By definition, a preemptive right gives an existing shareholder the opportunity to buy a proportional interest of any future issuance of common stock to help maintain their initial percentage ownership position in the company. It is often provided to existing shareholders of a corporation to protect them from involuntary and undesired dilution of their ownership stake.
It is a contractual clause that gives the right to majority owners who want to protect their stake in the company when and if additional shares are issued.
Preemptive rights also protect a shareholder from losing voting power as more shares are issued and the company’s ownership becomes diluted. Since the shareholder is getting an insider’s price for shares in the new issue, there can also be a strong profit incentive.
There are certain benefits that accrue as a result of the inclusion of this right. The main benefit is that it allows the partners to a joint venture maintain control of the venture, which is achieved by being able to control participation by new venture partners. Parties to a joint venture should have the ability to prevent a new comer to the venture from participating if it does not meet certain requirements.
Factors such as the requisite financial and technical capacity, and sometimes non-tangible considerations like business philosophy, goodwill and past relationship may amount to considerations that existing parties deem necessary in order to be effective.
Following from the above, the inclusion of a preemptive clause in oil and gas operating agreements is, from the perspective of the indigenous oil companies in Nigeria, favourable to the extent that it retains the operations and control of oil blocks in the hands of indigenous oil companies, increasing their prominence in the oil and gas sector.
Existing licensees also have the advantage of being able to monitor wealth transfer in the venture and it prevents a split transfer of interest, which may affect the voting pattern and make it more difficult to make decisions.
After labouring on an oil field, it is believed that parties to a joint venture view this right as an opportunity to increase their stake in the joint venture and also to increase their benefit. This is only fair.
The Nigerian National Petroleum Company Limited in a bid to safeguard the country’s oil and gas assets as well as guaranteeing energy security for the country has intensified efforts at exercising its preemptive rights on some of the assets with its Joint Venture partners.
This is to ensure that the NNPC sustains a prosperous business environment for Nigeria and enable the National Oil Company pay more attention to abandonment and relinquishment costs; severance of operator staff; and third-party contract liabilities among others.
Onshore decommissioning involves capping oil wells, clean-up and taking out all production and pipeline risers that are sustained by the platform, removing the platform and getting rid of it in a junk storage area or manufacturing yard.
Within the last decade, the Nigerian upstream sector had witnessed significant transactions involving the sale of interests in oil licenses.
Some of these transactions were concluded in the time of high oil prices and in some instances involved asset transfers from International Oil Companies with long years of carrying on exploration and production activities in Nigeria, to smaller indigenous companies with limited experience in the upstream sector.
In August last year, Shell divested about 30 per cent of its stake in Shell Petroleum Development Company of Nigeria Limited subsidiary.
Just few days ago, Seplat Energy Plc announced an agreement to acquire the entire share capital of Mobil Producing Nigeria Unlimited from Exxon Mobil Corporation, Delaware for $1.28bn.
The transaction entails the acquisition of ExxonMobil Nigeria’s entire offshore shallow water business.
According to the deal, ExxonMobil Nigeria’s shallow water business is an established, high-quality operation with a highly skilled local operating team and a track record of safe operations.
Shell Petroleum Development Company of Nigeria and ExxonMobil are presently faced with huge remediation costs over their failure to properly decommission and cap oil and gas assets across the Niger Delta, especially the ones sold to Nigerians in recent divesture programmes.
The situation has created severe environmental risks and pollution to host communities in the oil-rich Niger Delta.
The recent case of Aiteo’s Nembe wellhead blowout, has also brought to the fore the need to enforce the relevant laws and to ensure that the multinationals that sold the assets to the Nigerian companies pay remediation charges.
Curiously, many of the oil and gas assets sold to Nigerians, mostly by the International Oil Companies, are rarely decommissioned or properly abandoned, a development that clearly breaches existing laws regulating the industry.
This is a clear violation of some of the international conventions guiding decommissioning operations which include the Geneva Convention on the continental shelf, 1958; United Nations Convention on Law of the Sea (UNCLOS), 1982; and Convention on the Prevention of Marine Pollution by Dumping of Wastes and other Matters, 1972.
But despite extant regulations and the provisions of the Petroleum Industry Act (PIA), there was rarely any adherence to full decommissioning for the infrastructure that had been sold by multinational oil companies. It is also evident that there might be no such arrangements for those for which buyers were being sought.
According to Section 232, (1) of the new Petroleum Industry Act, “The decommissioning and abandonment of petroleum wells, installations, structures, utilities, plants and pipelines for petroleum operations on land and offshore shall be conducted in accordance with good international petroleum industry practice.”
In Section, 233 (1), the new law stated, “Each lessee and licensee shall set up, maintain and manage a decommissioning fund held by a financial institution that is not an affiliate of the lessee or licensee, in the form of an escrow account accessible by the commission.
“The decommissioning and abandonment fund shall exclusively be used to pay for decommissioning and abandonment costs. Where a lessee or a licensee fails to comply with the decommissioning and abandonment plan, the decommissioning and abandonment fund shall be accessed by the commission to pay for the performance by a third party.”
On the wave of divestment of international Oil Companies from Nigeria’s upstream sector, the Group Managing Director of the NNPC, Mele Kyari last Monday told participants at the fifth edition of the Nigerian International Energy Summit that while the country understands the right of companies to freely divest, it is however, critical to ensure that the right thing is done so as to avoid disruption.
He further said that issues and obligations related to abandonment and decommissioning must be fully addressed and discharged in line with global best practices, regulations, convention, and law
He said, “Companies that are divesting, they are leaving our country literarily and that’s the way to put it. But they are not leaving because opportunities are not here, these companies are shifting their portfolios where they can add value and not just that but where they can add to the journey of net carbon zero emission.
“We understand this very perfectly. But also, we cannot afford to realize that this country must benefit from the realities of today. We will work with our partners, we understand the necessity for their investments, we do know that there are issues, we understand that this must take place, but also it must be done in such a way that we are able to deal with issues around abandonment and decommissioning.
“We will also make sure that whatever arrangement that is put in place, will show that we are also alive to the energy…