Host governments have long scrutinized transactions to buy or sell oil and gas assets. After all, those assets may be a critical state resource, and oil and gas operations can give rise to significant environmental risks. In African countries, however, there is a developing trend for increased governmental intervention in transactions as regulatory regimes become more sophisticated and are modernized to address environmental, and wider ESG, concerns. Nigeria is one such example. While legislative change is invariably well intentioned, the net result can be delay and uncertainty. So, how can buyers and sellers mitigate risk and keep deals on track?

In these circumstances, knowledge is power. Knowledge of current laws, regulations and guidelines, but also knowledge of how regulators have previously viewed similar transactions and the policy objectives driving their decisions.

Hunton Andrews Kurth recently advised Oando PLC on its acquisition of the Nigerian Agip Oil Company from Eni. The industry viewed that transaction as precedent-setting for how the new Nigerian regulator – the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) – will implement its mandate under the Petroleum Industry Act 2021 (the PIA).

There has already been much commentary on the PIA and the sweeping changes it introduced to the Nigerian oil and gas industry. Whilst that is not the focus of this article, it is pertinent to note that the PIA created NUPRC as a new regulator with specific responsibility for upstream operations. One of the other key changes introduced by the PIA was the replacement of the Nigerian National Petroleum Corporation, a statutory company, with a new limited company (NNPC Limited) intended to operate as a commercial entity wholly owned by the Nigerian government.

The PIA reforms to the upstream sector have since started to be implemented by regulations and guidelines issued by NUPRC. This has included the Nigerian Upstream Petroleum Host Communities Development Regulations 2022, which require a host communities development trust for the benefit of relevant host communities, and the Nigerian Upstream Petroleum Decommissioning and Abandonment Regulations 2023, which require parties to submit a decommissioning and abandonment plan to NUPRC containing a statement of annual amounts to be contributed to cover decommissioning and abandonment costs.

There are other regulations that the PIA contemplates but that have not yet come into force. For example, regulations for the establishment of an environmental remediation fund by NUPRC, which fund is to be used for the rehabilitation or management of negative environmental impacts of upstream activities, have been drafted as the Upstream Environmental Remediation Fund Regulations and are expected to be gazetted. The progress of the Nigerian Upstream Petroleum Assignment of Interests Regulations, also in draft form, is being closely monitored.

With substantial regulatory change comes uncertainty. That uncertainty can manifest in buyers or sellers seeking contractual protection in transaction documents that may either be unacceptable to their counterparty, putting a deal in jeopardy, or that seeks to address a risk that doesn’t truly exist. Targeted contractual protection, addressing circumstances arising when regulators take actions that they are entitled to take and have previously taken, is much more likely to be effective.

It has been a developing trend in Nigeria for international oil companies to divest part or all of their interests in oil and gas assets to free up capital and to focus on what they see as their ‘core’ business in other countries. This has particularly been the case in Nigeria’s onshore and shallow water blocks. These divestments have offered the opportunity for Nigerian companies to take on greater prominence, and sometimes the operator role, in mature assets.

In that context, what is NUPRC seeking to protect and how can that manifest in the sales process? Fundamentally, NUPRC will want to ensure that a divesting company has met its obligations up to the point of sale and that the acquiring company has the capacity to meet ongoing obligations, and in particular the decommissioning and abandonment liabilities, associated with the asset. At a time when obligations associated with the asset are developing quickly, such as with new requirements to make contributions to a decommissioning and abandonment fund or a host community fund, it is not always straightforward for a seller to be sure that it has taken every step that NUPRC may require of it. That means the ability to have informed and constructive dialogue with the regulator during the sales process, and for the buyer and seller to have a clear mutual objective to achieve completion, can be critical to achieving a positive conclusion.

Finally, what of NNPC Limited operating as a commercial entity? This is particularly important to consider in any sales process in which NNPC is a joint venture participant with pre-emption rights. That new “commercial entity” remit for NNPC means that most industry participants now consider it far more likely that NNPC will exercise pre-emption rights and try to take on a more prominent role in existing assets. Whilst any pre-emption process with NNPC is distinct from the regulatory approval process with NUPRC and the Minister, it would be remiss not to recognize that the same policy objectives of the Nigerian government can impact upon both. Whilst ultimately there may be little that can be done to mitigate the risk of a valid pre-emption right, being aware of the risk from the outset and being armed with knowledge of how NNPC sees the asset in question and how it fits with wider policy objectives can be very powerful.

The coming months have the potential to be a period of significant momentum and activity in the Nigerian oil and gas market. This gives rise to opportunity for both buyers and sellers, and the winners will be those who can navigate a changing regulatory environment most adeptly.