Benefits and Highlights Petroleum Industry Act (PIA) 2021
Oil and Gas Business in NigeriaAugust 10, 2022

This post contain Nigerian Petroleum Industry Act 2021 Highlights or key points, the Acts Repeals in the PIA Act, Governance and Institutions Administration system, Host Communities Development and Fiscal Framework.

What is the Petroleum Industry Act?

Petroleum Industry Act 2021. An Act to provide legal, governance, regulatory and fiscal framework for the Nigerian petroleum industry, the development of host communities, petroleum taxes and for related matters. The Act Repealed some old Acts in the industry.

 

The key objectives of the PIA 2021 are as follows:

➢ To create efficient and effective governing institutions, with clear and separate roles for the petroleum industry;

➢ To establish a framework for the creation of a commercially oriented and profit-driven national petroleum company;

➢ To promote transparency, good governance and accountability in the administration of the petroleum resources of Nigeria;

➢ To foster a business environment conducive for petroleum operations.

➢ To deepen local content practice in Nigeria Oil and Gas Industry

 

Read: NCEC Certificate Registration

 

Petroleum Industry Act 2021 Highlights/ Key Points

The Petroleum Industry Act 2021 contains 5 Chapters, 319 Sections and, 8 Schedules dealing with Rights of Preemption; Incorporated Joint Ventures; Domestic Base Price and Pricing Framework; Pricing Formula for Gas Price for the Gas Based Industries; Capital Allowances; Production Allowances and Cost Price Ratio Limit; Petroleum Fees, Rents and Royalty; and Creation of the Ministry of Petroleum Incorporated.

The Petroleum Industry Act repeals about 10 laws including the Associated Gas Reinjection Act; Hydrocarbon Oil Refineries Act; Motor Spirit Act; NNPC (Projects) Act; NNPC Act (when NNPC ceases to exist); PPPRA Act; Petroleum Equalisation Fund Act; PPTA; and Deep Offshore and Inland Basin PSC Act. It amends the Pre-Shipment Inspection of Oil Exports Act while the provisions of certain laws are saved until termination or expiration of the relevant oil prospecting licenses and mining leases including the Petroleum Act, PPTA, Oil Pipelines Act, Deep Offshore and Inland Basin PSC Act.

The Act Repeals the Following Acts.

  1. Associated Gas Reinjection Act, 1979 CAP A25 Laws of the Federation (LFN) 2004, and its amendments;
  2. Hydrocarbon Oil Refineries Act No. 17 of 1965, CAP H5 LFN 2004;
  3. Motor Spirits (Returns) Act, CAP M20 LFN 2004;
  4. Nigerian National Petroleum Corporation (Projects) Act No. 94 of 1993, CAP N124 LFN 2004;
  5. Nigerian National Petroleum Corporation Act (NNPC) 1977 No, 33 CAP N123 LFN as amended, when NNPC ceases to exist pursuant to section 54(3) of this Act;
  6. Petroleum Products Pricing Regulatory Agency (Establishment) Act 2003;
  7. Petroleum Equalisation Fund (Management Board etc.) Act No. 9 of 1975, CAP P11 LFN 2004;
  8. Petroleum Equalisation Fund (Management Board, etc.) Act, 1975;
  9. Petroleum Profit Tax Act Cap P13 LFN 2004, (PPTA); and
  10. Deep Offshore and Inland Basin Production Sharing Contract Act (DOIBPSCA), 1993 CAP D3, LFN 2004 and its 2019 amendment.

 

Read: Local Partner Service 

 

Benefits of Petroleum Industry Act

The PIA overhauls the regulation and governance of the oil and gas industry. The law provides for two regulatory agencies.

The PIA addressed the Host Community issue with oil & Gas companies by stipulating that existing host community projects must be transferred to the Host Community Development Trust Fund (HCDTF), and each settlor (or oil license holder) must make an annual contribution of an amount equal to 3 percent of its operating expenditure for the relevant operations from the previous year.

Other benefits of Petroleum Industry Act 2021, the PIA introduces a new tax regime, replacing the existing petroleum profits tax with a hydrocarbon tax and introducing a tax on the income of oil companies. Under this new fiscal regime, hydrocarbons—including crude oil, condensates, and natural gas liquids produced from associated gas—will be subject to taxation. Notably, crude oil from deep offshore is excluded from the tax.

