Vinson & Elkins LLP
Local content obligations on operators across West Africa are becoming increasingly demanding and are having a major impact on the way oil companies do business there (and on the costs of doing business). Specifically in Nigeria, Africa's largest producing nation, the Nigerian Oil and Gas Industry Content Development Act (the "Act") aims to significantly increase indigenous participation in the industry. During 2014, IOCs and oilfield services companies with operations in Nigeria are being forced to rethink and restructure their operations to comply with the Act.
The Act initially entered into force in March 2010. The Act was the first of its kind in Africa and was created to increase participation by Nigerian companies in all aspects of the country's oil and gas industry by setting out ambitious targets in a number of areas. Recognizing that capacity to provide certain goods and services from within Nigeria was limited, the Act allowed for an exemption until March 2013 so that the relevant goods or services could continue to be imported. That exemption has now expired and the authority with responsibility for implementing the Act, the Nigerian Content Development and Monitoring Board (the "Board") has begun to take a tougher stance with international companies in monitoring compliance with the Act.
All oil and gas companies operating in Nigeria are required regularly to submit information to the Board for review, including an annual Nigerian Content Development Plan and a statement of the value of contracts awarded to Nigerian companies. If any company carries out a project in violation of the Act, the company may be subject to a fine of 5% of the relevant project value or cancellation of the project.
In awarding contracts, operators and contractors must first consider Nigerian suppliers, even where those suppliers are more expensive than their international equivalents. The award of high-value contracts in particular is strictly monitored to ensure that Nigerian companies receive due consideration. The Act is not just about service contracts and suppliers. Local Nigerian ownership has also become critical to E&P companies in successfully acquiring upstream acreage. For example, under the Act, Nigerian independent operators are given "first consideration" in the award of oil blocks, oil licences, oil lifting licences, and all projects to be awarded in the industry.
Under the Act, a "Nigerian" company is a company formed in Nigeria with not less than 51% of the equity held by Nigerians. International service companies and IOCs are busy adopting a variety of joint venture structures with Nigerian local partners, to create service companies (and E&P companies) that are Nigerian in the eyes of the Board, while having sufficient access to foreign capital and technical expertise.
As part of the Board's oversight, it examines the joint venture to determine whether it involves genuine Nigerian participation, and will consider not only whether the local partner legally holds at least 51% of the equity but also the broader terms of the joint venture, including control, voting, and dividend rights. Described below are some of the key issues to consider in setting up a joint venture in the Nigerian oil and gas sector:
•Integrity due diligence: Avoiding corruption and maintaining spotless compliance with applicable law remain key in entering any Nigerian operation. In taking a local partner, companies need to carry out careful integrity due diligence regarding a potential partner, focusing on the background of the company, its structure, principals and shareholders, and looking carefully for any political connections. Nigeria can be a challenging country in which to operate, and companies need to be sure that their joint venture activities do not leave them liable to allegations of breach of international anti-bribery and corruption legislation such as the US Foreign Corrupt Practices Act or the UK Bribery Act.
•Jurisdiction of the joint venture company: Companies need to consider whether to use a Nigerian entity as the joint venture vehicle or to incorporate a new joint venture company outside of Nigeria, which in turn has a wholly owned subsidiary within Nigeria to actually conduct business there. Using a Nigerian joint venture company can be problematic for the non-Nigerian party, as there will be a greater risk that the Nigerian courts will agree to determine any dispute between the shareholders (regardless of the dispute resolution terms agreed to between the parties). Where that happens, there is a real possibility of the Nigerian courts preferring the Nigerian partner over the foreign partner, regardless of the merits of the claim. In any event, companies will want to ensure that the shareholders' agreement or joint venture agreement with their local partner provides for arbitration in a neutral venue under well-respected arbitral rules.
•Share classes, control, and funding: Many companies are looking at structures involving the creation of different classes of stock or shares, to grant different rights to the foreign partner and the local partner. The different classes might carry different voting and control rights, different funding obligations, and different rights to receive profits and dividends. Great care needs to be taken to ensure that these structures are acceptable for Nigerian local content purposes, and to avoid the Board concluding that there is inadequate genuine Nigerian participation. However, structured correctly these arrangements can allow Nigerian participation in oil and gas ventures that would otherwise be beyond the wallet or the expertise of the Nigerian partner.
•Provision of documents to the Board:Oil and gas investors also need to remember that Nigerian companies' constitutional documents are publicly available in Nigeria. So, care should be taken to avoid including provisions which need to remain confidential or which may cause the Board to believe incorrectly that the spirit of the Act has not been followed. For example, any restrictions on the authority of employees could, instead, be included in the relevant employment contracts. Other restrictions and covenants are often included in finance documents (including shareholder loan arrangements) to avoid misunderstandings about the effect of those restrictions.
•Financing and credit support: The joint venture company needs to demonstrate that it owns the necessary equipment to carry out oilfield services contracts, so consideration will need to be given to how the local partner will fund its share of the costs of acquiring such equipment (typically from the foreign partner). Often companies implement a financing structure but, if the terms of the financing are made available to the Board, the parties will need to consider whether it is feasible (and compliant) for the foreign partner to retain ownership until any loan is repaid. The parties also need to consider whether credit support should be provided for the local partner's liabilities, and what form this credit support should take. One natural solution would be to take a pledge of the local partner's shares in the joint venture company; however, the need to maintain local equity ownership percentages can make the enforcement (and in some cases even the creation) of any such pledge problematic.
Both the Nigerian authorities and the domestic Nigerian oilfield services companies have been paying close attention to the structures being adopted by the foreign players, and no sympathy should be expected for non-compliance. Foreign companies entering the market with a local partner want to be cautious, and to take advice at an early stage to avoid unwelcome surprises in the course of their projects.