Maximising Economic Potentials And Eliminating Competitive Drilling Through Unitisation Agreements: An Appraisal Of The Nigerian Upstream Petroleum Regulatory Commission’s Regulations 2023
In some instances, oil and gas deposits may straddle between the boundaries of two or more licensees. The concerns arising from this can be summed up into one query – how should oil exploration be delineated in the best interest of parties that find themselves in this sort of potential oil drilling conflict? To resolve this question in light of emerging issues, several principles have been birthed along legal, financial and operational lines. Notable among these principles is the rule of capture. The rule of capture originates from the common law groundwater case of Acton v. Blundell and has been subsequently affirmed in the landmark oil and gas cases such as Kelly v. Ohio Oil. Unlike the normative rule against physical trespass to land, the rule of capture allows the drilling of an oil well beyond the land boundaries of a licensee, thus extending oil exploration activities to the territory of adjoining land(s) that shares the same reservoir with the licensee. This leaves the owner/holder of a lease to the adjoining land with no option but to act in a like manner. Although correlative rights of leaseholders, physical trespass, slant well/fracture, willful wastefulness, nuisance and lack of reasonable care are exceptions to the rule of capture, nevertheless the obvious disregard for possessory, occupational and operational rights of leaseholders comes with attendant devastating economic and competitive impact in oil exploration activities. These excesses, therefore, gave rise to unitisation as one of the ways of curbing the overbearing effects of the rule of capture. With unitisation, the mutual economic benefit is guaranteed and the rights of each leaseholder are well protected.
As a major oil-producing state, Nigeria has had its fair share of the market impact and economic effect of cross-boundaries oil drillings. For more than a decade, issues arising from such oil production activities have remained topical in the Nigerian oil and gas sector, thereby leaving indelible marks on negotiations and closing of oil exploration agreements. In this article, we will examine the contractual nuances of competitive oil production, the difference unitisation makes and prior regulatory interventions vis-à-vis the recently released Nigerian Upstream Petroleum Regulatory Commission (NURPC) Unitisation Regulations, 2023 (“The Regulations”).
2. Understanding Unitisation
Unitisation refers to an arrangement whereby the licensee of an oil field which straddles other licensed areas agree to develop the oil field as a single unit in line with its geophysical attributes as opposed to individually developing the oil field as separate and in a competitive fashion based on the terms of the licenses of each licensee. The key feature here is that unitisation allows a concessionary arrangement as against the competitive oil drilling that is obtainable under the rule of capture. Hence, where hydrocarbon reserves cut across two or more licenses, unitisation provides the licensees with an economically viable and legal option to come together to reach a compromise on the modus of mutually beneficial oil exploration operations. The process of unitisation between concerned parties is governed by the Unitisation and Unit Operating Agreement (“UUOA”). That is, the UUOA regulates the operation of the reservoir beneath oil fields that straddles two or more concessions and equally govern the equity interests of contracting parties.
The practice of unitisation has gained prominence in several jurisdictions. For instance, while the United Kingdom’s Petroleum Licensing (Production) (Seaward Areas) Regulations 2008 empowers the Secretary of State to mandate unitisation where it is prudent to do so, the Algerian National Development of Hydrocarbon Resources also has the power to mandate unitisation where two more licenses share a common oil reservoir. Meanwhile, in Australia, the voluntary unitisation agreement is provided subject to the authorization of the Joint Authority. Across all jurisdictions, one common feature is that parties normally elect to enter into a pre-unitisation agreement (“PUA”) due to the complexities and time-consuming nature of concluding the UUOA. Upon the conclusion and adoption of a UUOA, a pre-unitisation agreement becomes terminated.
It is instructive to note that unitisation is unique and distinct from similar arrangements such as pooling and Joint Operating Agreements (“JOA”). Like UUOA, pooling involves the coming together of common holders of petroleum interests to jointly source hydrocarbons from the same oil reservoir. But while hydrocarbons are sourced from a reservoir through a single oil well in a pooling arrangement, UUOA is formed by different licensees with independent oil wells who seek to maximize oil exploration from the same reservoir. Other differences between pooling and UUOA are the rationales, size of acreage owners, etc.
