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June 27, 2014

Petroleum Development Contracts in Nigeria


Petroleum is no doubt a predominant source of Nigeria's revenue and foreign exchange. The petroleum industry in Nigeria is divided into two main segments; the upstream and the downstream sectors. The upstream refers to activities such as Exploration, Production and Delivery to an export terminal of crude oil or gas while the downstream sector encompasses activities like loading of crude oil at the terminal, transportation, supply trading, refining distribution and marketing of petroleum.
The development of the oil industry in Nigeria had a negative impact on the diversity of its industrial base. Income annuity typically used to finance the federal budget, local governments, to the purchase of military equipment or maintenance of an ever-growing political clientele. Sectors such as agriculture and fisheries will suffer from the Nigerian public authorities to develop, as a priority, the extractive industry. Nigeria is a country to issue and especially unable to withstand shocks such as drought or food self-sufficiency. Hence the oil in Nigeria appears as harmful to the diversification of its industrial base and hence development of the country.
Nigerian political authorities have made the capture of oil rents the main objective of the operation of petroleum industry. Petroleum industry gives the majority of its revenue to the state, however, suffers from a relatively weak infrastructures. Thus, the lack of maintenance of oil refineries requires the country to export much of its crude oil. This reflects a mismatch between the Nigerian industrial landscape and its claims for a regional leadership. However, economies with a strong manufacturing sector are exposed to less volatile production conditions remain more stable and are likely to generate jobs and know rapid economic growth. The industrialization in Nigeria then appears as a paradox facing the multiplicity of energy issues. It has implications on its march towards development, but also on oil cooperation in the sub-region of West Africa.
With crude oil production of about 2 million barrels / day, Nigeria ranks first oil producer in Africa, and the fourteenth in the World. The oil industry is the cornerstone of the national economy. In 1995, the revenue from this sector accounted for 57% of budget revenues of the country. According to official statistics, oil exports account for 98% of Nigeria's exports. The health status of the Nigerian economy is, therefore, closely linked to the volume of Nigerian oil and sold in the global crude market[1].
Given the strategic importance attached to the sector, Nigeria has chosen to nationalize much of the oil industry in the 70s. Between 1958 (the first exploitation of an oil field in the country) and 1971, foreign companies ensured 100% of the cost of exploration and production and realized the entire gross sales. Nigeria joined 1'OPEP in 1971 and, as required by the organization to its members, gradually acquires shares in foreign companies operating in the country. With NNPC (Nigerian National Petroleum Company), created in 1977, the government of Nigeria owns more than half of the shares of all oil companies operating in the country, in 1978, while the NNPC has taken full control of refineries and owns 40% of most companies petroleum products distribution.
 Nigeria has set up refineries in order to treat a portion of its production of Crude oil for local consumption. The country currently has four Refinery Port Harcourt 1 (installed in 1963), Warri (1978), Kaduna (1980) and Port Harcourt II (1989). The theoretical refining capacity reached 445,000 barrels / day. But these four refineries are regularly stopped, including the following non-delivery time appropriate spare parts and the succession of fires. None worked to full capacity over the entire period from 1980 to 1995. The most powerful, Port Harcourt II, suffered in November 1995 by an act of sabotage that forced the refinery to cease its production for several months.
The rate of capacity utilization production would be only 50 to 65% depending on the year. In such a context, actual production of refined products would not exceed 250,000 barrels while consumption in the country is around 350,000 b / d. This situation forced the Nigerian government to contact the international market to meet some of the local demand. Nigerian refineries produce, according to experts, with higher costs than international standards. Experts estimate that by closing all refineries, and importing all its fuel, the country could save more than $100 million. In this context, economic rationality should lead the Nigerian government to import all refined products it consumes. The retail sector consists of eight large companies, mostly subsidiaries large multinationals, who own about 2,000 stations. 1500 stations services remaining independently owned.
There is no doubt that any government committed to petroleum development would adopt policies and measures which would ensure that if petroleum were discovered, the maximum of benefits resulting from such discovery would accrue to the national economy. Consequently, petroleum producing countries, including Nigeria sought as a basic objective the maximum development of their resources in providing a major source of domestic revenue and foreign exchange earning. Other objectives include, support to domestic industries, employment of nationals, transfer of technology and skills to nationals. It is imperative that in attaining these objectives, the host oil producing state provides a stable and efficient legal and administrative structure. Anything else, would constitute too significant a risk factor to the potential investor and deter investment and development. Further, a proper and well-defined legal and administrative framework represents a strategy to development which uses mechanisms designed to secure state objectives.
The Question of Ownership of Petroleum in Nigeria is particularly a pertinent issue because most of the problems arising from the industry revolve around issues of ownership apart from contentions ones such as compensation and poor management. There is no doubt that Petroleum resources are naturally endowed. However, they do not occur in vacuum. The resources that comprise petroleum (i.e. crude oil and natural gas) may occur on shore (land) or offshore (beneath the sea bed). The land in which the resources found is the property of an individual or entity. In the same vein, off-shore occurrence may obtain within the Territorial Waters of a given state, or in the Exclusive Economic Zone (EEZ) or a coastal state. Therefore, it can be said that, to the extent that crude oil and gas occur in properties that are owned, they are capable of being owned, ordinarily, by whoever owns the land.
