8 January 2007

Nigeria: How to Prevent Litigation in OPL Conversion


Lagos — NIYI AYOOLA-DANIELS ESQ examines critically, legal issues involved in OPL conversion to OML, with particular reference to the South Atlantic Petroleum case

This article examines the legal frame work for Oil Prospecting Licence (OPL) conversion to Oil Mining Lease (OML) in Nigeria and in particular the Oil Prospecting Licences (Conversion to Oil Mining Lease, etc.) Regulations 2004. For a better understanding of the legal issues involved in this conversion, the writer briefly explores the legal meaning and nature of OPL and OML in Nigeria. And being the first judicial pronouncement on OPL conversion to OML in Nigeria, the writer highlights relevant legal issues in the recent Federal High Court decision in SOUTH ATLANTIC PETROLEUM LIMITED v MINISTER OF PETROLEUM RESOURCES. The writer concludes by drawing lessons from the Turkish Petroleum Code on OPL conversion to OML with a view to filling any gap or lacuna if any, in the controversial Regulations 2004.

Legal nature of OPL

An OPL is a licence given by the Minister of Petroleum Resources which gives the holder of the licence the exclusive right to explore and prospect for petroleum within the area of his licence.

Exclusivity here means that the grant of an OPL precludes the grant of another form of licence or lease for petroleum exploration, prospecting or mining, within the same licensed area. The term of an OPL is at the discretion of the Minister of Petroleum Resources but shall not exceed five years including any periods of renewal, but in the case of a Deep Offshore, the duration is for a minimum period of 5 years and an aggregate period of 10 years. This means that the holder of OPL has a very limited period during which he may produce and dispose of petroleum from his licensed area. The area comprised in the grant of an OPL shall be a compact unit not exceeding 1,000 square miles (2,590 square kilometers).Rights granted under OPL. Subject to the statutory obligation to pay rents, petroleum profits taxes and royalties under the Petroleum Profits Tax Act (PPTA) and the Petroleum (Drilling and Production) Regulations and other obligations imposed under the Petroleum Act 1969, the holder of an OPL "may carry away and dispose of petroleum won during prospecting operations". This is by virtue of Paragraph 7, First Schedule to the Petroleum Act).

What is Oil Mining "Lease" (OML)?

Though there has not yet been any decided case in Nigeria on the juridical nature of an Oil Mining Lease (OML) granted under the Petroleum Act, but a close look the wording of the Act and the granting clause of the lease shows the intention of the grantor of the lease. To this extent therefore, I submit that the right granted to a holder of an OML is not a "lease" in the common law sense of a lease but rather it is a license to explore for, produce, carry away or export petroleum discovered within the lease area. The right granted does not convey an interest in land; (the subject matter of the OML) whether corporeal or incorporeal (profit a pre endre). A profit a prendre is an incorporeal interest in land authorizing entry upon a tract of land and severance and removal of a part of the corpus of the land. At common law a lessee acquires "exclusive possessory right" over the leased area to the exclusion of any other person including the grantor -lessor. The holder of an OML has no exclusive possession of the leased area to the exclusion of the Federal Government of Nigeria. Apart from this, the Land Use Act imposes an obligation on the holder of an OPL or OML to obtain the consent of any person lawfully occupying the licensed or leased area (the subject of the grant) or the holder of the right of occupancy before entering upon the land to commence exploration and production activities. The holder of an OML is also liable to pay fair and adequate compensation for the disturbance of surface or other rights to any persons who owns or is in lawful occupation of the leased area.

In RADIACH v SMITH, (1950 101 CLR page 209) the Australian High Court held that "if there is any decision which states positively that a person legally entitled to exclusive possession for a term is a licensee and not a tenant, it should be disregarded for it is self contradictory and meaningless".