Governance and Institutions Administration

  • The Act made provision for good governance and accountability in the industry. Creation of a commercially oriented national petroleum company, and fostering a conducive business environment for petroleum operations.
  • Creation of the Nigerian Upstream Regulatory Commission responsible for the technical and commercial regulation of the upstream petroleum operations; and the Nigerian Midstream and Downstream Petroleum Regulatory Authority responsible for the technical and commercial regulation of the midstream and downstream operations in Nigeria. The Commission and Authority are exempted from the provisions of any enactment relating to the taxation of companies or Trust Funds
  • Imposition of up to 1% levy on the wholesale price of petroleum products sold in the country (0.5% each for the Authority Fund and Midstream Gas Infrastructure Fund)
  • Incorporation of a commercial and profit focused NNPC Limited under CAMA within 6 months from commencement of the new law with ownership vested in the Ministry of Finance Incorporated (and Ministry of Petroleum Incorporated) on behalf of the Federation to take over assets, interests and liabilities of NNPC. This structure is expected to pave the way for eventually sale of shares to Nigerians.
  • Any assets, interest and liabilities not transferred to NNPC Limited will remain with NNPC until extinguished or transferred to the government after which NNPC shall cease to exist. Transfer and sale of the shares are subject to approval by the government and endorsement by the National Economic Council.
  • NNPC Limited will earn 10% of proceeds of the sale of profit oil and profit gas as management fee while 30% will be remitted to Frontier Exploration Fund for the development of frontier acreages in addition to 10% of rents on petroleum prospecting licences and mining leases.
  • The main objective is to promote the exploration and exploitation of petroleum resources in Nigeria for the benefit of the Nigerian people and promote sustainable development of the industry, ensure safe, efficient transportation and distribution infrastructure, and transparency and accountability in the administration of petroleum resources in Nigeria.
  • Avoid economic distortions and ensure a competitive market for the sale and distribution of petroleum products and natural gas in Nigeria; and avoid cross-subsidies among different categories of consumers.
  • The Commission is required to develop a model licence and model lease to include a carried interest provision giving NNPC Limited the right to participate up to 60% in a contract.

Host Communities Development

  • The main objective is to foster sustainable prosperity within host communities, provide direct social and economic benefits and enhance harmonious co-existence.
  • Any company granted an oil prospecting licence or mining lease or an operating company on behalf of joint venture partners (settlor) is required to contribute 3% – 5% (upstream Companies) and 2% (other companies) of its actual operating expenditure in the immediately preceding calendar year to the host communities development trust fund. This is in addition to the existing contribution of 3% to the NDDC. The Fund is tax exempt and any contributions by a settlor is tax deductible.
  • Board of trustees and executive members of the management committee may include persons of high integrity and professional standing who may not necessarily come from any of the host communities.
  • Available funds are to be allocated 75% for capital projects, 20% as reserve and 5% for administrative expenses. However, a community will forfeit the cost of repairs in the event of vandalism, sabotage and other civil unrest causing damage to petroleum facilities or disruption of production activities.

Fiscal Framework

  • The key objective is to establish a progressive fiscal framework that encourages investment in the Nigerian petroleum industry, provides clarity, enhances revenues for the government while ensuring a fair return for investors.
  • FIRS to collect Hydrocarbon Tax of 15% – 30% on profits from crude oil production, CIT at 30% and Education Tax at 2% which will no longer be tax deductible. The Commission will collect rents, royalties, and production shares as applicable while the Authority will collect gas flare penalty from midstream operations. Late filing of tax returns will attract N10m on the first day and N2m for each subsequent day the failure continues. A N20m fine is applicable to an offense where no penalty is prescribed.
  • Generally, expenses must be wholly, reasonably, exclusively and necessarily incurred to be tax deductible. However, a cost price ratio limit of 65% of gross revenue is imposed for hydrocarbon tax deduction purposes, any excess cost incurred may be carried forward.
  • No tax deduction for head office costs while tax deduction of interest on monies borrowed is subject to the satisfaction of the commission that the fund was employed for upstream operations and the interest rates reflect market conditions.
  • Royalties are payable at the rates of 15% for onshore areas, 12.5% for shallow water, and 7.5% for deep offshore and frontier basins, 2.5% – 5% for natural gas. In addition, a price-based royalty ranging from 0% – 10% is payable to be credited to the Nigerian Sovereign Investment Authority.
  • Gas utilisation incentive will apply to midstream petroleum operations and large-scale gas utilisation industries. An additional 5-years tax holiday will be granted to investors in gas pipelines.

Calculation of Royalties:

Both the price-based royalty and production-based royalties shall be paid together. Production royalty will be calculated on a field basis and is chargeable on the volume of crude oil and condensates produced from the field area in the relevant month on a terrain basis as follows:

  1. onshore areas-15%
  2. shallow water (up to 200m water depth)- 12.5%
  3. iii. deep offshore (greater than 200m water depth) with monthly production less than 50,000 bpd- 5%
  4. deep offshore (greater than 200m water depth) with monthly production above 50,000 bpd- 7.5%
  5. frontier basins- 7.5%

Where a single field covers two or more PMLs, the royalty shall be determined based on the total production from the field.

In addition to production royalty, companies would be liable to additional royalty when crude oil, and condensate, prices exceed specified benchmark prices and are payable to the Nigerian Sovereign Investment Authority. For fields in onshore, shallow water and deep offshore areas, the royalty rates will apply as follows:

  1. Below US$50 per barrel– 0%
  2. At US$100 per barrel– 5%
  3. Above US$150 per barrel– 10%

The price levels provided shall however apply only to the year 2020. At the beginning of 2021 and of each succeeding calendar year, these price levels shall be increased by 2% relative values of the previous year.

For natural gas and natural gas liquids, royalty will be on the chargeable volume in the relevant area at the rate of 5%of the chargeable value. However, the royalty rate for gas produced and utilized in-country shall be 2.5%.