About JOA, the key difference lies in the rationale and size of joint exploration activities. While JOA seeks to share risks and ameliorate the capital burden of petroleum activities of parties, UUOA is motivated by the quest to curb competitive drilling. Also, the licensed area/block to which a JOA applies is smaller in size compared to an entire oil reservoir which is the subject matter of UUOA. Another difference is that redetermination provisions are present in UUOA but absent in JOAs because while changes in field data may necessitate redetermination of unit equity, interests of parties in JOAs are always fixed from the initial stage of the contract and remains constant until expiration, transfer, assignment, etc.
3. The Nigerian Legal and Contractual Realities
For more than a decade now, unitisation has become prevalent in the Nigerian oil and gas industry. The first regulatory framework for unitisation in Nigeria was spelt out in the provisions of Regulation 47 of The Petroleum (Drilling and Production), 1969. In 2008, an amended version was released by the defunct Department of Petroleum Resources (“DPR”) and known as the Unitisation Guidelines, 2008. These subsidiary legislations were made by the Minister of Petroleum Resources in line with the provisions of section 9 of the repealed Petroleum Act. However, these prior legal frameworks were grossly underutilized. For instance, despite the identification of more than 70 straddle oil fields, only about 5 UUOAs have been executed. This slow-paced development in maximizing the pre-existing landscape is a consequence of the contractual difficulties in finalizing UUOAs. These difficulties are characterized by unclear provisions on the recognition of straddling and non-straddling oil reservoirs of oil reservoirs, pitfalls in appointments of unit operators, divestment concerns, the requirements for brown-brown fields, etc. By implication, the Nigerian oil and gas sector is at risk of competitive drilling and a huge loss in oil revenue for the country as billions of oil barrels remain untapped.
In addressing the situation and providing improved legal arrangements for unitisation and UUOAs, the Nigerian Upstream Petroleum Regulatory Commission (“NUPRC” or “Commission”) released the Unitisation Regulations, 2023 (“The Regulations”). This Regulation is examined in subsequent paragraphs.
4. Key Provisions of The Regulations
The NUPRC issued the Regulations in line with sections 10(f) and 80 of the Petroleum Industry Act 2020 (“PIA”) and salient issues addressed by the Regulations are: gathering geological data and mapping out traps, notification of hydrocarbon discovery, determination of straddling reservoirs. This will be discussed accordingly. In acquiring geological data and mapping out the geological trap of a petroleum reservoir that straddles one or more adjoining licenses or leases, an affected licensee is only allowed to shoot across its boundary to a distance of not more than two kilometres from the adjoining license. The acquisition of such geological data must be with prior approval of the NURPC and notification to the licensee of the adjoining license.
Upon the identification of a petroleum reservoir in a geological trap which covers two or more adjoining licenses, the licensee who identifies this is under obligation to notify the NURPC within two weeks of well suspension or abandonment. Thereafter, a detailed report with particulars of each straddling oil reservoir must be sent to the NURPC within 60 days. Apart from the obligation to notify the NURPC and file a report, the licensee who discovers hydrocarbon in this regard and the NUPRC must both, albeit independently notify the other licensee(s) who holds a license(s) over the adjoining license(s).
After the notification, there would be a determination of straddling reservoirs. To ascertain whether a petroleum reservoir straddles, the Commission will require the licensee of adjoining land to confirm if the reservoir extends to his licensed area. This confirmation could be done by carrying out exploratory activities, including drilling a confirmatory well or providing a rebuttal based on existing information available to the licensee. Where, after exploratory activities, including drilling of a confirmatory well, have been carried out and the licensee confirms that the reservoir did not straddle, the NURPC shall declare the reservoir as such and that ends the possibility of unitisation. Meanwhile, the initial licensee who claims that the reservoir straddles is entitled to a rebuttal and where such rebuttal is presented, the Commission’s decision shall be final. However, should results from confirmatory activities show that the petroleum reservoir straddles, the NURPC shall direct parties to enter into a unitisation agreement.
