leasing of onshore lands for oil and gas production: a comparative study of federal onshore oil and...

7/30/2019 Leasing of Onshore Lands for Oil and Gas Production: A Comparative Study of Federal Onshore Oil and Gas Leases

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LEASING OF ONSHORE LANDS FOR OIL AND GASPRODUCTION: A Comparative Study of Federal

Onshore Oil and Gas Leases in the United States and

Nigeria.

University of Tulsa College of LawMay 2013


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Table of Content Pages

1. Introduction 22. Onshore Federal Leases in the United States 3

2.1. Federal Oil and Gas Lease Administration on Onshore Lands 32.2. Lands Available for Leasing 52.3. Lessees Qualification 62.4. Types of Oil and Gas Leases and the Leasing Process 72.5. Lease Terms and Conditions 92.6. Assignment and other Transfers 122.7. Termination of the Lease 132.8. Commencement of Drilling Operations 14

3. Onshore Federal Leases in Nigeria 153.1. Federal Oil and Gas Lease administration 153.2. Lands Available for Leasing 163.3. Lessees Qualification and Limitations 163.4. Types of Oil and Gas Leases and the Leasing Process 173.5. Lease Terms and Conditions 193.6. Assignment and other Transfers 223.7. Termination of Lease 233.8. Commencement of Drilling 25

4.Analysis andConclusion 25


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1. INTRODUCTION.

Oil and gas resources are viable sources of income for the Governments of United

States and Nigeria and also a means of meeting the energy needs of both countries.

Both countries are rich in hydrocarbon resources and have enacted laws and

initiated policies for the exploitation of these resources. In 2007, the U.S. federal

government generated over $2.6 billion in onshore oil and gas royalties,1 while the

Nigerian government in 2010 realized about $59 billion on oil and gas revenue.2

According to the U.S. Department of Interior, "roughly 76% of the onshore lands

offered for sale between October1, 2009, and September 30, 2011, were bided on

for oil and gas activities.3 The BLM held 31 onshore lease sales in 2012 and

realized $233 million,4 and it is currently implementing oil and gas leasing reforms

to ensure that leases are granted in suitable locations, in order to avoid unnecessary

litigation.5

The oil and gas lease is the basic document in the development of oil and gas

resources. It is considered to be a conveyance and a contract because it is the

instrument used by the mineral owner to convey a property right to a lessee to

explore and produce oil and gas, and it also contains certain rights and obligations.6

1

American Petroleum Institute, Oil and Natural Gas Development on Public Lands are an Important RevenueSource for Government, retrieved atwww.api.orgon 03/25/13.2Bloomberg, Nigerian OilRevenue Rose 46% to $59 billion in 2010 over improved Security. Retrieved atwww.bloomberg.comon 03/25/13.3 U.S. Department of the Interior, Report to the President on Oil and Gas Lease Utilization, Onshore andOffshore, 12 (May 2012). Retrieved atwww.doi.gov/news/pressreleases/upload/final-report.pdfon03/25/13.4 Darren Barbee, Federal Oil and Gas Leases Command Premiums in 2012, But Sales Down, Oil and GasInvestor News, (Dec. 27, 2012) Retrieved atwww.oilandgasinvestor.comon 5/2/2013.5 See n. 4 at 15.6 John S. Lowe, et el. See n. 3 at 307.
http://www.api.org/http://www.api.org/http://www.api.org/http://www.bloomberg.com/http://www.bloomberg.com/http://www.doi.gov/news/pressreleases/upload/final-report.pdfhttp://www.doi.gov/news/pressreleases/upload/final-report.pdfhttp://www.doi.gov/news/pressreleases/upload/final-report.pdfhttp://www.oilandgasinvestor.com/http://www.oilandgasinvestor.com/http://www.oilandgasinvestor.com/http://www.oilandgasinvestor.com/http://www.doi.gov/news/pressreleases/upload/final-report.pdfhttp://www.bloomberg.com/http://www.api.org/


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According to Coggins, even though the federal oil and gas leasing regime is

fashioned after private leasing transactions, the government as the oil and gas lessor

exercises its sovereign powers by regulating most of the lease terms through

legislation and regulations.7

Access to federal lands is one of the issues affecting onshore oil and gas

development due to the restrictions and complex sets of requirement imposed by

federal statutes and regulations in both U.S and Nigeria. It is in view of these

complexities that this paper tends to make a critical analysis of the laws and

regulations promulgated to govern the leasing of federal onshore lands for oil and

gas development and the institutions responsible for leasing those lands in United

States and Nigeria. The paper will also examine the procedures for obtaining a lease,

the terms and conditions of the lease and attempt to compare the leases of both

countries. The paper will provide an analysis of the practice and procedure for the

leasing of onshore federal lands in the United States and Nigeria.

