Fundamental Legal Issues in the Oil and Gas Industry

II: Licensing

The last paper discussed the legal issues surrounding

ownership of oil and gas in situ. This week follows that

discussion by analysing the manner by which the rights to

explore for and exploit oil and gas is awarded. This process is

generally known as licensing. A thorough discussion of

licensing covers a variety of topics, which may not be

comprehensively dealt with in one paper. Therefore the

discussion on licensing would be dealt with in a mini series

of papers. This paper would introduce the topic by describing

what licensing is and how this process is conducted in

various jurisdictions. The next set of papers would address

the legal issues involved in the different types of licensing

regimes – concessions, production sharing contracts, risk

service contracts etcetera.

What is licensing?

Licensing in this context may be generally described as the

process by which the owner of natural resources (usually the

State) authorises or permits a public or private entity to

exploit the natural resources. Akinrele in his Nigeria Oil and

Gas Law, states that: “the license serves to establish the

rights of the licensee in substances produced from the

licensed area and to regulate the manner in which operations

under the licence are conducted.” This definition highlights

two key aspects of licensing – the grant of rights and the

regulation of operations.

The Grant of Rights

The right of the State to grant a license is often contained in

the petroleum law of that country. For example in Nigeria,

section 2 of the Petroleum Act, Cap P10 Laws of the

Federation of Nigeria 2004, empowers the Minister to grant

licenses to explore for and to exploit oil and gas resources.

In the United Kingdom, the Petroleum Act of 1998 empowers

the Secretary of State to grant licences to search for and

bore for and get petroleum to such persons as he thinks fit.

In Brazil, the right to award licenses is granted to the

National Petroleum Agency (“ANP”). The ability of the State

to grant licenses derives principally from its rights as owner

of the natural resource.

Regulation of Operations

The license is also often used as a means of regulating the

conduct of operations. Typically specific conditions would be

attached to the license, which would address issues such as

surrender and relinquishment of license area, control over

rate of depletion of resources, environmental issues etcetera.

The right of the State to control the manner of exploitation in

this manner principally derives from its status as a sovereign

as well as an owner of resources. Oil and gas exploration and

exploitation would have effects on the local area in particular

and on a country in general and as such it is incumbent on

the sovereign to ensure that the positive effects are

maximised whilst the negative effects are minimised. The

sovereign or the State would seek to do this through

regulation.

Different approaches to the award of licenses

Generally, licenses have been awarded utilising two methods

– private negotiations and through bidding systems. The

history of license awards in Nigeria has seen the utilisation

of the two systems.

Private Negotiations

Historically, licensing rights were awarded by private

negotiations between the State and the multi-national oil

company. The multi-national oil company would approach the

head of the government and negotiate a concession over a

portion of the territory of the State. This practice is no longer

common. However, in some countries, private negotiations

are still the order of the day, albeit in a more formalised way.

The negotiations are now often between the multi-national

company and the national oil company. It should be noted

that during the military era in Nigeria, this system was often

utilised to effect the award of licenses to cronies and to

dispense political favours.

Bidding Systems

The award of licences by utilising a bidding system is

typically conducted either through a competitive bidding

system or discretionary allocation.

Under a competitive bidding system, applicants are typically

required to meet certain requirements to participate in the

bidding process. The winner of the bid would be determined

on the basis of competitive sealed bids. The bid may be

based on the percentage of royalty which an applicant may

be willing to offer or the cash bonus offered by the applicant

for the license (see E. Smith et al, International Petroleum

Transactions). The 2005 licensing round in Nigeria adopted

elements of this bidding system.

Under the discretionary allocation bidding system, the

Minister or any other nominated authority is given discretion

in the award of licences. Section 2 of the Nigerian Petroleum

Act, grants significant discretion to the Minister to award

licenses. The Minister’s discretion is only “subject to this

Act…” and there are no significant limitations under the Act

regarding the award of a license to applicants. The lack of

limitations in the Petroleum Act has led to significant abuses.

Oduniyi described discretionary allocation in Nigeria as

meaning “the issuance of oil licenses to favoured individuals

or companies with links to the ruling clique”. It should be

mentioned that the 2005 licensing round was widely praised

as being Nigeria’s most transparent licensing round. It would

be however useful for the proposed Petroleum Industry Bill to

include specific criteria or require that published criteria be

applied in petroleum licensing rounds in Nigeria. In the

United Kingdom, where discretionary allocation is also

utilised, the award of licenses is determined by the ability of

an applicant to fulfil the goals which have been set out by

the Government in relation to that licensing round.

Concluding remarks

The general discussion on licensing has highlighted one of

the deficiencies in the current Nigerian licensing system,

which is the excessive discretionary power granted to the

Minister under the Petroleum Act. We would be looking

closely at the draft Petroleum Industry Bill to see if this issue

has been adequately addressed. The next topic should

address Production Sharing Contracts as a form of licensing.

This would however be dependent on the timing of the

publication of the draft Petroleum Industry Bill. In view of the

significant implications the Bill would have on the industry, it

would be necessary to critically examine its provisions, to

ensure that the critique is considered in putting together the

final draft.

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.