In over two decades, crude oil has been the driving force behind Nigerian economy, accounting for about 90% of her export earnings. This invariably caused several governments to place focus and priority on this sector by attempting to create an all-encompassing Petroleum Industry Law.

Consequently, in September 2020, President Muhammadu Buhari sent a new Petroleum Industry Bill to the National Assembly for consideration by the Senate and the House of Representatives. After several months of scrutiny, a harmonized version of the bill was passed by both legislative houses on 16^th July 2021.

On 16^th August 2021, the President signed the much-anticipated Petroleum Industry Bill into law after two decades of failed attempts. Thus, The Petroleum Industry Act 2021 (‘The Act’), repeals;

• 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 LFN2004;
• Motor Spirits (Returns) Act, CAP M20 LFN2004;
• Nigerian National Petroleum Corporation Act No. 94 of 1993, CAP N124 LFN2004;
• Nigerian National Petroleum Corporation Act (NNPC) 1977 No, 33 CAP N123LFN as amended, (when NNPC ceases to exist pursuant to section 54(3) of this Act);
• Petroleum Products Pricing Regulatory Agency Act2003;
• Petroleum Equalization Fund (Management Board etc.) Act No. 9 of 1975, CAPP11 LFN 2004;
• Petroleum Equalization Fund 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

However, the provisions of certain laws are saved until termination or expiration of the relevant oil prospecting licenses and mining leases including the Petroleum Profit Tax Act, Deep Offshore and Inland Basin PSC Act.

The Act seeks to provide a framework for the legal, governance, regulatory and fiscal matters of the Nigerian Petroleum Industry as well as the development of Host Communities. It contains 5 chapters, 319 sections and 8 schedules. This article gives a chapter by chapter review of the newly enacted petroleum Industry Act and highlights the key points therein which will be discussed below.

1.  Governance and Institutions 

This chapter focuses on transparency, good governance and accountability in the administration of petroleum resources in Nigeria.  It further highlights the creation of a commercially oriented national petroleum company and encouraging friendly business environments for petroleum operations.

The Act commences with governance and the establishment of the Nigerian petroleum sector’s institutional framework. The Minister, two new regulatory bodies – the Nigerian Upstream Regulatory Commission (the “Commission”) and the Midstream and Downstream Regulatory Authority (the “Authority”), and the Nigeria National Petroleum Company Limited (“NNPC Limited”) (successor company to the Nigerian National Petroleum Corporation) are the four distinct players in the sector.

The Minister

• The Act segments the Nigerian petroleum industry into the upstream sector on one hand, the midstream and downstream sectors on the By virtue of Section 3  of the Act, the general oversight powers over the petroleum industry (across all segments) is vested in the Minister of Petroleum (‘The Minister’). It also empowersthe Minister to negotiate treaties or other international agreements on behalf of the government on petroleum-related issues. Interestingly, The Act inter alia, restricts the Minister’s powers in granting or revoking prospecting licenses or mining leases. Previously, such powers were exercised at the discretion of the Minister. However, the Act mandates such powers be exercised following the Commission’s recommendation.

Upstream Petroleum Operations and Establishment of The Commission

• Section 4 of The Act establishes the Nigerian UpstreamRegulatory Commission (‘The Commission), giving it regulatory powers over the technical and commercial activities of the upstream petroleum operations. The Commission is further empowered to enforce compliance with the conditions of all leases, licenses, permits and authorizations issued to companies in the sector. The Act in Sections 7&8, spells out the functions of The Commission, granting it powers that were exercised by the Department of Petroleum Resources (‘DPR’). Thus, Section 10 vests the Commission with the power to enforce the provisions of any regulations, policies or guidelines formerly administered by the Department of Petroleum Resources or the petroleum inspectorate, with respect to upstream petroleum operations, Thus, the Commission presently acts as a successor to the DPR and the Petroleum Inspectorate Division. The Commission is to be run by a governing body which shall be responsible for the policy and general administration of the Commission.

Creation of Frontier Exploration Fund

• In a bid to encourage activities in frontier basins and to ensure that adequate promotional activities in this area are undertaken, the Act provides for a Frontier Exploration Fund. By virtue of Section 9 of the Act, the Frontier Exploration Fund shall consist 30% of the share of profit from oil and gas of the Nigerian National Petroleum Company Limited (NNPC) for the development of frontier acreages.