The term "Oil Mining Lease" as used in the Petroleum Act, found its way into Nigeria's oil and gas jurisprudence as a carry- over from the America petroleum legislation which legislation has had a long history of substantial litigation involving the juridical nature of the lessee's interest in petroleum. In LOMIS v GULF OIL CORPORATION, the Court of Appeal of Texas held the lessee's interest to be an interest in land of a corporeal nature. In the Canadian case of BERKHEISER v BERKHEISER (1957 SCR 387) the Court held the lessee's interest to be an exclusive profit a prendre right to explore for and produce petroleum. On the issue of revocation, the position of common law is that a lease once granted cannot be revoked but a licensor can validly revoke a licence upon giving reasonable notice or upon compliance with the terms or contract governing the licence. In F.G.N. v ZEBRA ENERGY LTD., (2002 18 NWLR Part 798 at page 162) the Supreme Court of Nigeria held that a petroleum licence (OPL) can be revoked once the procedure stipulated under the Petroleum Act has been compiled with.

From the above, it becomes obvious that an OML is actually a licence and the holder only enjoys an exclusive permit or licence to conduct petroleum exploration and prospecting operations within the leased area (not exceeding 500 square miles) and to carry away petroleum discovered in or under the leased area. At best, the grant of an OML creates a statutory licence. For the avoidance of doubt, Paragraph 11, First Schedule to the Petroleum Act provides that "Subject to this Act and any special terms or conditions imposed under paragraph 34 of this Schedule, the lessee of an Oil Mining Lease shall have the exclusive right within the leased area to conduct exploration and prospecting operations and to win, get, work, store, carry away, transport, export or otherwise treat petroleum discovered in or under the leased area".

It must be also stated clearly here that under the Petroleum Act the Minister of Petroleum Resources reserves the right (as a sovereign act of Government) to unilaterally alter the terms and conditions of the lease including its juridical nature during the continuance of the lease. Form D of the Schedule to Petroleum (Drilling and Production) Regulations states expressly that "..the lease is granted subject to the Petroleum Act and the regulations thereunder now in force or which may come into force during the continuance of this lease"

Duration and Renewal of OML

The term of an OML shall not exceed twenty years, but may be renewed in accordance with the Petroleum Act. This longer duration of the term of an OML is one of the distinctive features of an OML. The modality for renewal of an OML is also a major attractive characteristic of the lease under the Petroleum Act. And for a renewal to be obtained, "the lessee of an OML shall be entitled to apply in writing to the Minister not less than 12 months before the expiration of the lease either in respect of the whole of the leased area or any particular part thereof, and the renewal shall be granted if the lessee has paid all rent and royalties due and has otherwise performed all his obligations under the lease". With the word "shall" used in paragraph 13, First Schedule Petroleum Act, it seems to me that the Minister of Petroleum Resources has no discretion on the matter and must grant the renewal once the lessee has paid all the rents and royalties due and has performed all the other duties and obligations under the Act. This view is predicated on the interpretation given by the Supreme Court of Nigeria on principle governing use of "shall" in a statute. The Court in AMOKEODO v I.G.P (1999 6 N.W.L.R part 607 at page 362) held that "shall" in a legislative sentence is generally imperative or mandatory and that it is a word of command which is normally given a compulsory meaning because it is intended to denote obligation.

Conversion of OPL to OML

The two major distinctive features of OML stated above (duration and renewal) make conversion from OPL necessary. By virtue of Paragraph 8 First Schedule to Petroleum Act, an OML may be granted only to the holder of an OPL who has :(a)satisfied all the conditions imposed in the licence or otherwise imposed on him by the Petroleum Act, including payment of rents, taxes and royalties. (b) discovered oil in commercial quantities. Oil shall be deemed to have been discovered in commercial quantities by the holder of an OPL if the Minister, upon evidence adduced by the licensee is satisfied that the licensee is capable of producing at least 10,000 barrels per day of crude oil from the licensed area. Modalities for conversion. By virtue of Oil Prospecting Licence (Conversion to Oil Mining Lease, etc) Regulations 2004, the holder of an OPL shall pursuant to Paragraph 8 Schedule 1 of the Petroleum Act be eligible, upon conversion, to no more than one OML after satisfying the conditions stipulated in the Petroleum (Drilling and Production) Regulations. However, the holder of an OPL which is eligible for conversion to an OML may apply for the grant of and may be granted an additional OML from the same contract area.

