Bondholders chase funds meant to ensure environmental clean-up

The ongoing liquidation of former African oil and gas company Afren Plc has taken a new turn as the dispute between the UK-based administrators of Afren Plc and the company’s creditors and former partners continues to simmer.

The collapse of Afren, which declared bankruptcy in July 2014 with over US$1.6 billion of debt, has left partners, contractors, shareholders and bondholders scrabbling for any value they can get. The administrators of Afren in the UK have been particularly active and aggressive as they seek to recover value for their ‘secured creditors’. These creditors are the bondholders who funded Afren’s capital investment for many years, but today are made up of a group of hedge funds who bought the debt cheap as Afren was collapsing, in the hope that they could make a return from the company’s demise.

As it becomes clear that the assets available to earn this return are minimal, and creditors have become more desperate, they have turned their attention to assets that should, under normal circumstances, be protected.

The best example is the current dispute over the Ebok field abandonment account. Under Nigerian environment law, any oil and gas operator in Nigeria is required to secure funds for the eventual abandonment and remediation of the field after oil and gas production operations have ceased. As part of the procedure for the approval of oil and gas project establishment in Nigeria, the regulator (DPR) requires that a percentage of funds from production be allocated to a specific, ring-fenced account that will be used to fund the safe, clean and sustainable abandonment of the project once the field reaches the end of its life. In the case of the IOCs, the parent company guarantees of these companies are considered sufficient. However, in the case of sole risk and marginal field operators the DPR requires that there is provision made throughout the period of commercial production. Whilst due to prolific nature of the Nigerian oil and gas fields the operators and regulator have not yet had to activate these funds as almost all oil fields remain either in production, or with remaining value, importance for the future is clear.

Unfortunately, in their desire to recover value, Afren’s international creditors are now targeting these funds, which have been held in a project account in BNP Paribas in Paris, and total approximately US$23m.

The Afren administrators filed a claim over these funds in 2016, Oriental opposed the claim on the grounds that these funds were no longer Afren funds but funds beneficially owned and owed to the Nigerian people for the remediation of the field at the end of commercial production. In addition, Oriental argued successfully that the funds were pursuant to Nigerian law and could not be dissipated as part of the wind-up of Afren, also relying on the Joint Operating Agreement and other contractual agreements showing that they had always notified their partner and BNP bank in funding Afren, of the requirement to sequester those funds for the abandonment on the commencement of commercial production.

The legal basis for this are the Petroleum Drilling and Production Regulations (PDPR) 36 (2) as well as the guidelines for the farm-out and operations of marginal fields in Nigeria which state that the “farmee shall set aside an agreed percentage of its budget (in an escrow account, trust fund or similar security), or put in place a performance bond to provide security for eventual abandonment”.

The Paris court has ruled that the funds must be placed in an escrow account until the dispute can be resolved. The legal process in Paris is ongoing.

The administrators were able to pursue this course of action because Afren, in breach of their obligations to the NNPC/ExxonMOBIL JV, the operator Oriental and the regulator sought to exercise their UK legal status in voluntary administration to dissipate the funds.

Funds that are designated for environmental protection, and asset closure, must be better protected under Nigerian law and oil and gas practice or Nigeria’s future ability to sustainably manage decommissioning of oil fields when they are exhausted faces a fundamental threat. The current expenditure running into billions of dollars being spent to decommission the giant structures in the North Sea at the end of the life of the North Sea fields showcases the model scenario for any oil and gas producing state.

While this is a problem that will ultimately manifest in the future, the precedents that are set in this process are very much about today. The case in French court will set the basis for how international courts interpret the ability of international investors to access these funds, not just in this case, but from assets across the Nigerian oil and gas industry. The Nigerian government and other operating companies need to pay close attention to this process, and identify how to ensure the protection of these funds in future transactions. The balance between the security needed for international investors to fund Nigerian oil and gas projects and the sovereignty of Nigeria’s laws and regulations, and sustainability of the environment, must be improved.

It is not only the funds meant for environmental clean-up that are under threat as the Afren liquidation continues apace. The administrators are also pursuing funds from the Nigerian operations of Afren, where a range of Nigerian contractors are also pursuing funds owed to them and have successfully lobbied the court to put Afren Resources Ltd, the domestic owner of Afren’s assets, into liquidation locally. This dispute between international hedge funds and local partners and contractors is clearly demonstrating the vulnerability of Nigeria’s current system.

Ralph Akpan