Against the back-drop of the above analysis, it is important to note however that the right of ownership of Petroleum is enshrined in the constitution of the Federal Republic of Nigeria at section 40(3).13 The Petroleum Act 1969 in a manner identical to that of the constitution makes it clear in its preamble the essence of the statute is:
“to provide for the exploration of petroleum from the 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 therefore in the Federal Government and for all other matter incidental thereto.14 The provision of the Act makes it apparent that ownership is vested in the Federal Government. This fact is again emphasized with sufficient certainty in section 1(1) and (2) of the Act which states thus: 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".
This paper intends to examine the scope and relevance of joint operating agreements in the exploitation of Petroleum in the Nigerian Oil Industry. It is important to point out right from the onset that joint operating agreements form the basis upon which joint ventures and memorandum of understanding arrangements are entered into between the Federal Government and the international oil commission. Joint operating agreements are common with countries involved in the upstream activities in the oil industry. Usually, the international oil companies, the joint partners are involved in key activities such as exploration, prospecting, and production of oil in commercial quantities.
The bargaining power of parties is said to be unequal if the situation is such that one of the parties is so strong in the negotiation process and the other so weak that the stronger party is capable of pushing the weaker one to the state of adherence to the terms of the contract which are in favor of the stronger party. But just what constitutes stronger or weaker bargaining power if one may ask? To answer this, if one examines the several doctrines under which the Common Law gives relief to a party to an unfair contract, it becomes apparent that the inequality of bargaining power and the resulting unfairness are of different types in the various cases.
This is so because a contract which is unfair in one situation may not be unfair in another. For example, it is observed that most of the more traditional doctrines of Common Law- such as apply only where there is unfairness in the sense of inadequacy of consideration,, but that some rules apply to clauses which leave a party at risk even if it got value-for-money; and that inequality of bargaining power can mean 'ignorance, vulnerability to persuasion, desperate need, lack of bargaining skills or simple lack of influence in the market. Many of the defenses to a contract enforcement, such as, duress, undue influence, breach of fiduciary duty, were properly exemplary of a general doctrine of inequality of bargaining power[2].
The Law is not clear or emphatic on the issue of compensation to individuals or community on whose land oil was discovered and taken over by government. This issue of compensation has for quite sometimes now, threatened the peaceful coexistence of this nation as Sovereign State. The government as a matter of policy has left the issue to be handled by the oil prospecting companies and the affected communities or individuals. The inaction of government in this direction is also untidy. There is need for a clear policy statement in this direction. The present attitude where the law only makes provision for the payment of fees, rents and royalties by the Holder of an OPL or OML to the Federal Government without an accompanying policy posture in issues of compensation is unfortunate.
The early forms of petroleum development agreements in Nigeria were, firstly, the traditional concession system and afterward the participation or joint venture agreements. The concession agreements, were in due course perceived as being unfavorable and against the desired interests of the country, and as a result were revised and ultimately discontinued. But the joint venture agreements which replaced them till today form the bulk of the petroleum development arrangements in Nigeria.
1.3 Justification of the Paper
As competition levels in the contemporary commercial world continue to rise, it has become highly important for companies and Nigerian government to seek and adopt a proper contract award system in order to maximize profitability and growth potential[3] (Parker, 2005) as well as smooth functioning of the contract. This justifies why this research is conducted in order to bring insight to businesses that seek to establish a good strategy for enhancing competitiveness.
This research will be highly useful, both in the academic and business circles. This research is anticipated to play a great academic role as it seeks to explore a field of study that is yet to be significantly explored. It opens room for more research regarding the possibilities that proper contract awarding system could have on Nigeria’s economy. This will not only occur through increased knowledge about this subject, but also, through the development of new research areas by addressing research gaps that may emanate from this research. Companies are bound to benefit significantly from the research.
The basic aim of this study is to discuss the evolution of petroleum industry of Nigeria by focusing on the development of this sector as well as the process of petroleum contract award system. This paper also discusses in detail the hydrocarbon policies of the government of Nigeria and are these policies succeeded or failed to get their desired aims,
·         To discuss the history of Nigerian Petroleum Industry
·         To describe the process of petroleum contract award system
·         To identify the Hydrocarbon policies of the government of Nigeria and how far they have worked or failed to achieve their aims
·         How Petroleum industry of Nigeria developed and evolved over a period of time?
·         How the contract of petroleum is awarded in Nigeria and is the process and system flawless or need improvements?
·         What are the hydrocarbon policies of the government of Niger? Do these policies properly served their purpose?
Nigeria is a major oil and gas producer in the world. Oil and gas Reserves are estimated at 26,000 million barrels and 157 trillion cubic feet, respectively, although other estimates placed over the 32,000 million barrels. Nigerian crude oil production to May 2011 was 2.4 million barrels a day, once overcome the problems of instability in the Delta, which caused the fall of production to 1.5 million barrels per day. The production could be higher, but is limited by the share of the Organization of Petroleum Exporting Countries (OPEP. Oil accounts 35% of gross domestic product, 80% of government revenues and 95% of reserves currency.