The SOUTH ATLANTIC PETROLEUM LIMITED (SAPETRO) v MINISTER OF PETROLEUM RESOURCES case provided a unique opportunity for the Federal High Court to consider Nigeria's law on OPL conversion to OML and in particular the provisions of Regulations 2004. Questions that the court had to provide answers to in that case include: (i) Is the power of the Minister to grant or not to grant an additional OML to the holder of an OPL susceptible to Judicial Review? (ii) Can two OML co-exist on the same OPL in the same hand and on the same acreage? (iii) Is OPL 246 put up for bidding by the Minister of Petroleum Resources the same as OPL 246 previously granted to SAPETRO? (iv) Does the grant of OML make an OPL disappear or is there any Regulation for automatic relinquishment of OPL under Nigeria law? (v) Would the grant of SAPETRO application put the Federal Government of Nigeria Oil and Gas Policy and Administration into turmoil and open a floodgate of potential claims from previous OPL holders who might be tempted to ask for a return to them of the unconverted portion of their previous OPLs?

In answering the question on Judicial Review of Minister's power, Justice Abdullahi Mustapha while disagreeing with the submission of the leading counsel to the Petroleum Minister, Prof. Fidelis Odita Q.C. SAN held that: "Regulation 2 (1) of the Regulations 2004 confers powers on the Minister to grant an additional Oil Mining Lease to the holder of an Oil Prospecting Licence if in his opinion the terms and conditions in the said paragraph have been satisfied. Therefore, where the Minister formed an opinion that the holder of an Oil Prospecting Licence who applied for the grant of an additional Oil Mining Lease should not be granted, that power is derived from the Regulations 2004 and he was exercising public law function and his decision is susceptible to Judicial Review. The Applicant's Right to be granted an additional Oil Mining Lease stemmed from Regulations 2 (1) of Regulations 2004 and not from any private contract between him and the Minister and so it is a public law right. The use of the words "if in his opinion" in the Regulations does not take the decision of the Minister out of the ambit of the Judicial Review".

On whether OML can co-exist on the same OPL in the same hand, the court also rejected the submission of counsel to the Minister of Petroleum Resources and held that: "... the holder of an OPL which is eligible for conversion to an OML, may apply for the grant and may be granted an additional Oil Mining Lease from the same contract area. A combined reading of Regulations 1 and 2 shows that two OML can indeed exist on the same OPL. One of the conditions for the grant of the OPL 246 as contained in a letter dated February 23, 1998 issued by a Director of Petroleum Resources is that the block would be operated on a "Sole Risk Basis" but that the Government reserves the right to participate at any time in the life of any subsequent Oil Mining Lease. That subsequent Oil Mining Lease can in my view be mining lease out of the original OPL or out of the Residue thereof. I reject the argument that an OML and OPL cannot co-exist at the same time in the same hands in the same acreage".

On whether or not the OPL 246 put up for bidding by the Minister was the same OPL 246 previously granted SAPETRO, the court recognized the fact that SAPETRO applied to the Minister for the conversion of OPL 246 to an OML. According to the court, the Department of Petroleum Resources (DPR) reviewed the application and advised that part of the OML derivable from OPL 246 fell within the Special Regime Area (SRA) which was included in the Joint Development Zone (JDZ) between Nigeria and Sao-Tome and Principe. The court therefore held that "while the Applicant has a right to exploit OML 130 it has no continuing right to explore or exploit what was previously OPL 246.

The OPL 246 put up for bidding by the Minister of Petroleum Resources, it is averred, is not the same OPL 246 previously granted to the Applicant. The original OPL 246 which was for 1000 square miles is said to have ceased to exist once the DPR conveyed the Minister's decision to convert 500 square miles of that OPL into OML 130 in 2005. While the new OPL 246 is for 500 square miles, the Applicant was never granted an OPL 246 for 500 square miles The residue of OPL 246 has retained its identification No 246 in accordance with international petroleum industry practice for reasons of convenience because of the petroleum information and data already associated with that number and is not an acknowledgement that the original OPL 246 granted to the Applicant continues to exist".

