Nigerian Energy And Mining Law

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NIGERIAN GOVERNMENT MAY DEBT FINANCE AND/OR EQUITY FINANCE ITS 2009 JOINT VENTURE CASH CALL OBLIGATIONS. February 2009, Volume 22 Issue # 2 For decades, the Federal Government of Nigeria, through its regulatory and participatory agency in the oil industry (the Nigerian National Petroleum Corporation-NNPC) has been notorious in failing to meet its cash call obligations in various joint venture contracts with the oil majors. In addition to delaying several projects with attendant losses to parties concerned, the high default rate of the NNPC has often led to arbitral disputes and cancellation of some projects. Recently, the NNPC confirmed that it will partly fund the 2009 joint venture cash calls through borrowing of funds from its joint venture partners. The Joint Venture partners include Shell, Total, ExxonMobil, Agip and Chevron. It is expected that the Federal Government would partly debt finance the joint venture cash calls in 2009. According to the new policy thrust, the funding of the JV projects would be done through some form of alternative funding called (Modified Carry –MCA) and other financial instruments.

In addition to increased borrowing, the Federal Government has announced a new policy on structural adjustment of the regulatory entities involved in the oil and gas industry in Nigeria. A key component of the proposed policy changes is the strategy of turning the joint ventures into incorporated entities. This would take the form of Incorporated Joint Ventures (IJV’s). Under the proposed framework, the IJV’s as incorporated commercial entities that can go to the financial market, raise capital for the business and pay dividends to their shareholders. What this entails for the government is that the government-owned partner in the joint venture needs to be a commercial, capitalized company. This new approach tallies with the proposed restructuring of the NNPC. Indeed, the new arrangement is already in the Oil Industry Reform Bill currently pending before the federal legislature. The proposals in the bill include measures to ensure that government increases its take from a growing number of deepwater developments, review of the royalties on gas production, increasing the tax take from gas by creating a new fiscal regime separate from rules governing oil. Another aspect of the proposal is effecting changes on the way tax breaks

©Blackfriars LLP 2009. All rights reserved. This document is for general guidance only. Definitive advice should be sought from counsel if required. Blackfriars LLP is a Nigerian law firm with a representative office in Toronto, Canada.

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are applied for new developments. Unger the arrangement, oil companies will be encouraged to refine at least 50 percent of their production in Nigeria by the end of the decade, new rules will be evolved to boost employment of Nigerians in the oil industry, and incentives to encourage development of marginal fields and improve community programmes in the Niger Delta will be deepened.

The proposed structural changes in the NNPC and of the funding operations of JV’s in Nigeria signal that the Nigerian oil and gas industry is being reformed with a view to ameliorating the notorious shortcomings and defects in the current regime which many operators have faulted for the industry’s many missed opportunities.

Beyond chronic defaults on its cash call obligations, it would appear that the two-year contractor circles and attendant reviews by both International Oil Companies (IOCs) have contributed significantly to higher costs of contracts. Towards this end, part of the new government policy is aimed at reducing the contractor circles to four months as against the current 18 or 24 months in the industry.

Ms. Clara Ndive Email: [email protected] Tel: +234 803 323 1868 Fax: +234 1 2694781

Many analysts have long blamed the long gestation period of the contracting circle as partly to blame for the cost of jobs in Nigeria which is the highest in Africa. In other African countries, for example, the contracting circle is four months. What this means is that everything that has to be done as regards any particular contract would not last more than four months. The effect is to avoid any possible escalation of the contract terms.

Dr. Virtus Igbokwe Tel: +647 831 7487 Email: [email protected] Fax: +234 1 2694781 Ms. Nkeiru Onyeaso Tel:+234 808 718 0833 Email: [email protected] Fax:+234 1 2694781 This newsletter has been sent to you by BLACKFRIARS LLP, a full-service law firm, in the genuine belief that its contents would be of interest to you. If you have received this newsletter incorrectly, or if you do not want to receive further information about legal developments in Nigeria and West Africa, please accept our apologies. To unsubscribe from future newsletters from BLACKFRIARS LLP please send an email to [email protected] with "unsubscribe" in the subject line.

©Blackfriars LLP 2009. All rights reserved. This document is for general guidance only. Definitive advice should be sought from counsel if required. Blackfriars LLP is a Nigerian law firm with a representative office in Toronto, Canada.