Finally, the Nigerian Petroleum Industry Act 2021 was signed into law. Apart from many decades of calls for Nigeria to have a holistic law that will manage her main source of foreign income, Petroleum Industry Bill (PIB) passage took National Assembly about 14 years after it was first introduced to be passed. Industry stakeholders have argued that the PIB has a lot to benefits for every legitimate player, also to enhance and attract local and foreign investments.
The Petroleum Industry Act seeks to provide legal, governance, regulatory and fiscal framework for the Nigerian Petroleum Industry and development of Host Communities. It contains about 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.
Read: Nigerian Oil & Gas Consultancy Service
Some of the arguments why National Assembly has been throwing away dirty water with the baby for these years has been with a full-fledged Ministry for the Niger Delta and the intervention funding provided by the Niger Delta Development Commission (NDDC), putting in place another funding mechanism for the oil-producing communities will be an overkill. Also, the politics of interest and number as members of National Assembly that came from the region where oil and gas are domicile are fewer.
THE ACT REPEALS THE FOLLOWING ACTS:
- Associated Gas Reinjection Act, 1979 CAP A25 Laws of the Federation (LFN) 2004, and its amendments;
- Hydrocarbon Oil Refineries Act No. 17 of 1965, CAP H5 LFN 2004;
- Motor Spirits (Returns) Act, CAP M20 LFN 2004;
- Nigerian National Petroleum Corporation (Projects) Act No. 94 of 1993, CAP N124 LFN 2004;
- 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;
- Petroleum Products Pricing Regulatory Agency (Establishment) Act 2003;
- Petroleum Equalisation Fund (Management Board etc.) Act No. 9 of 1975, CAP P11 LFN 2004;
- Petroleum Equalisation Fund (Management Board, etc.) Act, 1975;
- Petroleum Profit Tax Act Cap P13 LFN 2004, (PPTA); and
- Deep Offshore and Inland Basin Production Sharing Contract Act (DOIBPSCA), 1993 CAP D3, LFN 2004 and its 2019 amendment.
Click to Download PIA 2021 PDF Copy
The PIA vested property and ownership of petroleum resources within Nigeria, its territorial waters, and continental shelves and exclusive economic zones on the Federal Government. The objective is to create effective governing institutions with clear and separate roles for the petroleum industry; establish a framework for the creation of a commercially oriented and profit-driven national petroleum company, and strengthen the accountability and transparency of NNPC Limited as a full-fledged limited liability company.
It will also promote transparency, good governance and accountability in the administration of the petroleum resources of Nigeria, among others while creating a funding mechanism for frontier basins. These frontier basins are areas where the government has been prospecting for crude oil to expand the revenue base of the Federation. The Act earmarks the use of 30 per cent of oil and gas profits of the Nigerian National Petroleum Corporation Limited to fund oil exploration activities in frontier basins.
The Petroleum Industry Act 2021 (PIA) is also expected to promote the exploration and exploitation of petroleum resources in Nigeria for the benefit of the Nigerian people; promote efficient, effective and sustainable development of the petroleum industry, promote the liberalisation of the downstream petroleum industry among other objectives. When it comes into effect, the law will establish what the promoters regard as a globally competitive and progressive fiscal framework that places Nigeria as the desired investment destination in Africa, balancing rewards with risk and enhancing revenues to the Federal Government.
It is also expected to establish a forward-looking, easy to implement fiscal framework with clarity, transparency and effectiveness, and enhances the revenue base of the country while ensuring a better return on investments. The PIB, according to stakeholders in the industry, will enable the exploration and exploitation of petroleum resources in Nigeria for the benefit of Nigerians, liberalise the downstream sector, fosters sustainable peace and prosperity and provide direct social and economic benefits to host communities.
Read: How to Start Oil & Gas Business in Nigeria
The PIA made funds available for the exploration of oil across the country. While the government made provision for 10 per cent rent on petroleum prospecting licenses and petroleum mining leases. There is additional provision of “30 per cent of NNPC Limited’s profit oil and profit gas as in the production sharing, profit sharing and risk service contracts”. The fund shall be applied to all frontier basins and undertaken simultaneously, while mandating the NNPC limited in section 9(5) of the Bill to transfer the 30 per cent of profit oil and profit gas to the frontier exploration fund escrow account dedicated for the development of frontier acreages only.
However, while the Petroleum Industry Act 2021 (PIA) has explained what is meant by petroleum prospecting licenses and petroleum mining leases as well as rent, it is silent on what constitutes profit oil.
By conduct, profit oil means the amount of production, after deducting cost oil production allocated to costs and expenses that will be divided between the participating parties and the host government under the production sharing contract. In other words, while investors receive cost oil to cover their expenses, profit oil is divided between the investors and the government based on the negotiated formula in the production sharing arrangement.
Setlor and Host Communities
The PIA 2021 dedicates a whole chapter to dealing with issues of host communities, which was defined by the explanatory aspect of the act to mean “any community situated in or appurtenant to the area of operation of a Setlor, and any other community as a Setlor may determine pursuant to Chapter three of this act”.
