“It seems to be almost a law of physics, that the winds of change awaken fear and fundamentalism”. Ironically, the only thing that life promises with certainty is change. Change sure can throw spanners into the status quo, but it can also offer opportunities to stakeholders. The reactions from a cross-section of Nigerians on the Petroleum Industry Act (PIA) which was passed by the National Assembly and signed into law by President Buhari on the 16th of August 2021is an example of Elizabeth Lesser’s statement on change quoted above. Change awakens fear and fundamentalism. The old petroleum industry regime had been accessed by industry practitioners, foreign and indigenous as challenged and the lack of reform that was so desperately needed over the years was said to have brought Nigeria immense financial losses by locking investments in both the upstream, midstream and downstream sectors. Everyone concurred that the old regime needed to be reformed. Attempts to reform has been on for the past 20 years, spanning 5 legislative assemblies. Yet now that the reform has been achieved, the controversy is not yet done.
Since the promulgation of the PIA, there have been significant chatter on some aspects especially those that relate to the 3% yearly payments of operating costs of oil companies payable to host communities and the 30% of profit of NNPC that is to be used as funds for exploration of frontier basins. The ‘chatter’ has been somewhat vitriolic, especially from less impacted stakeholders, while the main stakeholders have largely been relieved that the long-awaited reform had finally occurred.
This article examines the reform that is the PIA through the lenses of the provisions of the PIA. The aim is to help readers gain clarity on the oil industry from a legal perspective. What is in the PIA? Who are the stakeholders that the law impacts and how does it impact them? What has changed in the new legal framework relative to the past? But why is it important to gain clarity at all?
The oil sector matters to Nigeria’s economy indeed and will matter for longer still despite the world’s shifting stance to green energy. Crude oil is Nigeria’s main source of export earnings, accounting for between 86 to 91%. of total exports. Crude oil however does not impact the GDP in the same manner as it impacts earnings. It contributes a mere 9% to the GDP yet it has the capacity to impact with greater significance in employment creation in the largely untapped investment opportunities in the upstream and downstream sectors. For example, Nigeria’s existing refineries are moribund and NNPC has failed in securing investors majorly on account of the unfriendly regulatory regime prior to the PIA. Investors, especially foreigners have been reticent to commit to the sector their finances with the uncertain regulatory framework of the past. To gain a peep into the investment opportunities in the oil sector and the resultant positive outcomes on Nigeria’s economy is to see what the Dangote Refinery which is nearing completion has already achieved. It has provided employment to 55,000 people with the certainty of indirect jobs running into the millions when fully operational. If all moribund refineries are brought online through foreign investments and additional refineries are built, the impact of the economy would be immense. Not only would jobs be impacted, Nigeria would have the capacity to export petroleum products and the pressure on the nation’s foreign exchange reserves would be reduced. As at present, the illegal sale of Nigeria’s petrol in neighbouring African nations is one of the drainpipes of Nigeria’s revenue and the new PIA will impact on this to plug the drains when the NNPC is allowed to function as a commercial entity and free of Government’s interference.
The Petroleum Industry Act (PIA)
- The Chief Olusegun Obasanjo administration inaugurated the Oil and Gas Reform Implementation Committee in April 2000, with a mandate to review and streamline all existing petroleum laws and establish an all-inclusive regulatory framework for the industry.
- The first Executive Bill on the PIB was in 2008 sent to the sixth National Assembly by the administration of late President, Umar Yar’Adua.
- In July 2012, a revised draft was again presented to the seventh National Assembly by the Goodluck Jonathan administration.
- During President Muhammadu Buhari’s first term, the 8th National Assembly passed the Petroleum Industry Governance Bill but, the President declined assent.
- In September 2020, President Muhammadu Buhari sent a new PIB to the bicameral National Assembly for consideration by the Senate and the House of Representatives. The bill passed on 1 July 2021
The Act is holistic. One legislation that encompassed all sectors of the oil industry. It provides for both the regulatory and operational legal framework of the oil industry. The Five Chapters deal with:
- Governance and Institutions.
- Administration.
- Host Communities Development.
- Petroleum Fiscal Framework.
- Miscellaneous Provisions.