Midstream and Downstream Petroleum Operations and Establishment of the   Authority

• Another key point in this chapter is the establishment of the Nigerian Midstream and Downstream Petroleum Regulatory Authority (‘The Authority) responsible for the technical and commercial regulation of the midstream and downstream operations in Nigeria. A cursory analysis of Section 29 of the Act would suggest that the sole power to grant, issue, modify, cancel, or terminate all licenses, permits and authorizations for midstream and downstream petroleum operations, is vested in the Authority. This is a departure from what was obtainable in the previous regime whereby such powers were typically vested in the Minister.

 

• Alsoworthy of note is that Section 47 of the Act provides for the Authority Fund and imposes a 0.5% levy to be imposed on the wholesale price of petroleum products in Nigeria as the source of this fund.

Creation of Midstream Gas Infrastructure Fund

• Section 52 of the Act creates a Midstream Gas Infrastructure Fundto “make equity investments of Government-owned participating or shareholder interests in infrastructure related to midstream gas operations aimed at – (a) increasing the domestic consumption of Natural Gas in Nigeria in projects which are financed in part by private investment, and (b) encouraging private investment.” The source of the Midstream Gas Infrastructure Fund shall be 0.5% levy on the wholesale price of petroleum products sold in Nigeria, and natural gas produced and sold.

 

• A combined overview of Sections 47 & 52 of The Act shows the Impositionof 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 Nigerian National Petroleum Company Limited

• The Act in Section 53 provides for the incorporation of a commercial and profit-focused Nigerian National Petroleum Company Limited (‘NNPC Limited’) under Companies and Allied Matters Act within 6 monthsfrom commencement date of the new piece of legislation. Ownership is to be 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 Limited. This structure is expected to pave the way for eventually sale of shares to Nigerians.

 

• NNPC Limited shall be operated like any other incorporated entity. The Act specifies that the company pay its fair share of royalties, fees, rents, taxes and other payments due to the Government and that it should pay out the bulk of its profits as dividends after retaining 25% for reinvestment. Any sale or transfer of shares of NNPC Limited shall be at a fair market value and subject to an open, transparent and competitive bidding process.

 

• Section 59 further states that the composition of the NNPC Limited board shall be determined in accordance with the provisions of the Companies and Allied Matters Act and its Articles of Association.

 

• 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 licenses and mining leases.

 

• The Act provides that employees of NNPC shall be deemed to beemployees of NNPC Limited on terms and conditions not less favorable than those enjoyed prior to the transfer of service and shall be deemed to be service for employment-related entitlements as specified under any applicable law upon the incorporation of NNPC Limited.

2. Administration

The key objectives of this chapter is to promote exploration and exploitation of petroleum products for the benefit of the Nigerian people, ensure sustainable development of the petroleum industry and create a conducive business environment within the petroleum industry inter alia.

• The provisions of chapter 2 of The Act applies to activities withinor associated with petroleum operations and the petroleum industry and persons conducting such activities. It caters for the administration of Upstream Petroleum operations, Midstream and Downstream Gas Operations, and Midstream and Downstream Petroleum Operations.

 Administration of Upstream Petroleum operations

• Section 70 of the Act provides for Licenses and Leases related to Upstream Petroleum operations. The Commission is saddled with receiving applications for licenses and leases and doing the necessary technical and commercial evaluations in order to make recommendations to the Minister on the granting of licenses and leases to the appropriate applicants. The principal licences/lease to be given for upstream operations will take the following form: Petroleum Exploration License (PEL) is provided in section 71 of the Act which may be granted to qualified applicants to explore petroleum on a speculative and non-exclusive basis. The holder of this license shall have non-exclusive right to carry out petroleum exploration operations within the area provided for in the license. It subsists for three (3) years and maybe renewable for additional period of three (3) years. This license is equivalent to the current Oil Exploration License (OEL).

 

• Petroleum Prospecting License (PPL), is provided for under Section 72, it is granted to qualified applicants to carry out petroleum exploration operations on an exclusive basis. A petroleum prospecting license for onshore and shallow water acreages must be for a term of not more than six (6) years, with a three-year initial exploration phase and a three-year possible extension period. It shall be for a term of not more than ten (10) years for deep offshore and frontier acreages, with a 5-year initial exploration phase and a 5-year possible extension period. This license is equivalent to the current Oil Prospecting Licence (OPL).

 

• Petroleum Mining Lease (PML), this is provided for under Section 81 of the Act. It may be granted to qualified applicants to search for, win, work, carry away and dispose of crude oil, condensates and natural gas. It shall subsist for a maximum period of twenty (20) years and maybe renewable for one or more additional period of not more than twenty (20) years each, subject to meeting specified conditions. This license is equivalent to the current Oil Mining Lease (OML).