Nigeria is the biggest oil producer in Africa and the sixth of OPEC, with approximately 7.7% of the total production of the petroleum. Historically Nigeria had problems with OPEC, by exceeding production quotas imposed by that body, so that the NNPC has received complaints from multinationals for the country to leave OPEC and can set their fees without external influence. Then, the problems of the Delta did not even reach the quota, while which currently limits are respected in that organization. Despite this significant deployment of resources and the current reputation of the oil sector in the economy, the oil and especially gas, are operating well below their potential and aggravating economic, social and environmental and profound in itself.
Until the 60s the Nigerian economy depends mainly on agriculture. Once oil was discovered, Nigeria abandoned all other economic sectors. Products previously generated wealth as palm oil, rubber, cocoa and nuts completely abandoned having to be imported from neighboring countries, creating an imbalance and dependence on basic products. With the money raised initially with oil, Nigeria began importing all kinds of raw materials from other countries and established an industry that manufactures these materials[4].
In 1971, Nigeria joined OPEC being the seventh largest producer of crude oil. One year later, the government announced a series of measures to protect and promote Nigerian companies, since over 70% of companies operating in Nigeria have their headquarters abroad. To do this, foreigners were forbidden to invest in certain sectors and limited its presence their others.
In 1974 oil prices increased significantly, producing large money coming into the country, instead of being harnessed to invest and diversify Nigerian economy, inflation increased and the unemployment rate rose. In 1975 oil demand declined and therefore its price fell, until at the end of year, OPEC intervened modifying production quotas to try to raise prices. The lack of a clear economic model, mass immigration to the cities, abandoning of all economic sectors and the falling price of oil, Nigeria was the 80s to the collapse of social services and the most basic infrastructure. This trend has continued until today, being, for example, income per capita of 2010 lower by 20% than that of the mid-70s, but also must take into account the population explosion experienced by the country. Government involvement in the sector is through the Nigerian National Petroleum Corporation (NNPC), which operates in the upstream sector mainly through joint ventures with foreign companies enjoying a monopoly in the oil refinery, in the transport and storage of oil and gas and petrochemical industry. To date, the NNPC has run this business more like a ministerial department as a private company, and the economic inefficiencies and financial losses associated with NNPC has been substantial. Currently, the marketing of product distribution petroleum is in private hands.
Forty-five years after independence, despite $ 350 billion in oil revenues, Nigeria is still not able to find a model of development in relation to its economic potential. The 2005 UNDP report places Nigeria at158th out of 177 countries in terms of Human Development Index, which is the 31st largest in Africa among the 50 African countries listed. It is even down seven places from the rankings published in 2004. Nigeria is one of the most open to international cooperation African countries. With the development of its oil industry, it has expanded its range of business partners and find themselves at the center of many issues. It is now one of the major axes of the geopolitics of oil on the world map. With this international openness, the country has considerable financial resources and huge foreign trade. The financial health of Nigeria is not enough, however, not to hide the considerable delay it took in the development process.
Indeed, despite the strength of its oil industry, the country remains among the least developed in the world. In case, the subjective management of oil by successive political regimes, and the vulnerability of its oil sector, the policy of "all oil", led by the country's leaders, was unable to overcome the situation of underdevelopment and has significantly reduced the chances of sustainable access to regional leadership. If Nigeria is undoubtedly one of the most powerful countries in Africa, the fragility of its political and social economic stability, casts doubt on its future. The geopolitics of oil, which is made of large consumers, appears as one of the sources of the lack of diversification of trade in Nigeria. The many challenges in the Nigerian oil and the vitality of its oil market then contrasted with the low level of industrialization of the country and do not allow it to be the locomotive of the sub-regional cooperation in West Africa and the Gulf of Guinea.
In 1956, Shell and BP discovered oil in commercially viable quantities in Basin Tertiary sediments of the Delta, to Oloibiri, 90 kilometers west of Port Harcourt. The first offshore field is discovered in 1964, off the coast of what was then Bendel State (now Delta State). Nigeria's oil production started in 1958 at a rate of 6,000 barrels per day.  Proven reserves of Nigeria increased from 16.7 billion barrels in 1984 to 21 billion in 1994 and $ 35.3 billion in late 2004. This increase in reserves demonstrates the dynamism of investment by oil companies operating in the country over the past decade, especially since the return of democracy in 1999. Nigeria has, over the past twenty years, the largest producer of crude oil in Africa, ahead of Algeria and Libya. According to the Director of the Nigerian National Petroleum Company (NNPC), the national oil company, Nigeria held in early 2005, 5 trillion cubic meters of proven gas reserves and 35.5 billion barrels of proven oil reserves[5].