Scholars are arguing that the act should expand host communities to include communities where pipelines pass through. For example, Cross River State is not an oil-producing community, but it has a lot of pipelines that traverse across the nooks and crannies of the state. The same applies to Edo State. Sometimes, there are leakages and when these leakages occur, it spoils the environment and also retards the ability to engage in meaningful farming and they will lose their source of livelihood in terms of fishing and what have you.
The law has made provisions for how the money going to the host communities will be shared and who should benefit from it. The act also include a grievance mechanism to resolve disputes between settlors and host communities as well as the ability of the settlor to make the adjustments to reduce expenditures where the available funds for administration are insufficient to fund ongoing operations. The establishment of the host communities’ development trust is left entirely to the companies operating in the areas.
Read: Nigerian Local Content Act
The Act state that “Setlor shall incorporate a trust for the benefit of the host communities for which the Setlor is responsible” known as host community development trust. It also vests the Setlor with the power to appoint and authorise a board of trustees to manage the trust fund after consultation with the host community. The government’s role in this regard is completely absent, giving room for likely crisis among contending factions in the host communities. In the same vein, the Setlor is mandated to undertake a needs assessment that will metamorphose into the community development plan to determine the projects to be undertaken by the host communities’ development trust. However, the board of the trust fund and the communities have not been given any role to play in this regard.
The establishment of the host community development trust is to provide funds to finance and execute projects for the benefit and sustainable development of the host communities; undertake infrastructural development of the host communities within the scope of funds available to the Board of Trustees for such purposes; facilitate economic empowerment opportunities in the host communities and advance and propagate educational development for the benefit of members of the host communities, among others. It is expected to draw 3 per cent funds from the actual operating expenditure of oil companies operating in such communities.
Upstream Petroleum Operations And Environment/ License And Leases Administration
Under Section 68 of the Act, title to any data and its interpretation relating to upstream, petroleum operations are vested in the Government and shall be administered by the Nigerian Upstream Petroleum Regulatory Commission. Where petroleum discovery is made in a frontier basin, the Minister on the recommendation of the Commissioner will reclassify all or part of the basin from frontier acreages to a general onshore area and the fiscal terms applicable to onshore shall apply to new licenses and leases in the basin after classification and any existing lease upon renewal, provided it is not applied to licenses and leases existing at the moment of reclassification.
A license or lease is granted to only companies incorporated and validly existing in Nigeria under the Companies and Allied Matters Act. The Act renames the existing licenses and leases related to the upstream petroleum operations and replaces it with the following according to Section 70;
- Petroleum Exploration License which may be granted to qualified applicants to carry out petroleum exploration operations on a non-exclusive basis;
- Petroleum Prospecting License which is granted to qualified applicants to;
- Drill exploration and appraisal wells and do corresponding text production on an exclusive basis and;
- Carry out petroleum exploration on a non-exclusive basis and;
- Petroleum Mining Lease which will be granted to qualified applicants to;
- Win, work, carry away, and dispose of crude oil, condensates, and natural gas on an exclusive basis;
- Drill exploration and appraisal wells and carry out related test production on an exclusive basis and;
- Carry out petroleum exploration operations on a non-exclusive basis.
Read: National Oil and Gas Excellence Centre (NOGEC)
The Act also provides for environmental management by the Commission in compliance with the Act in respect to environmental sustainability. Section 102 of the Act provides that a licensee or lessee who engages in upstream or midstream petroleum operations is required to within one year or six months of the effective date or after the grant of the applicable license or lease, submit for approval an environmental management plan in respect of projects which require environmental impact assessment to the Commission or Authority as the case may be. The plan shall be approved where it complies with relevant Environmental Acts and the applicant has the capacity to rehabilitate and manage negative impacts on the environment.
Administration of Midstream and Downstream Petroleum Operations
The Nigerian Midstream and Downstream Petroleum Authority under Section 111 of the Act may grant, renew, modify or extend individual licenses or permits, provided that where it relates to the establishment of refineries shall be issued by the Minister on the recommendation of the Authority.
A license for midstream and downstream petroleum operations may be granted where it meets the following according to Section 111(3) of the Act;
- It meets the technical standards required for petroleum operations based on good international petroleum industry practices;
- The location and size of the area occupied by the facilities or right of way is acceptable to the Authority;
- It meets the health safety and environmental standards as determined by the Authority and;
- it provides for the efficient and economic use of facilities and pipelines.
By virtue of the Act, the Authority is required to also make regulations and guidelines for the grant or renewal of license for midstream and downstream petroleum operations.
Administration of Midstream and Downstream Gas Operations
Under Section 125 of the Act, the activities requiring a license for midstream and downstream gas operations involves establishing, constructing, or operating a facility for the processing of gas; engaging in bulk transportation of natural gas by rail, barge, or other means of transportation, operating gas transportation network, engaging in wholesale gas supply, engaging in the construction or operation of petrochemical or fertiliser plants, etc.
The Authority is also required under Section 126 of the Act to issue regulations with respect to midstream and downstream gas operations which includes the establishment and operation of a wholesale natural gas market scheme to ensure continuity of supply of natural gas to customers which applies to owners and operators of gas transportation pipelines, shippers of natural gas, holders of natural gas storage and distribution licenses and gas retailers and other matters consequential or ancillary to the activities stated above.