 

• A holder of a Petroleum Prospecting License or Petroleum Mining Lease shall not assign, novate or transfer his license or lease or any right, power or interest without prior written consent of the

 

• Upon expiration, all existing OPLs and OMLs would be automatically converted to PPLs and PMLs. Section 92 of the Act on the otherhand, allows holders of OPLs and OMLs under the present administration to convert them to PPLs or PMLs freely and voluntarily.

 

• The Act contains a list of condition precedents that must be included inthe Conversion Contracts. One of such stipulation is that all pending arbitration and court disputes must be ended, any stability provisions or guarantees provided by NNPC in respect of oil prospecting licences or oil mining leases to be converted shall be null and void, and the fiscal stabilization clauses incentive provisions contained in sections 11 and 12 of the Petroleum Profit Tax Act shall not apply.

 

• In order to guarantee the safety and protection of people and the environment, the combined provisions of Sections 79&102 respectively states that the Commission requires an upstream petroleum licensee or lessee to submit an environmental management plan for approval in respect of projects that need environmental impact assessment within one year of the Act’s effective date or six months following the award of the related license or lease. The Commission approves such a plan if it complies with the provisions of the Act and the applicant hasrequisite capacity to restore and manage negative environmental impacts. The Act also provides that chemicals shall not be utilized for upstream petroleum operations, except the Commission grants an applicable permit and approval.

 

• Due to its environmental impact, the Act has upheld the prohibition of gas flaring, save in limited circumstances when there is no other viable choice than to flare gas.

 

• According to the Act, a licensee or lessee must pay a penalty determined by the Commission through regulation. The following are the only known few cases where the Act may authorize gas flaring:

1. in the event of a disaster
2. under the terms of a Commission-issued exception.
3. in accordance with existing regulations, as an acceptable safety practice.

Administration of Midstream and Downstream Petroleum Operations

• The Nigerian Midstream and Downstream Petroleum Regulatory Authority (the “Authority”) has the power to grant, renew, modify or extend individual licenses or permits but where it relates to the establishment of refineries, the license is to be issued by the Minister on the recommendation of the

 

• The Authority has the power to set the pricing framework for petroleum transportation, distribution, and processing through regulations. Tariffs will be set in US dollars or other foreign currencies as appropriate in order to attract foreign investment in midstream and downstream petroleum operations, with payments made in the respective foreign currency or equivalent value of the naira at the open market rate published by the Central Bank of Nigeria as applicable under the regulations.

Administration of Midstream and Downstream Gas Operations

• The Act requires that a holder of an existing lease, license, or permit who is involved in midstream or downstream gas operations prior to the effective date of The Act must apply to the Authority within 24 months of the effective date, and the Authority may issue the relevant license or permit, if

 

• According to Section 125, involvement in midstream and downstream or downstream gas operations without a license or authorization commits an offence and faces a penalty of – (a) 1 year in prison or a fine imposed by regulation in the case of a license-required Activity; or (b) 6 months in prison or a fine imposed by regulation in the case of a permit-required Activity.

 

• The Act in Section 314 proposes that employees of the Department of Petroleum Resources, Petroleum Pricing and Product Regulatory Agency, the Petroleum Equalisation Fund (Management Board) and Petroleum Inspectorate be transferred to their respective regulators.

3. Host Communities Development

Notwithstanding the fact that the host communities want more from the environmental effects of oil operations, in the light of all the agencies participating in Niger Delta development, the government considers that adequate measures are currently being carried out in this field.

Chapter 3 of the Act is focused on Petroleum Host Community Development (‘PHCD’). Its key objective is to encourage sustainable development and prosperity within host communities, provide host communities with direct social and economic benefits from oil operations, ensure harmonious coexistence between licensers or leasing parties and host communities and to establish a framework to facilitate host community growth. This chapter is generally aimed at increasing the quality of life of the host communities.

Incorporation of Host Community Development Trust (‘The Trust’)

• Section 235 of the Act instructs that a settlor or group of settlors under a joint operating agreement must establish a trust for the benefit of the relevant host communities and where a group of settlors are running operations under a joint operating agreement, the operator appointed under the agreement is responsible for compliance with this chapter on behalf of the settlors.

 

• Settlor under the Act is defined as “a holder of an interest in a petroleumprospecting license or petroleum mining lease or a holder of an interest in a license for midstream petroleum operations, whose area of operations is located in or appurtenant to any community or communities”.