Chapter One: Governance and Institutions
In Chapter One, all the institutions that have bearing on operations of the oil sector are established and their powers and duties prescribed. There are 4 institutions covered in Parts 2-5 of Chapter 1, while Part 1 details the objective of the PIA and vests all oil in Nigeria, onshore and offshore in the FGN. The objectives of the PIA is the entrenchment of good governance of the oil sector, (Part 1, sections 1-2). The institutions established are the Minister of Petroleum (Part 2, section 3), the Nigerian Upstream Regulatory Commission (The Commission) (Part 3, sections 4-28), the Nigerian Midstream and Downstream Petroleum Regulatory Authority (The Authority) (Part 4, sections 29-52) and the Nigerian National Petroleum Company Limited (NNPC Ltd) (Part 5, sections 53-65).
The Commission has jurisdiction on upstream petroleum operations (section 5) while the Authority has jurisdiction for midstream and downstream petroleum operations (section 30). Both institutions are regulatory bodies. The funding sources and structures for the two institutions are prescribed. For the Commission, the sources are money appropriated by the National Assembly on a first-line charge; fees charged by the Commission for services rendered to licensees, lessees permit holders and other authorisations issued by the Commission; money derived from revenue collection in accordance with government policy; income derived from publications made by the Commission and other related activities, including data sales; fees paid to the Commission for using facilities owned or managed by the Commission; and money accruing to the Commission by way of grants, aids, gifts, testamentary dispositions, endowments and contributions.
For the Authority, sources of funding include money appropriated by the National Assembly for the Authority on a first-line charge; fees charged by the Authority for services rendered to licensees, lessees permit holders and other authorisations issued by the Authority; not more than 1%
of the levy prescribed in a Regulation under this Act, derived from wholesale price of petroleum products sold in the country; income derived from publications made by the Authority and other related activities, including data sales; fees paid to the Authority for using facilities owned or managed by the Authority; and money accruing to the Authority by way of grants, aids, gifts, testamentary dispositions, endowments and contributions.
Part 5 which deals with the NNPC Limited encompasses sections 53 to 65. The most significant change from the old legal regime is that the NNPC is to become a private limited liability company, a commercial entity which shall be regulated the same way all business entities are by the Companies and Allied Matters Act 2020 (CAMA). Unlike the regulatory institutions, there is no provision for funds for the NNPC because the Act states that NNPC Limited and any of its subsidiaries shall conduct their affairs on a commercial basis without recourse to government funds and their memorandum and articles of association shall state these restrictions.
Ownership of all shares in NNPC Limited shall be vested in the FGN at incorporation and held by the Ministry of Finance Incorporated (MoFI) on behalf of the FGN. MoFI in
consultation with the Government, may increase the equity capital of NNPC Limited. At incorporation, shares held by the FGN in NNPC Limited are not transferable, including by way of sale, assignment, mortgage or pledge unless approved by the FGN. There is a hint that shares may later on be transferrable to others as long as it shall be at a fair market value and subject to an open, transparent and competitive bidding process.
Section 59 prescribes the composition of the Board of Directors of the NNPC and how they are to be named. It is pertinent to keep in mind that the company is a private company owned by the FGN and the main shareholder is MoFI, thus it is to be expected that it is the FGN that can name persons and appoint them to the Board. The Act saves the statutory requirement of the CAMA as relating to the Memorandum and Articles of Association, thus NNPC Limited cannot run afoul of CAMA.
The Board of NNPC Limited shall be appointed by the President and composed of a non-executive chairman; the Chief Executive of NNPC Limited; the Chief Financial Officer of NNPC Limited; a representative of the Ministry of Petroleum, not below the rank of a Director; a representative of the Ministry of Finance, not below the rank of a Director; and two (2) non-executive members with at least 15 years post-qualification experience in Petroleum or any other relevant sector of the economy. For the Chief Executive of NNPC Limited, the appointee shall have extensive managerial, technical and professional knowledge in the petroleum or other relevant industry with at least 15 years’ postqualification experience. In another reference to the likely future change of the NNPC from a private owned entity to a public one, the Act states that the provisions of section 59 shall apply where NNPC Limited remains wholly- owned by the Government and where NNPC Limited is not wholly owned by Government, the composition of the Board of NNPC Limited shall be determined by the shareholders of NNPC Limited in accordance with the provisions of the Companies and Allied Matters Act and the articles of association of NNPC Limited. NNPC is entitled to participate in contracts with oil licensees as shareholders and “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.”
