JOA CASE STUDY: NNPC vs SHELL (2010)

NNPC, Shell Head for Collision over 3 Oil Blocks

Controversy has stalled the 10-month-old process by Shell Petroleum Deve-lopment Company (SPDC) to transfer ownership and operatorship of three oil blocks to a consortium of two Nigerian companies.

SPDC in January this year said it had sealed a deal to transfer, within six months, its interest in the three production licenses and other related equipment in the Niger Delta to a consortium led by two Nigerian companies and a French firm.

The Anglo Dutch company is the operator of the licences under a joint venture between the Nigerian National Petro-leum Corporation (NNPC), 55 per cent; Royal Dutch Shell, 30 per cent; Total Exploration & Production Nigeria Limited, 10 per cent; and Nigeria Agip Oil Company, 5 per cent.

It said that the agreement covered Shell’s 30 per cent interest in oil mining leases (OMLs) 4, 38 and 41, covering approximately 2,650 square kilometres in the north-western Niger Delta.

Crude oil production in the area, which includes about 30 wells with a production capacity of approximately 50,000 barrels of oil equivalent per day, is currently shut down awaiting completion of repairs to an export pipeline damaged in late 2008.

SPDC identified the buyer as Seplat Petroleum Company Limited, an indigenous consortium jointly formed by two Nigerian firms – Platform Petroleum Limited and Shebah Petroleum Develop-ment Company Ltd – along with Maurel & Prom of France.

But THISDAY gathered that controversy has trailed the transaction following the decision of the NNPC to exercise its rights by taking over the operatorship of the blocks, in accordance with the provisions of the joint operating agreement (JOA) between Shell, NNPC, Total and Nigerian Agip Oil Company.

According to investigation, NNPC capitalised on the JOA, which provides that SPDC as a partner and operator shall give other partners “prior right” to acquire its interest in the blocks before offering the interest to a third party.

A top official of the National Petroleum Investment Management Services (NAPIMS), an investment arm of NNPC,stated last weekend that with this provision, SPDC was expected to have given the NNPC and other partners the right to acquire its interest before accepting Seplat’s offer.

Article 19.4 of the JOA states: “Subject to Clause 19.1 and 19.2, if any party has received an offer from a third party, which it desires to accept, for the assignment or transfer of its participating interest, it shall give the other parties prior right and option in writing to purchase such participating interest as provided in sub-clauses 19.4.1 to 19.4.2.”

He also confirmed that SPDC required NNPC’s approval before going public with the offer.

Clause 19.2 of the JOA states: “Ether party may, at any time upon notice to the other parties transfer all or its participating interest to an affiliate of such party, subject to any necessary government approval.”

The NAPIMS official also said that SPDC, as the operator of SPDC/NNPC Joint Venture, had no powers to transfer its operatorship to a third party without the written consent of the NNPC.

According to the JOA, Shell can only transfer operatorship to its affiliate or affiliated company and Article 1.1.2 (i) of the JOA defines Shell’s affiliates as: Shell in the Netherlands; Shell Transport and Trading Company Plc in the United Kingdom or any other company that is being controlled directly or indirectly by any of these two companies.

“Seplat is not an affiliate company of Shell,” said the NAPIMS official.

He disclosed that following these unresolved issues, the indigenous firm had not yet taken physical possession of the blocks, except, perhaps, the blocks’ 2,000 square kilometre 3-Dimensional seismic data, which contained information on where crude oil could be drilled.

It was gathered that the delay in handing over the blocks to the Nigerian firms followed the decision of the NNPC to operate the three blocks through its subsidiary, the National Petroleum Development Company (NPDC).

Indications that all was not well with the deal between SPDC and the indigenous firm emerged after a recent statement by the Group Managing Director (GMD) of NNPC, Mr. Austen Oniwon, that the corporation had acquired Shell’s interest in the three oil blocks.

Speaking at the second Quadrennial Delegates’ Conference jointly organised by the NNPC, Nigerian Union of Petroleum and Natural Gas Workers (NUPENG) and Global Energy Company (GEC), Oniwon said the agreement to take over the oil blocks was signed on September 14, 2010.

“National Petroleum Development Company is growing. I will tell you that only yesterday, we signed an agreement, which saw NPDC acquiring 55 per cent interest in OMLs 4, 38 and 41. This will immediately, with all effort from all of us, increase the asset base of NPDC by over 150 million barrels of crude oil and we are going to proudly achieve the production of 100,000 barrels of crude oil per day before the end of the year,” he said.

But the Managing Director of Seplat Petroleum Company Limited, Mr. Austin Avuru, told THISDAY that what the NNPC boss meant was that NNPC had assigned its original 55 per cent stake in the oil blocks to NPDC.

“I think what Oniwon meant was that NNPC has assigned its stake to its subsidiary, the NPDC. But SPDC’s stake still belongs to us (Seplat). We are still controlling Shell’s interest. By this arrangement, our new partner is now NPDC and not NNPC,” he said.

However, an NNPC official said that all NNPC-operated blocks are always operated by the NPDC as the subsidiary is not self-accounting and is also not a legal entity in the joint venture.

“So, if NNPC was merely assigning the blocks to NPDC, it should not have been news. The truth is that by the position of GMD, SPDC has relinquished operatorship to NNPC’s NPDC and not Seplat. From the huge investment they have made, Seplat wanted to acquire not only Shell’s interest but its status as the operator. But now, the highest NNPC can concede is to make them hang on to Shell’s 30 per cent interest but they won’t like that because that is not what they bargained for. It is the operator that spends other people’s money and tells them stories,” he said.

A Shell Joint Venture official stated that the desire of SPDC to hand over the blocks to indigenous companies was part of its commitment to encouraging local companies in the upstream business.

He stated that the position of the NNPC now towards the transaction was that “we (NNPC) can’t force you (SPDC) to hang on to your equity but you don’t have the right to assign operatorship to a smaller company”.

Source: http://allafrica.com/stories/201010190234.html

NUTSHELL:
The case reported here may have happened mid-2010 however, it highlights some of the complexities associated with Joint Operating Agreements. Watch how the line between JOA's and Partnerships is  blurred by the seeming interchanging use of both words to mean the same thing. There is a difference indeed. Read more about the complexity of the relationships between JOAs and Partnerships by clicking on the following article by Gizel T-Roberts: JOINT OPERATING AGREEMENTS: Marriage of convenience or just a seat at the table