What do Joint Venture (JV) and Production Sharing Contracts (PSC) mean in the oil and gas sector?

Globally, oil and gas development and production often require high capital expenditures (CAPEX), high technological expertise and the ability to manage investment risks.

Oil companies that don't have the financial wherewithal to undertake such capital-intensive investments or projects will either bow out of the bidding process or adopt strategic approaches that could help them develop enough capabilities to overcome challenges waiting up front.

Usually, two contractual arrangements are adopted to achieve this. One is a Joint Venture (JV), while the other is a Production Sharing Contract (PSC).

What is a Joint Venture (JV)?

A joint venture (JV) is a strategic equity-sharing agreement where two or more parties combine resources to execute an oil & gas transaction and mitigate the risk associated with the business. You may also call it a Joint Operating Agreement (JOA).

Typically, the operators of a JV asset each have to contribute funds, in a proportionate degree, to develop the asset in question. 

But in the case where only one party is operating the asset and the other is not, the actual operator requests funds from its non-operating partners through cash calls.

Most JVs are incorporated, although some, as in the oil and gas industry, are "unincorporated".

A JV is not a permanent structure, meaning it can be terminated whenever infractions arise in contractual terms. However, it is enforceable in the court of competent jurisdiction.

What is a Petroleum Sharing Contract (PSC)?

Petroleum (or Production) Sharing Contract is a type of agreement entered into between the host of the petroleum resources and its contractor(s), where the former (host) confers on the contractor or contractors (as the case might be) the rights to develop the discovered resource and share the after-tax profits made therefrom with it at an agreed percentage.

This agreement is usually between the government and the participating companies who want to develop a resource.

While a JV may involve risk-sharing amongst parties, the PSC doesn't. In PSCs, only the contractor(s), not the host, bears the costs and risks associated with the development of an asset.

Why do companies enter into a JV?

On the one hand, there are four main reasons companies enter into a JV: To explore an economic opportunity; to distribute perceived risks associated with the transaction; to access more capabilities like labour, technology, capital, etc.; and to scale operations and broaden the market.

On the other, PSCs could be entered into to share ownership or governance of strategic national resources, say petroleum, as in the case of Nigeria and IOCs. Shockingly, the Nigerian government enters into JVs for the same reasons as PSCs. 

The Nigeria Scenario

In Nigeria, only the government has the right to eminent domain where there is a proven commercial reserve of any minerals. 

Put differently, the federal government exercises permanent sovereignty and ownership over mineral resources (oil and gas) within its borders. Section 44(3) of the Constitution of the Federal Republic of Nigeria provides legal support for this.

To represent it, the government mandates the Nigerian National Petroleum Company (NNPC) Ltd to undertake commercial activities in the oil and gas industry. 

The NNPC Ltd., the country's state oil company, holds no less than 50% joint operatorship and enters into Production sharing contracts (PSC) in literally all prolific oil fields operated by international oil companies (IOCs) in Nigeria.