Legal Considerations in Renewing Licenses and Leases in the Nigerian Petroleum Sector

Acquisition of any legal right is usually by means of consideration by way of cash, property or services. Initially, most investments in Nigeria for the exploration and exploitation of its crude oil were by multinational corporations who enjoyed oil concessions covering land, territorial waters and continental shelf areas for extended periods of time. However, by the enactment of the Petroleum Act, certain provisions were made for the acquisition of participatory interest in the petroleum industry by entities willing to participate in the sector.

Acquired rights of participation are granted through licenses and leases (such as the Oil Exploration License, Oil Prospecting License and Oil Mining Lease). Just as these rights can be granted, they can also be revoked.

These leases and licenses granted by the Minister do not span in perpetuity, hence there is a need to renew them depending on the type of grant. This article explores the process of renewing these grants, in the wake of the recent debate on the ongoing renewal of licenses by oil companies in Nigeria.

How are Legal Rights Granted under the Petroleum Act?

The Petroleum Act provides for 3 grants that the Minister of Petroleum, can make;

a. Oil Exploration license (OEL) is a non-exclusive right which is subject to the initial rights of the owners or occupiers such as the communities of the area of the license, to explore petroleum.

b. Oil Prospecting License (OPL) confers exclusive rights on the licensee to explore and prospect for petroleum in the area covered by the license.

c. Oil Mining Lease (OML) is the transitionary grant of the holder of an OPL who has satisfied the conditions imposed on the license by the Petroleum Act and has discovered oil in commercial quantities.

Obtaining Minister’s grants of a License

Companies applying for any of the above grants must accompany their applications with;

a. The prescribed (non- refundable) fee;

b. Ten copies of a map on a scale or scales specified by the DPR upon which is delineated in red the boundaries of the area concerned;

c. An adequate survey description of the boundaries of that area;

d. Evidence of the physical status and technical competence of the applicant;

e. Details of the work which the applicant is prepared to undertake or a program for carrying out any minimum working obligations imposed;

f. Details of the annual expenditure which the applicant is prepared to make;

g. The date on which the applicant is prepared to begin operations after the grant of the lease or licenses;

h. Details for a specific scheme for the recruitment and training of Nigerians;

i. Evidence of the applicant’s ability to market any petroleum produced;

j. Annual reports in respect of the applicant’s oil exploration and production activities in the preceding three years and;

k. Any other information which the Minister may request.

These grants may be obtained via Discretionary grant by the Minister or competitive bidding. For the discretionary grant, it is done by the Minister where it is shown that ownership and control of the applicant resides in Nigerians. This is to get indigenous involvement in the sector, taking statutory requirements into consideration. The competitive bidding on the other hand, occurs in three phases; Companies Registration, Technical Evaluation and Commercial Evaluation.

What is the Lifespan of these Licenses and Leases?

The Oil Exploration license (OEL) subsists for a term of one-year subject to renewal. An application for renewal of an OEL should be done three months before the expiration of the existing license. The Oil Prospecting License (OPL) subsists for a period of five years inclusive of the period of renewal. The Oil Mining Lease (OML) on the other hand is granted for a period not exceeding 20 years subject to subsequent renewal. All applications for the renewal of an OML should be sent twelve months before the expiration of the existing license.

Renewal of Licenses

The effect of the law is to create an enforceable right in favourof the Lessee to the renewal of a lease subject to the fulfilment of the conditions of the renewal and Payment of all rent and royalties due and Performance of all obligations under the lease.

That said, an Application for renewal of licensees and leases is carried out through the Department of Petroleum Resources (DPR). In furtherance of its responsibility towards processing renewals, the DPR in July 2017 released templates for award and renewal of licenses of operators in the petroleum industry. The renewal of oil licenses which applies to International exploration and production companies attracts a statutory application fee of $2,000,000 (Two Million Dollars). The DPR, while assuring that the process for the renewal would be within 120 working days, has pegged the amount for the conversion from an oil mining license to lease at $1 million.

The DPR assesses the production profile and production growth plan to ensure that sound reservoir management practice is adhered to for optimal maturation of the asset.Other checks conducted by the DPR include; review and assessment of compliance with payment of all applicable royalties, concession rentals and other statutory payments.

Economic evaluation of both surface and subsurface assets of the block taking into cognizance the remaining reserves and possible cost of future development, using standard industry methodologies for valuing oil and gas assets to determine the lease renewal bonus payable by the leaseholder.

It is worth mentioning that a five percent net present value of the asset was approved to be charged as a renewal bonus. It is also important to note that Section 25 (1) of the Petroleum Act provides that the Minister also has the right to revoke an oil mining lease under certain circumstances, thereby implying the renewal of a license or lease is not as of right.

Conclusion – Powers of the Minister to Refuse a Renewal

Recently, there has been a lot of debate on the Minister’s discretion to grant renewal of leases and licensees under the Petroleum Act. This issue emanates from the assertion that the oil companies which have had their application for renewal refused were unfairly dealt with by the Minister.

As earlier stated, although the holder of a lease under the Petroleum Act has a right to seek renewal, the Minister is not obligated to grant an application for same. The Minister’s powers to renew or revoke a lease, though hinged on certain conditions, still leaves a lot to the Minister’s discretion. In support of these, the Petroleum (Drilling & Production) Regulation 1969 as amended in 2001 acknowledges this discretion by the use of the word ‘may’ in relation to the Minister’s right to renew leases and licenses.

In fact, it is the wide extent of the Minister’s powers that led to clamors for the passage of the Petroleum Industry Governance Bill of 2017, which the President vetoed on Wednesday August 29, 2018. The President’s refusal to assent to the Bill was reportedly hinged on the fact that the Bill would whittle down his powers as Minister of Petroleum Resources and those of the Minister of State for Petroleum Resources.

Mojisola Olugbemi

Managing Partner

Stark Legal

Mojisola Olugbemi