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Addax OML Licence Revocation – What we must know

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FUPRE VC lauds FG on commercialisation of Gas ProjectIn 1998, the NNPC entered into a 20-year PSC (Production Sharing Contract) in respect of certain oil mining leases (OMLs) with Addax Petroleum, a company listed on the Toronto Stock Exchange (TSX). The PSC was subsequently extended for a further four years, until 2022. The assets were OMLs 123, 124, 126 and 137.

Under the PSC, Addax fully funded and operated the development of the OMLs, with profit shared between Addax and NNPC. From 1998 until 2009, Addax increased production in these OMLs to about 130,000 bopd. In 2009, Sinopec (a Chinese state-owned company) purchased Addax Petroleum. As a result, Sinopec obtained the rights to these assets.

No payments were made to the Federal Government during the purchase by either party. However, in recent years, there have been no new investments in the assets, and by 2021, production had declined to 25,000 bopd. This led to a significant reduction in revenue accruing to Government. In addition, large gas resources in the assets remain undeveloped, and excess gas has been continuously flared to the atmosphere, contrary to FGN policy and best-practice and international environmental practice.

Since 2017, Sinopec has attempted, by a private sales process, to divest its rights in the PSCs (which are due to expire in July 2022) to a third party of Sinopec’s choice. In March 2021, Mr. President via DPR announced the revocation of the PSC rights to Sinopec, and an assignment of the rights to an indigenous consortium of Kaztec Engineering Limited and Salvic Petroleum Resources.

As part of the assignment, the new consortium are required to:

a. Operate the OMLs under a PSC with NNPC

b. Pay a Good and Valuable Consideration (GVC) of US$ 340 m at the commencement of the PSC

c. Develop the significant oil resources which have been lying fallow, and ramp up production

d. Commence development of the large gas resources within 24 months both for the domestic market and for export, in line with the Government’s aspirations for the gas industry

e. Ramp up investment in the OMLs so that production revenues, royalties and taxes to the Government are exponentially increased, in addition to the upfront payment of GVC.

The new operating consortium has been carefully chosen by Government for their familiarity with the assets. Kaztec, one of the leading indigenous EPIC-M companies with vast experience in offshore and onshore petroleum E&P, has collaborated with the previous operator on the assets for many years. The essence therefore is to ensure a seamless transition of operations with no disruptions in production or loss of revenue to the Government.

The choice of consortium is also in the accordance with the Nigerian Oil and Gas Industry Content Development (Local Content) Act which was enacted in 2010 to promote indigenous operation of Nigeria’s oil and gas assets. Under the Act, seasoned Nigerian independent operators like Kaztec and Salvic are to be given first consideration in the award of oil blocks and oil field licenses.

The consortium intends to maximise the potential of the assets to ensure that the Government and people of Nigeria reap their full benefits against the backdrop of the ongoing Energy Transition. In addition to optimizing production, the Consortium intends to deepen relationships with local communities, boost local content in all its ramifications and increase the employment and training of Nigerians, directly and indirectly.

At the urging of DPR, the Consortium has engaged with the previous operator, to ensure a smooth and amicable transition of operations at the assets. The DPR also directed that Addax and the new Consortium engage in an amicable resolution of all issues including a commercial settlement if needed. These discussions between the new Consortium and Addax commenced in April 2021.

The DPR should be commended for proactively taking concrete steps to boost the revenue accruing to the Government from these underperforming assets. Nigeria and China continue to enjoy cordial economic, political and social ties, and will cooperate to ensure the mutual development of their countries.

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