nigeria, the permanent sovereignty and ownership over mineral resources (oil and gas) found in its geographical location are vested in the Federal Government of Nigeria, conferred under Section 44(3) of the Constitution of the Federal Republic of Nigeria. The federal government is represented by the Nigerian National Petroleum Corporation (NNPC) to undertake commercial activities in the oil and gas industry while the Federal Ministry of Petroleum Resources acting through the Department of the Petroleum Resources is the regulatory authority.
Joint Venture in the Oil & Gas Industry
Joint venture agreement is a special growth strategy between internal and external strategies; it exists where two or more parties combine together to execute an oil & gas transaction and mitigate risk associated with the business. It involves an equity arrangement between two or more independent enterprises, which results in the creation of a new organisational entity. In the Nigerian oil industry, virtually all the exploration and production in the oil & gas undertakings are based on joint ventures. The participation agreement sets out the level of participation of each party in running the affairs of the company; it determines the interests and obligations and the agreement of ownership of production facilities and assets.
Participant companies to a joint venture agreement relationship contribute assets, capital, unique enterprise, labour, risk sharing, market entry, tax benefits and so many others while it provides a benefit of maintaining the corporate independence of the participants and avoiding the economic and political risk associated with the merger or joint venture agreement.
In a joint venture arrangement with the government, the host government takes part in the concessionary system as working interest owners, where a Joint Operating Agreement (JOA) is drawn for the execution of the operations. The host government has ownership rates in the development and productions operation of the oil fields, and therefore, shares exploration; drilling and development expenditures accrued from the operations.
Under a JV, the Nigerian Government through NNPC has about 60% participatory interest in all Joint venture agreements. JVs appear to be most favourable in the level of participation in the entire projects as this affects the economic rent derivable from the contracts.
Currently, NNPC upstream operations are in joint partnerships with the major oil companies. These Exploration & Production companies are operating predominantly in the onshore Niger Delta, coastal offshore areas and lately in the deep waters.
Primarily the joint venture between the government(through its entity, the NNPC) and oil companies can take place by virtue of the joint participation in the oil prospecting license(OPL) or oil mining lease(OML) or production sharing contract(PSC).
Multinational co-joint ventures with NNPC
There are 6 major players in the Nigerian upstream sector. They account for the chunk per cent of the Nigerian oil exploration and production. These companies participate in the oil industry in joint ventures with the NNPC as operators/contractors in the Nigerian deep water under production sharing contracts with NNPC.
These multinationals include:
- Shell Petroleum Development Company of Nigeria Limited (SPDC): A joint venture operated by Shell accounts for more than forty per cent of Nigeria’s total oil production (899,000 barrels per day (bpd) in 1997) from more than eighty oil fields. The joint venture is composed of NNPC (55 per cent), Shell (30 per cent), Elf (10 per cent) and Agip (5 per cent) and operates largely onshore on dry land or in the mangrove swamp.
- Chevron Nigeria Limited: A joint venture between NNPC (60 per cent) and Chevron (40 per cent) has in the past been the second largest producer (approximately 400,000 bpd), with fields located in the Warri region west of the Niger River and offshore in shallow water.
- Mobil Producing Nigeria Unlimited: A joint venture between NNPC (60 per cent) and Mobil (40 per cent) operates in shallow water off Akwa Ibom state in the southeastern delta and averaged production of 632,000 bpd in 1997, making it the second largest producer, as against 543,000 bpd in 1996. Mobil also holds a 50 per cent interest in a Production Sharing Contract for a deep-water block further offshore and is reported to plan to increase output to 900,000 bpd by 2000.
- Nigeria Agip Oil Company Limited: A joint venture operated by Agip and owned by NNPC (60 per cent), Agip (20 per cent) and Phillips Petroleum (20 per cent) produces 150,000 bpd mostly from small onshore fields.
- Elf Petroleum Nigeria Limited: A joint venture between NNPC (60 per cent) and Elf (40 per cent) produced approximately 125,000 bpd during 1997, both on and offshore. Elf and Mobil are in dispute over operational control of an offshore field with a production capacity of 90,000 bpd.
- Texaco Overseas Petroleum Company of Nigeria: A joint venture operated by Texaco and owned by NNPC (60 per cent), Texaco (20 per cent) and Chevron (20 per cent) currently produces about 60,000 bpd from five offshore fields.
Apart from the above stated JV currently being run by the multinationals, there are several other JVs being run by the NNPC together with smaller and domestically owned oil companies.
The importance of Joint Venture in the oil and gas industry
There are several benefits attached to a Joint Venture Agreement in the oil & gas industry which could be listed as follows:
- It reduces the control and requires a degree of collaboration between oil and gas related companies. For example, in an instance where the project developers seek to partner with technology owners where project success is predicated on access to technology.
- A joint venture can be entered into where oil projects are big for a single company to finance on its own in terms of accessing funds and cost exposure.
