In 2021, the most significant development in the energy sector was the enactment of the Petroleum Industry Act (PIA), bringing to a close a 20-year effort to reform the Nigerian oil and gas sector, with the aim of overhauling the regulation and governance of the oil and gas industry.
A lot has changed in the sector domestically and globally since the reform efforts began. The number of indigenous oil and gas firms has grown, but so has the number of oil-producing countries in Africa. Militancy in oil-rich communities, while remaining, has diminished. Concerns over climate change have fuelled aggressive efforts to reduce global consumption of fossil fuels, driving divestment from the Nigerian oil and gas sector by international companies and institutions.
The PIA represents a new beginning and an effort to meet the changes in the oil and gas environment. In 2019, the oil and gas sector accounted for about 5.8 percent of Nigeria’s real GDP and was responsible for 95 percent of Nigeria’s foreign exchange earnings and 80 percent of its budget revenues. The law is therefore far-reaching in its remit; however, it is complex, and serious concerns remain as regards its implementation.
If well implemented, the PIA can represent an international standard for natural resource management, with clear and separate roles for the subsectors of the industry; consisting of:
- The existence of a commercially oriented and profit-driven national petroleum company;
- The codification of transparency, good governance, and accountability in the administration of the petroleum resources of Nigeria.
- The economic and social development of host communities; environmental remediation; and a business environment conducive for oil and gas operations to thrive in the country.
The PIA which embodies 5 Chapters, 319 Sections, and 8 Schedules, was enacted to provide for the legal, governance, regulatory, and fiscal framework for Nigerian petroleum industry, the establishment, and development of and other related matters in the upstream, midstream and downstream sectors of the petroleum industry. It, therefore created an array of provisions and innovations that will affect the private, public sector and stakeholders in the oil and gas industry.
Key provisions
Dual Regulatory and Governance Architecture
NUPRC
The Act establishes dual regulators for the petroleum industry. One is called the Nigerian Upstream Petroleum Regulatory Commission – NUPRC (the “Commission”), which is a body corporate with perpetual succession whose functions are limited to only the upstream petroleum activities as provided for in Section 4 of the Act, which provides that “the Commission is responsible for the technical and commercial regulation of the upstream petroleum operations”. The Commission is also established to ensure compliance with all applicable laws and regulations governing upstream petroleum operations.
NMDPRA
The other regulatory agency under Section 29 of the Act is the Nigerian Midstream and Downstream Petroleum Authority – NMDPRA (the “Authority”), responsible for the technical and commercial regulation of the midstream and downstream petroleum operations in the petroleum industry as provided under Section 29(3) of the Act.
NNPC
The PIA commercialises the perennially loss-making state-owned enterprise, the Nigerian National Petroleum Company (NNPC), turning it into the NNPC Ltd, a quasi-commercial entity the ownership of which shares shall be vested with the government, and the ministries of Finance and Petroleum, who shall hold the shares on behalf of the government.
Pursuant to the PIA’s provisions, the president of Nigeria will appoint the president of NNPC Ltd as well as heads and members of the regulatory agencies. Separately, the minister of petroleum, then, will head the industry with a wide range of powers to formulate, monitor, and administer government policy under the PIA.
Importantly, the PIA provides that 30 percent of the profits of the NNPC Ltd will fund a new entity, to finance exploration in other basins in the country (Frontier Exploration Fund). Ten percent of rents on petroleum prospecting licenses and 10 percent of rents on petroleum mining leases are also assigned to Frontier exploration. The PIA is unclear on whether there will continue to be exploration in existing basins.
Host Communities
The PIA aims to address the relationship between the oil companies/operators and the host communities by creating the Host Community Development Trust Fund (HCDTF) whose purpose will be to, among others, foster sustainable prosperity, provide direct social and economic benefits from petroleum to host communities, and enhance peaceful and harmonious coexistence between licensees or lessees and host communities.
Specifically, the law stipulates that existing host community projects must be transferred to the HCDTF, and each settlor (or oil license holder) must make an annual contribution of an amount equal to 3 percent of its operating expenditure for the relevant operations from the previous year. The management committee of the trust must include one member of the host community. In addition, the act stipulates a penalty for failure to comply with host community obligations, including revocation of license.
Section 257 of the PIA also imposes the responsibility to protect oil and gas assets on host communities and stipulates that any host community that fails to protect oil assets in its community from vandalism will be held accountable for the repairs.
Fiscal framework
The PIA introduces a new tax regime, replacing the existing petroleum profits tax with a hydrocarbon tax and introducing a tax on the income of oil companies. Under this new fiscal regime, hydrocarbons—including crude oil, condensates, and natural gas liquids produced from associated gas—will be subject to taxation. Notably, crude oil from deep offshore is excluded from the tax.
A controversial provision in the PIA is the provision stating that, in the event of supply shortfalls, only companies with active refining licenses or proven track record of international crude oil and petroleum products trading will be allowed to import such products. This is a controversial provision that has been interpreted as an attempt to confer monopoly powers on a few domestic refiners.
Finally, the fiscal framework provides for penalties for gas flaring arising from midstream operations. Revenues from these penalties will accrue to the Midstream and Downstream Infrastructure Fund and will be used to finance midstream and downstream infrastructure investment.
KEY ISSUES
The success of the PIA are conditional on Nigeria’s political and oil industry leaders overcoming some key challenges.
The PIA’s wording does create challenges to interpretation through imprecise language. This gives rise to ambiguity. For example, it is unclear whether host community development trust obligations are additional to existing community levies (such as the Niger Delta development levy) or will be an aggregation of those levies. Similarly, the law is silent on the definition of “frontier basin” and host community, instead deferring to the NUPRC on the definition of frontier basin and to settlors or license holders on the definition of “host community.” These definitions are not neutral to revenue; they have revenue implications. This lack of clarity creates uncertainty and even possible disputes, especially if relevant parties define them differently.
Capacity building. This law is complex and complicated. While capacity in the oil and gas sector has been built over the years, the new legal provisions and fiscal framework will need new capacities to succeed. This challenge will be particularly acute in the new regulatory institutions; in the understanding, interpretation, and application of the law; and in the management of the funds, including the HCDTF.
There are several lingering North/South disagreements about the PIA. The bill that became the PIA was originally proposed by the executive (largely supported in the North) and passed largely along regional (North/South) lines. Leading politicians from the Niger-Delta states opposed it and many lawmakers from the South believe the bill advances Northern interests to the detriment of the South.