 

• The Act specifies the following timelines for establishing the Trust:for existing OMLs, within 12 months of the Bill’s effective date; for existing designated facilities, within 12 months of the Bill’s effective date; for existing new designated facilities under construction on the effective date, within 12 months from the effective date; for existing oil prospecting licenses, prior to the application for the field development plan; for petroleum prospecting licenses and petroleum mining leases granted under this Bill, prior to the application for the field development plan; for licensees of designated facilities granted under this Bill, prior to commencement of commercial operations.

Introduction of The Host Community Development Trust Fund

• In pursuance tothe Act, each host community development trust must create a fund called The Host Community Development Trust Fund (‘the Fund’).  Under Section 240 of the Act, it prescribes the source of funding for the Trust and states that each settlor is expected to donate a certain percentage of its Actual operational expenses in the previous fiscal year to the Fund. According to sections 256 & 257 therein, the Fund is tax-exempt, and settlor contributions are deductible for hydrocarbon tax and companies’ income tax purposes, respectively. The host community development trust fund may also receive gifts and donations for the purpose of achieving its objectives and profits accruing to the Trust’s reserve fund shall also be contributed to the applicable host community development trust fund.

 

• For the purposes of establishing the Trust, the settlor shall appointand authorize a board of trustees (the ‘Board of Trustees’), which shall apply to the Corporate Affairs Commission to be registered as a corporate body under the Companies and Allied Matters Act in the manner prescribed in this chapter. The 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.

 

• Section 251 also requires the settlor to perform a host community needs assessment to evaluate each host community’s needs and develop aCommunity Development Plan to satisfy those needs.

 

• In order to achieve its key objective, the Act puts in place a framework forthe allocation of the Fund and states that 75% of available cash will be used for capital projects, 20% for reserves, and 5% for administrative expenses. In the event of vandalism, sabotage, or other civil unrest resulting in damage to petroleum facilities or disruption of production activities, a community will forfeit the cost of repairs. The settlor must give a matrix to the Board of Trustees which shall be used for the distribution of the Fund to the host communities.

4. Fiscal Framework

The cardinal objective of this chapter is to create a progressive fiscal framework that encourages investment in Nigeria’s petroleum industry, offers transparency, increases government revenues, and ensures a fair return for investors.

Introduction of Hydrocarbon Tax

• This chapter introduces the Hydrocarbon The Federal Inland Revenue Service (FIRS) shall administer andcollect hydrocarbon tax which will be chargeable from the profits of upstream petroleum companies in the onshore and shallow water. The hydrocarbon tax, which applies to crude oil, field condensates and associated gas natural gas liquids, is subject to different license charges which is 30% on converted PML’s and 15% on converted PPL’s.

 

• Section 260 of the Act clearly states that hydrocarbon tax will only apply torelated gas crude oil, condensates, and natural gas liquids. Even if they are then mixed with oil, associated gas, condensates, and natural gas liquids from non-associated petroleum gas will be exempt from the tax if the related amounts can be determined at the measurement locations or at the exit of the gas processing plant. The Act has effectively addressed the dispute concerning the fiscal legislation that applies to condensates and NGLs that are then mixed with oil.

 

• For the purpose of ascertaining crude oil revenue of a company, Section 262provides that the crude oil revenue of a corporation for any accounting period, shall be the value of any chargeable oil adjusted to the measurement points, based on the – (a) the revenues from the sale of all chargeable oil; and (b) the total amount of chargeable oil disposed of. The aggregate value of crude oil estimated for royalties for all fields will be used to establish the value of chargeable oil disposed of. As a result, unlike the Petroleum Profit Tax system, extraction, storage, and transportation costs will no longer be factored into taxable revenue under the hydrocarbon Furthermore, revenue derived from petroleum operations would be exempt from taxation under hydrocarbon tax.

 

• To encourage exploratory activity in that area, the HT will not apply to deepoffshore projects. Due to the fact that hydrocarbon tax is a resource tax, charges that are not directly related to production will not be deductible. However, such expenses will be deductible against a company’s income tax.

Deductions under the Hydrocarbon Tax

• Section 263 generally states that 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.

 

• In addition to the usual disallowable expenses, section 264 of the Act introduces the following as nondeductible expenses:Penalties and gas flare fees; Expenditure for the purchase of information on existence and extent of petroleum deposits, except in respect of geophysical, geological and geochemical data and information; Financial/ bank charges; bad debts/ questionable loans; Interest on loans; Arbitration and litigation costs; Costs incurred outside Nigeria including head office, shared costs, research and development cost and affiliate costs; All custom duties, amongst others.