There is a savings clause to preserve the res of the old NNPC (assets, interest and liabilities) in the interim till a smooth succession is achieved, thus the NNPC Limited will inherit the natural assets and liabilities pertaining to its operations as NNPC which have been transferred to it by FGN and those assets not transferred will be remain with the FGN which the old NNPC shall cease to exist.
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. This provision for Frontier Exploration Fund has generated controversy and will be discussed later in this article.
Chapter Two: Administration
Chapter 2 of the Act deals with Administration of all the institutions set up in Chapter 1 save, the NNPC which is to run as a private sector commercial entity in accordance with its Memorandum and Articles of Association. The main objectives for prescribing the provisions on Administration are to promote the exploration and exploitation of petroleum resources in Nigeria for the benefit of the Nigerian people; 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 clauses on Administration relate to procedures for grant and revocation of licenses by both the Commission and the Authority for upstream, middle and downstream operations. One notable provision is on the safeguard of the environment that is weaved into every license. Licensees for all operations must incorporate an Environmental Management Plan (EMP) into their operations and the EMP shall be in accordance with the regulations made under this Act. The EMP must be approved by the regulator for the subsector under which the license is issued. The Licensee must also pay a prescribed financial contribution to an Environmental Remediation Fund established by the Commission or Authority. It is an offence under the Act to flare gas and penalties are prescribed (fines). A fine paid pursuant to the Act is not eligible for cost recovery or to be tax deductible.
Chapter Three: Host Communities Development
The objectives for Host Communities Development (HCD) is contained in section 234 (1) while the incorporation of Host Communities Development Trusts (HCDT) is contained in 234 (2). The objectives are to foster sustainable prosperity within host communities; provide direct social and economic benefits from petroleum operations to host communities; enhance peaceful and harmonious co-existence between licensees or lessees and host communities; and create a framework to support the development of host communities. The Commission/Authority as the case may be may make regulations on areas within their competence and jurisdiction as specified in the Act. The Settlor which means the company who is the licensee for a particular oil/gas operation shall incorporate a trust for the benefit of the host communities for which the settlor is responsible (“host community development trust”). The settlor shall for the purposes of setting up the trust, appoint and authorise a body trustees (the “ Board of Trustees”), which shall apply to be registered by the Corporate Affairs Commission as a corporate body under the Companies and Allied Matters Act in the manner provided under this Chapter. The name of the corporate body to be registered by the Board of Trustees shall contain the phrase “host communities development trust”. The Commission or the Authority, as the case may be, shall –make regulations on the administration, guide and safeguard the utilisation of the trust fund; and have the oversight responsibility for ensuring that the projects proposed by the board of trustees are implemented. The Settlor shall undertake needs assessment that the metamorphose into the Community Development Plan for the purpose of determining the projects to be undertaken by the Host Communities Development Trust. The Act makes it compulsory to incorporate a HCDT within 12 months Failure by any holder of a licence or lease governed by this Act to comply with its obligations under this Chapter may be grounds for revocation of the applicable licence or lease.
Like all Incorporated Trustees, each host HCDT shall have a Constitution which shall allow it to manage and supervise the administration of the annual contribution of the Settlor and any other sources of funding. The objectives of the host communities development trust shall be specified in the constitution but must contain the following, the finance and execution of projects for the benefit and sustainable development of the host communities; the undertaking of infrastructural development of the host communities within the scope of funds available to the Board of Trustees for such purposes; facilitation of economic empowerment opportunities in the host communities; the advancement and propagation of educational development for the benefit of members of the host communities; support of healthcare development for the host communities; support of local initiatives within the host communities, which seek to enhance protection of the environment; support of local initiatives within the host communities which seek to enhance security; investment of part of available fund for and on behalf of the host communities; and assisting in any other developmental purpose deemed beneficial to the host communities as may be determined by the Board of Trustees.
