Licences, Leases, Other Contractual Arrangements For Exploration, Production Of Petroleum

By GODFREY ETIKERENTSE

Effect of Paragraph 12 (1) of Schedule 1 to the Petroleum Act on pre-1969 Grants
Does the relinquishment provision of this paragraph apply to pre-1969 grants even in the face of the saving provisions of the. Transitional and Saving Provisions of Schedule 4 to the 1969 Act? It has been argued that since the saving provisions of Paragraph 1 only make for the exemption of the duration, rent and royalties conditions from the application of the 1969 Act, the strict provision of Paragraph 12 (1) of Schedule 1 should apply to pre-1969 leases. It has therefore been urged that -50 per cent of the area covered by a pre-1969 lease be surrendered to the NNPC after ten years of the date of the original grant. This argument can be faulted by an illustration in which an extreme or near total relinquishment is provided for. For example, if Paragraph 12 (1) in question were to stipulate that 95 per cent of the leased area be relinquished after five years of the grant the result of such stipulation if such interpretation were to hold would be the near total erosion of the duration rights owned by the lessee. The rights saved and furthered by Paragraph 1 of Schedule 4 to the Act would have been negated. The view advanced here is that since the duration rights of pre-1969 leases are specified to be extant both by the provisions of such leases and by the saving provisions of Paragraph 1 of Schedule 4 to, the Petroleum Act, Paragraph 12 (1) must be construed in such a way as not to derogate from such rights. A pre-1969 leaseholder ought not be divested of a substantial portion of the area covered by its lease. In order to prevent possible injustice to a pre-1969 lessee, a case can be made by it to the Petroleum Minister for the invocation of his powers under the same Paragraph 1 of Schedule 4 to the. Petroleum Act 1969 for him to certify that 'the justice of the case requires that ... " a particular term or condition in its 'lease should continue to be operative notwithstanding provisions to the contrary in the 1969 Act.
The causes for which an oil-mining lease may be revoked come under the following two main headings:
(i)    Change in .the Legal Status of the Lessee Company The lease may be revoked when the lessee becomes controlled directly or indirectly by shareholders who are nationals of a country whose .Jaws prohibit Nigerian citizens or corporations from establishing or participating (in such country) in petroleum related enterprises under conditions that are comparable to those applicable in Nigeria. In short, this reason, which is a stipulation of Paragraph 23 (1) of Schedule 1 to the Petroleum Act 1969, demands some measure of reciprocity in the legal regimes of the country of the lessee company and that of Nigeria provisions of Paragraph 24 (1) of Schedule 1 to the Petroleum Act 1969, a lease may be revoked if:
(a) the lessee fails. to conduct operations continuously and vigorously in a businesslike manner and in accordance with good oilfield practice. It has been asked whether the NNPC can revoke a lease on the ground that an operator or lessee has reduced its production or pace of activities because of its inability to dispose of its productions due to either oil glut or reduced demand for oil in the world market. This writer advances the view that it would be wrong and inappropriate under this provision of the law to invoke the powers of revocation if in truth the lessee's action or reduced activity is solely brought about by dictates of market overt trends and not by proven conspiracy with other institutions. Such reduced activity can be defended on the following grounds:
(i) No enterprise can be said to be conducted in a businesslike manner if it continues to flood the market with its products while no sales are being effected. It should be noted that the provision requires the lessee to conduct its operations in a businesslike manner.
(ii) Faced with reduced demand for oil and the constraints of storage facilities oil is best left in the ground during such hard times when there is scarcely any lifting of production as long as care is taken to avoid reservoir damage thereby.
(iii) Usually, NNPC's' Petroleum Inspectorate sets production limits for operations and in reacting to slack market trends, NNPC would in any case have directed the lessee to reduce its pace of operation. In other words NNPC would be an accomplice in any accusation of reduced activity.
(b) the lessee fails to pay due rents, royalties and taxes under the Petroleum Profits Tax Act 1959 as amended. It is no defence that such payments had not been demanded.20
(c) the lessee fails to furnish reports on its operations as directed by the Head of the Petroleum Inspectorate.
(d) the lessee has failed to comply with any of the other provisions of the Petroleum Act or those of its subsidiary legislation - the Petroleum (Drilling and Production) Regulations 1969.
For any revocation arising from the reasons listed under 2 (ii) above to be effected, it is required that the lessee be intimated of the reasons for which revocation is being contemplated and for the lessee to be given time to rectify the situation. It is only after the lessee has failed within the specified time to effect a change for the better that the lease stands revoked. The notice of revocation is then published in the Federal Government Official Gazette, but the lessee remains liable for all· obligations incurred prior to the effective date of such revocation.
