OIL PROSPECTING LICENSE
An Oil Prospecting license is granted by the Federal Government to a Company or Joint Venture to prospect for petroleum resources. This license is granted to the licensee to conduct extensive exploration activities, remove and dispose of commercially feasible petroleum discovered during prospecting operations. A prospecting license is granted for a period of time not exceeding five years to be determined by the Minister of Petroleum if after the limited time it was granted, the company has not discovered or performed its obligation, the licence will be relinquished back to the government.
Methods of acquiring OPL
Oil prospecting licenses are mainly acquired by two major means, which are the Bidding Rounds and the Grant on the application to the Minister of Petroleum.
Only the holder of a concession can engage in petroleum prospecting in Nigeria. Concessions are allocated to operators based on an open competitive bidding process. The Government awards oil exploration and prospecting license through competitive bidding known as licensing rounds. The company must produce evidence of financial capacity that must not be less than the US $10,000,000 (Ten Million Dollars), which is about N1, 000,000,000.00 (One Billion Naira)
Oil companies compete in international licensing rounds to be allowed to explore a geographical basin. Interested companies submit to the government detailed proposal bids for prospecting; this bid sets out the commitment of the company concerning the commitment of the amount to be invested to explore the area and bear the entire cost of the operation and a commitment on the type and amount of work to be carried out by the company.
Bidding Guidelines for OPL
- The Department of Petroleum Resources will advertise all blocks available for bidding in the National Dailies and Magazines; international publications approved by the government and dedicated websites for bidding rounds.
- Interested investors will be required to pay the sum of US $10,000 for a bid processing fee.
- The bidders will be required to provide details of their shareholding structure, names of directors, track record in the oil and gas sector, audited financial statements, partnership or collaborations with indigenous firms and financial resources to bid and pay for oil acreages
- After this stage, investors will pay the US $15,000 each for data mining fees to enable them to gain access to the relevant data on acreages that will be placed on the offers.
- Investors will also avail information on the size of the fields, seismic surveys and past appraisals conducted among other information.
- The department of petroleum resources will commence a technical evaluation on the bids submitted and where investors fail to meet the criteria, they will be dropped while investors that have passed the technical evaluation process will be invited to submit their commercial bids in a process that will be opened to the public
- Finally, oil acreages will be given to the highest bidders who will be given a timeline to pay for the acreages
Recent Bids in Nigeria
The Nigeria National Petroleum Corporation (NNPC) received over 254 bids for its 2018 crude oil contracts. The tender was opened on the 10th of November 2017 and closed on the 9th of January 2018. On the 9th of January 2018, the Federal government considered about 254 bids from indigenous and foreign companies interested in the purchase of the Government equity crude oil under the 2018/2019 crude oil term contract. At the end of the event, the NNPC spokesperson said the winners would be selected as licensed off-takers to trade on Nigerians equity crude for a 12 months period.
Some of the conditions the off-takers were required to meet are: having a minimum annual turnover of $500 million for 2016 and a net worth of $250 million for 2016. They were also required to demonstrate the capacity to establish an irrevocable power of credit. 50 companies have won the bids out of the 254 that applied, although it has not been formally announced.
Oil prospecting licence will be granted to the company or a Joint venture that shows the highest interest and ability for the exploration of petroleum. Applications are made to the Minister for petroleum attaching a proposal on the economic terms governing the applicants’ production activities. The application fee is $10,000 per block. The Petroleum (Drilling and Production) Regulations outlines the application process for companies incorporated in Nigeria to apply for oil exploration licenses.
Procedure for application for the Grant of OPL
- The applicant is expected to pay a non-refundable fee of US $10,000 per block.
- The applicant will also pay the annual rent of $10 per sq km, and provide the following documents:
- Certificate of incorporation of the company
- Evidence of financial standing to the tune of US $10,000,000 or N1,000,000,000.00
- Evidence of the applicants’ technical knowledge in oil prospecting.
- Evidence of detailed environmental policies referencing environmental impact assessment analyses
- Evidence of payment of all necessary fees
- Where the minister is satisfied with the information provided, it will permit the Department of Petroleum resources to grant the permit.
Upon the grant of the Oil Prospecting License, there are certain obligations to be performed by the holder of the license, which includes; the holder upon grant is expected to start the geographical investigation within six months of the grant on the area leased. The holder of the OPL license is also required to train Nigerians on the act of drilling and production of crude oil; the holder also has financial obligations to pay rents and loyalties as stipulated by the Petroleum Profit Tax Act.
Converting OPL to Oil Mining License
After petroleum resources have been discovered in commercial quantities, upon the expiration of the OPL, it is either relinquished back to the government or converted into an Oil Mining Lease. The OPL holder would need to apply for an Oil Mining Lease to allow full-scale commercial production in the leased area. OML is only granted to OPL holders, where the Minister is satisfied upon evidence adduced by the licensee, that the licensee is capable of producing at least 10,000 barrels of crude oil per day from the licensed area. This license grants the leaseholder the exclusive right to prospect, explore, produce and undertake market activities in a specified acreage for a period of 20 years. Conversion of OPL to OML is provided under Section 31 of the Petroleum (Drilling and Production) Regulations. It states that within 6 months of the date of grant of the license, seismic data acquisition shall commence and continue until the area is fully investigated; not later than 18 months of the grant, drilling operations shall also commence with a modern oil well drilling outfit all through the prospective zones in the relevant area to satisfy the minimum obligation for the application for conversion of an OPL to OML.
Legal Framework for OPL
The laws that guide the oil prospecting activities in Nigeria are many. We have highlighted a few of them below:
- The Petroleum Act: this is the principal statute that governs petroleum operations in Nigeria. Any company or investor with the intention to operate in the oil industry can do so with the authorisation granted by the Minister of Petroleum Resources. The Petroleum Act has its subsidiary legislation including the Petroleum (Drilling and Production) Regulations among others.
- The Nigerian National Petroleum Corporation (NNPC) Act: the Act established the NNPC to participate in petroleum operations on behalf of the federal government.
- The Petroleum Profit Tax Act: this act governs the financial activities of companies engaged in oil operations in Nigeria. It imposes a tax on profits made from the operations. The Act subject exploration and production companies to pay the rate of 85% of their assessable profits to the government.
To acquire an interest in an oil field, a company must first acquire licenses which are granted subject to the approval of the Minister for Petroleum Resources. The Oil Prospecting Licence is granted for the purpose of exploiting petroleum found in commercial quantity. Before it can be granted, the applicant must satisfy and fulfil some conditions stipulated by the Minister.
Upon the fulfilment of the conditions set out by the Minister, the holder of the OPL License after discovering oil in commercial quantity and satisfies the Minister that it can produce a minimum of 10,000 barrels of oil per day, can apply for the license to be converted to an Oil Mining Lease, which will enable the company to produce and dispose of petroleum discovered for a long period of 20 years subject to renewal.
An OPL holder cannot extend its scope of operations beyond the area covered by its license. This means that the holder cannot produce and dispose of petroleum until it converts its current license to an OML.
Written by the Oil & Gas Law Department at Resolution Law Firm in Nigeria