PETROLEUM INDUSTRY ACT: HIGHLIGHTS, PROSPECTS & CHALLENGES.

Click here to download the PDF of this Article.

INTRODUCTION

Against all odds, we finally have the Petroleum Industry Act (hereinafter referred to as ‘PIA’) in our midst walking the talk. But was it all worth the hype? For decades now, there have been calls to finalize the omnibus legislation that would serve some whiff of hope for the petroleum sector, but all fell flat.

However, the “revolutionary” bill was on everyone’s lips when it was finally passed at the National Assembly. Two months later, President Muhammadu Buhari on August 16, 2021, signed the bill into law. This was a watershed moment, to say the least. This primal gesture sends a strong cue to investors depicting the countries’ commitment to providing an enabling environment for businesses to thrive. But what exactly does this act bring to the fore?

PIA: SCOPE and OBJECTIVES.

The PIA arrives with lofty optimism and desired clarity, which without, has hitherto reduced the investment opportunities that the petroleum sector embodies, largely in revenue. Gbite Adeniji, a leading expert in the oil and gas industry noted that, the PIA is more of an economic legislation than a petroleum act. It comes with a tremendous financial framework to navigate Nigeria’s oil and gas industry. The Act alters several legislations that were applicable before now. Structurally, the Act is divided into (5) chapters and 319 sections with innovative regulations for the development of tectonic economic infrastructure, assertive global mandate and the overall benefits of the society.

The central objectives of the PIA are to inter alia;

  • Create a conducive environment to enhance the mutual benefit of petroleum operators in Nigeria.
  • Create regulatory and policy institutions
  • Define the relationship between society and investors
  • Establish an innovative mechanism to fund petroleum host communities directly through trust funds
  • Improve transparency and accountability in the sector.

In the face of endemic corruption, disappointing environmental ebb, and a weak-kneed administration that has so far eroded our gains, it is refreshing to see the PIA come around to prove its mettle.

SO, WHAT’s NEW?

As earlier stated, the PIA makes revisions to a handful of oil and gas regulations in many breadths. Our focus in this piece is to discuss in simple terms some key designs that cut across the entire Petroleum Industry Act.

  • An NNPC Overhaul; a New Entity:

Interestingly, the PIA wears a remake in the context of incorporating a new NNPC[1] as a limited liability company under the extant CAMA. This would be done within (6) six months from the commencement of the Act. In parallel, the Minister must, within (18) months, ascertain the assets & liabilities to be inherited by the current company and which would remain with the FG. It will also serve as the agent of the former NNPC until it becomes inert.

The NNPC Limited would operate on a commercial basis profitably without resorting to government funds. Further, the shares held by the company can only be transferable upon the approval of the FG as the endorsement by the NEC.[2]

The Minister: Although the Minister retains a broad exercise of administrative powers, the PIA still exposes him to some modifications. First, it transfers the power of the minister to make regulations on the upstream, midstream and downstream sector to the Commission[3] and The Authority respectively. Similarly, the Minster cannot revoke or assign any petroleum prospective licenses and mining leases in a vacuum unless with the recommendation of the Commission. The Minister also has a pre-emption right over petroleum and petroleum products in the face of a national emergency. This presupposes a ‘first option to buy/acquire arrangement. He may also order a cutback of crude oil levels or natural gas to reflect international oil agreements of which Nigeria is a party.

  • “The Commission” and “The Authority

To start with, The National Upstream Petroleum Regulation Commission (the commission) which displaces the DPR[4] shall supervise and ensure the due compliance of all regulations, specifically governing the upstream petroleum operations and also perform all other technical & commercial functions as specified under the law, to wit, cost control, issuing permits, implementing the cutback order of crude oil/condensate production by the Minister among others.

On the flip side, the Nigerian Midstream and Downstream Petroleum Regulatory Authority (the authority)[5] is established to, inter alia regulate the midstream and downstream petroleum operations and promote a competitively healthy market with an improved infrastructural development. Also, the body is to define the base price applicable to concerned stakeholders, formulate a suitable framework for pricing/tariffs in the downstream sector. This body also has to foster and administer the prompt payments of a 0.5% wholesale price of petroleum products and natural gas to the MDGI Fund.[6]

  • Hydrocarbon Tax:

Section 260 of the Act provides that the Hydrocarbon tax (HT) shall only be levied on the profits of companies engaged in the upstream petroleum operations relating to crude oil, condensates & natural gas liquids from associated gas. In a sense, HT will also apply alongside CIT.[7] By this, the provisions of PPT have been repealed by (the Act).