Sources of funding for HCDTs
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% (upstream Companies) and 2% (other companies) of its actual operating expenditure in the immediately preceding calendar year to the host communities development trust fund. The Fund is tax exempt and any contributions by a settlor is tax deductible. In addition, each host community development trust may receive donations, gifts, grants or honoraria that are provided to such host community development trust for the attainment of its objectives. Profits and interest accruing to the reserve fund of a host community development trust shall also be contributed to the applicable host community development trust fund.
Management and composition of the HCDTs
The Board of Trustees of the HCDTs shall be set up by the settlor and shall be subject to the approval of the Commission/Authority as the case may be. The settlor shall, in the determination of membership of the Board of Trustees, include persons of high integrity and professional standing, who may not necessarily come from any of the host communities. The settlor shall determine the selection process, procedure for meeting, financial regulations and administrative procedures of the Board of Trustees; the remuneration, discipline, qualification, disqualification, suspension and removal of members of the Board of Trustees; and other matters other than the above relating to the operation and activities of the Board of Trustees. Each member of the Board of Trustees shall serve a term of 4 years in the first instance and may be reappointed for another term of 4 years and no more.
Allocation of funds
The Board of Trustees shall in each year and pursuant to section 240 of this Act allocate from the host communities development trust fund, a sum equivalent to 75% to the capital fund out of which the Board of Trustees shall make disbursements for projects in each of the host community as may be determined by the management committee in furtherance of the objectives set out in section 234 of this Act, provided that any sums not utilised in a given financial year shall be rolled over and utilized in subsequent year; 20% to the reserve fund, which sums shall be invested for the utilisation of the host community development trust whenever there is a cessation in the contribution payable by the settlor; and to an amount not exceeding 5% to be utilised solely for administrative cost of running the trust and special projects, which shall be entrusted by the Board of Trustee to the settlor, provided that at the end of each financial year, the settlor shall render a full account of the utilisation of the fund to the Board of Trustees and where any portion of the Fund is not utilised in a given year, it shall be returned to the capital fund.
The Act contains many other important provisions including the requirement for HCs to prepare development plans that, setting up Advisory Committee, Management Committee and Fund Management. There is clearly an attempt at a holistic development agenda for host communities. It remains to be seen whether the host communities will embrace the regime of change and improve the fortunes of their communities.
The Act also makes provisions for monies that are deductible from the funds of the HCDF. Apart from the deductibles for the purposes of hydrocarbon tax and companies’ income tax as applicable. An interesting deductible was incorporated into the Act in respect of host communities where vandalism occurs. When an act of vandalism, sabotage or other civil unrest occurs that causes damage to petroleum and designated facilities or disrupts production activities within the host community, the community shall forfeit its entitlement to the extent of the cost of repairs of the damage that resulted from the activity with respect to the provisions of this Act within that financial year. It is hoped that this provision will serve as deterrent to host communities and in fact engage them as stakeholders to protect the oil facilities around them.
Chapter Four: Petroleum Industry 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. A summary of the Chapter provisions include that FIRS shall collect Hydrocarbon Tax CIT and Education Tax and while the Commission will collect rents, royalties, and production shares as applicable on upstream operations, 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. 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 and 2.5% – 5% for natural gas. Gas utilisation incentive will apply to midstream petroleum operations and large-scale gas utilisation industries and additional 5-years tax holiday will be granted .
Public reactions to the PIA
Industry practitioners, investors, host communities and Nigerians from all works of life have reacted to the PIA. The reactions, controversies and general apprehensions are summarised:
Prevalent positive commentaries from industry practitioners are that the PIA has freed the NNPC from the shackles of regulation. That hitherto the NNPC had both the role of regulator Agency as well as a business venture. This hampered its ability to concentrate on making money for the nation. The NNPC as a purely commercial company will be more focused on delivering value to its shareholders by pursuing business activities that will afford return on investment. Also, that the clarity of the new law in delineating upstream from middle and downstream oil operations, setting up separate regulatory agencies for the respective sectors, prescribing in clear terms the process of operations in both sectors, gives comfort to investors and practitioners.