5. Pre-Unitisation and Unitisation Agreement
Upon confirmation that a petroleum reservoir straddles, affected licenses will be mandated by the NURPC to execute a pre-unitisation agreement and thereafter, enter into a unitisation agreement for the joint development of the reservoir. Here, the Regulations recognize the pertinence of a pre-unitisation agreement and how it can serve economic and commercial purposes pending the exhaustive time that it would take for a unitisation agreement to be concluded. Both the PUA and the UUOA are subjected to NURPC’s approval. However, where the straddling reservoir is brown-brown, parties may outrightly proceed to execute a UUOA. These agreements can only be modified with the approval of the Commission. Meanwhile, should licensees fail to reach an agreement within the stipulated timeframe, the Commission may issue a written directive to the licensee to jointly appoint an independent consultant to develop the terms and conditions of the unit agreement. Licensees in this instance will therefore have within 90 days of the directive to appoint an independent consultant. Otherwise, the NURPC shall on its own appoint an independent consultant. Whether the consultant was appointed by the licensees or NURPC, the terms and conditions of the appointment of the independent consultant shall be determined by the NURPC. If a petroleum reservoir has been confirmed to extend to an area or adjacent land which is not covered by a license, the NURPC may either require the Licensee who made the confirmation to make an application for his license to cover the area without a license. Alternatively, the Commission may elect to conduct a bid in line with the PIA.
It is not in every instance that the reservoir straddles that the NURPC will sanction a joint development. The PIA and the Regulations envisage and address this. That is, in the process of conducting a joint appraisal programme for a field that is not yet explored and under a PUA, licensees may make a declaration of commercial discovery in line with the PIA. Such declaration could be to the effect of a substantial gas discovery lying underneath the field, the economic potential of the reservoir, or the fact that the discovery is of no interest to the parties. While making the declaration, parties may elect to apply to the NURPC that a unit agreement is not required and thereby submit proposals for separate development plans of the fields. The NURPC will consider the proposals within 90 days of receipt and in its consideration, the NURPC will essentially prioritize the economic and commercial prosperity of the separate development plans as against having a unitized arrangement.
It is not uncommon to have situations where licensees are already independently producing petroleum from their respective areas before a unitisation arrangement. In this circumstance, the law is that the status quo should be maintained until the execution of a PUA. However, the NURPC can order the termination of such pre-existing exploration activities where the NURPC thinks that the maintenance of the status quo will ultimately affect the optimal recovery of petroleum from the reservoir or jeopardize the rights of other licensees.
Determination and redetermination clauses are essential features of a unit agreement. Compromise, as regards the percentage equity interest of each constituent of a UUOA, is known as determination. Redetermination is then usually necessitated by changes in the basis for the calculation of tract participation and unit interests. The UUOA executed under the regulation should normally state the effective date of determination and redetermination. But, should the UUOA be found silent on these, the Regulations stipulate that the date of completion of such determination and redetermination shall be the effective date.
Another issue that the Regulations did well to address is the framework for cross-border unitisation. Where a reservoir extends to the territory of another country, the first obligation here is for NURPC to notify the appropriate authority in such a foreign country. Thereafter, unitisation should be conducted in line with applicable international agreements or treaties to which both Nigeria and the foreign country are parties. In the absence of such relevant international instrument, unitisation shall be conducted based on consultations with the competent authority(ies) of such other jurisdiction.
6. Future Prospects
As is the case in the United Kingdom, the United States of America, and other jurisdictions with comprehensive legal regimes for unitisation, the Regulations will ultimately entrench an efficient system of maximizing petroleum resources that extends beyond the confines of a licensed or unlicensed oil field. In the same breath, we reckon that the Regulations are a potent tool for nipping competitive drilling in the bud. Meanwhile, as promising as it is, there are areas of lapses that are capable of orchestrating downturns in commercial and economic oil exploration activities. An example is the conflict between the timeframe for the completion of unit agreements. For both PUA and UUOA, the Regulations stipulate that parties have a minimum period of 12 months from the time the NURPC directs for each. This is however in conflict with section 80 (3), PIA which is to the effect that the minimum period NURPC can stipulate for parties to enter into a unit agreement to develop the petroleum reservoir as a unit is two years. Although it is trite law under the Nigerian legal jurisprudence that principal legislation will override subsidiary legislation where both conflicts, this conflict could create uncertainties in the business environment and potentially hinder negotiations.
It is also noticeable that the Regulations did not address the modus for calculating the participating interest and the yardsticks for determination and redetermination. These are at the heart of unitisation and account for the long delays in finalizing unit agreements. While it can be argued that the silence of the Regulations in this regard gives parties the liberty to reach a method on their own, the availability of different models could equally put parties at a crossroads during negotiations.
Given the technicalities and obvious lapses of the extant unitisation framework in Nigeria, concerned licensees must engage experts in navigating the regulatory waters, ease compliance and negotiate the best arrangement applicable to peculiar circumstances.
To view all formatting for this article (eg, tables, footnotes), please access the original here.