2. ONSHORE FEDERAL LEASES IN THE UNITED STATES.2.1Federal Oil and Gas Lease Administration on Onshore Lands.

The Mineral Leasing Act of 19208, as amended, and the Mineral Leasing Act for

Acquired Lands of 1947,9 as amended, gives the Bureau of Land Management (BLM),

within the Department of Interior (DOI), responsibility for leasing onshore lands,10

which includes 258 million surface acres managed by the BLM, 57 million surface

7 George C. Coggins, Public Natural Resources Law 23.01[1] (1992).8 30 U.S.C. 181 - 2639 U.S.C. 351 359.10See 43 CFR 3100 et seq., for regulations on federal onshore leasing


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acres where the federal government has retained mineral rights but the surface is

non-federal, mostly privately owned, called split estate or private surface,11 as

well as other 385 million acres acquired lands whose surface is managed by other

federal agencies.12 However the BLM can only lease acquired lands if the surface

management agency consents to the leasing, but it is common for the surface

management agency to impose certain stipulations to limit the length of oil and gas

leases and address potential conflicts over the use of the surface by the oil and gas

lessee.13 For instance, the oil and gas resources found on U.S. Forest Service lands

are leased under the Land and Resource Management Plans (LRMPs) developed by

the Forest Service.

It is worth mentioning that the BLM is not the only federal agency with authority for

onshore oil and gas leasing. The U.S. Postal Service (USPS) has authority to lease

postal service lands for oil and gas development, and the General Service

Administration (GSA) has authority to lease lands that have been acquired by

federal agencies and later declared to be excess by the acquiring agencies needs.

However this paper is focused on lands leased by the BLM in the United States.

The BLM carries out its responsibility through its headquarters office in

Washington, D.C., 12 state offices, and several subsidiary field offices.14 The BLM

headquarters develops regulations15 and guidance for the leasing of onshore lands,

and its state offices are responsible for administering the leasing of federal oil and

gas resources.

11Where the surface rights are owned by parties, while the federal government owns the mineral rights.12 United States government Accountability Office, Letter to Chairman House Committee on NaturalResources, 1 (July 30, 2010) 1. GOA-10-670 Onshore oil and Gas.13Gregory J. Nibert, Administration of Federal Oil and Gas Leases in New Mexico," 4.14 Id. at 2.15The BLMs regulations are found in 43 C.F.R. 3000 3100.


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There are five phases in the development of onshore federal oil and gas resources:

Land Use Planning; Parcel Nomination and Lease Sale; Well Permitting and

Development; Operations and Production and; Plugging and Reclamation. The BLM

regulates and supervises all the five phases.

2.2Lands Available for Leasing.Before leasing any land, the BLM develops a Resource Management Plan (RMP),

which will indicate areas that are open to oil and gas leasing, and areas that are

closed to such leasing. The RMP analyzes the impact of reasonable foreseeable

development, and states any stipulations or restrictions required to provide extra

protection for sensitive resources in an area designated to be open for leasing.

Parcels of land situated in areas identified in an RMP as open for leasing may be

nominated for leasing by the general public. However, the BLM does not

automatically place all nominated parcels for leasing. The Bureau ensures that

nominated parcels are actually available, and that stipulations from the RMP are

attached before the land is placed for leasing.

Each BLM office is required by the MLA to at least hold a quarterly lease sale, if land

is available.

2.3Lessee Qualifications and Limitations.The MLA16 authorizes four categories of interest holders to obtain and hold federal

oil and gas lease: Adult citizens of the United States, association of United States

citizens, corporations incorporated under the laws of the United States or of any

16 30 U.S.C. 181.


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state, and municipalities.17 Such associations include any form of unincorporated

partnership, trusts, joint ventures, tenantincommon, joint tenants, and husband

and wife.18 But sole proprietorships are not qualified.

However, there are certain restrictions on the qualification of the following to own

an interest in federal oil and gas leases:

Aliens: Aliens may hold interests in leases only through stock ownership in a United

States corporations holding a lease, so long as the aliens country give similar

privilege to United States citizens.19 But aliens may not hold a lease interest through

units in a publicly traded limited liability partnership.