For the first time also, the development of host communities is addressed in a more holistic manner as unlike the previous attempts made under the Derivation Fund and the Niger Delta Development Commission which all failed to impact positively on the living standards and livelihood of the host communities. Not only does the PIA prescribe the funding sources, it also specifies how same shall be used, the purposes for which it shall be used and who will manage the fund. Specifies includ also, the percentage that the HCDT shall spend on CAPEX, remuneration, other expenses and a reserve that must be put in a fund to ensure sustainability of the HC. An effective deterrent to vandalization of oil installations is in the penalty clause contained in the Act, that the communities will bear the cost of vandalization in their communities from the money payable by the Oil Licenses who contribute to the HCDF.
Among the more negative criticism of the PIA, is the misunderstanding of the provision of the Act that a 30% share of NNPC profit should be set aside for frontier exploration and 3% contributed to trust funds for host communities. As Professor Omowunmi Iledare writes in “the Conversation” “The fund for host communities is to mitigate the impact of oil exploration while the 30% specific allocation to NNPC is for frontier exploration in the inland basins. The inland basins are spread around the South East (Anambra basin), the lower, middle, and upper Benue trough, the southeastern sector of the Chad basin, the mid-Niger (Bida) basin, and the Sokoto basin.” He finds the debate on these 2 provisions to be disappointing because of the misrepresention of the two provisions as a
North versus South transfer payment. He decried the heated debate centred around a comparison of 3% with 30% even though they have no bearing on one another. According to Iledare, the two provisions are basically apples and oranges and no meaning can be derived by comparing them. “Each must be evaluated on its own merit without making reference to the other. Neither is dependent on the other.” The former relates to host communities’ development while the latter relates to NNPC’s future exploration in order to discover and bring more oil assets to life. Also, the funding allocated to the former is directly from the Oil companies operating in the companies and not from the NNPC or government agencies. The funds are 3% of operating expenses in the preceding year. The expenses would be audited, so there will be transparency and credibility. The funds for the 30% exploration fund is from NNPC’s profit after tax and also not from government agencies Just as any limited liability company, public or private would retain some profit for expansion or for exploring other businesses, NNPC has a ceiling of 30%.
Professor Iledare acknowledges however that there are a few issues that critics could genuinely raise with the 30% exploratory fund provision. He queries whether it may not conflict with the current laws on Revenue mobilisation and allocation of Federal revenue but opines that since the Act has become law having been passed by the National Assembly, that issue can only be resolved by the judiciary if anyone raises it. Secondly, he wonders if the government will have political will to commit and stick to 30% of money it could have available yearly being used in a risky venture as exploration of frontier basins. It is not unlikely that the Governors may sometime decide to litigate this provision, but it is pertinent to point out that all the states of the federation are represented in the two legislative arms and that since the Act passed, then the issue should be moot.
To the average Nigerian, there is apprehension that the PIA would lead to an end to subsidy regime and that the price of fuel will go up? This fear is definitely real but judging by the fact that Nigeria’s subsidy regime has been unsustainable and there has been so much debate on the need to end it, the public might not react as much with anger as they may have in the past. There is also the fact that Nigeria has the lowest petrol pump price in West Africa In Ghana price it is $1.09 per litre and in Nigeria $0.41. Nigeria’s petrol is the sixth cheapest in the world. Even prices in Saudi Arabia, capped at $0.62 per litre, is higher than Nigeria.”
Professor Iledare believes that the PIA will “decontrol product prices in the downstream and eliminate subsidy payment to traders. The Act will create efficacy, market efficiency and inter-generational equity in the sector by optimising consumer surplus and producer surplus with minimal if not zero welfare losses.” Professor Iledare is a credible commentor, given his experience in the oil sector for over 25 years.
Conclusion
This article was written to serve the purpose of presenting a precis of the PIA- giving enough content that readers to educate without needing to read the 289 pages of the Act. Of course, industry practitioners will need to read the Act more in-depth. The article has also attempted to present the reactions of various stakeholders to the Act both negative and positive. It has taken Nigeria 20 years to get to this point in time and that in itself is success. If in the future issues arise that make the Act to require amending, this should not be a problem.
