Why are regulators struggling to approve the Seplat-Mobil deal?

This week proves there’s never a dull moment in the Nigerian upstream oil sector.

If it’s not international oil companies (IOCs) leaving, it’s Nigeria losing hundreds of thousands of oil barrels to vandalism and theft—just another day in the upstream oil sector. The latest event that had everyone in a tizzy was the showdown between the minister of petroleum and the Nigerian Upstream Petroleum Regulatory Commission (NUPRC).
 

We’ll get into the details later, but essentially, the minister of petroleum and the NUPRC released statements within hours, communicating opposing stances on the same issue. Worse, the minister of petroleum changed his mind a day later. If it’s not apparent, I’m referring to the Seplat Exxon Mobil transaction. This regulatory collision gets more heated when we unmask the minister of petroleum—it’s President Buhari.

So, amid all this regulatory uncertainty, the question on everyone’s lips is, “Would the real regulator of the Nigerian upstream oil sector please stand up?”

It’s funny because regulatory uncertainty was one of the issues the Petroleum Industry Act (PIA) tried to solve. Before the PIA, there were regulatory overlaps between the department of petroleum resources (DPR), the Petroleum products pricing regulatory agency (PPPRA) and the Nigerian National Petroleum Corporation (NNPC).  Until 1988, DPR, the oil sector’s regulator, was a unit in NNPC, a company it was supposed to regulate. After that, DPR became independent, but other regulators still had issues. One incident that comes to mind was in March 2021, when the PPPRA, whose job was to set petrol prices, announced an increase in petrol prices from ₦162/litre to about ₦200/litre. Predictably, there was a backlash, which led the NNPC to release a statement that prices would remain the same. The PPPRA deleted its statement hours later, and petrol prices remained at ₦162/litre.

To solve the issue of regulatory uncertainty, the PIA made the DPR and the PPPRA extinct, replacing them with two distinct regulators. The NUPRC regulates the upstream petroleum sector, and the NMDPRA regulates the midstream and downstream sectors. It also incorporated the NNPC, making it a private company without regulatory powers.

So, yes, it’s a little funny that even after all this, regulatory overlaps are still coming up in the Seplat ExxonMobil case. This article will explore the upstream regulators’ mandates and rules to diagnose why the minister of petroleum and the NUPRC have overlapped. Ultimately, this will reveal the impact of this regulatory convergence problem on the sector.

But first, I owe you some gist on the ExxonMobil Seplat deal that’s causing all this confusion.

Let’s get ready to rumble

ExxonMobil (as well as Shell and Chevron) wants to exit Nigeria’s onshore and shallow water oil assets. Basically, they’ve had enough and hopped on the Japa wave.

As vandalism and theft have become a feature of oil exploration in Nigeria, the margins just don’t make sense for IOCs, which have resources and assets worldwide. But here’s where it gets interesting. For various reasons, the Nigerian government has been dragging out their exits. Shell’s asset sale is on hold until the Supreme court rules on a 2019 oil spill case the company is involved in, which sounds reasonable. But ExxonMobil’s case is tricky.

The plan was for Seplat, Nigeria’s most successful indigenous oil company, to buy Mobil Producing Nigeria Unlimited, Exxon Mobil’s entire shallow water business, for $1.283 billion (almost ₦600 billion at official rates). The acquisition would increase Seplat’s production by almost 200% and solidify its position in the Nigerian oil and gas market. This would also mean higher oil production for Nigeria.

The critical thing here is that ExxonMobil wasn’t selling its oil licences or interests; it was selling a business. When a company gets a licence to extract oil, they agree with the national oil company to lift a percentage of the oil produced. For instance, the agreement could be that NNPC gets 55% for every barrel while the other company gets 45%. So, if the company wanted to sell its stake, it would sell its share (45%). In this case, ExxonMobil was selling a company to Seplat, which technically would also mean a transfer of assets to Seplat.

Still, when companies get licences to produce oil in Nigeria, their contracts with the NNPC state that if they ever want to sell their stakes in the oil blocks, they must try to sell to the NNPC first. It’s only if the NNPC refuses that they can go ahead to sell to other parties. This is called the right of first refusal. So, the deal was announced in February, and by March, the NNPC came out to say that it hadn’t been allowed to exercise its right of first refusal. Apparently, NNPC wanted to buy ExxonMobil’s assets even though the NNPC barely extracts any oil by itself. But remember, ExxonMobil wasn’t selling oil licences; it was selling shares in a company, MPNU, to Seplat. And technically, selling shares wasn’t stated as an issue in ExxonMobil’s contract with the NNPC. So, the NNPC’s issue with the deal is neither contractual nor regulatory.

However, Section 95 (1) of the PIA states that shareholders of incorporated joint ventures cannot sell or transfer shares without the written consent of the minister. In addition, according to Section 95 (2), the minister can only grant consent upon the recommendation of the NUPRC (the regulator). Section 95 (4) further states that a licensee that wishes to transfer its shares or assets must apply to the NUPRC in the format the regulator prescribes. So, this is where the regulatory issue stems from.