Minors: Minors as determined by the state law where the land is situated, may not

directly acquire leases, but the BLM is authorized to issue leases to the legal

guardian or trustees on behalf of a minor. Such legal guardian or trustee must meet

the qualification of a lessee.20

Other restrictions: Members of the United States Congress and employees of the

Department of Interior are not qualified to own an interest in federal oil and gas

leases, although the regulations do not expressly prohibit indirect ownership

through shares in a corporation. Also heirs and devisee must be qualified persons

under the Act to be able to own an interest. Therefore if a successor is not qualified

under the Act, he or she must divest the interest within two years of becoming

entitled or loose the interest. Furthermore, trespassers on lease; a person found

1743 CFR 3102.118 Gregory J. Nibert, n 3 supra, at 5.1943 C.F.R. 3102.220 43 C.F.R. 3102.3


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guilty of planning to circumvent or defeat the purpose of the MLA, and a person

found to have violated a surface disturbance requirement, may be denied leases.

2.4Types of Oil and Gas Leases and the Leasing Process.

The BLM issues two types of leases for oil and gas exploration and development on

onshore lands owned or controlled by the Federal Government: competitive and

non- competitive leases.

Competitive Leases: Under the Federal Onshore Oil and Gas Leasing Reform Act

1987,21 public lands that are determined by the BLM to be available for oil and gas

leasing must be offered first through competitive bidding. Competitive leases are

issued to the public at oral auction, and the bidding shall be at least in the amount

specified by the Secretary as the minimum acceptable bid for the tract.22 Since the

passage of the Energy Policy Act of 1992, competitive leases are issued for a 10-

year period, and continue for as long thereafter as oil or gas is produced in paying

quantities. The maximum size of a competitive lease is 2,560 acres in the lower 48

states and 5,760 acres in Alaska.

Non-Competitive Leases: Non-competitive oil and gas leases may be issued only

after the land has been offered for competitive bidding and no bid was received for

the minimum acceptable bid.23 Such lands are available for leasing under a non-

competitive bidding process for a period of two years following the lease sale on a

first qualified applicant basis. Non-competitive leases are to be issued for a primary

21 U.S.C. 266 (b)(1)(A).22 Id. 266(b)(B)23 Id. 266(c)(1)


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term of ten years, and continue for as long thereafter as oil or gas is produced in

paying quantities. The maximum size of a non-competitive lease in all states is

10,240 acres.

Competitive Leasing Process: The BLM state offices are required to conduct oral

lease auction, at least once every quarter, if parcels are available. First, the BLM

state office must publish a Notice of Competitive Lease Sale at least 90 days before

the date of the auction. The Notice will specify the lease parcels to be offered at the

auction, the lease stipulations applicable to each lease parcel, the place and date of

the auction, and usually bidding and payment requirements.

BLM conducts lease sale by oral bidding on each parcel, and bidders are required to

attend either in person or through a representative. The BLM will award the lease to

the highest bid, at or above the minimum acceptable price, as the successful bid. The

successful bidder must on the date of the auction submit a properly executed lease

bid form which constitutes a legally binding bid offer, and pay an administrative fee

of $75.00, the first years rental at the rate of $1.50 per acre or fraction thereof, and

the minimum bonus bid of not less than $2.00 per acre. The balance of the bonus bid

must be paid within ten working days of the auction, and failure to pay the balance

will lead to rejection of the offer and forfeiture of the entire deposit money.

Protests: After the publication of the Notice of Competitive Lease by the BLM state

office, anyone can present challenges through protests, appeals and litigations.

Through protests, the challengers essentially request the BLM to reconsider its

proposed decision to offer a parcel or parcels of land for oil and gas development.

And if the protest is denied, the protester may appeal to the Interior Board of Land


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Appeals (IBLA),24 a body of administrative law judges within the Department of

Interior, to review the decision of the BLM. An aggrieved party with the decision of

the IBLA may seek review from the United States District Court.

2.5Lease Terms and Conditions.

The lessee of an onshore federal oil and gas lease obtains the right to explore and

drill for, extract, remove, and dispose of deposits of oil and gas, other than helium

found on the lease. The terms and conditions of the lease are governed by the MLA,

which provides for the annual rental, royalties, and requirement of diligent

development and continued operation. The lessee is required to conduct all

operations in a manner that ensures the proper handling, measurement, disposition,

and security of leasehold production, and protect other natural resources and

environmental quality, as well as life and property.25

Terms and Conditions contained in the Lease:

Bonding: Exploring, drilling, extracting, removing and disposing activities are not

supposed to cause disturbance to the surface or to other resources than is

necessary. The lessee, or appointed operator of the lease, before commencing any

surface disturbance activity on the leased premises, is required to furnish a bond in

the amount of at least $10,000.00 to ensure compliance with all the lease terms,

including environmental protection.26The operator can use the bond of another

24 The Interior Board of Land Appeals (IBLA) is part of the Interiors Office of Hearings and Appeals. 25 30 U.S.C. 3162.1(a).2643 C.F.R. 3104.1 et seq.