Since 1971, when integration of Nigeria OPEC and the start of the policy of nationalization of the oil industry, the oil and gas sector plays a fundamental role in the Nigerian economy. During the period 1993-2003, the oil sector contributes 41.1% of GDP. The "Nigerian National Petroleum Company" (NNPC), founded in 1977, is the centerpiece of Nigeria's oil policy room. It has stakes in companies distributing petroleum products (Shell, Exxon Mobil, Chevron Texaco, ENI / Agip and Total) and holds the country's refineries. With a total installed capacity of 445,000 b / d, the four refineries (Port Harcourt 1, 2 Port Harcourt, Warri and Kaduna), which have never shot more than 65% of their capacity, not even cover one quarter the country's needs for refined products.
The fundamental objective of the Nigerian oil policy, as reflected in the development plans, is to use the financial resources from the exploitation of oil fields to create productive structures to support economic growth. Nigerian oil policy depends primarily on external factors sources, such as the state of the global oil market, international obligations or responsibilities to OPEC. Other determinants, internal order, including the financing needs of economic and social development and political pressures in the country, also affect Nigeria's oil policy.
The downstream oil sector has long been dominated by the government, through the NNPC, and more specifically its refineries, pipelines and storage facilities. However, the upstream petroleum sector is largely held by a few private companies that buy products from NNPC warehouses. Indeed, given the low level of prices in Nigeria compared to the international market, if companies were supplied on the international market, they would be forced to sell at a loss. The area was, until recently, highly regulated, with an import monopoly granted to NNPC, set margins, and consumer prices administered. End of September 2003, the government announced that the distribution companies would now be free to set prices. However, liberalization is not yet fully implemented and the state continues to set price caps.
The oil and gas segment has become inefficient in recent years and is now unable to meet the growing demand of the country. Thus, during the period 1993-2003, 85% of crude oil is exported, while the remaining 15% is allocated to the NNPC so that it plays a role in regulating the oil sector. NNPC exports part of the allocation of crude oil and refined the other party locally. NNPC withdraws gain export crude oil as the government gives it the allowance at a level below that of the domestic market, which encourages the export rather than refining. The country is therefore forced to import much of its international market needs.
Beginning in 2005, Nigeria has reached a theoretical production capacity of 3 million barrels per day, with an average actual production (crude + condensate) of 2.5 million barrels per day and an export volume of more than 1 7 million barrels per day in 2004. Nigeria is consistently among the top ten oil exporters, a place varying in recent years, according to the vagaries of production in Iraq and Venezuela.
With such potential, oil plays a central role in the economy. It is in recent years about 40% of GDP (against 15% a decade earlier), 95% of export earnings, 90% of foreign exchange earners and 70% to 80% of budget revenues of the country. With the recovery in oil prices from 2002 and the accompanying surge since the second half of 2004, GDP continues to grow, as well as the share of oil in GDP. According to the World Bank, Nigerian GDP reached in 2004, a record $ 71 billion; while it was still only $ 58.4 billion in 2003 and $ 46.7 billion in 2002.
Basically, there are three types of legal licenses that an oil company can receive from the Nigerian government to undertake activity in Nigeria. These licenses form the operating agreements which normally exist between the Nigerian government and the international oil companies.
Contractual conditions determine the amount that a producer country will gain from its natural resources, and often the opportunity for a government to have the regulatory authority necessary for the implementation of environmental standards, health and others that apply to companies. Governments should use their regulatory power to protect the public interest (to avoid, for example, that oil spills not affect the drinking water). However, it is also expected that host governments establish a favorable investment climate that encourages economic growth and job creation, while establishing investment laws and penalties in case of violation. Host governments must learn to strike a balance between these conflicting requirements. However, the situation is further complicated because as a signatory of a contract, the Government is like a normal company that seeks to maximize its revenue[6].
This puts the government in a difficult position, since it must regulate itself. Governments of resource-rich developing countries are also face the problem of having to deal with major oil companies, which have the advantage of employing hundreds of highly qualified legal representatives. The importance of contracts in oil industry is emphasized because of the opportunities for corruption offered by large investment costs and the huge profits that accompany most markets in the energy sector. As generally very little information is made public on the negotiations and contractual conditions, much risk of abuse on both sides.
Companies participating in bidding for potentially lucrative operations have sometimes carried out illegal payments, often hidden, members of government or their representatives, for their support. It is difficult to know whether a particular company was chosen for the competitiveness of its offer and its jurisdiction or to its close relationship with government representative. If the latter is the one who is responsible for regulation, corruption opportunities are even greater.
Although the content of the various contracts may vary in details, they all must decide on two key issues: how the benefits (often called "rents ") are divided between the government and the companies involved, and how the costs are covered. The negotiations are further complicated by the high degree of uncertainty flows of incomplete or incorrect information. In general, neither the oil company nor the host government will know exactly when the signature which costs will incurred by the exploration and development of a field, if the future price of oil and Gas justify these costs, or how much oil or gas will be found in a given field. Nine out of ten exploration operations result in losses.