In May, the NUPRC and the president were on the same page, with the NUPRC stating that the president refused consent because ExxonMobil failed to follow the correct procedures.

Fast forward to July, after several letters from the NNPC and the minister of petroleum attempting to block the deal, the NNPC (now NNPC Limited) lawyered up and sued MPNU, effectively blocking the sale. So, from February, when the deal was announced, till July, it wasn’t clear which way was up. However, in its Q1 and Q2 2022 financial statements, Seplat remained optimistic, stating that despite the significant hitches, they were confident that the transaction would be completed.

Their confidence seemed to pay off when, on the 8th of August, the president’s spokesman said the president had approved the deal. I don’t know about you, but if I was Seplat or ExxonMobil and the president, also the minister of petroleum, announced his approval, the champagne would be flowing. But, hours later, the NUPRC CEO said its previous deal rejection was still in place. Cue the confusion—is the deal approved, or is it not? Should the champagne keep flowing, or should it stop? The president answered this question when he rescinded his approval a day later, which confused us even more.

Now that we’re caught up, what are the roles of the NUPRC and the minister of petroleum, and where’s the confusion coming from?
 

Confusion in the regulators’ camp

The PIA is pretty straightforward on the roles of the minister and the NUPRC. 

The NUPRC assesses and recommends, while the petroleum minister approves the regulator’s recommendations and represents the country’s international petroleum interests. So, their roles are distinct.

However, Section 303 of the PIA also states that the provisions of the PIA do not apply to licences awarded before the PIA except if they try to convert their licences. Before the PIA, licences given to producers permitting them to extract and sell oil from specific locations were oil exploration leases, oil mining leases, and oil prospecting leases with varying levels of exclusivity. But the PIA changed the nomenclature replacing “oil” with “petroleum”. So, the licences are now called petroleum exploration leases, petroleum mining leases and petroleum prospecting leases. This ensured the differences between the old and new regimes were clear. Section 303 of the PIA states that most of the act's provisions don’t apply to companies with old licences unless they expire and try to convert to new ones.

The only provision that still applies to such licensees is Section 311, and subsection (1) says that any act or regulation amended by the PIA still holds if there’s no conflict with the act until another regulation replaces it.

All this legal jargon means that it’s unclear whether or not the PIA applies to Exxon Mobil since their licences were awarded way before the PIA, which was just signed last year. Indeed, ExxonMobil’s licences were awarded under the Petroleum Act of 1969. So, under the 1969 Act, the Minister of Petroleum is responsible for everything licence or asset-related; this is where the NUPRC and the minister don’t agree.

On the one hand, the NUPRC’s responsibility under the PIA is to recommend to the minister after ExxonMobil has applied for a transfer of shares or assets. Here, the minister’s responsibility is to consent to their recommendation. However, the assets in question pre-date the PIA, which states that repealed regulations still hold water for old licences unless there’s a conflict between the new and old rules. As such, under the 1969 Petroleum Act, the minister of petroleum has the only say as the NUPRC didn’t even exist then.

But now, the petroleum minister has reversed his approval, creating even more uncertainty in many ways.
 

Uncertainty is risky

The ultimate objective of the PIA was to clear up uncertainty to promote investment in the sector. The PIA was supposedly designed clear up regulatory, legal and fiscal uncertainty to ensure that the Nigerian oil sector was attractive to foreign investors.

According to KPMG, only 4% of the $70 billion investment inflows into Africa’s oil and gas industry between 2015 and 2019 came to Nigeria, even though Nigeria is (or used to be) the most prominent producer with the largest reserves in the continent.

The Nigerian upstream oil sector is already at high-risk. High levels of vandalism and theft mean that operators and investors cannot maximise their returns and investments. Hence, IOCs are leaving. More recently, the Nigerian Bureau of Statistics’ Q4 2021 capital importation report states that the oil and gas sector only attracted 1.48% of capital imports into the country. As of Q1 2022, this figure dropped to 0.04%. As a result, our only hope for increased oil production is with indigenous oil companies like Seplat.

On the one hand, the PIA is not living up to this objective on the regulatory front. Conversely, the regulators’ hostile response to the Seplat acquisition doesn’t indicate that they’re serious about attracting investment in the sector. In our article on Seplat, we mentioned that one of their fundamental problems is that they are a Nigerian oil company exposed to “Nigerian risk”, which includes things like vandalism, theft and now, wishy-washy regulators.

Amid all this uncertainty, only one thing is certain—the minister of petroleum and the upstream regulator aren’t doing Nigeria’s unattractive upstream sector any favours. Because, considering the state of investment in the sector and Nigeria’s low oil production, you would think that the minister of petroleum and the NUPRC would welcome the deal with open arms. Instead, the rejection from the regulators has left many industry insiders stumped on what comes next with the Seplat ExxonMobil deal and, on a broader level, what the regulators really want for the sector.