THE NIGERIAN OIL AND GAS INDUSTRY & ITS CHANGING INVESTMENT CLIMATE

1. THE NIGERIAN OIL AND GAS INDUSTRY & ITS CHANGING INVESTMENT CLIMATE By Sola Adepetun Managing Partner International Bar Association African Regional Forum 6th – 8th November , 2013 Lagos, Nigeria

2. INTRODUCTION “Any change, even a change for the better, is always accompanied by drawbacks and discomforts” -Arnold Bennet

3. OUTLINE • I. Introduction • Nigerian oil & gas industry statistics • Recognisable legal environment and investment climate to prolonged reforms and uncertainty • The emerging environment for petroleum operations • II. Where were we • The Pre-Reform Era: Established upstream legal and regulatory framework • The Pre-Reform Era: Contractual framework • The Pre-Reform Era: Upstream fiscal regime • Where are we • Emerging trends • The Reforms and the PIB Debate • The Emerging Law and Changing Practice • A paradox of Divestments and Opportunities • Where are we going: an uncertain future? • Recent Global Developments • Concluding questions

4. 1.1 Nigerian Oil & Gas Industry Statistics • Facts & Figures • 37.2 million barrels of proven oil reserves; 42.1% oil reserves-to-production ratio as at 2012; the second largest proven oil reserves in Africa (Source: BP statistical Review of World Energy, 2013) • Current oil production- 2.2 million barrels per day (bbl/d); potential for over 3 million bbl/d (Source: PWC Oil and Gas Review, June 2013) • Over 182 trillion cubic feet (Tcf.) of proven gas reserves. The largest in Africa and the 9th largest in the world (Source: BP statistical Review of World Energy, 2013) • Petroleum sector accounts for more than 95% of export earnings and more than 75% of Federal Government revenue

5. 1.2. From a stable legal environment and investment climate to prolonged reforms and uncertainty

6. 1.3. The emerging environment for petroleum operations • “…Uncertainties in Nigeria's investment policies and regulatory framework have caused a slowdown in oil and gas exploration activity, and delays in project development... However, the long-awaited and delayed Petroleum Industry Bill (PIB) could potentially iron out investment uncertainties and set a regulatory framework for the country's oil and gas industry…” [emphasis added] • Source: US Energy Information Administration (EIA), 2012 Country Analysis on Nigeria • Is the current investment climate sustainable or not? • What are the relevant legal and policy issues? • What are the emerging trends?

7. WHERE WERE WE?

8. 2.1. The Pre-Reform Era: Established upstream legal and regulatory framework • A recognisable upstream regulatory framework • OEL: non-exclusive license to explore. Expires 31st December of the year granted • OPL: exclusive rights to exploration/production. Duration: 5years (onshore and shallow waters); 10 years (deep offshore and inland basins), including period of renewals • OML: exclusive rights to win, get, work, store, carry away, transport, export or otherwise treat petroleum discovered. Duration- 20 years. To be renewed as provided by the Act and Regulations • Other issues covered- assignments; revocations; farm outs; regulation for fees, rents and royalties; field development, drilling and production operations etc • Ancillary regulations include: the Mineral Oils (Safety) Regulations, Petroleum Refining Regulations, and the National Domestic Gas Supply and Pricing Regulations 2008, etc

9. 2.2. The Pre-Reform Era: contractual framework

10. 2.3. The Pre-Reform Era: Upstream fiscal regime • Tried and tested upstream fiscal regime- Outdated? • PPT applied to the chargeable profits of companies engaged in upstream petroleum operations as provided in the PPTA • A general PPT of 85%. A PPT rate of 65.75% for first five years of petroleum operations • PPT applicable to PSCs is 50% flat rate for the contract area • The Regulations and the DOI-PSCs Act deal with royalties • The DOI-PSCs has a fixed royalty rate of 20% for onshore PSCs (with production above 10,000 bpd) and a sliding scale of royalties (based of water depth) for offshore PSCs • Rents and fees are dealt with in the Regulations • Signature and production bonuses are required for PSCs and other concessions

11. WHERE ARE WE? What have the reforms or the “PIB” got to do with it?

12. 3.1. Emerging Trends • Nigeria’s 2011 crude oil and condensate: • Production reduced by 3% from 2010 • Domestic and export lifting reduced by 4% from 2010 • Source: NNPC, Annual Statistical Bulletin, 2011 • Petroleum exploration activity levels: • At their lowest in 10 years. • Only 3 exploratory wells drilled in 2011 compared to over 20 wells drilled in 2005 • Source: EIA, 2012 Country Analysis on Nigeria • Security Challenges: • Crude oil theft – over US$6 billion lost annually • Source: Thisday, April 1, 2013, Pg 12 • Refined products theft- over N105 billion lost annually • Source: Thisday, April 1, 2013. Pg 12 • Pipeline sabotage • Piracy • Kidnapping • Rash of Divestments: • British Gas- 100% • SPDC- 30% stake in OMLs 4, 38, 41, 42 etc. • Total- 20% stake in OML 138 • ConocoPhilips- 100% • Petrobras- 100%??? • Chevron -OMLs 83 and 85. Plans to divest interests in OMLs 52, 53 and 55 • SPDC- again?

13. 3.2. The Reforms and the PIB Debate

14. 3.2.1. The Proposed PIB: Regulatory and Institutional Framework

15. The Proposed PIB: Regulatory and Institutional Framework (contd)

16. 3.3The Emerging Law and Changing Practice • Existing legal and institutional framework • PIB considered ambitious and time consuming • Resultant state of flux!! • Drawback- development of practice rules outside the framework • Nigerian Oil and Gas Industry Content Development Act, 2010 (“Local Content Act”) • Applies to all matters pertaining to local content • Supremacy issues; major reference document • Drafting and clarity issues • Interpretation issues e.g. Nigerian subsidiary of international or multinationals- S.41(2) • The lacuna and the unclear legislation • “Regulatory discretion” • OML renewals • Arbitrary extensions • Material changes • “Wait for the PIB” • Resort to case law • The MoniPulo case • Acquisition of controlling shares in concession owning company requires prior ministerial consent • Sections 194(1) & (2), PIB • The Famfa Case • Supreme Court- government must follow due process of negotiation before exercising back-in-rights

17. 3.4. A Paradox of Divestments and Opportunities • State of flux- negative impact on investment climate • Heightened investment risk profile • Disincentive to oil and gas project development • Discouraging industry statistics • IOC divestments • Fresh investment opportunities created by divestments • “Dumped” concessions being snapped up • Emerging indigenous powerhouses • OANDO, Sahara, SEPLAT, AFREN, Midwestern, NECONDE, First E&P; Atlantic, etc

18. WHERE ARE WE GOING: AN UNCERTAIN FUTURE?

19. 4.1. Recent Global Developments • Competitive global markets • (Cheaper) shale oil and gas explosion • East and West African discoveries • Kenya, Uganda, Tanzania, Mozambique, Ghana, etc • Dire need for favourable investment climate • Full throttle production • “Make hay while the sun shines” • Investments in new and existing oil and gas projects required

20. CONCLUDING QUESTIONS • Is there anything we can do to improve the investment climate while we wait for the PIB to be passed? • Strengthen the Local Content Act? • When will the PIB be passed??? • Politicization • Stagnation • Political will- can this bill be shelved? • Yet another change??? • “To improve is to change; to be perfect is to change often” • - Winston Churchill

21. ADEPETUN CAXTON-MARTINS AGBOR & SEGUN CONTACT DETAILS: