Is The Nigerian Petroleum Industry Act 2021 A Game Changer? By Adewale Ajayi

Is The Nigerian Petroleum Industry Act 2021 A Game Changer? By Adewale Ajayi

Though full implementation may take between 18-24 months, the expectation is that the PIA will indeed be the game changer that the Nigerian petroleum industry needs to fully transform itself as a competitive and transparent sector. Whether the PIA will fulfil these expectations, only time will tell!

Introduction

On 16 August 2021, President Muhammadu Buhari signed the Petroleum Industry Bill (PIB) into law. This put an end to the two decades of attempts made to pass the PIB. Since the enactment of the Petroleum Industry Act (PIA), 2021, the big question is whether this will indeed be the game changer that the Nigerian oil and gas industry badly needs given the ongoing transition to clean energy. Various countries have announced plans to replace internal combustion engines (ICE) powered vehicles with electric vehicles by 2030. Some have even declared their intention to become carbon neutral by 2050. In the light of the proposed changes, some banks have decided not to finance oil and gas projects in the near future. So, is Nigeria late to the party?

At the inauguration of the Steering Committee and PIA Implementation Group, the President stated that Nigeria had lost an estimated €42.38 billion worth of investments in the past 10 years due to stagnation and uncertainty over the petroleum industry. Consequently, Nigeria didn’t have any choice but to pass the PIA now to attract the desired investments into the sector. This has become even more critical when one considers the fact that there are many competing oil and gas projects within Africa, not to mention significant discoveries in the South American countries of Guyana and Surinam.

This article seeks to the answer the important question of whether the PIA will indeed be the game changer for the Nigerian oil and gas industry.

PIA Objectives.

The PIA seeks to achieve five (5) key objectives, namely:

  • Create efficient and 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
  • Promote transparency, good governance, and accountability in the administration of petroleum resources of Nigeria
  • Foster a business environment conducive for petroleum operations and
  • Deepen local content practice in Nigerian oil and gas industry.

The summary of these objectives is to have a law that is balanced, transparent, fair, and competitive enough to attract foreign investment while promoting the involvement of indigenous investors in the industry.

Key Features of the PIA

A detailed review of some of the provisions of the PIA will help to answer the question whether the law is indeed a game changer.

1. Discretionary Powers of the Minister – The Petroleum Act (PA) 2004, as amended, provides for the sole discretion of the Minister of Petroleum in the award of oil licences/leases and grant of ministerial consent on assignment of petroleum interest. However, under the PIA, the Minister can only exercise the discretion on the recommendation of the Upstream Regulatory Commission (The Commission). Moreover, he must act within a defined period (90 days in the case of award of an oil block and 60 days in respect of ministerial consent to assignment). Failure to act within the stipulated period will constitute a deemed approval of the recommendations made by the Commission. The review of the Minister’s discretionary power will help to mitigate the uncertainties often associated with award of oil interest and grant of ministerial consent. Before now, such approval could take up to 1 year before being granted. The PIA also specifically states that all awards of oil blocks must be based on the result of competitive bidding rounds conducted by the Commission. The expectation, therefore, is that this will put an end to discretionary awards of oil blocks.

However, the question that is often asked is what can the Commission do in the circumstances where the Minister is also the President, who has the power to remove any member of the Commission without recourse to the Senate? The PIA also ensures that the Minister be mainly involved in setting policy direction and providing general oversight to the oil and gas industry and not be directly involved in regulatory, commercial, and technical matters.
2. Establishment of two (2) Regulators – Under the PA, the Department of Petroleum Resources (DPR) is the regulator for the petroleum industry. However, the PIA decides to follow a different route by providing for two regulators: The Commission and the Midstream and Downstream Authority (The Authority). The Commission will focus on upstream petroleum operations while the Authority will be responsible for the midstream and downstream operations. There is, therefore, clear demarcation of responsibilities while also avoiding a situation of a super regulator with wide span of control as is the case today.

Given the transition to clean energy by many countries, the midstream sector will become extremely critical to the industrialization of the country. If we cannot sell our petroleum resources, we can (at least) refine the oil into petroleum products while also processing the gas for power, as feedstock to gas-based industries and fuel for commercial purposes. Surplus petroleum products and outputs from the petrochemical and fertilizer plants can be exported to generated foreign exchange for the country. The focus by the authority on midstream operations and the establishment of the Midstream and Downstream Infrastructure Fund will help to achieve this objective. This will also ensure that the country do not lose sight of the extractive sector, which is the responsibility of the Commission. One can understand the concerns on the part of people that frown at the establishment of the two regulators given the associated cost. However, if we can get the midstream right, the benefits will more than outweigh the costs.
3. Effective Acreage Management – One of the reasons Nigeria has had limited licensing rounds in the past years is lack of available oil blocks even though the PA provides for relinquishment of 50% of Oil Mining Leases (OMLs) after 10 years of their issuance. The PIA has introduced aggressive provisions with respect to drill or drop or deep rights. Failure to comply with the approved field development program will result in the relinquishment of the relevant licence or lease. In addition, after 10 years, the licensee or lessee must give up any area that is deeper than the deepest producing formations or does not fall within a boundary of producing fields. Of course, there are also those parcels that will become available because of voluntary relinquishment. An effective enforcement of these provisions will make available acreages for future licensing rounds.
4. Frontier Exploration Fund – The PIA provides for the establishment of a Frontier Exploration Fund, which will be financed by 30% of the profit oil and gas of NNPC Limited from production sharing contracts, profit sharing contracts and risk service contracts. It should be noted that a frontier area is not limited to the Northern part of Nigeria. However, it includes any area that has potential for hydrocarbons but has not been explored or where there has been discovery, there has been no development. The Commission shall have the power to decide which area constitutes a frontier area though such areas will include the following basins: Dahomey, Anambra, Benue, Bida, Sokoto and Chad.

The major driver for exploring for petroleum in wildcat areas is to boost petroleum reserves. For the past 20 years, the country’s oil reserves have stood at about 37 billion barrels. Depletion rate is about 2% given the current rate of production. Simply put, if we do not find new petroleum sources, we will run out of oil in 50 years! However, there is need for caution in spending money exploring for petroleum resources in the frontier areas. In the past, the country had spent so much money exploring for oil in the Yola basin without any thing to show for it. We, therefore, must strike a delicate balance between optimizing production in the deep offshore and Niger Delta and spending limited and scarce resources exploiting unproven or high-risk areas.
5. Environmental Remediation Fund – The provision to create an environmental remediation fund to address oil spillage and related disasters must be applauded. We should remember the BP Horizon rig disaster of 2010. For a period of 87 days, 5 million barrels of oil flowed uncontrollably into the Gulf Coast polluting the waters and killing marine life. As at the end of December 2020, BP had spent about €55.10 billion in clean-up cost and legal fees. It should also be noted that 11 people died in the blow out of the rig. In another case, it took Shell 50 years to pay €94.09 million to Nigeria’s Ejama-Ebubu community to settle a lawsuit over an oil spill, which the company maintained was caused by third parties. There was also the fine of €34.76m imposed by the Nigerian Supreme Court against Shell for an oil spill. There have been repeated claims of oil spills in the Niger Delta and which are still outstanding. The objective of the fund is to provide readily available finance for the timely clean up anytime a spill occurs, and this should be expected given the nature of petroleum operations. This will help in significantly improving the quality of life of the people in the Niger Delta area.
6. Host Community Development Trust Fund – The law requires settlors (defined as anyone with interest in Petroleum Producing Licence and Petroleum Mining Lease) to set up Host Community Development Trust (HCDT) Fund within 12 months of the commencement date of the Act. The upstream operators will contribute 3% of the operating expenditure incurred in the previous year to the Fund though they will continue to contribute the annual 3% of their budget to the Niger Delta Development Commission (NDDC). The establishment of the Fund will give the host communities a say on the projects being executed. It will also ensure that those projects are based on the actual needs of the communities. However, the communities have the obligations to ensure that the designated facilities and other infrastructure within their communities be protected from vandalism. Any cost of repair of damage to the facilities will be recovered from the contributions due to the affected communities.

Some host community leaders have questioned the adequacy of the 3% devoted to the HCDT Fund and have refused to support it. However, it should be noted that the 3% is an add-on to existing interventions. What should be paramount at this time is that the Funds are judiciously used for the benefit of the host communities.
7. Fiscal Provision – The Fiscal provisions in the PIA will apply upon conversion of existing licences /leases, termination of expiration of unconverted licenses/leases and renewal of the OMLs. Though the law provides for a dual tax regime: hydrocarbon tax and companies income tax for upstream operators, the headlines rates are fair and competitive when compared with other jurisdictions. Expectedly, operators have raised concerns over the Cost-Price Ratio limit of 65%. However, the law has since been fine-tuned to exclude, from the calculation of the cap, expenses such as lease rentals, royalties, NDDC levy, HCDT contribution, environmental remediation contribution and contribution for decommissioning and abandonment. The royalty rates have also been reduced with preferential rates for gas produced in-country.

Conclusion

The PIA 2021 may not be a perfect law. However, it is a good way to start given the provisions highlighted above. It is hoped that some of the ambiguities and contentious areas of the Act will be revisited and refined through the annual Finance Acts. There is also the key question of how to ensure the effective and efficient implementation of the provisions of the Act. This has often been one of the challenges Nigeria has faced in the past. Hopefully, the timely establishment of the Steering Committee/ Implementation Working Group will go a long way in addressing this issue. It is also hoped that the Regulators will be quickly set up and the various regulations required to operationalize the law developed as soon as possible.

There must be adequate efforts to ensure that the people with the right set of skills, experience and knowledge be transferred to the various institutions right from the outset and not just a wholesale transfer of existing staff. Otherwise, nothing would have changed. It is also important that continuous engagement with all stake holders be carried on to secure buy-in and support.

Though full implementation may take between 18-24 months, the expectation is that the PIA will indeed be the game changer that the Nigerian petroleum industry needs to fully transform itself as a competitive and transparent sector. Whether the PIA will fulfil these expectations, only time will tell!

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