Examining "Moni Pulo v Brass" Against Changes in Upstream Petroleum Mergers and Acquisitions Regime

The Federal High Court's decision in Moni Pulo Limited v. Brass Exploration Unlimited & 7 Ors[i] (the “Moni Pulo Case”) case marked a pivotal moment in the stratum of corporate activities within Nigeria's oil and gas industry. This judgment seemingly resolved the debate surrounding the necessity of Ministerial consent in upstream mergers and acquisitions. Leveraging this ruling, the defunct Department of Petroleum Resources (DPR) introduced the 2014 Guidelines and Procedures for Securing Ministerial Consent for the Assignment of Interests in Oil and Gas Assets (later repealed by the 2021 Guidelines)

Nonethless, the Moni Pulo’s case sparked inquiries into the ambiguous extent of interests in Oil Mining Leases (OMLs) or Oil Prospecting Licenses (OPLs) and the specific transactions requiring Ministerial consent. The Petroleum Indutsry Act (“PIA” or the “Act”) ushered some changes seemingly addressing the uncertainties arising from both the Federal High Court's decision and the DPR guidelines. In this newsletter, we delve into the provisions of the PIA governing assignment, transfer, merger, and acquisition of interests, contrasting them with earlier provisions under the Petroleum Act and the Petroleum (Mining and Drilling) Regulations (“PMDR”). Furthermore, we contemplate whether the outcome of the Moni Pulo case would differ under current circumstances and examine the status of the 2021 Guideline vis-à-vis the Petroleum Industry Act.

Moni Pulo v Brass Background

According to Paragraph 14 of the First Schedule to the Petroleum Act: “Without the prior consent of the Minister, the holder of an oil prospecting licence or an oil mining lease shall not assign his licence or lease, or any right, power or interest therein or thereunder.”

Regulation 4(b) of the Petroleum (Drilling and Production) Regulations 1969 (“PDPR”) provides that:

"[An] application for the assignment or takeover of an oil prospecting license or oil mining lease (or of an interest in the same) shall be made to the Minister in writing and accompanied by the prescribed fees at the discretion of the Minister; and the applicant shall furnish in respect of the assignment, or takeover, all such information as is required to be furnished in the case of an applicant for a new licence or lease."

The facts of the case centered around OML 114, where PetroSA, seeking to expand its interests, agreed to acquire the entire shares of Brass Holding Limited and Brassco (Cayman) Ltd, thereby obtaining a 40% Participating Interest in OML 114.

Subsequently, PetroSA endeavored to relinquish its interest in OML 114 by selling its shareholding in Brass to Camac Energy Services Limited and Camac Energy Resources Limited ("Camac"). However, PetroSA omitted to seek the requisite consent from the Minister for this transfer, a critical oversight that would later spark legal contention.

In response to PetroSA's unilateral action, Muni Pulo, a party to the joint operating agreement with Brass, raised objections, asserting that the share transfer to Camac was invalid without Ministerial consent. In a landmark ruling, the court sided with Muni Pulo, affirming the necessity of Ministerial consent for such transactions. Citing provisions of the Petroleum (Drilling and Production) Regulations, the court elucidated that "takeover" within the context of the PDPR pertains to scenarios where a party gains control over another entity, thereby necessitating Ministerial oversight to safeguard against undue influence or disruption in the sector. In a nutshell, it held that transfer of shares and ownership of an asset owning company amounts to indirect transfer of interest in such assets and therefore required Ministerial consent.

Following the judgment, the 2014 and 2021 guidelines were issued, defining the scope of assignments. They provided for not only direct share acquisitions but also the indirect takeover of rights or interests in licenses, leases, marginal fields, and associated assets. However, the broad interpretation of these guidelines has led to unintended consequences, where even minor transfers of company shares or divestment of other interests trigger the requirement for Ministerial Consent.

To address this regulatory challenge and clarify the intricacies surrounding assignment, mergers, transfers, and acquisitions of petroleum mining leases (PML) and petroleum prospecting licenses (PPL), key provisions from the Petroleum Industry Act are examined below:

1. Consent Requirements and Assignment Defined

The Act stipulates that the assignment, novation, or transfer of a petroleum prospecting license or petroleum mining lease, or the sale or transfer of shares in an incorporated joint venture, necessitates prior written consent from the Minister upon the recommendation of the Nigerian Upstream Petroleum Regulatory Commission (“Commission” or “NUPRC”).[ii] Also, change of control in the holder of a license or lease above is deemed to be an assignment.[iii] There is a change of control where a person acquires direct or indirect beneficial ownership of a percentage of the voting power of the outstanding voting securities of the holder that exceeds 50% at any time.[iv]

From the foregoing, the Moni Pulo Case interpreted "takeover" in the context of the Petroleum (Drilling and Production) Regulations, emphasizing situations where another entity gains control over the affairs of a company. On the other hand, the Petroleum Industry Act defines "change of control" and encompasses scenarios where beneficial ownership of voting power exceeds 50%, ensuring regulatory oversight over significant shifts in ownership or control. More significantly, the decision on whether to grant consent is now split between the Commission and the Minister because the Commission is vested with the power to recommend eligible applicants to the Minister, thereby eliminating the Minister’s power monopoly (on paper though).