Chargeable Profits and Allowance

The Act in section 266 makes key changes to the chargeable profit and allowance calculation in removing the capital allowance restriction; introduction of Production Allowances to replace investment tax allowances and credits; deactivation of petroleum investment allowance; separation of acquisition costs of petroleum rights into the value of rights and value of assets, so that capital allowance claimable on the value of rights will now be 20% per year for Company Income Tax purposes. For hydrocarbon tax purposes, however, the yearly allowance on the value of rights fraction will be 20%, while the value of assets will be tax depreciated at 20% each year, subject to a 1% retention in the books.

Consolidation of Taxes

• Companies participating in upstream petroleum operations will be subject to company income tax, and will be required to settle their company income tax liability on an annual basis, using a similar estimate mechanism to that used for hydrocarbon tax. However, for company income tax reasons,hydrocarbon tax will not be deductible. The company income tax will be applied as an entity-based tax, allowing results to be consolidated across terrains. This means that there are no constraints on individual fields.

 

• Enterprises that purchase loss-making companies in order to benefit from the aforesaid incentive, however, will not be able to claim the acquiredcompany’s losses.

Sequel to the fierce impact of the global oil price and the COVID-19 pandemic on the world economy, particularly the oil and gas industry, it is unavoidable that businesses would acquire bad/questionable loans. As a result of the exclusion of bad/doubtful debt from permissible deductions, businesses may be forced to pay taxes on profits that are not recoverable.

Furthermore, there is a risk that this provision will impair the cash flow of these companies since they may be forced to settle their tax bills with capital or funds set aside for additional investments, with no recourse to reclaim the amounts owing to them by the government.

5. Schedules and Miscellaneous

The Act contains 8 schedules which deals respectively with;

• Dealing with Rights of Preemption;
• Incorporated JointVentures;
• Domestic Base Price and Pricing Framework;
• Pricing Formula for Gas Price for the Gas Based Industries;
• CapitalAllowances;
• Production Allowances and Cost Price RatioLimit;
• Petroleum Fees, Rents and Royalty;
• Creation of the Ministry of Petroleum Incorporated

Few other key points include;

• The 3^rdschedule provides that The Authority must consider the following considerations in setting the domestic base price,

1. The price must be high enough to stimulate voluntary gas production in order to meet domestic demand.
2. The price shall not be greater than the average of identical natural gas prices in major emerging countries that are substantial natural gas producers, as determined by the Authority unless the first condition is
3. The price will be modified annually to take inflation into consideration.
4. Within three months of the Act’s effective date, the Authority must decide the domestic base price based on regulations and adjust it where circumstances in the domestic market necessitate it, in accordance with legislation.

• In the 7^thschedule, 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

Conclusion

The passage of the long-awaited Act is a major win for the petroleum industry and the country as a whole, as it sends a strong message to international investors. As a result, the newly enacted Petroleum Industry Act of 2021 (PIA) is intended to boost investor confidence in Nigeria’s petroleum industry while also increasing job prospects for the host communities.

Recommendations

The newly enacted Petroleum Industry Act, 2021 is quite a commendable, but imperfect piece of legislation. Taking into consideration the global advancement across all industries in-terms of technology and use of expert human resources for the advancement of state economy, the respective Regulators contemplated by S.314 of the Act should thread carefully. It is critical for the Regulators to do a complete assessment to determine qualification. Employees should only be transferred if they can show that they have the necessary experience, knowledge, and abilities to succeed in their new roles. It’s also critical to do a manpower requirements assessment to identify how many personnel each regulation requires. Also, for proper accountability and decision-making, administrative organs should use technology to interface with operators. Licensing applications, periodic returns, and all other data flows should be digitalized (the accountability model adopted by the United Arabs Emirates for their oil and gas industry, should be adopted). This is a necessary foundation for qualitative data that will guide decision-making and successful sector administration under the Act.

With reference to the establishment of the Petroleum Host Community Fund under the Act, there are a few lacunas and the questionable relevance of the existing contributions to the Niger Delta Development Commission (NDDC). The Act does not clearly state if the host community fund contribution will be combined with the existing contribution of a 3% levy to the NDDC. There is also the question of whether or not the 3% of annual operating expenditures will be enough to satisfy the needs of host communities.

Nonetheless, accountability for the prudent use of funds is critical and we can see the efforts of the Act in ensuring this, by defining the source and ratios of allocating the Funds therein.