Companies generally seek to protect themselves from potential financial losses, which lead to increased internal costs for investors. Contract Negotiations requires skillful bargaining to find a reasonable balance and mutually acceptable between the interests of the investor and the government. Often, host governments are aimed at financial and International legal experts to advise during negotiations. One of the first decisions to be taken by governments is to choose the type of contract system they will use to establish process conditions Development: a concession, a joint venture (JV) or a Production Sharing Contract (CPC).
Each type of contract has advantages and disadvantages, particularly from a business perspective. The detailed content of the contract can vary widely between similar types of contracts. To further complicate matters, the provisions of concession contracts and PPC also came to resemble. The governments and investors should disclose the terms of their contracts. If they refuse to do so, it is important to raise questions about the privacy needs, because there is no intrinsic reason why we should hide these contracts to the public.
Joint ventures (JV) defy explanation and made definitions, because no definition or meaning does the consensus. JV simply assumes that two or more parties wish to pursue a joint venture, in a form that is not clarified. Given the indeterminate nature of this type of structure, it is not surprising that JV are rarely used as a basic agreement between an oil company and a host government. However, Nigeria is an exception: The national oil company chose this formula until it can no longer meet its share of the financial obligations of the JV. Today, the new agreements concluded in Nigeria are mainly CPP.
JV requires the parties to act together in abstaining from solving important before entering into a JV concerns, the parties will only delay any disagreement or deadlock, particularly in cases where a joint venture is a 50-50 arrangement. The JV require long painstaking negotiations over extended to ensure that all questions are properly addressed and that parties agree on the terms of their collaboration.
Different agreements are specified in the Petroleum Act 1969 at paragraphs 1 to 13 of the First Schedule17 and they are as follows:
a. Oil Exploration Licenses (OEL's) - This is valid for one or two years (i.e. if the one year extension was approved by the Minister of Petroleum Resources); it confers non-exclusive rights to make geological and geophysical studies but not the right to drill oil. The license may be renewed for another one year.
b. Oil prospecting license (OPL'S) - This involves an obligation on the part of the company to meet certain minimum drilling requirements. Moreover, they grant exclusive right for a maximum period of five (5) years (including any periods of renewal). This confers the exclusive right to explore, carry away and dispose petroleum discovered and won in an area covered by the lease.
c. Oil mining leases (OML'S) - Half of the OPL'S on expiration is converted to an OML with the other half of the acreage reverted back to the government, and it is usually effective for a maximum period of ten (l0) years18 and is renewable for another term. An OMC confer on the lease the exclusive right to search for win, work and carry away and dispose of petroleum discovered and won in the less operation subject to the term of the lease. An OMC contains regulatory terms and standardization provision relating to the lease operations. Its duration is from 30 to 40 years.
There is no doubt that the attitude of the law concerning the granting of OMC and premium are of serious advantage to past Nigerian government, despite the fact that the provision was made by the predecessors, the colonial masters. However, there is another dimension to Joint Operating Agreements. This is referred to as 'traditional concessions' in which two or more oil companies come to certain terms (of agreement) concerning their activities. Of particular interest is the sharing agreement between the Nigerian Agip Oil Company, NAOC (owned equally by Agip, an Italian corporation, and Philips, an American private corporation) on the one hands and the Nigerian government on the other. This agreement allows the Federal government to purchase up to 30% of the company's share capital in installments to be paid over three (3) years and to pass on its shares to state governments or public corporations.
Operations exploration and production are dominated by joint ventures (JVs) of the NNPC and production sharing contracts with foreign oil majors such as Shell, Chevron, Texaco, Exxon Mobil and Total Fina Elf. Six JVs currently represent approximately 95% of the total production. The NNPC has a 58% stake in the JVs, but delegates management in each of the various foreign oil companies. As for the PSCs, the NNPC contributes capital, bringing the entire burden of financing lies in its members. Gradually, the JVs give way to PSCs in future bidding rounds of concessions oil.
The NNPC has its own exploration and production company, Nigerian Petroleum Development Company, which owns and operates a number of licenses. The operations of the NPDC are, however, relatively small compared with the total upstream sector activity. There are also a number of Nigerian companies operating in this sector; they also represent a small percentage of the total activity, and usually in partnership with foreign operators. Foreign companies dominate the oil services sector and participation of Nigerian in this field is limited by the lack of technical knowledge required and the difficulty of access to sources of funding. Although the upstream sector agreements generally worked well, however, it raised a number of concerns and doubts in recent years.
The funding obligations of NNPC regarding participation in JVs have been difficult to meet. The funds come from the general budget and must compete with other priorities. This has caused costly delays in the development of some projects and has limited investment in the different areas of this sector. Nigeria's ability to manage and control the costs of foreign operators sector (function should develop a unit called NAPIMS NNPC) is weak and is limited by the lack of the necessary resources. In addition, foreign companies complain of excessive bureaucracy.
Moreover, foreign companies do not carry out a transfer of knowledge to local companies, which inhibits the development of true national capacity of this sector, both in the areas of exploration and production and in the supply. The companies engaged in the exploration and production are perceived as causing adverse environmental and social impacts and generated hostilities in local communities. The few relationships with indigenous people, sabotage on infrastructure oil and security problems in the Niger Delta are factors that reduce productivity of Nigerian oil exploitation. Large multinationals attempt alleviate these problems through development of communities. They created the Niger Delta Development Commission (NDDC) which channels funds for start up of economic and social programs.
