Addax OMLs: Rebuilding Investors’ Confidence

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Tayo Isaac
The decision by President Muhammadu Buhari to restore the operating permits on Oil Mining Leases (OMLs) 123, 124, 126 and 137, to the Nigerian National Petroleum Corporation (NNPC) and, by extension, Addax Petroleum, has been hailed as a major steps towards rebuilding investors’ confidence in the oil and gas sector.

Indeed, the development was a reflection of the federal government’s commitment towards ensuring stability in the oil and gas sector as well as the sanctity of contracts. It has also been described as a victory against prebendalism, which appears to be a major allegation that the Buhari’s government has been confronted with in recent time.

The Nigerian government, through the national oil company, had been in a Production Sharing Contract (PSC) with Addax Petroleum, a subsidiary of SINOPEC, the national oil company of People’s Republic of China, on these oil blocks.
PSC is a contractual arrangement for exploration and production of petroleum resources where the contractor undertakes all the financial, technical and operational risks associated with petroleum operation in return for a share of profit, after production cost, payment of royalty, and taxes.

In this case, the assets were owned by the NNPC which brought in the contractor, Addax.
The President said his decision to hand over the assets to the NNPC was line with his government’s commitment to the rule of law, fairness and enabling a stable business climate for investment.

While directing the DPR to retract the letter of revocation of the leases, the President also directed NNPC to utilise contractual provisions to resolve issues in line with the extant provisions of the PSC arrangement between NNPC and Addax.
President Buhari further stressed that the restoration of the blocks to NNPC would boost the organisation’s portfolio, thereby making the Corporation to, in the long run, boost its crude oil production and in turn increase the revenue it generates to the Federation Account.

The Department of Petroleum Resources (DPR) last month announced the revocation of the four OMLs, which it then stated belonged to Addax Petroleum and had hinged its decision on the non-development of the assets by the petroleum company.
The Director/Chief Executive Officer, DPR, Mr. Sarki Auwalu, had told journalists that it was discovered that over 50 per cent of the assets had remained underdeveloped.

He said the non-development of the assets led to the loss of revenue by the federal government.
He said going by the country’s Petroleum Act, “the first reason for a revocation is when you discover that the asset is not being developed, according to the business guidelines, because it is economic sabotage.”

Interestingly, at no point during his interaction with journalists did Auwalu mention that the Nigerian government, through the NNPC, had been in a PSC with Addax Petroleum, a subsidiary of SINOPEC, the national oil company of People’s Republic of China, on the affected oil blocks.

For not disclosing this sensitive information to the media, the DPR boss can be said to have acted a script. This can be literally described as the case of the voice of Esau and the hands of Jacob.
Contrary to what the DPR boss said, three of the blocks are actively producing and incurring costs thus Addax may still have grounds to make claims in respect of cost recovery of outstanding expenditure.

Also, OMLs 123 and 124 expire July 1, 2022, while OML 126 expires November 24, 2024.
As expected, following the revocation of the licences, Addax had written the DPR and the NNPC, and had threated to utilise all government, diplomatic and legal means to seek redress, it had described the exercise as an attempt to expropriate its interests in Nigeria.

Obviously, President Buhari’s intervention saved the nation from another embarrassment after the 2017 KNOCs case where the Supreme Court ruled that the decision of the federal government under President Yar Adua to void the allocation of Oil Prospecting Licenses (OPLs) 321 and 323 to the Korea National Oil Corporation (KNOC) and re-award the oil blocks to ONGC/Owel Petroleum Consortium as illegal, procedurally unfair, unreasonable, and against the legitimate expectation of KNOC.

Indeed, if this procedural error was allowed to stand it could have led to a serious legal dispute if Addax had commenced legal action against NNPC and the federal government, at a time the country has not finally gotten respite from the thorny P&ID case and at a time of serious fiscal challenges.

Worse still, this was a clear case of transferring an asset from the commonwealth to a chosen private estate, Kaztec and Salvic Consortium, owned by Emeka Offor and chaired by Oye Hassan-Odukale respectively, even as there had been allegations that there was not a transparent process that led to the selection of the company.

Certainly, the proper procedure for revocation would have been to direct the revocation to NNPC; the NNPC would then be obligated to properly communicate the situation to the PSC Contractor and terminate the PSC on the basis that the underlying leases have been revoked.

No doubt, the revocation of an oil mining lease is indeed within the purview of the Minister of Petroleum Resources as enshrined in Paragraph 25 (1) of the First schedule of the Petroleum Act.
Based on the Act provisions, the Minister of Petroleum Resources through the regulator (DPR) is to inform the Licensee of the infractions and give the Licensee time to respond or rectify the situation prior to such revocation. But recent revelations shows that the stipulated provisions were not adhered to and thrown to the dogs as NNPC (the licensee) only got to know about the revocation from a rumour that started in social media then subsequently confirmed by a letter from the DPR addressed to Addax

The provisions states that revocation of a lease is against the Lessee and not on the Contractor. Clearly DPR clearly by processing the revocation against Addax (PSC Contractor).
Therefore, the DPR ought to have informed NNPC of any infractions in relation to the operation of lease and afforded adequate time to provide appropriate explanations on the said infractions as well as reasonable time to remedy the alleged infractions.

Also, in the case of a PSC, revocation can only be directed to the Lessee and the Lessee will then be obligated to properly communicate the situation to the PSC Contractor and resolve the issues contractually in line with the provisions of the PSC.

Therefore, the ability of the NNPC and the Contractor Parties to properly utilise the assets may be severely hampered if Addax goes ahead with its threat to legally challenge the revocation process as regards compliance with the Petroleum Act.
Also, the immediate implication of the revocation and reallocation of the OMLs is that NNPC is no longer associated in any way with OML 137 as it is now awarded to new allottees as a Sole Risk Block.
Based on DPR’s letter, NNPC is meant to still be associated with OMLs 123, 124 & 126 as a PSC Concessionaire but at this time there is a regulatory and administrative limbo.

There is no valid PSC in place between NNPC and Kaztec/Salvic Consortium as such there was no contractual basis for any sort of interaction between NNPC and Kaztec Engineering Limited/Salvic Petroleum Resources Limited (KEL/Salvic) Consortium currently.

So, even If Addax does not contest the legality of the revocation process, they may still have grounds to make claims in respect of cost recovery of outstanding expenditure or consequential losses such as profit against NNPC and thus indirectly the government.

Furthermore, in terms of diplomatic implications of the earlier revocation of Addax’s contract, China, the parent country of Addax is the largest trading partner of Nigeria representing over 20 per cent of international trade and almost three times the next largest trading partner, saying Addax diplomatic threat was thus not inconsequential and should be taken seriously.

In addition, China also provides financing for key infrastructural projects like the railways, Abuja -Kaduna -Kano Pipeline amongst others, stating that the revocation action could also threaten the realisation of these critical projects
Also, Addax has over 5TCF of Gas. OML 137 has about 3TCF of NAG, NNPC as a concessionaire has held several engagements on the development of both upstream as well as midstream of the gas development. Already, engagements are to be progressed with Addax on the development of a Gas Development Agreement (GDA) and an NNPC subsidiary (NGMC) will market the gas on behalf of the PSC.
Clearly, the intervention by the President will help bolster the much-needed investor confidence to attract foreign direct investments in the country.

Issac, a public affair analyst writes from Lagos