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party such as the lessee, with the consent of the surety and the bondholder.27 Each

time there is a new operator, the BLM must be notified of that fact and the

particulars of the bond the operator will use to cover its operations. Acceptable

instruments of bonding are surety bonds, personal bond accompanied by negotiable

treasury securities, cashiers check, certified check, certificate of deposit, or

irrevocable letter of credit. The BLM may require an increase in the bond amount

whenever condition requires.

Lease Annual Rentals: A lessee is required to pay annual rentals to effectuate the

lease in the primary term, if no well capable of producing oil or gas in commercial

quantity is drilled in the leased premises. Annual rental rates for both competitive

and non-competitive leases are $1.50 per acre, or a fraction thereof in the first 5

years and $2.00 per acre each year thereafter.28 The lessee is expected to file the

first years rental with the BLM state office where the lease was issued. But

subsequently, the lessee is required to make the paymentto the DOIs Office of

Natural Resources Revenue (ONRR) on or before the lease anniversary. Failure to

pay annual rentals at the right time in the proper amount will automatically

terminate the lease.29 However, upon sufficient showing by the lessee, the rentals

may be waived, reduced, or suspended by the Secretary of the Interior.

Royalties: Lessees are required to pay 12.5% of total production as royalties to the

ONRR for all onshore federal leases managed by the BLM.30 However there are a few

exceptions. For example, leases issued on or before December 22, 1987, which are

27 U.S. Department of Interior Bureau of Land Management, Question and Answers about Leasing, 3. Retrievedfromhttp://www.blm.gov/wo/st/en/prog/energy/oil_and_gas.htmlon 1/13/201328 U.S.C. 30 266(d).29See 43 C.F.R. 3103.230 Id 266(b)(2)(A)(ii).
http://www.blm.gov/wo/st/en/prog/energy/oil_and_gas.htmlhttp://www.blm.gov/wo/st/en/prog/energy/oil_and_gas.htmlhttp://www.blm.gov/wo/st/en/prog/energy/oil_and_gas.htmlhttp://www.blm.gov/wo/st/en/prog/energy/oil_and_gas.html


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subject to the rates contained in the regulations at the time of issuance, sliding scale

on older leases, reduced royalty rates on certain oil and gas leases with declining

production are not subject to the 12.5% royalty.31

Where there is a shut-in well capable of producing in quantities on the lease, the

lessee is required to pay a minimum royalty at the end of each lease year. The

minimum rentals payable on competitive and non-competitive leases issued after

December 22, 1987, is an amount not less than the amount of rental which

otherwise will be required for that lease year.

The Secretary of the Interior, upon a determination that a reduction or suspension

of royalty is necessary to promote development, or that the leases can not be

successfully operated under their terms, is authorized to waive, suspend, or reduce

the rental or minimum royalty or reduce the royalty on an entire leasehold or any

portion thereof.32

Lessees are required to pay compensatory royalty when lands in any onshore

federal leases are being drained by wells, either on another federal lease issued at a

lower rate, or on adjoining non-federal lease, where the lessee fails to drill a

protection well. A Lessee is also liable to pay royalties on oil and gas lost or wasted

from the lease premises when such loss or waste is attributable to the negligence of

the operator, or failure of operator to comply with any rule, regulation, order or

citation issued by the BLM.

2.6Assignments and other Transfers.

31See 43 C.F.R. 3103.332 43 C.F.R. 3103.4 1.


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The MLA authorizes assignment and subleases of an onshore federal lease. The

regulations recognize assignment of record title or transfer of operating rights

interest. The lessee must file with the BLM state office any assignment or other

transfer of an interest in the lease, within 90 days from the date of the execution by

the transferor. The lessee remains responsible for the lease, and the right of the

transferee will not be recognized until the transfer has been approved by the BLM.

But once it is approved, the transferee becomes responsible.

There is a distinction between an assignment of record title and transfer of

operating rights. Upon approval by the BLM of assignment of record title, the

assignors obligation immediately terminates with respect to the assignors interest

in the lease, and the assignee is treated as the original lessee, whereas upon

approval of transfer of operating rights, the owner of the underlying record title to

the lease, still retains title to the lease and remains obligated for all lease

obligations.33

Assignment of record title (lease title) or transfer of operating rights must be filed in

triplicate on the approved BLM form, accompanied with a non-refundable $75.00

filing fee for each lease, three original copies of the duly executed transfer

instrument, and all required exhibits. The BLM will not approve any assignment of a

record title of a separate zone, or deposit, or of part of a legal subdivision, and the

BLM will also not approve any assignment of record title of less than 640 acres

outside of Alaska or less than 2,560 acres within Alaska. However, the BLM may

approve an assignment of record title for a lesser acreage, if the assignment

3343 C.F.R. 3106


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constitute the entire leasehold or is demonstrated to increase the chances of oil and

gas development.

