The Petroleum Industry Act, 2021 (PIA or "the Act") was signed into law in August 2021. The PIA introduces significant changes to the legal and governance framework, administrative processes, regulatory and fiscal terms, and host community engagements in the oil and gas industry. There is renewed hope that a robust implementation of the PIA will lead to a transformation of the Nigerian oil and gas industry, thereby attracting the much needed investment into the industry.
The government has been taking the necessary steps to implement and operationalise the PIA within the timelines stipulated in the Act. For instance, the government inaugurated the steering committee responsible for PIA implementation immediately after the PIA was signed into law. The Nigerian Upstream Petroleum Regulatory Commission (NUPRC) has also published several draft regulations and guidelines for review by stakeholders in the industry. Based on the timelines stipulated in the Act and the draft regulations issued by the NUPRC, the deadlines for upstream companies to implement certain provisions of the PIA are fast approaching. As such, it may be instructive for the relevant companies to proactively analyse the impact of the PIA on their operations and identify the compliance requirements, in order to ensure timely implementation.
In this article, we will elaborate on the key compliance imperatives to be considered by upstream companies in implementing the PIA.
Conversion to PIA fiscal regime
The new fiscal framework in the PIA is applicable to existing licences upon renewal, while marginal field operators are required to convert to Petroleum Mining Leases (PMLs) within 18 months from the effective date of the Act. Although the Petroleum Profits Tax Act (PPTA) will continue to apply to existing Oil Mining Leases (OMLs) obtained prior to the emergence of the PIA until the mandatory timeline for conversion, operators can opt for the application of the PIA prior to the renewal of their existing OMLs.
Indeed, the decision to opt for an immediate conversion or wait until the mandatory timeline will be largely driven by project economics, financial and commercial realities amongst other organizational priorities. Therefore, operators are expected to take a comprehensive look at the following:
- The cost-benefit analysis of converting before or after the mandatory timeline based on the fiscal provisions; and
- Resulting effective tax rate from the adoption of the PIA vis-à-vis the PPTA for selected forecast period(s).
Based on the draft guidelines issued by the NUPRC on conversion of licences, applications for conversion should be submitted four (4) months before the expiration of the eighteen (18) months' timeline in the PIA. Given that the PIA was signed on 16 August 2021, applications must be submitted on or before 15 October 2022. Consequently, given the fast approaching deadline, it is important that all industry operators take proactive steps in conducting PIA impact assessments, to ascertain whether a conversion will be beneficial or otherwise. In addition, all operators should begin collating the relevant documents required to be submitted alongside the application for conversion, to avoid last-minute rush.
Decommissioning is a general term used to describe the process of returning an oil production site to its pre-lease condition at the end of the useful life of that oil asset. Prior to the enactment of the PIA, companies typically recognised provisions for decommissioning costs in their books in accordance with the provisions of the International Accounting Standard (IAS) 37 "Provisions, Contingent Liabilities and Contingent Assets". Such provisions were typically not funded by industry operators.
However, the PIA requires lessees and licensees to establish a decommissioning or abandonment fund and make periodic contributions to the fund, which will be utilised for abandonment and decommissioning purposes. Based on the PIA, a licensee or lessee is required to inform the NUPRC of the establishment of its decommissioning and abandonment fund not more than three months from the date of commencement of production for upstream petroleum operations. This implies that Companies that commenced production before the enactment of the PIA should have set-up the funds immediately the PIA was signed by the President.
Furthermore, the PIA requires operators to prepare a decommissioning and abandonment plan and submit same to the NUPRC within 12 months of the effective date of the PIA. In effect, the plan should be submitted by 15 August 2022. The details of the content of the plan will be determined by regulations to be issued by NUPRC. However, the plan will establish the yearly amount to be contributed to the abandonment fund, which will be the projected decommissioning and abandonment costs divided by the estimated life of the facilities/field.
Host Communities Development
In a bid to ensure a harmonious co-existence between petroleum companies and host communities, adequate provisions were made in the PIA to address the needs of the host communities. The PIA provides that exploration and production companies (referred to as settlors in the PIA) will be required to set up a Host Communities Development Trust (HCDT) for the benefit of the host communities where they operate. The HCDT will be funded by a contribution from each settlor of an amount equal to 3% of its actual annual operating expenditure in the immediately preceding financial year, with respect to its upstream petroleum operations affecting the host communities.
Settlors are also required to appoint a Board of Trustees (BoT) which will be registered as a corporate body by the Corporate Affairs Commission. In addition, operators are to prepare the constitution for the HCDT.
Based on the PIA, holders of existing OMLs, are expected to incorporate the HCDT by 15 August 2022. However, based on the draft Petroleum Host Community (Commission) Regulations published by the NUPRC, settlors are required to submit a request for the establishment of the HCDT to the NUPRC two months prior to the timeline of 15 August 2022 in the PIA, i.e., by 15 June 2022. The request should be accompanied with an outline of the area of operations, proposed host communities, the proposed BoT, the draft constitution of the HCDT, amongst other documents.
Other compliance requirements relating to host communities are as follows:
- Conduct of host communities' needs assessment, within six months following the granting of the licence or lease or within six (6) months after the first annual contribution in the case of an existing licence or lease. The Host Communities Development Plan will be prepared based on the findings during the needs assessment.
- Submission of annual report of the HCDT to the NUPRC which will contain a yearly audited account, list of proposed project for the subsequent year, status of ongoing projects and the cost of the individual projects.
Environmental Management Plan
The Petroleum Industry is considered to have a high risk of negative environmental impacts and as such, there is a need to have a plan to manage such impacts should they occur. Based on the provisions of the PIA, operators will be required to submit for approval, an environmental management plan in respect of projects which require environmental impact assessment. The plan should be submitted within 12 months from the effective date of the PIA (i.e., 15 August 2022) or six months after the grant of the applicable licence or lease.
Prior to the approval of the environmental management plan by the NUPRC, such licensees or lessees will be required to pay a prescribed financial contribution to an environmental remediation fund established by the NUPRC for the rehabilitation or management of negative environmental impacts with respect to the licence or lease.
Natural Gas Flare Elimination and Monetisation Plan
The PIA provides that the holder of a license or lease shall within 12 months of the effective date of the Act, submit a natural gas flare elimination and monetisation plan to which would be prepared in accordance with regulations made by under the Act. In effect, the plan must be submitted by 15 August 2022.
It should be noted that the PIA stipulates several other compliance requirements for industry operators. However, we have focused on the key compliance requirements in this article. Companies are therefore advised to proactively and comprehensively review the PIA to ascertain how the PIA impacts their operations from a compliance and operational perspective. In addition, the timelines for compliance with some of the provisions of the PIA are yet to be specified. We expect these timelines to be indicated in the regulations to be issued pursuant to the PIA, in due course. As such, operators must keep themselves abreast of developments in this regard.
Given that the PIA introduces significant administrative penalties for non-compliance, companies need to be proactive in ensuring that the timelines indicated in the PIA are met. Operators should, where necessary, obtain professional advice in conducting PIA impact assessments and designing a compliance roadmap.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.