The Petroleum industry Act (PIA) was officially signed into law on the 16 of August 2021 by the President of Nigeria. The Act provides for legal, governance, regulatory and fiscal framework for the Nigerian Petroleum Industry and development of Host Communities and related matters. It contains 5 Chapters, 319 Sections and, 8 Schedules dealing with Rights of Preemption; Incorporated Joint Ventures; Domestic Base Price and Pricing Framework; Pricing Formula for Gas Price for the Gas Based Industries; Capital Allowances; Production Allowances and Cost Price Ratio Limit; Petroleum Fees, Rents and Royalty; and Creation of the Ministry of Petroleum Incorporated. We shall briefly summarize the basic features of the Act.
The first chapter of the Act focuses on Governance and Institution, the Act vests the ownership of petroleum within Nigeria in the Federal Government. The Act creates two regulatory bodies, known as the Nigerian Upstream Regulatory Commission responsible for the technical and commercial regulation of upstream petroleum operations and the Nigerian Midstream and Downstream Petroleum Regulatory Authority (the ‘Authority) responsible for the technical and commercial regulation of the midstream and downstream operations.
The Act also provides for the incorporation within 6 months from commencement of the Act of a commercial and profitable oriented limited Liability company under Companies and Allied Matter Act to replace the Nigerian National Petroleum Company (NNPC), it is to be known as The Nigerian National Petroleum Company Limited, all shares are to be held by the Ministry of Finance and the Ministry of Petroleum in equal portions on behalf of the federation. NNPC Limited is to pay its share of all fees, rents, royalties, profit oil shares, taxes, and other required payments to the Government as any other company in Nigeria and that it should pay out the bulk of its profits as dividends after retaining 25% for reinvestment.
The Minister of petroleum and the Minister of Finance shall within 18 months of the effective date determine the assets, after which such assets, interests, and liabilities of NNPC are to be transferred to NNPC Limited or its subsidiaries, assets or liability not transferred shall remain the assets, interests, and liabilities of NNPC until they become extinguished or transferred to the Government and Six months following the determination of such assets the Minister of Finance and the Attorney-General of the Federation shall develop a framework for the payment of the liabilities not transferred to NNPC Limited and if such assets, interests, and liabilities are not transferred within the stipulated period, all the assets, interests, liabilities of NNPC is deemed to be transferred to NNPC Limited and NNPC shall cease to exist.
Section 52 of the Act establishes the Midstream and Downstream Gas Infrastructure Fund, the major source of funding for the Midstream and Downstream Gas Infrastructure Fund is a 0.5% levy on the wholesale price of petroleum products and natural gas produced and sold in Nigeria. Interestingly, Section 65 of the Act encourages NNPC Ltd and its joint venture partners to explore the use of incorporated joint venture companies.
The second chapter of the Act focuses on general administration, the main objective of the Act is to promote the exploration and exploitation of petroleum resources for the benefit of Nigerians, promote sustainable development, encourage and facilitate both local and foreign investment, ensure safe, efficient transportation and distribution infrastructure, avoid market distortions and ensure a competitive market for the sale and distribution of petroleum products and natural gas in Nigeria; and avoid cross-subsidies among different categories of consumers, and is built on the tenets of effectiveness, efficiency, accountability, competitiveness, safety, conducive business environment.
The Act establishes new Licenses and Leases, which include the Petroleum Exploration Licence, Petroleum Prospecting Licence (PPL), and Petroleum Mining Lease (PML). All the existing licenses and leases would be automatically converted to PPLs and PMLs upon their expiration, however, the Act allows holders of Oil Prospecting Licences and Oil Mining Leases under the current regime to voluntarily covert them to PPLs or PMLs after fulfilling some condition precedent.
The Commission is required to develop a model license and model lease which shall be incorporated into contracts before such can be approved, and to include a carried interest provision giving NNPC Limited the right to participate up to 60% in a contract.
Chapter 3 of the Act introduces the Petroleum Host Community Development (PHCD) which has the main objectives to wit: to foster sustainable prosperity within host communities, provide direct social and economic benefits and enhance harmonious co-existence. Section 240 of the Act went further to make provision for the host communities development trust fund and how it is to be funded, each settlor is to contribute 3% of its actual operating expenditure in the upstream petroleum operations in the preceding calendar year, it may also be funded by donations, gifts, grants or honoraria and interests accruing to the Trust’s reserve fund. The Fund is tax-exempt and contributions by settlors are tax-deductible. 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 the host communities.
The Board of trustees are to allocate available funds contributed to trust yearly, in the following ratio- 75% for capital projects, 20% as a reserve, and 5% for administrative expenses, however, a community will forfeit the cost of repairs in the event of vandalism, sabotage and other civil unrest causing damage to petroleum facilities or disruption of production activities.
Chapter four focuses on the fiscal framework, the key objectives are establishing a forward-looking fiscal framework that encourages investment, dynamism, clarity, enhances revenues for the government while ensuring a fair return for investors, promotes equity and transparency. The Federal Inland Revenue Service is charged with the administration and collection of revenue such as Hydrocarbon Tax of 15% – 30% on profits from crude oil production, Company income Tax at 30%, Education Tax at 2% which will no longer be tax-deductible, rents, royalties, and production shares, while The Authority is responsible for collecting gas flare penalty from midstream operations.
The Act has significantly increased the general penalty for late filing of returns, late filing of tax returns will attract N10million on the first day and N2million for each subsequent day the failure continues.
Chapter Five is the miscellaneous provisions, it makes provisions for legal proceedings, the Act repealed 10 laws, they include the Associated Gas Reinjection Act, Hydrocarbon Oil Refineries Act, Motor Spirit Act, NNPC (Projects) Act, NNPC Act (once NNPC ceases to exist) Petroleum Products Pricing Regulatory Agency Act, Petroleum Equalisation Fund (Management Board, etc.) Act, Petroleum Profit Tax Act, and Deep Offshore and Inland Basin Production Sharing Contract Act. It went further to amend The Pre-Shipment Inspection of Oil Exports Act and Petroleum Equalization Fund while the provisions of some extant laws will still apply until termination or expiration of the relevant oil prospecting licenses and mining leases, these include The Petroleum Act, PPTA, Oil Pipelines Act, Deep Offshore and Inland Basin PSC Act.
In Conclusion, the Act has completely changed the oil and gas administration and governance in Nigeria. The government agencies such as the Department of Petroleum Resources (DPR) and the current NNPC, which have been abolished by virtue of the Act will gradually transition to a new agency & entity respectively in accordance with the provisions of the PIA 2021.
By Oil & Gas Law Team at Resolution Law Firm