2.7Termination of Lease.An onshore federal lease will terminate at the end of the primary term of ten years,

unless there is a well capable of producing in paying quantities on the lease, or a

producible well attributable to it under approved communitization or unitization

agreements, or there is continuing diligent drilling operations on or for the benefit

of the lease.34

A federal lease will also terminate for failure of the lessee to make timely and proper

annual rental payments during the primary term, failure to pay minimum rentals

when a well capable of producing in paying quantities is drilled in the well, cessation

of production, cancellation due to lessees violation of lease conditions, or by

relinquishment. Terminations take immediate effect without any further action, but

cancellation requires an administrative or judicial pronouncement to take effect.

A lease, in its extended term will terminate if there is a complete cessation of

production in the lease. Once such well ceases to produce, the lessee has 60 days

from the receipt of notice from the BLM to start reworking or additional drilling

operations to place the well into production. But if no reworking or drilling

operations are timely and diligently commenced within the 60 days, and pursued

with reasonable diligence in re-establishing production, the lease terminates

automatically.

34 30 U.S.C. 266(h)(i); see also 43 C.F.R. 3108


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The lease will terminate if the lessee files a written relinquishment with the BLM

state office having jurisdiction over the land and such notice takes immediate effect

on the date it is filed. However upon relinquishment, the lessee must plug any

abandoned well, and comply with all reclamation obligation.

2.8Commencement of Drilling Operations.The lessee or an operator hired by the lessee must file an application for permit to

drill (APD) on form 3160-3, and a surface use plan of operations with the BLM state

office 30 days prior to the anticipated commencement of operations with all the

required attachments.35 The BLM will analyze operations that will have significant

impact with an environmental impact statement (EIS), while operations that do not

have significant impact are analyzed with an environmental assessment (EA). The

BLM is required to open the APD for comments from the public for a period of 30

days, and also consult with the appropriate surface management agency and other

interested parties. The BLM will not approve any APD without preparing an

environmental record of review or environmental assessment as appropriate, which

will be used to determine whether an EIS is required, and also the terms and

conditions to be placed on the approval.

The BLM is required to approve, not later than five working days after the thirty-day

notice, the APD as submitted or with modification, or return the application and

advise the applicant for the reason for disapproval. Whether the APD is approved,

approved with modification, denied, or defers action, an aggrieved party is entitled

to request an administrative review within twenty days before the appropriate BLM

35 43 C.F.R. 3162.3 1(d).


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State Director, and any aggrieved party can appeal the decision of the State Director

to the IBLA,36 and the decision of the IBLA is subject to review by a United States

District Court. A lessee or any hired operator cannot commence drilling operations

without an APD approval from the BLM.

1. ONSHORE FEDERAL LEASES IN NIGERIA3.1Federal Oil and Gas Lease Administration on Onshore Lands.

The Constitution of the Federal Republic of Nigeria states that, the entire

property in, and control of all minerals, mineral oils and natural gas in, under, or

upon any land in Nigeria or in, under or upon the territorial waters and the

Exclusive Economic Zone of Nigeria vests in the Government of the Federation

and shall be managed in such a manner as may be prescribed by the National

Assembly.37 The Constitution confers exclusive jurisdiction on the National

Assembly on matters relating to oil, gas, and other minerals.

This constitutional provision is an adoption of the provisions of the Petroleum Act of

1969,38 which, is the principal legislation regulating onshore oil and gas activities in

Nigeria. The Act vests the entire ownership and control of all petroleum resources

in, under or upon any land in Nigeria, in the Federal Government of Nigeria.39

The legal implication is that since ownership and title to the oil and gas is vested in

the Federal Government, it is only the Federal Government that can issue an oil and

gas lease in any land within the territory of Nigeria.

36 See note 21 supra.37 44(3).38 Cap P10, LFN, 200439 1(1)


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The Petroleum Act and the regulations made thereunder govern the issuance of oil

and gas leases in Nigeria and the Act the powers to issue a lease on the Minister of

Petroleum Resources.

3.2 Lands Available for Leasing.

The oil and gas in place in any land comprised in the territory of Nigeria belongs to

the Federal Government.40 Accordingly, the Petroleum Act empowers the Ministry of

Petroleum Resources to map out areas for oil and gas development. The Petroleum

Act states that the ownership section applies to all land (including land covered by

water), which is in Nigeria,41 and that a lease or licence may be granted in any

specified area, where premium has not been placed by the Minister, and where

there is no subsisting or already approved leased or licence.

