Some Issues in the Conversion of Unincorporated Joint

Ventures to Incorporated Joint Venture

Going back to the first paper in this series, one of the

objectives of the government in the oil and gas industry

reform process is the resolution of the joint venture cash call

issue; this problem was highlighted in that paper and would

not be repeated here. One of the major solutions that has

been proposed by the Oil and Gas Implementation Committee

in this regard, is the conversion of the existing

unincorporated joint ventures to incorporated joint ventures.

The purpose of this paper is to highlight some of the major

issues that may arise from the perspective of the

International Oil Companies (“IOCs”) in the conversion of the

joint ventures.

Current Structure

The initial joint venture contracts started with Nigeria

acquiring interest in the oil concessions given to IOCs in the

‘50s and ‘60s. The Nigerian Participating Joint Ventures

(“PJVs”) gave the Nigerian National Oil Company a 60% share

in all fixed and moveable assets of the IOC. The rights and

obligations accrued under these agreements have since been

transferred to the Nigerian National Petroleum Corporation

(“NNPC ”) which was created in 1977.

The Nigerian joint venture arrangement is an un-incorporated

joint venture. Under this arrangement, each co-venturer has

an undivided interest in the lease as well as all oil produced

and the assets employed in oil production. The effect of this

is that all rights and obligations accruing to the lessee under

an Oil Mining Lease (“OML”), would accrue to all the joint

venture partners including NNPC.

Currently, the joint ventures account for more an estimated

90% of Nigeria’s daily oil production. The table below shows

the various PJVs in Nigeria and the interests of the parties.

The various joint venture projects are subject to agreements,

which govern the relationship of the contracting parties. The

participation agreements sets out the interests of the

parties; the Operating Agreement spells out the legal

relationships between the owners of the lease and lays down

the rules and procedure for joint development of the area

and of joint property; the Heads of Agreement delimits the

general principles intended to govern offtake, scheduling and

lifting agreements for the crude oil. These agreements

alongside the Oil Mining Leases define the relationships

under the joint venture arrangements in the Nigerian oil

industry.

The basic features of the Nigerian PJV are:

• The IOC (or one of the IOCs) is usually the

operator. All parties to the PJV pool funds to facilitate

exploration activities in the ratio of their participation

interests. The operator is required to submit to each

non-operator a statement of the amount, which it (non-

operator) is due to pay to meet its participating interest

share of the costs and expenditures. This is known as

the ‘cash call’.

• NNPC may meet its cash call obligations by allowing the

operator to lift some of its crude oil. This right is

subject to giving adequate notice.

• NNPC has an undivided interest in the concessions and

in the assets and liabilities of the venture, based on its

participating interest share.

• Crude oil from exploration activities is divided between

NNPC and the joint venture partners according to the

ratio of their participating interests.

• The joint operating committee supervises matters

relating to the operations of the joint venture and each

venture partner is represented in accordance with their

 interest in the PJV although decisions by the committee

are taken unanimously.

Proposed Structure

The Oil and Gas Implementation Committee has proposed an

alternative structure – the incorporated joint venture (“IJV”),

to aid the financing of joint venture projects. An incorporated

joint venture is simply one in which the legal means of

dividing the project's equity is by shareholdings in a

company. Whilst the detailed plans have not yet been

released, the broad structure of the initiative is as follows:

 Each existing PJV would be incorporated with the

Corporate Affairs Commission (“CAC ”) with shares held

by the new National Oil Company & the IOCs according

to their current interest levels.

 The Board of the IJV is expected to reflect the

shareholdings of the co-venturers. The effect being that

the National Oil Company would hold the most number

of seats on each board. Additionally, the employees of

the new companies are expected to also reflect the

shareholding of the company. Thus NNPC would provide

more staff than the IOCs to these IJVs.

  The IJV would serve as the operator in its own fields and

would be empowered to independently source for funds

for executing its projects. It would also be allowed to

sell and keep the funds derived from cost oil and cost

gas, while transferring all other hydrocarbon produced

to its shareholders.

Legal Issues in the Conversion of PJVs to IJVs

The current structure is a creation of contract and not of law;

therefore any changes to the structure must be with the full

consent of the other co-venturers. A number of issues would

need to be considered by the IOCs in making a decision

whether to accept these changes. These would include for

example the consideration of the potential tax implications

of such a change. These tax considerations in the short term

would include the possibility of transfer taxes, upon the

transfer of the assets to the IJV company. In the longer term,

consideration would need to be given to whether the IJV as a

vehicle in itself would be subject to additional tax other than

what the IOCs are currently exposed to acting under the PJV

structure.
In addition to these concerns, thought would need to be

given to the composition and voting powers of the board

members. Under the current structure the management

committee acts as the overall governing body of the PJV.

Whilst membership of this body is constituted proportionally,

decisions of the committee are taken on a unanimous basis.

It is not yet clear whether the decisions of the board of the

IJV would be taken unanimously. In the position that they are

not, IOCs may be concerned about the domination of NNPC

on the board and its effective ability to bind the other

venturers, by virtue of its majority position.

The principles which apply in the case of the composition and

voting powers of the board also apply in respect of

employment. It should be noted, that the experience of the

IOCs in acting as the operator(s) in several field cannot be

replicated by NNPC, as it has had only a limited opportunities

to act as an operator. Therefore, caution needs to be

exercised in imposing the principle of proportionality in

relation to employees.

It may be accepted as general knowledge that under the

current regime, decision making is very slow. A possible

concern of the IOCs is that the creation of the IJVs and their

board may amount to the imposition of a new layer of

bureaucracy, whereby the IJV boards are not infused with

sufficient independence to make decisions on their own

without seeking clearance or approval from the board of the

parent national oil company.

Comments

The question of whether in itself the IJV structure would

provide a permanent solution to the funding problems is one

that has not been approached in this paper. However given

the Government’s position that this is indeed the case, and

the contractual nature of the existing arrangements, it must

carry the IOCs along and address some of these issues as

well as other concerns they may have in the detailed plans.

This paper concludes the series on the institutional reforms

of the oil and gas industry.

Adeoye Adefulu holds a Ph.D in oil and gas industry reform

from the Centre for Energy, Petroleum and Mineral Law &

Policy, University of Dundee. He is a partner in the law firm

of Odujinrin & Adefulu e s t 1972.