The new Petroleum Industry Act 2021, which was recently assented and signed into law by President Muhammadu Buhari on August 16th, 2021 to repeal the previous Petroleum Act 2004, has created dozens of new provisions and innovations that will impact the oil and gas industry’s private, public, and stakeholder sectors. This article seeks to provide a high-level summary of the Act’s key provisions, which are divided into five chapters, 319 sections, and eight schedules.
The Petroleum Industry Act was enacted to provide for the Nigerian Petroleum Industry’s legal, governance, regulatory, and fiscal framework, as well as the establishment and development of host communities and other related matters in the upstream, midstream, and downstream sectors of the petroleum industry.
The Act is divided into 5 Chapters, 319 Sections, and 8 Schedules, as previously stated. The petroleum sector is governed and institutionalised under Chapter 1 of the Act. The ownership and management of petroleum inside Nigeria and its territorial seas is vested in the Federal Government of Nigeria, according to the document. Section 3(1) gives the Minister of Petroleum Resources, who oversees the petroleum sector, the authority to establish, supervise, and execute government policies in the petroleum industry, among other things.
Introduction of Dual Regulatory Agencies
The Nigerian Upstream Petroleum Regulatory Commission (the “Commission”) is a corporate body with perpetual successions whose functions are limited to only upstream petroleum activities, as provided for in Section 4 of the Act, which states that “the Commission is responsible for the technical and commercial regulation of upstream petroleum operations.” The Commission was formed, among other things, to guarantee compliance with all relevant laws and regulations regulating upstream petroleum activities.
The Nigerian Midstream and Downstream Petroleum Authority is the other regulatory body established under Section 29 of the Act (the “Authority”). According to Section 29(3) of the Act, this regulatory body is responsible for the technical and commercial control of midstream and downstream petroleum activities in the petroleum sector.
Nigerian National Petroleum Company Limited
In addition, Section 53 of the Act created the Nigerian National Petroleum Company Limited (NNPC Limited). The NNPC Limited was formed to act as an agent for the Nigerian National Petroleum Corporation (NNPC) in the winding down of the NNPC’s assets, interests, and liabilities. “Within six months of the commencement of this Act, the Minister must cause to be formed under the Companies and Allied Matters Act, a limited liability company, to be known as the Nigerian National Petroleum Company Limited,” according to Section 53 of the Act.
As stated in Section 53(3) of the Act, NNPC Limited is owned by the Federal Government at the time of formation and is held by the Minister of Finance and the Ministry of Petroleum in equal shares on behalf of the Federation and the Ministry of Petroleum. Under Section 65 of the Act, incorporated joint corporations are also established. The NNPC Limited is required to run its business on a commercial basis and profitably, without relying on government money, as stated in its memorandum and articles of organisation. As mandated by Section 53(7) of the Petroleum Industry Act, the NNPC must pay dividends to its shareholders and keep 20% of profits as retained earnings to build its company, much like any other incorporated firm formed under the Companies and Allied Matters Act.
The Petroleum Industry Act of 2021, Chapter 2, outlines the general administration’s goals, which include promoting the exploration and exploitation of petroleum resources in Nigeria for the benefit of the Nigerian people, as well as the efficient and effective growth of the petroleum industry. According to Section 67 of the Act, the administration and management of petroleum resources in Nigeria must be carried out in line with the Act and the principles of good governance, transparency, and long-term development.
General Administration of Upstream Petroleum Operations and Environment/Licenses and Leases
Title to any data and its interpretation relevant to upstream petroleum activities is vested in the government and handled by the Nigerian Upstream Petroleum Regulatory Commission under Section 68 of the Act. When petroleum is discovered 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 will apply to new licences and leases in the basin after classification, as well as any existing lease upon renewal, provided it is not applied to licences and leases that are already in place at the time of reclassification.
Only firms formed and legitimately operating in Nigeria are awarded a licence or lease under the Companies and Allied Matters Act. According to Section 70, the Act renames the current licences and leases connected to upstream petroleum activities and replaces them with the following:
Petroleum Exploration 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 Exploration License which will be granted to qualified applicants to; Win, work, and carry out petroleum exploration on a non-exclusive basis and; Petroleum Mining Lease which will be granted to qualified applicants to; Win, work, and carry out petroleum exploration on a non-exclusive basis and the Act also mandates that the Commission manage the environment in accordance with the Act in order to ensure environmental sustainability. According to Section 102 of the Act, a licensee or lessee engaged in upstream or midstream petroleum operations must submit an environmental management plan to the Commission or Authority, as the case may be, within one year or six months of the effective date or after the grant of the applicable licence or lease. The plan will be authorised if it conforms with applicable environmental laws and the applicant has the ability to mitigate and manage negative environmental effects.
General Administration of Midstream and Downstream Petroleum Operations.
Individual licences or permits may be granted, renewed, modified, or extended by the Nigerian Midstream and Downstream Petroleum Authority under Section 111 of the Act, with the exception of refinery licences, which are awarded by the Minister on the Authority’s suggestion.