Modern forms of petroleum contracts as known today started with the traditional concession system or 'the first generation agreements’. The word concession has no clear legal connotation in many legal systems. In some countries the term is referred to as administrative contract and in others, such as the Common Law jurisdictions, a concession may take the form of a grant, a license or a lease or even sometimes all three.
Concession contracts have evolved considerably since their inception in the early 1900s, when they were unilateral contracts, and many countries with rich resources were colonies or protectorates of other states or empires. The modern form of such contracts often given exclusive rights to company to explore, exploit, sell and export oil or minerals extracted of a specific area for a set period. The companies are competing through tenders, often associated with signing bonuses, for the granting of such rights. This type of contract is very common in the world, and is used in countries as diverse as Nigeria, Kuwait, Sudan, Angola and Ecuador countries.
The advantages from the perspective of a developing country, are significant. First, the concession contracts are simpler than other types of contracts, particularly if a system of public bidding is used to establish baseline conditions. The level of support and expertise required is often less complex that is necessary to negotiate joint ventures or sharing production contracts. However, qualified financial advisers are still needed to structure the process of bidding for concessions. Legal infrastructure acceptable and reliable, including a judicial system capable of interpreting complex agreements, is also required. With a highly developed legal system, as in most industrialized countries such as the UK, Norway and Canada, a concession contract may be focused on commercial terms, without having to develop contractual provisions to fill the gaps of the host country's legal system.
Financial terms and other provisions of the concession contract are defined in an agreement prepared by the host government, which shall then be published and open through a competitive process open to companies competing offers. The winning bidder then pays the price of the auction (usually human concession and / or signing bonus), and these amounts are retained by the host-whatever amount of oil discovery-government, and the commercial production begins.
In case of commercial production, the host government also affects royalties based on gross income and / or income tax based on net income, which are both based on the amount of production and the selling price of production. All financial risks related to oil development, including costs exploration, are endorsed by the bidder. In short, there are several significant disadvantages, financial or otherwise, for the host government, outside loss of opportunity or loss of time, if the process of tendering would not attract acceptable bidder, providing adequate financial guarantees and technical expertise.
The main disadvantage from the point of view of developing countries, as that of the bidder is commercial. Knowledge about the potential of an area of ​​concessions are generally insufficient, because the explosion.
The oil companies have no choice but to take risks based on the price they can offer for a concession contract. A company will be conservative compared to the amount it is willing to offer, because there is no assurance that the grant will cover the costs of the company and generated profits will be disposed. When the level of knowledge and practical conditions is insufficient, the host government cannot optimize its chances of profit from a system auction. Given that documents the tender specify a program minimum work (a recommended period of time during which the investment should be made at the risk of losing the concession), potential bidders will naturally offers more prudent and judicious.
As a result, in the oil and gas industry today, 'concession' is an all-embracing term, covering any agreement between the government and an investor (MNOC) for exploration and production of natural resources; but this is far from its traditional meaning. It may be discerned that the traditional concession agreement was a relatively simple document, the main provisions of which was an outright grant of the rights to exploit and market minerals recovered within the area of concession by a Sovereign in return f or which the concessionaire provided the necessary capital, know-how and bore the risk of exploration.
The concession area was usually very large and if it does not include the whole territory of the conceding state, it covered its largest part. Contrasted with today's standards, the duration too was long and usually ranged between 30 to 99 years. The principal financial feature of the old concession was the royalty payment. Judged by today's values also, these early royalty payments were modest in size, but as time went on and competition for concessions became keener, the amounts increased. In many cases the companies paid a nominal rent for a whole concession. There was no royalty in the modern sense, that is, the concessions provided for a royalty calculated as a flat rate per ton of oil rather than as a percentage of the value of the sale price of production. 
On examination of the general features of the traditional concessions it is evident that there are certain merits and demerits that go with their application. We begin by highlighting the pros and cons of the system from the host country's or mineral owner's position.
For the host country, the early concessions meant simplicity. These agreements were characterized by their simplicity and similarity. The grant made to the concessionaire was usually an exclusive right to exploit the mineral resource with minimum administrative and supervisory requirements. This invariably meant too that there were few ceremonies such as negotiations or bargaining under such agreements. This is hardly surprising because a good many of these old concessions were granted either by traditional rulers or colonial administrations.
The investors, who at the time were comprised of the "majors", were assured that government would not interfere in, with what they termed, "management prerogatives. It was for the investors alone to determine how the minerals would be mined, at what rate; the extent to which they would be processed in the host country, if at all; where they would be sold, on what terms, conditions and prices, etc.
Furthermore, under concessions, the host country exercised little or no control, or participation in the activities of the industry. The role of the government then was passive. In turn, the investor provided all the capital not only for the mining project, but for the infrastructure as well. Having contributed all of the capital, the concessionaire expected to receive all of the profit. Probably, this explains why the host country received a proportionately smaller income as rent as it contributed nothing and bore no risk throughout different stages of production.