As an aside, it is 'this writer's view that the importance attached to the revocation powers of the grantor in this matter has been eroded to a great extent. by the very fact that ,in nearly all petroleum operations in Nigeria now, the Government through NNPC has participation interests. NNPC's'representatives have a say in the way the operations are carried out and they would therefore be privy to any defaults deserving of revocation of the lease. A revocation would thus affect both parties to the joint venture and NNPC's Inspectorate, being the actual organ charged with effecting any revocation, would be most reluctant to carry out a measure that would indirectly affect its alter ego.
Grantor', Right of Pre-emption
The provisions of both Section 622 of the Petroleum Act 1969 and Schedule 2 to the Act, empower the Minister of Petroleum to, order a lessee ,to produce and deliver (on the Minister's behalf) sufficient quantity and quality (in grade) of petroleum to a refinery in Nigeria to the extent of which such lessee has such quantity and quality of 'petroleum. In respect of such requisitioned supply, reasonable and adequate compensation is payable by the Minister to the lessee.23 Similarly, payment is required to be made for any lessee's works, plants, machinery, premises or other property which is requisitioned or taken over by the Minister. The parties (Minister and Lessee) .are required by Paragraph 5 of Schedule 2 to the Act to submit any unresolved: disputed issue of compensation in the matter to arbitration.
 (4) Governing Law and Arbitration
The fact that the 1969 Petroleum Act is the main legislation on oil-mining operation in Nigeria, makes it unnecessary for it to stipulate specifically that the governing or applicable law for the construction of the terms and provisions in a Nigerian typical oil-mining lease is the law of the Federation of Nigeria. Additionally, as the typical lease also contains regulatory provisions, these can only be given Nigerian interpretation. In fact" pre-969 oil-mining lease do contain provisions' that Nigerian ,law is applicable in the construction of the "'terms in the leases.24 Also Section 40 (3) of the: 1979 Nigerian Constitution vests the property and Control of all minerals in Nigeria in the Federal Government. It therefore goes without saying that the applicable law is Nigerian law.
As regards Arbitration disputes, Section 10 of the Petroleum Act does provide that such disputes which arise from the provisions of the Act should be settled by arbitration in accordance with the arbitration law of the State, in Nigeria mutually agreed to by the parties. Where the parties fail to reach such agreement the arbitration law of Lagos State, is said to apply. It appears clear that in view of this legal provision of Section 19.as well as that of Section 6 (2) (r)25 of the National Office of Industrial Property Act 1979, coupled with the effective repeal or" all prior related petroleum legislation by the 1969 Petroleum Act, the strict Arbitration Clauses in certain pre-1969 grants can no longer hold. An opposing view is that the principles of the sanctity of contract should cause those pre-1969 grants Arbitration Clauses to ,remain enforceable.
For a proper definition and description of the concession area covered by an oil-mining lease, a map26 of the area is attached to the lease as a Schedule. The Schedule contains the geographical co-ordinates by which the leased area is delimited. In this respect reference is made to Regulation 2 of Part 1 of the Petroleum (Drilling and Production) Regulations 1969. Therein, it is provided that the boundaries of an oil-mining lease applied for, shall be straight lines in north to south and east to west directions and where so required by the Head of the Petroleum Inspectorate, shall be coincident with all or part of any existing 'lease boundaries or international or inter-State boundaries or with grid lines designated by him'.
The area covered by an oil-mining lease concession must be in compact blocks or units when excised from the area of an oil-prospecting licence. Where more than one block or unit is derived from an oil-prospecting licence, each block or unit should form the' concession of a separate and distinct oil-mining lease. The size of a unit should not exceed 1295 square kilometres.
 (6) Stamping and Registration of Oil-mining Leases
An oil-mining lease document, like any other lease, attracts stamp duties. The payment for the stamp duty is usually effected in the office of the Commissioner of Stamp Duties in, the Inland. Revenue 'Department of the relevant State. 'Relevant State' as used here refers to the State in Nigeria in which the leased area is situate and it is such State's stamp duties' law that, will be applicable to the lease document. In Bendel State, for example, an oil-mining lease is subject only to a nominal fixed duty of three naira'(N3.00) as specified in the Schedule to that State's ~tamp Duties Law of 1976 (Cap. 155). Where the leased area straddles more than one State it is advisable that the lessee (whose obligation it is to effect the stamping) ensures that the document is presented for stamping in each of the States in which part of the concession lies. Regarding continental shelf area lease documents, these are stamped in the Federal Government's Stamp Duties Office under the Federal Ministry of Finance.
The registration o(oil-mining leases is similarly required by law. As with stamp duties, the registration of land and territorial waters mining leases is done in the' Deeds Registry of the relevant State. In support of this requirement, reference is here made to Regulation 8 in Part 1 of the Petroleum (Drilling and Production) Regulations 1969. Taking the Bendel State Law again as an example, its Lands Instruments Registration Law 1976 requires that an oil-mining lease be registered in Benin at, the Deeds Registry. By interpretation of this law's (Cap. 81 of 1976) Section 2, 'State grant' includes mining leases and water rights. Where a concession falls into more than one State, it is advisable for the lessee to register such oil-mining lease in the affected number of States.