REGULATORY PERSPECTIVES
Alexander Msimang
Jessica Cull
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). Specifcally in Nigeria, Africa’s largest producing
nation, the Nigerian Oil and Gas Industry
Content Development Act (the “Act”) aims
to signifcantly increase indigenous participation in the industry. During 2014, IOCs
and oilfeld 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 frst 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 fne of
5% of the relevant project value or cancellation of the project.
In awarding contracts, operators and contractors must frst 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 “frst
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 com-
panies) that are Nigerian in the eyes of the
Board, while having suffcient access to for-
eign capital and technical expertise.
As part of the Board’s oversight, it exam-
ines 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 equi-
ty but also the broader terms of the joint ven-
ture, including control, voting, and dividend
rights. Described below are some of the key
issues to consider in setting up a joint ven-
ture in the Nigerian oil and gas sector:
• Integrity due diligence: Avoiding corrup-
tion and maintaining spotless compliance
with applicable law remain key in entering
any Nigerian operation. In taking a local
partner, companies need to carry out care-
ful integrity due diligence regarding a po-
tential partner, focusing on the background
of the company, its structure, principals and
shareholders, and looking carefully for any
political connections. Nigeria can be a chal-
lenging 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 involv-
ing the creation of different classes of stock
or shares, to grant different rights to the for-
eign partner and the local partner. The dif-
ferent classes might carry different voting
and control rights, different funding obliga-
tions, and different rights to receive profts
and dividends. Great care needs to be taken
to ensure that these structures are accept-
able for Nigerian local content purposes,
and to avoid the Board concluding that there
is inadequate genuine Nigerian participa-
tion. However, structured correctly these ar-
rangements 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 confdential 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 fnance 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
oilfeld 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 fnancing structure but, if the terms of the
fnancing 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 lo-
cal 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 oilfeld services com-
panies have been paying close attention to
the structures being adopted by the foreign
players, and no sympathy should be expect-
ed 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. •
Operators must carefully navigate Nigerian local content rules
