Examining Addax Lease Revocation, Restoration

Emmanuel Addeh writes that with last Friday’s restoration of Addax Petroleum’s operating rights on four Oil Mining Leases, few weeks after they were withdrawn by the industry regulator, mixed signals may have been sent, not only to industry operators, but the international business community

A few weeks ago, the federal government announced the official withdrawal of four oil mining leases (OMLs) belonging to Addax Petroleum, a decision that raised some pertinent unanswered questions as to the adherence to due process.

While it is not strange for governments all over the world to withdraw licences for oil operations to companies that are confirmed to have breached their contractual agreement, the manner of revocation of the oil mining leases in the Addax saga raised quite some eyebrows.

Suspicious Deal

Addax is owned by China’s Sinopec Group. Of the four revoked assets, OML 123, OML 124, OML 126 and OML 137, three have producing fields, Addax said on its website. The company has 11 fields with 80 production wells in OML 123, two fields with 15 producing wells in OML 124 and two fields with 17 production wells in concession OML 126. It began operations in Nigeria in 1998 by signing two Production Sharing Contracts (PSCs) with the Nigerian National Petroleum Corporation (NNPC).

Coming a few days after the Ministry of Petroleum received a report which had indicted Addax for allegedly abandoning a fabrication yard, located in Ilase village, Lagos, after calling a force majeure on, “issues that were totally unrelated,” it was obvious that the company which says it got its name from a type of Sub-Saharan Africa antelope, particularly known for its ability to survive harsh environments, needed all the skills to weather the raging storm.

At the time, the bone of contention was that OMLs 123, 124, 126 and 137 – all operated by the company were taken away in a manner that was described as hasty and were speedily awarded to Kaztec Engineering Limited/Salvic Petroleum Resources Limited.
The decision to sell the OMLs was conveyed in a letter signed by the Director of the Department of Petroleum Resources (DPR) the industry’s regulatory agency, to Kaztec owned by oil magnate, Emeka Offor and another firm, Salvic, which has its chairman as Mr. Oye Hassan-Odukale.

Contrary to the tradition in the industry, the re-award was said to have happened so swiftly after the revocation letter, that in a matter of just three days, leading to the last Easter holiday weekend, it appeared to have been concluded, even though it was still being delayed in the public space to give a semblance of credibility.

While the authorities said the key reason for the revocation was lack of compliance with work programme targets, sources close to Addax argued that all the facilities were producing assets on which royalties were being paid.
Meanwhile, while the contentious OMLs 123 and 124 are expected to expire in 2022, OMLs 126 and 137 will expire in December 2024 and May 2027 respectively.

Addax and trouble

In less than four weeks, Addax was in the news for the wrong reasons in two crucial matters. First for abandoning the EPC facility in Lagos which the Chairman of the investigation panel, Magnus Abe, said led to the loss of over 3,000 jobs and secondly, for alleged non-compliance with the contract it signed, leading to loss of revenue to government.

But it wasn’t also the first time Addax was getting into trouble with the authorities in Africa. A few years ago, the Gabonese government hadinformed Addax that it planned to withdraw its drilling licence for its Tsiengui onshore oilfield after the then contract expired in 2015.

The reasons cited related to contract violations. Moreover, Gabon accused Addax of failing to pay customs duties and not respecting Gabonese laws. In fact before then, Gabon had seized the Obangue oilfield from Addax due to alleged breaches of contract, environmental abuse and tax dodging on oil exports.
While Addax approached the court asking for $330 million in damages, the Gabonese government countered by a claim of $780 million, with the assets eventually handed over to be managed by the national firm, Gabon Oil Company.

DPR explains reasons for revocation

But the DPR in trying to defend its action, explained that the revocation was due to non-development of the affected assets by the petroleum company.

Director/Chief Executive Officer, DPR, Mr. Sarki Auwalu, said the agency discovered that over 50 per cent of the assets had remained underdeveloped, which he said was resulting to loss of revenue to the federal government.

“Addax refused to develop the assets and Addax was, therefore, not operating the assets,” he said.
He said going by the country’s Petroleum Act, “the first reason for a revocation is when you discover that the asset is not being developed, according to the business guidelines, because it is economic sabotage.”

“One of the assets – OML 137 – holds a gas reserve of more than 3 trillion cubic meters (tcm). This has the potential for us to increase our gas reserve and it can support the integration of gas development of the asset.

“The entire OML 137 holds about five tcm in two key reserves, but the company failed to develop this asset in line with the government’s gas revolution policy and it was, therefore, necessary to take a step to attract willing and capable investors to undergo the development of the assets both for our domestic use and exports,” he stated.

According to him, the average reserve profile of the assets showed that oil reserves have remained essentially flat, adding that the company never made efforts to grow the reserves.

He said crude oil in all three producing assets had been declining over the years due to inadequate investment by the company.