Para. 30 - 32 of the First Schedule to the Act provided inter-alia with respect to royalties: “Royalties shall be paid at the prescribed rates or, where rates are specified in special terms and conditions attached to the relevant license or lease at the rates so specified”. It seems that the clamor for compensation is informed by a myriad of many factors presently. According to Pearson, since discovery of petroleum in Nigeria in 1956, the General knowledge of the existence of large reserves of petroleum has exacerbated divisive ethnic pressures and later engendered frequent communal clashes over oil and oil-related claims. The government initial response was to establish Oil Minerals Producing Areas Development Commission (OMPADEC) to address problems of environmental pollution occasioned by oil prospecting activities and the neglect of oil producing areas and the consequent protests by the communities.
OMPADEC was established under Decree 23 of 199 to address the difficulties and sufferings of the people in oil producing areas. It's primary assignment was to ensure physical and human development in the communities by compensating materially, the communities, local government areas and states which have suffered damage (ecological, environmental, etc) or deprivation as a result of oil prospecting in their areas; provision of infrastructural and physical development; tackling the problem of oil pollution and spillage and liaising with the various oil companies on matters of pollution control and a host of other responsibilities or objectives.
The policy adopted by the oil companies is such that compensation is paid only when genuine cases of oil spills occur. For instance, between 1989 and 1995, 25% of oil spills were as a result of sabotage. Investigations in the Ogoni area revealed that 69% of oil spills between 1985 and early 1993 were caused deliberately by communities. This calculated measure was usually adopted to get compensation and also to make political gains. But oil companies usually resist pressures for compensations when spillages are engendered by political considerations.
Most of these claims for compensation as a result of pollution have been actuated by the fact that the enlightened city or community youths had acquired information on environmental pollution. They, unlike most off their parents, had become aware of their right under the law, and they know that oil spills, one of the accidents experienced during oil production, can fetch a lot of compensation money. They had heard about how much was paid in especially other developed or advanced countries, such as USA, when Exxon Valdez spilled thousands of barrels of crude there.
The policy relating to this sector and its supervision are the responsibility of the Office of the Special Presidential Assistant on Petroleum and Energy Matters and the Ministry of Oil. These institutions are short of resources and do not have adequate staff to develop their duties efficiently. It should be mentioned a legislative initiative that can change the landscape. It is the Petroleum Industry Law, (Petroleum Industry Bill, PIB), which wants to increase profits for the country, to the detriment of the majors. This law is more important than ever because most of the contracts with multinational companies were signed in 1968 for a period of 40 years. Since, are operating with interim agreements. Exxon Mobil got a new agreement, for 20 years, in November 2009, but in May 2011, the Petroleum Minister has revoked. This has generated a certain amount of uncertainty.
2.2.2 Risks in Contracts Negotiation
A careful analysis for a procedure of contract should be to select the correct allocation of responsibilities, types of contracts and procedures for tendering a project. To proceed with preparing the contract requires the identification and the definition of specific risks in the design of the contract documents and how should these risks be shared between the parties. The challenge of these tasks is to decide the equitable distribution of risks[7]. The risks are located differently in those contracts that are based in the "cost" as those that are based on the 'price'; the way in which the risk is paid to distinguish these two main types of contract. Cost-based contracts are those that include fixed prices (usually paid) (for a total sum) and unit price contracts (using estimates of) (quantities or program evaluations).
The risks based on prices or assessments provided by the contractor in proposal. These contracts thus require that the contractor charge with a much of the risks in contracts based on cost. The contractor should estimate the cost of risks to include these in their prices or budgets. The uncertainty of risk and claims, coupled with the confidentiality of the costs of the contractor may increase the cost of the construction project.
When the magnitude of the risk and uncertainty is high, the risk of failure of project can reach higher, since customers may pay excessive amounts for their contracts[8]. The most likely outcome is that the contractors are underpaid with the risk of file for bankruptcy before completing the contract. A method of control is the use of contracts cost-objective to maintain an incentive to the contractor to maintain the current low cost for and thus achieve the goal in addition to winning a portion of the difference.
The contractor and his team of advisers must choose how much responsibility there is in the design, building and support activities that are mapped and incorporated[9]. Contract fees, contracts administration, construction management, design and management, all are used, and all assigned risk in different forms. These are achieved partly through payment methods as described above. In addition, there are special conditions of contract, particularly in management of contracts. During the operation the contractor or company recover their invested capital and operating costs, a profit with the income generated by the operation of the asset (toll shares). Many customers have seen the contract model as little more than transfer risk to the private sector. Clearly a contract project participants need to pay attention to the challenge management strategy.
Probably the greatest consequence for managing challenge in these non-traditional contractual arrangements comes from the administrative structure and in particular the responsibility given to the management. The contractual guarantees can be used to create a contractual relationship between the parties which until now did not have any type of contract[10]. A relationship of this type can be established, therefore, between a client and a sub-contractor. This allows a client to follow up on these contracts after the project has been terminated and if a defect may appear. Such guarantees may be more important where local laws do not allow recovering the losses out of contract due to negligence[11].
