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| Credits – www.channelstv.com |
In a recent article, it was announced
that President Buhari had given the Nigerian Petroleum Development Company
(“NPDC”) the approval to corporatise its joint venture assets and
convert them into Incorporated Joint Ventures (“IJV”). The IJV structure has
been floated at least since 2008 when the first draft of the Petroleum Industry Bill
(“PIB”) was issued. That draft of the Bill mandated the formation of IJVs with
respect to joint ventures between the Nigerian National Petroleum Corporation
(“NNPC”) and its partners (mostly international oil companies). The
IJV was seen as a solution to the perennial difficulties faced by NNPC in
financing its share of the joint venture cash calls. This was based on the
theory that an IJV was likely to be in a better position to raise money from
loan and equity markets. This concept, loosely based on the NLNG model, was
resisted by the joint venture partners for a variety of reasons and was removed
from subsequent drafts of the PIB.
The recent proposal is a bit
different. Firstly, it is targeted at companies in joint ventures with NPDC, a
subsidiary of NNPC. These companies are typically Nigerian owned and/or
Nigerian-led companies. The assets recommended for conversion into IJV status
are detailed in the table below:
|
Asset
|
Joint Venture Partner
|
Key shareholders*
|
|
OML 30
|
Shoreline Natural Resources Nigeria
Ltd
|
Shoreline (indigenous) & Heritage
(foreign)
|
|
OML 26
|
First Hydrocarbon Nigeria Ltd
|
Afren (foreign)
|
|
OML 34
|
ND Western Ltd
|
NDPR (indigenous), Petrolin
(foreign), First E & P (indigenous), WalterSmith (indigenous)
|
|
OML 40
|
Elcrest E & P Nigeria Ltd
|
Eland(foreign) & Starcrest
(indigenous)
|
|
OML 42
|
Neconde Energy Ltd
|
Nestoil (indigenous) & Kulcyzk
(foreign)
|
|
OMLs 71 & 72
|
West African Exploration &
Production Company Ltd
|
Dangote & First E & P (both
indigenous)
|
*from publicly available data
and news reports
It is not clear whether NNPC/NPDC
believes that the local companies are soft targets for implementing the
IJV strategy or whether this is a first step which may be extended to all
companies in a joint venture with NNPC. Whatever the case, it is worth noting
that unlike the IOCs, most of these companies are single asset companies, which
means two things. One, the success of the asset means everything to the
company, its owners and its employees. Therefore, these stakeholders will be
averse to any change which they consider may affect the economic potentials of
the company. Two, most of the companies and/or its owners are substantially
leveraged from the acquisition of the assets and the lending banks will have a
say in any proposed reforms.
There is no indication (at least not
yet), that these companies would be compelled by law, as previously proposed
under the 2008 PIB draft, to enter into these IJVs. This allows for detailed
negotiations on the form and substance of the IJV structure which may emerge.
This brief paper will not be examining
the merits or demerits of the IJV structure. It only seeks to enunciate two
options, which may be taken by the NPDC and the joint venture partners in
achieving the IJV structure. In doing this, we show that the process of
conversion itself is not that simple and requires all parties to put a lot of
thought to the issues likely to be faced.
Background
Before looking at the options
available, it would be useful to comment on the characteristics of the current
unincorporated joint venture structure, which may impact on its
conversion.
Rights to explore for, develop and
produce petroleum are granted in Nigeria through the award of Oil Prospecting
Licences (“OPL”) and Oil Mining Leases (“OML”). Typically, two or more parties
would become the licensee and enter into a joint venture governed by a joint
operating agreement (“JOA”). The JOA, amongst others, spells out the
participating interest (or the share of costs and oil) to which each party is
entitled. Each joint venture party holds its participating interest as an asset
on its own books and is entitled to assign the asset (subject to certain
controls) and to pledge the asset. It is worth mentioning that the pledge of OML/OPL
assets is not typical in Nigeria due to the requirement for ministerial consent
and the time it takes to achieve such consent.
