This paper reviews the proposed incorporated joint venture structure under the Petroleum Industry Bill

1.
2008
Some Issues in the Conversion of
Unincorporated Joint Ventures to
Incorporated Joint Venture
Odujinrin &
Adefulu
Church House
st
1 Floor
29, Marina, Lagos

2. This article first appeared in “Legal Energy” a column in the Nigeria
Energy Intelligence.
Going back to the first paper in this series, one of the objectives of the
government in the oil and gas industry reform process is the resolution of the
joint venture cash call issue; this problem was highlighted in that paper and
would not be repeated here. One of the major solutions that has been
proposed by the Oil and Gas Implementation Committee in this regard, is the
conversion of the existing unincorporated joint ventures to incorporated joint
ventures. The purpose of this paper is to highlight some of the major issues
that may arise from the perspective of the International Oil Companies
(“IOCs”) in the conversion of the joint ventures.
1. CURRENT STRUCTURE
The initial joint venture contracts started with Nigeria acquiring interest in
the oil concessions given to IOCs in the ‘50s and ‘60s. The Nigerian
Participating Joint Ventures (“PJVs”) gave the Nigerian National Oil Company
a 60% share in all fixed and moveable assets of the IOC. The rights and
obligations accrued under these agreements have since been transferred to
the Nigerian National Petroleum Corporation (“NNPC”) which was created in
1977.
The Nigerian joint venture arrangement is an un-incorporated joint venture.
Under this arrangement, each co-venturer has an undivided interest in the
lease as well as all oil produced and the assets employed in oil production.
The effect of this is that all rights and obligations accruing to the lessee
under an Oil Mining Lease (“OML”), would accrue to all the joint venture
partners including NNPC.
Currently, the joint ventures account for more an estimated 90% of Nigeria’s
daily oil production. The table below shows the various PJVs in Nigeria and
the interests of the parties.
The various joint venture projects are subject to agreements, which govern
the relationship of the contracting parties. The participation agreements sets
out the interests of the parties; the Operating Agreement spells out the legal
relationships between the owners of the lease and lays down the rules and
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3. procedure for joint development of the area and of joint property; the Heads
of Agreement delimits the general principles intended to govern offtake,
scheduling and lifting agreements for the crude oil. These agreements
alongside the Oil Mining Leases define the relationships under the joint
venture arrangements in the Nigerian oil industry.
The basic features of the Nigerian PJV are:
• The IOC (or one of the IOCs) is usually the operator. All parties
to the PJV pool funds to facilitate exploration activities in the ratio of
their participation interests. The operator is required to submit to each
non-operator a statement of the amount, which it (non-operator) is due
to pay to meet its participating interest share of the costs and
expenditures. This is known as the ‘cash call’.
• NNPC may meet its cash call obligations by allowing the operator to lift
some of its crude oil. This right is subject to giving adequate notice.
• NNPC has an undivided interest in the concessions and in the assets
and liabilities of the venture, based on its participating interest share.
• Crude oil from exploration activities is divided between NNPC and the
joint venture partners according to the ratio of their participating
interests.
• The joint operating committee supervises matters relating to the
operations of the joint venture and each venture partner is represented
in accordance with their interest in the PJV although decisions by the
committee are taken unanimously.
2. PROPOSED STRUCTURE
The Oil and Gas Implementation Committee has proposed an alternative
structure – the incorporated joint venture (“IJV”), to aid the financing of
joint venture projects. An incorporated joint venture is simply one in which
the legal means of dividing the project's equity is by shareholdings in a
company. Whilst the detailed plans have not yet been released, the broad
structure of the initiative is as follows:
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4. Each existing PJV would be incorporated with the Corporate Affairs
Commission (“CAC”) with shares held by the new National Oil Company
& the IOCs according to their current interest levels.
The Board of the IJV is expected to reflect the shareholdings of the co-
venturers. The effect being that the National Oil Company would hold
the most number of seats on each board. Additionally, the employees
of the new companies are expected to also reflect the shareholding of
the company. Thus NNPC would provide more staff than the IOCs to
these IJVs.
The IJV would serve as the operator in its own fields and would be
empowered to independently source for funds for executing its
projects. It would also be allowed to sell and keep the funds derived
from cost oil and cost gas, while transferring all other hydrocarbon
produced to its shareholders.
3. LEGAL ISSUES IN THE CONVERSION OF PJVS TO IJVS
The current structure is a creation of contract and not of law; therefore any
changes to the structure must be with the full consent of the other co-
venturers. A number of issues would need to be considered by the IOCs in
making a decision whether to accept these changes. These would include for
example the consideration of the potential tax implications of such a change.
These tax considerations in the short term would include the possibility of
transfer taxes, upon the transfer of the assets to the IJV company. In the
longer term, consideration would need to be given to whether the IJV as a
vehicle in itself would be subject to additional tax other than what the IOCs
are currently exposed to acting under the PJV structure.
In addition to these concerns, thought would need to be given to the
composition and voting powers of the board members. Under the current
structure the management committee acts as the overall governing body of
the PJV. Whilst membership of this body is constituted proportionally,
decisions of the committee are taken on a unanimous basis. It is not yet clear
whether the decisions of the board of the IJV would be taken unanimously. In
the position that they are not, IOCs may be concerned about the domination
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5. of NNPC on the board and its effective ability to bind the other venturers, by
virtue of its majority position.
The principles which apply in the case of the composition and voting powers
of the board also apply in respect of employment. It should be noted, that
the experience of the IOCs in acting as the operator(s) in several field cannot
be replicated by NNPC, as it has had only a limited opportunities to act as an
operator. Therefore, caution needs to be exercised in imposing the principle
of proportionality in relation to employees.
It may be accepted as general knowledge that under the current regime,
decision making is very slow. A possible concern of the IOCs is that the
creation of the IJVs and their board may amount to the imposition of a new
layer of bureaucracy, whereby the IJV boards are not infused with sufficient
independence to make decisions on their own without seeking clearance or
approval from the board of the parent national oil company.
4. COMMENTS
The question of whether in itself the IJV structure would provide a permanent
solution to the funding problems is one that has not been approached in this
paper. However given the Government’s position that this is indeed the case,
and the contractual nature of the existing arrangements, it must carry the
IOCs along and address some of these issues as well as other concerns they
may have in the detailed plans.
This paper concludes the series on the institutional reforms of the oil and gas
industry.
Adeoye Adefulu holds a Ph.D in oil and gas industry reform from the Centre
for Energy, Petroleum and Mineral Law & Policy, University of Dundee. He is
a partner in the law firm of Odujinrin & Adefulu e s t 1 9 7 2 .
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