The nature of the Oil and Gas industry in Nigeria makes it unattractive for commercial lenders to agree to finance such projects when they are embarked upon by smaller companies.
Regardless of the difficulty in securing loans oil and gas exploration projects have developed alternative means of finance through the use of Drilling Funds, Illustrative Agreements, Royalty Purchase, Sale Purchase Agreements, Production Sharing Contracts and Farm Out Agreements.
History of Farm Out Agreements
The term “farmout” came about from the Roman practice of transferring the right to collect taxes to a third party for a fee. This practice spread to England, Scotland and France but was abolished a long time ago.
Farm Out Agreement
Farm Out Agreementshave been extensively used in the oil and gas industry as an alternative means of financing exploration activities. A “Farmout Agreement” is an agreement between operators whereby a lease owner (Farmor) assigns the lease or a portion of it to another operator (Farmee); the obligation of the assignee to drill one or more wells on the assigned acreage is the primary characteristic of the Farmout.
Evolution of Marginal Fields In Nigeria
The main thrust of Marginal Field Development was to promote indigenous participation; put an end to continuous holding of undeveloped fields by International Oil Companies (IOCs) without exploring same, increase government’s take on undeveloped acreages and help in building indigenous capacity in the upstream sector.
The first marginal fields competitive bidding licensing round was held in February 2003 when 24 licenses were awarded. Interestingly of those 24(twenty four) marginal field licence operators, it was reported that only 9 out of those companies are presently producing.
However, indigenous companies have experienced many challenges making it difficult for most of the awardees to reach production.
Generally Marginal Field Operators agree that the Challenges Facing them include:
Litigation with technical partners; many awardees have ended up in litigation with their technical partners.
Capacity Building and Technology Limitations; There have been capability and capacity issues as well as technology limitations.
Asset acquisition and management – many of the assets were not bankable and they could never have raised funds on them and agreements were delayed among other problems.
The non-bankability of some Marginal Field assets; has led to the inability to raise funds for the development of the fields.
Environmental Issues; Many have had environmental issues such as communities, security, gas flaring, among others)
This article attempts to address the possible causes of “Litigation with technical partners” and possibly suggest solutions to same. Possible causes of disputes may include skewed joint venture agreements, access to trade secrets and a willingness of the technical partner to dislodge the farmee.
Litigation with technical partners
Some Nigerian companies have been awarded oil blocs and entered into joint ventures with established oil majors, but found themselves holding the short end of the stick after being schemed out of the equation by their supposed technical partners. Agreements entered into with Technical partners like all other agreements are not different from stories in the sense that they tell a story about the agreement that both parties have arrived at either independently or through the guidance of their lawyers if any. If there was no “meeting of the minds” in the first place no matter how water tight the written contract is, it would still explode into dispute.Above all get appropriate referrals companies are like human beings their reputations precedes them.
What is a Joint Venture/Operating Agreement?
A joint venture is an association of corporations or other legal entities who agree by contract to engage in a common undertaking for joint profit. Typically in Marginal Field Operations the Joint Venture is usually between Marginal Field Operator and a technical partner. The parties to a joint venture, (contribute money, intellectual property and other assets) in order to produce oil and gas from a given acreage.
A Good Joint Venture/Virtual Partnership Agreement must…
It must not only be legally binding it must also make “business sense” for both parties to be willing to abide by the terms, as some firms are of the opinion that is more profitable to breach contractual terms and pay damages than to abide by the letters of an earlier agreement. That is if the string of litigation that has plagued Marginal Field operators is any indication to go by.
The Marginal Field Operators seem to suffer a disadvantage by virtue of their difficulty in sourcing funds while the Technical partners seem to bring more to the table thus fostering resentments.
Challenges/Pitfalls Unique to Joint Ventures
Lack of clarity, as regards who owns the assets, intellectual property contributed to the project, improvements on such intellectual property or new property that is developed may lead to ownership disputes that can be costly, lengthy and freeze a profitable project.
Another possible cause of the endless litigation is the unhindered and “unencumbered” access by the technical partners to the trade secrets of the Marginal Field Operators. It’s not unheard of that a former technical partner turned around to apply for the same acreage it was once engaged in as a technical partner with a marginal field operator, having benefited from the knowledge it gathered as technical partner. Some cases were resolved by the Courts with the former technical partners being made to pay a percentage of their profits to the original lease/license owner.
A “trade secret” is defined as any product, operating formula, pattern, device or “other compilation of information which is used in a business”, which gets its economic value from being kept secret, and gives the business a competitive advantage.
The upstream oil and gas industry, “Marginal Fields Operators” inclusive depend heavily on trade secret protection.
Trade secrets arise without any administrative process, they operate by denying competitors information that is necessary to access and use the technology.
For trade secret protection to be operative, the owner of the trade secret must take active steps to prevent dissemination of the trade secret information to the public by the use of contractual and other methods.
Paradigms of Trade secrets protection
A school of thought as regards trade secrets states that ideas are ten naira a dozen; so they share their innovations but believe in executing better and getting to the market place quickly.
The second school of thought believes that you should treat your innovation as proprietary, and use available legal means to protect it; data protection mechanisms, nondisclosure agreement; non-compete agreements, employment agreements; and generally limit access to valuable information.
Marginal field companies are presently innovating; some are integrating value through crude oil production (for example Nestoil), monetization of gas and small scale refining. They are deploying new technologies to help them produce cheaper, better and faster, with the right exposure our indigenous companies will grow to become major players in the global energy scene.
The information contained in this piece should help inform the Marginal Field Companies and their service providers as to possible alternatives, and possibly foster frank discussion between the Marginal Field Operators and their Technical Partners prior to signing any agreements and when in doubt all parties should please seek legal advice.
Olufola Wusu is a Commercial, Oil and Gas and I.P. Lawyer based in Lagos
Olufola Wusu Esq. © 2013
Olufola Wusu is noted for his “dynamic practice” and “commercial acumen”. He is praised for his
“first-rate skills” in assisting clients…