Indeed, a team of experts had already been inaugurated to evaluate the revoked four oil mining licenses from Addax to a new operator – Kaztech/Slavic Consortium which was given one week to do the job, before the spanners fell in the works of the promoters last Friday.

The arguments

Going back memory lane, the NNPC/Ashland Production Sharing Contracts (PSCs) on OMLs 123/124 (formerly OPL 98) and 126/137 (formerly OPL 118) were signed in 1973 and terminated after 25 years of operation.

It was thereafter that the NNPC signed another PSC with Addax Petroleum in 1998, on the same OMLs under the Petroleum Act, with oil reserves of over 450 million barrels of oil and 5 trillion standard cubic feet of gas. The argument is that Clause 19 of the PSC clearly spells out the ground for the termination of the PSC by the Concessionaire (NNPC), including a default in the performance of material obligation; assignment of the contractor’s rights and interests under the contract without written notice and prior written consent of NNPC, insolvency or liquidation.

Those in the know also maintain that a PSC is essentially a contract between the Concessionaire (NNPC) and the Contractor (Addax) and that the regulator (DPR) was never a party and therefore lacked the powers to terminate the contract.
Buhari Wades in Last Friday, President Muhammadu Buhari approved the restoration of the permits on the OMLs to the NNPC and by extension, Addax Petroleum.

The president, in a release by his Media Assistant, Garba Shehu, said the leases belonging to the federation, which were revoked on March 30, 2021, were being restored to NNPC in line with the current administration’s commitment to the rule of law, fairness and enabling a stable business climate for investment.

“This development reaffirms the commitment of President Buhari to the rule of law and sanctity of contracts,” the statement said.

While directing the DPR to retract the letter of revocation of the leases, the president instructed the NNPC to take advantage of contractual provisions to resolve issues in line with the extant provisions of the PSC arrangement between the national oil company and Addax.

Buhari further stressed that the restoration of the blocks to NNPC will boost the organisation’s portfolio, thereby making the corporation to, in the long run, boost its crude oil production and in turn increase the revenue it generates into the federation account.

Real reasons the president intervened

But THISDAY checks indicated that the decision to return the operating permits on the four facilities was taken by the president to avert a major face-off with the Chinese government which is assisting the federal government in undertaking several infrastructural projects across the country.

A source knowledgeable with how the decision was arrived at, stated that the matter was escalated to President Muhammadu Buhari after the diplomatic implications as well as the image problems that the revocation, which would have portrayed the Nigerian business environment as being operated by the whims of certain individuals , rather than adherence to rules, were analysed.

While the NNPC, which Addax was directly partnering in the PSC, it was learnt, was not in the know of the processes leading to the cancellation of the leases, the president, the source said, also considered the legal implications if the matter eventually ended in the court.

“The revocation was not even done with any consultation with the direct party, the NNPC. That was a big blunder which they should have known because if those guys go to court, they would win because in reality, they do not have any contract with the DPR, but with the NNPC.

“Ordinarily, it is the NNPC that should have communicated to Addax as contractor to say we are terminating this contract and there are steps to it.
“So, it would have become an embarrassment to Nigeria even both in diplomatic terms, because China will feel slighted that we can’t even follow our own rules and considering the number of projects like the Ajaokuta-Kaduna-Kano gas project they are assisting us with, they would have just messed things up,” the source said.

If due process was followed, the source added, it would have been the NNPC that should have communicated the decision to Addax on the prompting of the DPR, the regulator, a step that wasn’t taken
“As far as the guidelines were not followed, there were always going to be problems,” it noted.

According to the source: “It would have been embarrassing if the Chinese withdrew from all the projects in retaliation because once they find you can’t even obey your own laws, they too can renege on some of the partnerships they have with us.”
According to data published by the NNPC, Addax pumped an average of about 30,000 barrels per day in 2019, equivalent to about 1.5 per cent of the country’s output.
Unanswered questions

Up until now, Addax has not come out officially or with any evidence to tell the world what transpired. It has also not refuted the government claim that the facilities were less than 50 per cent operational despite its obvious lucrativeness, reason the licence was cancelled.

And if indeed, the DPR was correct in its assessment of the performance of the assets, Addax has not given cogent reasons it operated the facilities at half capacity for years.
On the side of the government, some pertinent questions worth responding to are still pending.

For instance, what form of communication, if any, took place between the regulator and Addax before the assets were retrieved from the company and if there was any interaction, was the firm given any chance to explain its position?

What inspired the swiftness with which action was taken on the assets? How much did Kaztec/Salvic pay for the assets or intended paying and what’s the relationship between those at the helms of affairs at the ministry of petroleum, the DPR and the so-called Aso Rock power broker? Why was the NNPC allegedly left in the lurch in relation to the processes that led to the cancellation of the four leases?

How could four operating permits be cancelled in the first place without the knowledge of the president, the substantive minister of petroleum? Or was he in the know initially, but bowed to superior argument, having been intimated with the implications of the move?

These questions have to be answered by all the parties involved in this matter.