On the question of Public Policy and whether the grant of the SAPETRO application will put the FGN Oil and Gas Policy and Administration into turmoil, the attention of the court was drawn to ORDER 47 RULE 1 (2) which requires the court to have regard to all the circumstances of the case including the chaos and difficulty which will arise from the court's decision. The court therefore held that "in an action of the Judicial Review even where the action challenged is found unlawful, the court usually considers the practical consequences of granting such an application. This is usually classified into two categories to wit, where there is no longer a live issue requiring a practical solution and those where granting a remedy would be detrimental to good administration".

On whether upon the grant of OML, the OPL disappears, the court held that there is nothing unlawful in the Government Policy that the residue of OPL 246 is automatically relinquished and reverted to the Federal Government in the grant of an Oil Mining Lease No 130 to the Applicant. I also hold that there is nothing unlawful in the letters dated March 1,2006 and March 21, 2006 wherein the Minister communicated to the Applicant the decision of the Government not to grant to the Applicant an additional Oil Mining Lease from the unconverted portion of Oil Prospecting Licence 246".

Having regard to all circumstances of the case and the evidence before Honourable Justice Mustapha Abdullahi, I submit in my humble view that this decision is correct and sound in law and in fact. However, I will propose an urgent amendment to the provision of Oil Prospecting Licences (Conversion to Oil Mining Leases, etc.) Regulations 2004 with a view to making the Regulations clearer, easily predictable and ascertainable than it is presently. This will avoid unnecessary assumptions, speculations and litigation. In this regard, I hereby propose a new Regulation 2 to the 2004 Regulations which should read "upon the grant of the oil mining lease, the oil prospecting licence shall expire". This new provision should, in my opinion truly put this controversial legal issue to rest.

Lessons from Turkish Petroleum Code

Under the Turkish Petroleum Code 1954, nothing is assumed or taken for granted. Unlike Regulations 2004, Turkish Petroleum Code clarifies and directly addresses the question on residue of OPL upon its conversion to OML. The Code also makes clear express provision for open competitive bidding (with some variation to suit their national interests) as a mode of granting oil prospecting licence or oil mining lease.

Article 63 of Turkish Petroleum Code provides:

(i) A licencee who has made a discovery in his licence area, and who while his licence is in effect applies for a lease in accordance with the Regulations, shall be granted a lease on terms prevailing at the time the related licence was granted, for any area or areas chosen by him from the licence, not exceeding one half thereof, subject to the limitations of Articles 61 and 62. The licensee shall attach to his application a receipt showing payment of the lease fee.

(ii) Upon the grant of the lease the licence shall expire. However, in the event the right holder re-applies for licence for the remaining part of the licence area, such application may be evaluated by the General Directorate outside the scope of Sub-Article 4 of Article 53 of the Law.

With regard to the mode of acquiring oil block (OPL or OML) in Turkey, Article 64 (2) of the Code provides that "No licence or lease may be granted except by competitive bidding on an area previously declared subject to lease by competitive bidding without revocation of such declaration". The Code further provides that "all or part of an area previously declared subject to lease by competitive bidding may be declared no longer subject to such bidding and that an offer of an area for competitive bidding shall not involve obligation to accept the highest or any bid".

In conclusion, I salute the courage and judicial wisdom of Justice Mustapha Abdullahi in SAPETRO case. And for the purpose of making the law on OPL conversion to OML in Nigeria clearer and easily predictable, the amendment proposed above should as a matter of urgency be looked into to avoid unnecessary future litigation against the Minister of Petroleum Resources on this critical legal issue.

- Mr Ayoola-Daniels, an Abuja based lawyer is the principal partner of Niyi Ayoola-Daniels & Co. and member, Nigerian Gas Association

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