As for customers, a detailed assessment of technical challenges in particular projects should be carried out. The initial challenge retained by a contractor and people can have a significant expansion, depending on the existing terms in the contract between the contractor and the client. Sometimes the public debt and other assurances are included as part of the assurance of facilities package. Only accidental loss and damage are covered, but not those where possible consequences are obvious negligence caused by the constructor.
Depending on the country in which the risk is situated, individual risks can be included or excluded from coverage, through the written terms and conditions. Limitations of coverage of risks have been described previously. To meet these limitations, financial risk alternatives may need to be considered by a contractor as well as the amount of risk that can be retained by the company.
Identify risks that a contractor may not transfer or which may be considered to be externally secured must be evaluated properly and should be added to the budgeted sum. Traditionally the estimated cost is based on available data to the current cost, in previous contracts and experience, and thus implicitly is includes an assessment of the cost of the risk. The price of current budget is often the choice of the best cost estimate more (or less) a percentage of adjustment, which has commercial aspects, such as the state of the market and that a contractor you want to the work, opportunities for recovery of investment, etc. This approach typically does not include a detailed assessment of the risk, above all because of the time constraints for a budget. However, in some circumstances, if time permits, a detailed analysis of risk may be justifiable.
Supervision of oil activities relies on federal laws and decrees, which introduce discrimination between different communities of Delta, particularly from the status of host communities. This enables communities in whose soil oil installations at large (well, terminal pumping station, pipeline, refinery, office or company offices ...), access by right and live royalties and contracts services from companies. This status generates jobs and financial benefits, exacerbating competition and sometimes conflict between hosts communities, even within the host communities where traditional leaders or people in charge of the allocation of these dividends divert their profit. This status also creates jealousy with neighboring communities who have nothing and depend more on their local government, too often helpless.
 It is this competition, on the basis of perceived as unfair by all excluded from these emoluments federal laws, which is causing unrest between communities in the Delta. As for the explanation tends to make these clashes of inter-ethnic conflicts, it fades before the rivalry between neighbors of the same ethnicity, between villages of the same clan, or between factions of the same village. In addition, many host communities, lack of representation and / or means of action, are excluded from redistribution, direct or indirect, while contractors belonging to other communities outside the Delta, including the ethnic groups majority
Subsequently, obtain contracts with oil companies. This plurality of processes between the different communities, their rights and their application, of course accentuates inequality, increasing frustration and fueling violence in the Delta. It is for the governors to use the funds derived primarily to reduce these inequalities. Later, yet another independent body responsible for the development of the Delta, despite increased resources, does not receive all the specific financing of the federal executive and state, so that companies pay their contributions.
Nigeria has four refineries, an extensive pipeline to transport networks storage and distribution and petrochemical complex. All of these facilities, with the exception of the distribution network, owned by the NNPC and managed by this organism. The four refineries are located in Kaduna (north) and Warri and Port Harcourt (southern region). They have a total theoretical capacity of 19 million tons per year, which is a considerable excess of the quantity demanded domestically. not However, in recent years the refineries have been operating inefficiently and well below its production capacity, which has been in short supply, increased imports of refined product and considerable financial losses. of Indeed, in 2010 the four were practically closed.
In 2002, the government launched a licensing program for the construction of 18 new refineries by the private sector in order to solve the obvious problems facing the sector, but, despite periodic announcements, there has come to build any new. This leads to the paradox that an oil producing country is forced to import 100% of your needs, sometimes even in countries such as Senegal, which are not pro producers. At the same time, the NNPC signed contracts with renovation and remodeling private sector operators with the intention of improving some of the greatest urgency problems of these refineries.
The storage and transport of the product is solely responsible for Pipelines and Products Marketing (PPMC), a subsidiary of the NNPC. PPMC operates a system pipeline of 5,000 km long, 20 pumping stations, 22 storage tanks and 5 terminals or jetties and other facilities. PPMC operations have been planted inefficiencies, delays, serious problems social and environmental vandalism and theft with the result of substantial financial losses for the PPMC and refineries. In contrast to the monopolistic situation in the sub NNPC refinery, storage and transportation of product, marketing and distribution subsector retail has a number of companies competing in this market. to 2004 competition in this subsector was compromised by the majority stake of the NNPC in large retail distributors of oil. However, recently NNPC shares were sold to private investors through a privatization program overseen by the Bureau of Public Enterprises (BPE). now There are seven large retailers and a large number of small distributors.

Eleme Petrochemicals Company (EPCL) is a subsidiary of the NNPC and is responsible production of a range of petrochemicals derived from natural gas and refined products. Because management inefficiencies and conditions loans signed on behalf EPCL registered huge losses in each year of operations. The distorted pricing policy, industry regulations, market incentives, corporate structures and procedures of budget creation, together with the chronic government intervention and its destabilizing changes in the direction of the guidelines that should govern the sector, have caused serious difficulties that Nigeria can achieve acceptable levels of performance in the downstream sector.

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