According to Section 111(3) of the Act, a licence for midstream and downstream petroleum activities may be issued if the following criteria are met:
It meets the technical standards required for petroleum operations, as determined by the Authority; the location and size of the area occupied by the facilities or right of way are acceptable to the Authority; it meets the Authority’s health, safety, and environmental standards; and it allows for the efficient and cost-effective use of facilities and pipelines.
The Authority must also adopt rules and standards for the award or renewal of licences for midstream and downstream petroleum activities, as required by the Act.
Midstream and downstream gas operations management
The activities requiring a licence for midstream and downstream gas operations include establishing, constructing, or operating a gas processing facility; engaging in bulk transportation of natural gas by rail, barge, or other means of transportation, operating a gas transportation network, engaging in wholesale gas supply, and engaging in the construction or operation of petrochemical or fertiliser plants, among other things.
The Authority is also required by Section 126 of the Act to issue regulations governing midstream and downstream gas operations, including the establishment and operation of a wholesale natural gas market scheme to ensure natural gas supply continuity to customers, which applies to gas transportation pipeline owners and operators, shippers of natural gas, holders of natural gas storage and distribution licences, and gas retailers, as well as other matters.
Development of Host Communities
Another important innovation is the Petroleum Host Community Development (PHCD) under Section 234 of the Act, which is included in Chapter 3 of the Act. The PHCD’s goals include building long-term prosperity in host communities, giving direct social and economic benefits from petroleum activities to host communities, and developing a framework to promote host community development, among others.
The Act also provides for the incorporation of host communities development trusts under Section 235 of the Act, in which the settler is required to incorporate a Host Communities Development Trust for the benefit of the host communities for which the settler is responsible, and the Act specifies the timeframe for doing so. Sections 240 and 244 of the Act further detail the sources and distribution of the host communities’ development trust. The monies will be disbursed to host communities by the Board of Trustees, based on a matrix submitted by the settler.
Petroleum Fiscal Industry Framework
The Petroleum Fiscal Industry Framework is introduced in Chapter 4 of the Act (PIFF). PIFF’s goals include establishing a progressive fiscal framework that encourages investment in the Nigerian petroleum industry while balancing rewards with risk and increasing revenue to the Nigerian government; providing a forward-looking fiscal framework based on core principles of clarity, dynamism, and fiscal rules of general application, among others. The Act mandates that any money owed to the government from the petroleum industry be deposited to a federal account and that the Federal Inland Income Service be in charge of collecting government revenue from the petroleum business (FIRS).
Introduction of Hydrocarbon Tax
The Act establishes the Hydrocarbon Tax, which will be imposed on the earnings of firms involved in upstream petroleum activities on the onshore, shallow sea, and deep offshore, and will be due throughout each accounting period. The value of any chargeable oil adjusted to the measurement points based on the profits of the chargeable oil sold by the company and the value of all chargeable oil disposed of by the company must be the crude oil revenue of the company, subject to Section 262 of the Act.
For every accounting period, the chargeable tax is 30 per cent of the profit from crude oil for petroleum mining leases in offshore and shallow water zones, and 15 per cent of the profit from crude oil for petroleum prospecting licences onshore and shallow water. In addition to the hydrocarbon tax as provided in Section 302 of the Act, the Company Income Tax (CIT) is now applicable to companies, licensees, concessionaires, lessees, contractors, or subcontractors engaged in upstream, midstream, or downstream petroleum operations, subject to the Companies and Allied Matters Act.
Failure to comply carries an administrative penalty of N10,000 (ten thousand Naira), and if no other punishment is specified, a person found guilty faces a fine of N20 million Naira or any sum authorised by the Minister of Finance, as provided for in Section 297 of the Act.
Finally, Chapter 5 of the Act contains miscellaneous provisions dealing with judicial procedures arising from any litigation brought by the Commission or Authority or any of its personnel. Finally, the Petroleum Sector Act 2021, as previously said, establishes the legal, governance, regulatory, and budgetary framework for the Nigerian petroleum industry as well as the development of host communities.
Host Communities and people of the Niger Delta region voiced their displeasure with the 3% equity shares for Host Communities describing it as one of the worse laws in recent time.
The member representing Obio/Akpor Federal Constituency of Rivers State in the House of Representatives, Kingsley Chinda said the hurried passage of the act was a pointer to its inadequacies.
He said; ‘’Any law that will not make for peace in the country is a bad law and contrary to Section 4 (2) of the Constitution that empowers NASS to make laws for the peace, order and good governance of the country,
“The PIA will cause crises in the country and therefore is a bad law. Aside the devilish 3% for host communities, how do you leave the definition of host communities to the discretion of the operators? There must be some clear yardstick.
“How can you punish host communities for any sabotage on oil facilities? Who has the responsibility to protect the oil facilities?”
For the Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN), the benefits of the act outweigh its demerits.
The president of the association, Festus Osifo said the Act puts the nation at the front burner of industry growth as it makes each industry accountable for its operations.
“The bill has already been passed, we’ve accepted it the way it is today. Any aspect that is not really reflective of what it should be, over time an amendment could be sorted out and the provisions could be amended,” he said.