The HT is chargeable at 15–30% on the items specified above.  There are also provisions for deductible items, non-deductible and minimum tax payments. Late filing of tax returns hereunder attracts a fine of N10 million on the first day and N2 million for subsequent days. The body charged with the collection and assessment is the Federal Inland Revenue Service.

  • Frontier Exploration Fund, Host Community Devt. Trust Fund, and Midstream & Downstream Gas Infrastructure Fund:
  • Frontier Exploration Fund (FEP)

Basically, the Frontier Exploration Fund directly pertains to the frontier territory[8] spread across strategic and conceivable places in the country. Put simply, it is a reinvestment fund set aside for the oil production business in Nigeria.

For context, the 30% pooled from the oil and gas profits of the new NNPC limited is what makes up the FEP which shall then be managed by (the commission).

  • Host Community Devt. Trust Fund

The Host Communities are territories relative to the Settlor’s area of operations, including the coastal regions for deep offshore operators or as may be determined by the Settlor.

Also, the Settlor shall, within 12 months of the effective date of the Act, establish a trust registered with the Corporate Affairs Commission for the benefit and development of the host communities. Principally, there will be a 3% payment to the fund from the annual operating expenses of the upstream companies. This shall be exempted from taxes. The Act went further to provide a framework as to how the funds will be shelled out.[9]

  • Midstream & Downstream Gas Infrastructure Fund (MGIF)

The MGIF is created as a body corporate to be supervised by a Governing Council. The fund shall be financed through 0.5% of the wholesale price of petroleum products and natural gas among other sources.[10] Similarly, the Authority shall ensure the prompt payment of designated fees to the fund.

The levy, hereunder, shall be due within 21 days of the sale of petroleum products and natural gas in Nigeria. The fund is intended to foster private investments, encourage natural consumption of gas et al.

  • Gas Flaring:

The Act attempts to cut away incidences of destructive gas flaring. This is done by creating quite a stringent framework for how operators handle gas processing in the Oil and Gas sector.[11] It is an offence to flare gas except under specific conditions. Where any act is done contrary to these provisions, then such licensee or lessee shall be liable to a penalty as prescribed under (the regulation).[12]

A licensee/lessee producing natural gas under the Act is required to submit before (the commission) a monetization and natural gas flare elimination plan within 12 months of the effective date.

IMPACTS

The Petroleum Industry Act holds the propensity for long term gains in oil and gas production, if carefully implemented. The Petroleum Industry Act has taken remarkable steps towards the attractive reform of NNPC’s governance structure and addresses particular environmental and social concerns.

That crude oil dominates about 90% of Nigeria’s export earnings hasn’t helped much, seeing that the industry is beset with a handful of problems. The Act includes rules and regulations laid down for environmental clean-ups and introduces a new dispute resolution mechanism between the government and Oil companies.

The creation of a commercially oriented National Petroleum Company to attract more domestic and foreign investors would quickly make the Oil sector a hotspot. The Act encourages the inflow of investors which would in turn make the industry more effective. Private investors will help in the rehabilitation and development of the new oil refineries; their investment could also reduce Nigeria’s reliance on imported refined oil.

The Act would bring noticeable and positive changes to the health care facilities and overall socio-economic development of the host communities The Act attempts to end flaring of gas and similar issues that pilot’s environmental pollution.

Furthermore, The PIA decreases the royalty rate for offshore fields producing a maximum of 15,000 barrels per day to 7.5% from the current 10% and raise the royalty threshold of crude oil price from $35 to $50 per barrel.

ANY MAJOR CONCERNS?

The Petroleum Industry Act has faced a number of grouses from stakeholders, particularly in southern Nigeria with the Pan-Niger Delta Forum and other groups describing its provisions as ‘unjust, satanic and provocative’. In Parallel, opposing both the 3% cut to host communities and the 30% allocation for the exploration of oil in the frontier basin then raises the question that “how much is really much?”

