2008 

Odujinrin & Adefulu

Church House

1st

Floor

29, Marina, Lagos

Some Issues in the Conversion of Unincorporated Joint Ventures to 

Incorporated Joint Venture 

Some   I ssues   in   the  Convers ion  of  Unincorporated   Jo int  Ventures   to   Incorporated   Jo int  Venture Page  2

This article first appeared in “Legal Energy” a column in the Nigeria Energy Intelligence.

Going back to the f irst paper in this series, one of the objectives of the government in the oi l and gas industry reform process is the resolution of the joint venture cash cal l issue; this problem was highl ighted 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 exist ing unincorporated joint ventures to incorporated joint ventures. The purpose of this paper is to highl ight some of the major issues that may arise from the perspective of the International Oi l Companies (“IOCs”) in the conversion of the joint ventures.

1. CURRENT STRUCTURE

The init ial joint venture contracts started with Nigeria acquir ing interest in the oi l concessions given to IOCs in the ‘50s and ‘60s. The Nigerian Part ic ipating Joint Ventures (“PJVs”) gave the Nigerian National Oi l Company a 60% share in al l f ixed and moveable assets of the IOC. The rights and obl igations 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 wel l as al l oi l produced and the assets employed in oi l production. The effect of this is that al l r ights and obl igations accruing to the lessee under an Oil Mining Lease (“OML”), would accrue to al l the joint venture partners including NNPC.

Currently, the joint ventures account for more an estimated 90% of Nigeria’s dai ly oi l production. The table below shows the various PJVs in Nigeria and the interests of the part ies.

The various joint venture projects are subject to agreements, which govern the relat ionship of the contracting part ies. The part ic ipation agreements sets out the interests of the part ies; the Operating Agreement spel ls out the legal relat ionships between the owners of the lease and lays down the rules and

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procedure for joint development of the area and of joint property; the Heads of Agreement del imits the general principles intended to govern offtake, scheduling and l i ft ing agreements for the crude oi l . These agreements alongside the Oil Mining Leases define the relat ionships under the joint venture arrangements in the Nigerian oi l 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 faci l i tate exploration activit ies in the ratio of

their part icipation 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 part ic ipating interest share of the costs and

expenditures. This is known as the ‘cash cal l ’ .

• NNPC may meet its cash cal l obl igations by al lowing the operator to l i ft

some of its crude oi l . This r ight is subject to giving adequate notice.

• NNPC has an undivided interest in the concessions and in the assets

and l iabi l it ies of the venture, based on its part icipating interest share.

• Crude oi l from exploration activit ies is divided between NNPC and the

joint venture partners according to the ratio of their part ic ipating

interests.

• The joint operating committee supervises matters relat ing 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 f inancing 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 detai led plans have not yet been released, the broad structure of the init iat ive is as fol lows:

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Each exist ing PJV would be incorporated with the Corporate Affairs

Commission (“CAC”) with shares held by the new National Oi l 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 Oi l Company would hold

the most number of seats on each board. Addit ional ly, the employees

of the new companies are expected to also ref lect 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 f ields and would be

empowered to independently source for funds for executing its

projects. It would also be al lowed to sel l and keep the funds derived

from cost oi l and cost gas, while transferr ing al l 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 ful l 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 possibi l i ty 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 addit ional tax other than what the IOCs are currently exposed to acting under the PJV structure.

In addit ion to these concerns, thought would need to be given to the composit ion and voting powers of the board members. Under the current structure the management committee acts as the overal l governing body of the PJV. Whilst membership of this body is constituted proportional ly, 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 posit ion that they are not, IOCs may be concerned about the domination

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of NNPC on the board and its effective abi l i ty to bind the other venturers, by virtue of its majority posit ion.

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 f ield cannot be repl icated by NNPC, as it has had only a l imited opportunit ies to act as an operator. Therefore, caution needs to be exercised in imposing the principle of proportional ity in relat ion 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 imposit ion of a new layer of bureaucracy, whereby the IJV boards are not infused with suff ic ient independence to make decisions on their own without seeking clearance or approval from the board of the parent national oi l 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 posit ion that this is indeed the case, and the contractual nature of the exist ing arrangements, it must carry the IOCs along and address some of these issues as wel l as other concerns they may have in the detai led plans.

This paper concludes the series on the institutional reforms of the oi l and gas industry.

Adeoye Adefulu holds a Ph.D in oi l and gas industry reform from the Centre for Energy, Petroleum and Mineral Law & Pol icy, University of Dundee. He is a partner in the law f irm of Odujinrin & Adefulues t 1972 .