- A Joint Venture is necessary were pooling the assets of participants or leveraging collective political influence may allow a JV to develop a market-leading position in a particular geography, thereby providing advantages that no participant could attain working alone. Similarly, where a company wishes to de-risk a business project, a JV may be used to reduce exposure and the on-going investment required, without having to consider full exit/divestment.
- Also, a JV is necessary where some countries require foreign companies to work with local entities to participate in their markets.
Types of Joint Ventures in the Oil and Gas Industry
- Operational Joint Ventures: this venture exist where two or more companies create a new entity that holds full complements of operating assets and capabilities necessary for developing and executing an oil and gas project.
- Capability Sharing JV: This type of JV conducts business by leveraging a combination of capabilities from the participants. For example, one participant may bring engineering and manufacturing capabilities, while the other brings political influence and resources in certain countries. For example, the JV itself may have limited operational assets; it then coordinates a mix of capabilities held by the various participants.
- Risk Sharing JV: Two or more companies create a JV primarily for the purpose of sharing risk or financing. It occurs where one participant typically runs the entire operation, with the others contribute only funding and input on strategy-level decisions.
Challenges faced in Joint Venture Agreements in the Oil Sector
In 2016, the federal government announced to the public that it was exiting joint venture agreement with international oil companies in 2016. The main reason for this withdrawal was hinged on the scarcity of funds arising from the drastic fall of crude oil prices in the international market, which made it impossible for Nigeria to meet its cash call obligations, making it responsible for the lack of growth in the oil and gas industry. The upstream petroleum sector in Nigeria recorded low investments in recent years.
Funding projects under JV agreements require the NNPC to provide its share of the capital in the proportion of its stake in the agreement. The operator of a JV requests for the funding of its non-operating partners through cash calls.
As at December 2015, the current cash call arrears in the oil sector over the last five years up owed by the government to oil majors is to the tune of $6.8 billion unpaid in the 2016 period. The effect of this was as a result of the drop of oil price from $110 to $40, which meant that the revenue coming to the government was unable to sustain the government’s ability to meet cash call obligations.
New Petroleum Policy
Following the cancellation of cash call method of government funding for joint venture agreement, the Federal Government has emerged with a new national petroleum policy, approved by the Federal Executive Council, targeted at bringing restructuring and value addition in the oil and gas industry.
The policy that evolves a new funding mechanism for the Joint Venture undertaken to eliminate the difficult cash call regime, enhances the efficacy of the management of the oil and gas resources and guarantee growth.
The policy provides for the following:
- The government would no longer provide money for joint cash calls in the national budget for oil and gas operations.
- The government will promote new legislation to overhaul the existing petroleum industry legislation in Nigeria that dates back to 1969 and modernise the Nigerian Petroleum Sector by addressing a range of issues such as the corporate structure of state-owned enterprises, transparency, sector governance, environmental issues e.t.c.
- The policy also allows local communities to participate, stating that already existing joint ventures are to become independent and self-funding, rather than depending on cash calls payments by joint venture operators in oil and gas industry, also the existing JV’s are to be monitored for effectiveness and performance.
- Under the new arrangement, the new JV’s would be become incorporated and source their own financing to free the government from the annual budget of cash call obligations.
One key advantage of this policy is that it would boost the confidence of investors and provides the opportunity for NNPC and joint partners to raise capital for financing oil and gas operations.
The NNPC’s Modern Joint Venture With Oil Companies
In earlier the year 2018, the NNPC announces it shall be entering into a modern JV agreement with an oil company, schlumberger Nigeria. Under the new era of JV, the government shall not be required to pay any cash call, as oil giant shall provide about $724 Million, which is the 30% of the funds required for the operation, while the balance of 30% is to be funded with cash flows generated by the project.
Joint Venture Between Oil & Gas Companies
Apart from the general joint venture between the various oil companies and government, it is also possible for oil companies to engage in joint venture within themselves by participating together to work in respect of any oil & gas venture. Under the Petroleum Act and Regulations, the Minister’s consent is sacrosanct for this type of partnership. The oil prospecting license and oil mining lease holders are not allowed from assigning their licenses or leases or any interest in it without the prior consent of the Minister of petroleum resources. Pursuant to the provisions of the Petroleum (Drilling and Production) Regulations, any takeover or assignment of interest in an OPL or OML’s company is subject to the consent of Minister.
Laws and contracts regulate the operations in the petroleum industry.
For exploration and production operations, the contractual arrangements can be in the form of a Joint Venture/Joint Operating Agreement (JV/JOA), Production Sharing Contracts (PSC) or Risk Service Contract (RSC).
From all stated, joint venture contracts have proved to be the most advantageous for the efficient operation in the Nigerian petroleum industry with 71.43 per cent optimality JVs accorded both government and oil companies with the participatory interest in the oil and gas exploration, development and production.
In the oil and gas operations, JV partners in proportion to their participatory interests contribute funds.
Finally, joint ventures have also provided sustainable development through contribution to environmental, social and economic sustainability in Nigeria.
Written by Oil & Gas Law Department at Resolution Law Firm