Additionally, the Forum rejects the ownership structure of the proposed Nigeria National Petroleum Company Limited. The forum disagrees that the company be vested in the Federal Ministry of Finance but “should be held in trust by Nigeria Sovereign Investment Authority since all tiers of Government have stakes in that vehicle.”

Opposition has also come from the leaders of the host communities and the international Oil Companies (IOCs) who have expressed dissatisfaction with some clauses in the petroleum act.  At a national assembly hearing organized by the Joint Committee on Petroleum Upstream, Downstream and Gas, Mike Sangstar, representing some major oil companies, insisted the Petroleum industry Act would create an unfavorable environment for future deep-water investments and launching of new projects. He proposed that to ensure investors are encouraged to finance deep-water projects; the PIA should grant deep-water oil projects a full royalty relief during the first 5 years of production and remove Hydrocarbon Tax considering that companies would be subject to CITA.

On the whole, there are concerns that conflict might arise over these issues which could breed regional animosity.

CONCLUSION

Expectedly, the PIA is a coin with contrasting sides. With its appreciative move to upgrade the oil investments and add better stability and clarity to the system; we can say the country is taking the growth of the oil and gas sector a notch ahead. This is a great step for us. Sure, Rome wasn’t built in a day.

Regardless, the Act had many heads turn with its marked concerns and shortfalls. To this end, we’ve proffered some palpable insights that we can take note of;

  • First, the PIA could have done a better job at giving a positive outlook towards contemporary areas such as the solar and offshore wind industry; encouraging research and general development in renewables which sadly isn’t happening.
  • Also, the idea to retain the NDDC alongside the Host Community Trust Fund under the Act is as superfluous as it gets.
  • While the potential that abounds with the PIA is immense, this must be matched with detailed policies by government agencies. Government agencies and ministries are much closer and need to provide policies that unpack the Act.
  • Further, the government needs to put a structured and independent framework in place within the host communities to put a scrutiny on how the 3% allocation is expended.
  • The 30% share of profit to the basins could actually be diversified for the advancement of areas witnessing oil spillage and oil pollution.

REFERENCES:

  • Chike Olisah, Nairametrics, ‘Understanding the challenges that have affected the PIB’
  • David Thomas, “African Business; What you need to know about Nigeria’s Petroleum Industry”
  • FITCH WIRE, FitchRatings, Nigeria’s Petroleum Bill Could Boost Long Term Oil Production.’
  • KPMG, Petroleum Industry Bill 2021.
  • Petroleum Industry Act, 2021.
  • Punuka, “Regulatory Update on the Petroleum Industry Act; New Changes and Key Provisions”

[1] To be referred to as “The Nigerian National Petroleum Limited”

[2] The National Economic Council.

[3] Section 3 of the Act.

[4] Department of Petroleum Resources.

[5] Section 29 of the Act.

[6] Midstream and Downstream Gas Infrastructure Fund.

[7] In addition to Education Tax (2%), Withholding Tax (10%). Meanwhile, CIT applies across board (i.e. upstream, midstream and downstream) sectors.

[8] Areas with prospects of oil discovery.

[9] (i.e., 75% on capital projects, 20% as retained proceeds and 5% on administrative expenses).

[10] Section 52 of the Act.

[11] Section 104 of the Act.

[12] Gas (Prevention of Waste and Pollution) Regulations.

 

ABOUT THE AUTHORS

Abdulateef Ibrahim Muhammed is a 400 level law Student at the University of Ilorin. He doubles as the Director of Research and Editor-in-Chief of Tax Club, Unilorin. He is an avid researcher with a bias for taxation and related matters. He can be contacted via: ibrahimlateef654@gmail.com or through his LinkedIn page.

 

Owolabi Lateefat is a 400 level Accounting Student at the University of Ilorin. She is an astute member of the Tax club, Editorial Board. She is a passionate and versatile student with
particular flair for accounting and tax
related matters. She can be contacted via: lateefatowolabi9@gmail.com or through her LinkedIn page.

 

 

NB: THIS PUBLICATION IS ONLY AN INFORMATIVE PIECE FROM THE EDITORIAL BOARD, THE TAX CLUB, UNIVERSITY OF ILORIN. FOR PROFESSIONAL ADVICE, REACH OUT TO EXPERTS.

You may also like...

Leave a Reply

Your email address will not be published. Required fields are marked *