Option 1 – Reverse
Takeover
This is not an RTO in the technical
sense where a private company takes over a (dormant) public company. Under this
structure, NPDC transfers its rights in the underlying OML in exchange for
shares in the indigenous company. The indigenous company would be required to
substantially increase its share capital in order to allot the requisite shares
to NPDC. This option, therefore, requires a thorough valuation of the assets
and the liabilities of the indigenous company as well as that of NPDC’s
interest in order to determine the appropriate level of shareholding to be
allocated.
This process is likely to lead to NPDC
holding majority shares in the indigenous companies (hence the RTO) and where
the shareholdings of the companies are already relatively fragmented, NPDC
would be the largest shareholder by a significant margin. This may raise
concerns from the existing shareholders in terms of their ability to influence
the operations of the new entity. A number of these concerns may be dealt with
by putting in place a robust shareholders’ agreement which addresses voting
rights, pass mark issues and other minority protection mechanisms.
NPDC may also be concerned that at the
end of this process, it would have only transferred assets and not achieved the
capacity building objectives of this exercise. This concern may be ameliorated
by allowing the process to accommodate the transfer of staff.
Regulatory &
Other Considerations
The transfer of assets from NPDC under
this option would require the consent of the Minister, which is unlikely to be
a problem, given that this initiative is being driven by the government side.
The process may also require the approval of the Securities and Exchange
Commission as it is likely to fall under the mergers and acquisitions rules of
the Investments and Securities Act. Further, the required increase in share
capital by the indigenous companies would incur fees at the Corporate Affairs
Commission as well as stamp duty fees. Banks and other lenders to the
indigenous companies as well as those of its existing shareholders may also
need to approve the transaction under the terms of their existing loan
arrangements.
Option 2 – Transfer
to A New Company
A second option which may be utilised
to achieve the IJV structure is for both parties – NPDC and the indigenous
companies, to transfer their assets and liabilities with respect to that OML to
a newly created entity. In this scenario, the shareholders in the new company
would be NPDC and the existing indigenous company. The post-transaction
shareholding structure should broadly reflect the current participating
interest ratio between NPDC and the indigenous company on the asset. This may
provide some level of comfort for the indigenous shareholders as they may act
as one block, reducing NPDC’s influence as the majority shareholder. It will
still be necessary to put in place a shareholders’ agreement which addresses
minority protection rights.
In adopting this structure, however,
there may be concerns about the tax exposure of the shareholders of the
indigenous company. Under the current arrangements, the indigenous company pays
petroleum profits tax (“PPT”) after which its shareholders may take dividends
from the remainder profit. The dividends are not subject to the payment of tax
under Nigerian law although the company which receives the dividends may be
further subject to companies income tax (“CIT”) on any profits it makes. The
addition of another layer through the establishment of this new company may
subject the current shareholders in the indigenous company to additional tax,
potentially whittling down profits.
Regulatory &
Other Considerations
The transfer of assets from NPDC under
this option would also require the consent of the Minister. As the option would
require the incorporation of a new company with sufficient share capital to
accommodate the assets being transferred, there are likely to be substantial
CAC fees as well as stamp duty fees. Banks and other lenders to the indigenous
companies and/or its existing shareholders may also need to approve the
transaction under the terms of their existing loan arrangements. The process is
unlikely to require SEC approval.
Concluding Remarks
There are a number of questions which
need to be asked around the desirability of the proposed conversion to IJV
status. As private sector entities, concerns may be raised around governance of
such an institution, incorporation of politics into the affairs of the
organisation and public procurement obligations amongst other issues. Even
where these hurdles are scaled, the fulfillment of the process requires both
NNPC/NPDC and the private companies to think through how to implement the
change. That process will not be straightforward and may take a number of years
to reach an agreement.
During that period, however, the
NNPC/NPDC and its joint venture partners must come to an agreement on appropriate
structures to enhance the efficiency of these joint venture operations. This
means agreeing on alternative finance structures and how operations are managed
and this would involve at the very least executing new joint operating
agreements.
by: Dr. Adeoye Adefulu