3.3Lessee Qualifications and Limitations.The Petroleum Act provides that only companies incorporated under the laws of

Nigeria can be granted oil and gas leases or licences.42 Therefore, a person must first

incorporate a company with the Corporate Affairs Commission before applying for a

lease or licence. The 1969 Act provided for the issuance of licence or lease to a

citizen of Nigeria or company incorporated in Nigeria. But the subsequent

amendments have deleted the requirement of issuance of lease or licence to a

citizen of Nigeria.

40 Id.41 Id. 1(2).42 Id. 2(2).


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3.4Types of Oil and Gas Leases and the Leasing Process.The Petroleum Act provides for three types of oil and gas leases: Oil exploration

licences (OEL), oil prospecting licences (OPL), and oil mining leases (OML).43 The

Minister of Petroleum Resources grants an OEL to a licensee, to undertake the

exploration of petroleum in the area covered by the license44. The grant of an OEL

does not confer exclusive right on the licensee over the license area, thus multiple

OELs can be granted over a particular license area.45 However the grant of an OEL

does not confer any right to the grant of oil prospecting license or oil mining

lease.46All OELs are granted, for one year and expires on December 31st, following

the date it was granted subject to renewal for another one year, if the licensee had

performed all obligations imposed under the Act, and the Minister is satisfied with

reports submitted thereto. 47 An application for renewal must be submitted three

months before the expiration of the license. But OEL is rarely granted in the present

dispensation because oil companies are not interested in investing in exploration

when they are not sure of deriving any benefit from it.

An oil prospecting license is granted by the Minister to a licensee for the exclusive

right to explore, and prospect for petroleum within the area specified in the

license.48 The holder of an OPL has the right to produce and dispose of the

petroleum produced during prospecting operations, subject to any obligations

imposed upon the licensee by the Act, such as the payment of taxes or royalties.49

43 Id. 2(1).44 Id. 1 of the First Schedule.45 Id. 2.46 Id. 4.47 Id. 3.48 Id. 5.49 Id 7.


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The Minister will determine the duration of an OPL, but it shall not exceed five

years, which include any period of renewal.50

The Minister is empowered to grant oil mining lease only to the holder of an oil

prospecting license, who has satisfied all the conditions, imposed by the Act and has

discovered oil in commercial quantities.51 Oil is in commercial quantities if the

licensee has drilled wells that are capable of producing at least 10,000 barrels per

day of crude oil from the licensed area.52 The grant of an OML confers on the lessee

the exclusive right to conduct exploration and prospecting operations, and to win,

get, carry away, transport, export, or otherwise treat petroleum product discovered

in or under the leased area.53 The term of an OML shall not exceed twenty years but

may be renewed in accordance with the Petroleum Act.54 The lessee of an OML may

apply in writing to the minister for a renewal of the lease thirteen months to the

expiration of the lease, if all rents, royalties and other obligation have been met.55

Every application for an OEL, OPL, or OML shall be made in writing through the

prescribed form A to the Minister,56 accompanied by a processing fee of

$10,000.00, application fee of $10,000.00 for OPL, $500,000.00 for OML57, ten copies

of a map of the area as specified by the Director of Petroleum Resources, a survey

plan of the area, evidence of the financial status and technical expertise of the

applicant, details of the plan of work which the applicant is prepared to undertake,

details of annual expenditure which the applicant is willing to make, the date the

50 Id. 6.51 Id. 8.52 Id. 9.53 Id. 1154 Id. 10.55 Id. 13(1).56 Reg.1(1) of the Petroleum drilling and Production Regulation, L.N. 69 of 1969.57 Id. Reg. 59(a) (c).


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applicant is prepared to commence operations, details of specific schemes for the

recruitment and training of Nigerians, evidence of applicants ability to market

petroleum product, annual report on the applicants exploratory and production

activities for the past three years, and any other information or evidence requested

by the Minister.58

The maximum area for an OML is 500 square miles, while that of OPL is 1,000

square miles and OEL 5,000 square miles.59

Upon submission of the applications, the Minister will consider the applications and

decide to either grant or refuse the application. If the Minister grants the

application, the Minister will sign and issue the OEL in Form B, the OPL in Form C,

and the OML in Form D,60 and publish the license or lease with the name of the

owner in the Federal Gazette.61

The licensee or lessee in accordance with law of the state where the land is situated

will register the lease or license and supply a copy of the registration to the Director

of Petroleum Resources, if such a lease or license is registrable in the state.62

3.5Lease Terms and Conditions.The Petroleum Act incorporates certain terms and conditions into the oil and gas

licenses and leases in Nigeria. The Act also empowers the Minister to make

regulations providing generally for matters relating to licenses and leases granted

58 Id. Reg. 1(2).59 Id. Reg. 2.60 Id. Regs. 10 & 14.61 Id. Reg. 5.62 Id. Reg. 8


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under the Act.63 The Act also imposes special terms and conditions that are

consistent with the Act in the public interest.64 Consequently the Minister

promulgated the Petroleum (Drilling and Production) Regulation, in 1969 (as

amended). Thus the terms and condition of licenses and leases are as provided in

the Act and the Regulations made thereunder.