2. Application and Approval Process

Upon seeking approval for assignment, novation, or transfer, or share sale or transfer, applicants must adhere to the format prescribed by the Commission, as outlined in section 95 (4) of the PIA. This application must be accompanied by requisite information pursuant to Commission regulations. Notably, the assignment or encumbrance of interests under a license or lease as security is subject to Commission consent.[v]

This is an important highlight on this issue. Under the Moni Pulo decision and the 2021 Guideline, assignment could be any form of transfer of interest, and not restricted to shares. What the PIA achieves is to make it possible for holders of licensee to encumber their interests as security or assign pledge, mortgage, or lease in respect of the interest without the consent of the Minister. However, the consent of the Commission must be sought.

3. Timely Consideration and Communication

The Act mandates the Commission to act on applications within 60 days, ensuring expeditious processing. Similarly, the Minister must consider recommendations within the same timeframe.[vi] In cases of Ministerial rejection or non-response, mechanisms are in place to prevent undue delays and facilitate efficient decision-making. Communication of approval or refusal by the Commission is mandatory, with reasons for refusal provided, enabling applicants to address concerns effectively. Where the Minister communicates no response within the 60 working days, the consent of the Minister is deemed to have been granted.[vii]

A major issue from the Moni Pulo’s decision was that the requirement of Ministerial Consent for share acquisitions of asset holders comes at a huge cost for transactions as parties could not predict when consent will be granted hence delaying transactions. This provision by the PIA mandates timely decision-making by the Commission and Minister, ensuring efficient processing of applications and preventing undue delays.

4. Conditions for Consent

Consent to assignments, novation, or transfers is contingent upon stringent conditions ensuring the transferee's legal status, reputation, technical competence, and adherence to competition laws. Additionally, the Act empowers the Commission to regulate transaction fees, enhancing fiscal transparency and accountability.[viii]

The reasoning behind the court’s decision in the Moni Pulo case was that “The Minister of Petroleum Resources has a duty to satisfy himself or herself that the…[persons] who have acquired the…shares in the [person holding the] participating interest in OML 114 are qualified to participate in the OML 114.” The conditions listed above appear alleviate the fear of unqualified entities taking over petroleum assets.

5. Disclosure and Publication Requirements

The Act mandates full disclosure of transaction details to the Federal Inland Revenue Service and publication in the Federal Government Gazette.[ix] These provisions underscore the commitment to transparency and public scrutiny, ensuring stakeholders are apprised of significant industry developments.

Status of the 2021 Guidelines to OML and OPL Holders

The 2021 Guideline was issued at a time where the PIA had not been enacted and the relevant rights then were the oil prospecting license and the oil mining lease issued under the Petroleum Act and governed by other regulations. Regulations and guidelines issued pursuant to the Petroleum Act such as the 2021 guidelines and the PDPR remain applicable to holders of existing oil mining leases and oil prospecting licenses and to the extent of corresponding provisions in the PIA supporting such regulations will remain effective and transition into the PIA regulatory framework.[x] In other words, provisions of regulations and guidelines that align with or are supported by the provisions of the PIA will remain effective and will transition into the regulatory framework established by the PIA.

Conclusion

A significant shift in ownership of an asset holder (PML or PPL), denoted by the acquisition of over 50% of voting securities, triggers an event: an assignment. This necessitates a written approval from the Minister, underscoring the regulatory scrutiny applied to changes in control within the industry. If the Moni Pulo’s case were to be decided today and where Moni Pulo had undergone a conversion contract to change its OML to PML under the PIA, there would only be few areas of divergence with the 2012 decision. In both scenarios, the court’s reasoning lies in the complete acquisition of the holder's shares, exemplifying a profound alteration in ownership dynamics. However, if the assignment entails less than 50% of the holder’s voting securities, it wouldn’t amount to a change of control because the significant threshold remains unmet, hence, the need for ministerial consent dissipates.

Read more and subscribe to my newsletter for free

References

[i] (2012) 6 CLRN pg 153-235

[ii] Section 95(1) AND (2) PIA

[iii] Section 95(3) PIA

[iv] Section 95(14) PIA

[v] Section 95(5) PIA

[vi] Setion 95(6) PIA

[vii] Section 95(7)(b)

[viii] Section 95(11) PIA

[ix] Section 95(13) PIA

[x] Section 311(1) and (9) PIA