Upon the grant of an OPL or OML, the licensee or lessee shall have a general right to

enter and remain on the land and do such things that are authorized by the licence

or lease, and shall comply with any law regulations relating to town planning,

country planning, and construction or demolition of buildings.65

A licensee or lessee is obligated to pay fair and adequate compensation to the

surface owner for damages.66 And the licensee and lessee are under an obligation to

indemnify the Federal Government and its agencies and staff against all actions,

demands or claims that might be brought by third parties in relation to anything

done in pursuance of the Act.67

Lessees of an OML are required within ten years of the grant of the lease to ensure

that 75% of its total employees in managerial, professional, and supervisor in

connection with the lease are Nigerians. The number of Nigerian citizens employed

in such grades shall not be less than 60% of the total workforce, and all skilled,

semi-skilled and unskilled employees should be Nigerian citizens.68 Within one year

63 Petroleum Act 9.64 Id. 35.65 Id. 36.66 Id. 37.67 Id. 3968 Id. 38.


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of the grant, a licencee of an OPL is obligated to forward a detailed plan for the

recruitment and training of Nigerians to the Minister for approval.69

Licensees and lessees are required to comply with all existing safety and all further

instructions that might be given in writing by the Director of Petroleum Resources.70

Royalties: The licensee or lessee is required to pay to the minister on a quarterly

basis a royalty at a rate per centum of the chargeable value (calculated in

accordance with paragraph (3) of this regulation) of crude oil and casing head

petroleum spirit, produced from the relevant area in the relevant period71, which

is 20% for onshore areas. While royalties for a rate per centum of the price

received by a licensee or lessee in the relevant area, and sold but does not include

any flare or waste gas appropriated by the Government of the Federation for its own

use is 7% for onshore areas. The licensee or lessee is required to pay the proper

royalty promptly.

Rental: The licensee of an OPL is required to pay annual rental of $10.00 per square

miles, while a lessee of an OML is required to pay $20.00 per square kilometer of a

producing lease for the first ten years, and $15.00 thereafter until expiration of the

lease.72 A licensee of an OEL is required to pay an annual rent of N500.00 (about

$3.00).73 Licensees and lessees are obligated to pay the proper amount of their rents

promptly.

69 See n. 31 supra. Reg. 2670 Id. Reg. 45.71 Id. Reg. 61(1)(a).72 Id. Reg. 60(2).73 Id. Reg. 60(1).


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Failure to pay rentals and royalties are grounds for revocation of the licenses or

leases by the Minister.74

The Act provides that all dispute arising from the lease or licence, including dispute

with regards to fees, rental or royalties shall be resolved by arbitration unless

where the issue is expressly excluded from arbitration.75

Joint Venture Agreements and Production Sharing Contracts: The Petroleum Act

empowers the Minister, in the public interest to grant an OPL or OML on condition

of participation by the Federal Government in the venture on mutually agreed

terms.76 Consequently the majority of licenses and leases are operated under join

venture agreements (JVAs), or production sharing contracts (PSCs) between the

Federal Government and the licensee or lessee. The Nigerian National Petroleum

Corporation (NNPC) is responsible for managing the Federal Governments interests

in the JVCs and PSCs.77 Currently the NNPC has joint venture agreements with seven

oil companies, and production sharing contracts with seventeen oil companies in

Nigeria in onshore and offshore areas.

3.6Assignment and Transfers.The Petroleum Act provides that the lessee or licensee can only transfer its interest

in any lease or licence with the prior consent of the Minister.78 A lessee or licensee

who wishes to transfer its interest, power, or right, shall file an application of an

assignment and pay the prescribed fee and the Minister may give consent to the

74 Petroleum Act, 25(C) of First Schedule.75 Id. 41., and Petroleum Act 42.76 Id. 35(a).77 5(1)(g) & 6(1)(c) of the NNPC Act.78 Id. 14.


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assignment on the payment of such fees, or premium, or both, and upon such term

as the Minister will determine.79 Consent may not be given, unless the Minister is

satisfied that the proposed assignment is of good reputation and that the assignee

has sufficient technical knowledge and financial resources to undertake operations

under the lease or license.80

Farm-out: The lessee of an OML with the consent and upon such terms and

condition as the President of Nigeria may approve, may farm-out any marginal field,

which lies within leased area.81 The President can also approve the farm-out of a

marginal field if such field has been left unattended for a period of ten years from

the date of first discovery of the field.82 But the President shall not give consent to

farm-out, unless the President is satisfied that it is in the public interest and that

parties are acceptable to the Federal Government.83 Farm-out is an agreement

between the lessee of an OML, and a third party which allows the third party to

explore, prospect, work or carry away any petroleum product in any specific area

during the pendency of the lease.84

3.7Termination of Lease.The licensee of an OPL, or lessee of an OML can terminate the license, or lease, by

giving three months notice in writing to the Minister.85 But the licensee or lessee is

79 Id. 15.80 Id. 16.81 Id. 17(1).82 Id. 17(2).83 Id. 17(3).84 Id. 17(4).85 Id. 18(1).


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bound to perform all obligation and liability that accrued before the effective date of

the termination.86

A licensee or lessee can also surrender any part particular part of the license or

lease by giving a three months notice in writing to the Minister,87 and in such

circumstance, the Minister will approve the area and size to be retained and

relinquished by the licensee or lessee.88

The Minister can revoke any OPL or OML, if licensee or lessee becomes under the

control of a citizen of, or a company incorporated in, any country other than the

licensees or lessees country of origin and a country whose laws do not give

reciprocal rights to Nigerian citizens or a company incorporated in Nigeria.89 And

the Minister can also revoke any OPL or OML, if in the Minister opinion, the licensee

or lessee is not conducting operations continuously, in a vigorous and business-like

manner, and in accordance with good oil field practices, or has failed to comply with

any provisions of the Petroleum Act or any regulation given thereunder, failed to

pay due rentals or royalties, or failed to submit such report that the Minister may

lawfully require.90 Before making any revocation, the minister must follow due

process by adhering to the procedures in paragraphs 26 to 30 of the first schedule

to the Act.91

3.8Commencement of Drilling Operations.

86 Id. 18(2).87 Id. 19(1).88 Id. 2089 Id. 2490 Id. 25(1).91 Id. 25(2).


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The licensee of an OPL is obligated to begin drilling operations with modern oil

well drilling outfit within eighteen months of the grant of the license, and the

licensee must drill an average of one well each year, until three wells are drilled

to satisfy the minimum drilling obligations to convert to OML.92 Before

commencing drilling operations, the licensee or lessee shall inform the Director of

Petroleum Resources and the Ports Authority (where appropriate) in writing of

the proposed site with necessary information, and the Director if satisfied will

approve in writing with necessary observations and comments, upon the

payment of fifty thousand naira ($320.00).93 The Director may withhold

permission and convey the reasons for the refusal to the licensee or lessee, if he is

not satisfied with the program of drilling.94

4 ANALYSIS AND CONCLUSIONS.There are remarkable differences in the nature, form, estate, rights and obligations

in onshore federal leases between the United States and Nigeria. In the United

States, they are known as oil and gas leases, while in Nigeria they are called oil

prospecting licences and oil mining leases.

In the United States, the lease is granted for a primary term of ten years and so long

thereafter as oil or gas is produced in paying quantity, thus it can continue forever.

But in Nigeria, an OML or OPL is granted for a fixed term subject to renewal for

another fixed term, thus it is a determinable interest.

92 Reg. 32 of the Petroleum Drilling Regulations supra.93 Id. Reg. 33(2) &(3).94 Id. Reg. 33(4).


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One major difference between the U.S. and Nigeria is that, in the US the government

does not own or participate in the oil and gas lease but in Nigeria, the government

through its national oil company NNPC, owns majority share and participates in the

development of the lease. The U.S. only grants lease on lands owned by the Federal

Government or for lands whose minerals where reserved by the Government. By

contrast, in Nigeria, the Government grants leases on all lands within the territory of

Nigeria. The U.S. issues leases to individuals and companies, while in Nigeria leases

are issued to only companies.

It is clear from the analysis of the paper that leasing of oil and gas onshore lands in

the United States is similar in some areas but quite different in many other areas

from that of Nigeria.

The paper has been able to show that leasing of minerals that are privately owned

are quite different from the leasing of federal government minerals in the United

States because, while a private mineral is mostly governed by the intent of the

parties as expressed in the lease, the federal mineral lease is governed by federal

laws and agency rules, and the lessee does not have an equal bargaining power to

negotiate the terms of the lease.

It is believed that the oil and gas lawyer will immensely benefit from the analysis in

this paper, as the issues addressed have been the subject of several litigations in the

United States and Nigeria.

leasing of onshore lands for oil and gas production: a comparative study of federal onshore oil and...

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