Introduction
In July 2024, the Nigerian Upstream Petroleum Regulatory Commission (the “Commission”) released an exposure draft of amendments to the Commission's Decommissioning and Abandonment Regulations (the “Regulations”) (the “Amendment Regulations”). The Amendment Regulations itemize changes to the Regulations. For a detailed understanding on decommissioning and abandonment in the Nigerian oil and gas industry, please view G. Elias's article on Decommissioning and Abandonment: Nigeria's Experience in a Global Context.
From the Amendment Regulations, some of the criticisms that the Regulations were fraught with seem to have been addressed. In this article, we highlight the key changes introduced by the Amendment Regulations while drawing out the differences from the previous provisions under the Regulations. On the whole, the amendments are welcome but should go further. It is to be hoped that they will be made more detailed and comprehensive before they are finally made legally effective.1
Key Amendments to the Regulations
- Timeline for the Establishment of the Decommissioning
and Abandonment Fund
Under the Amendment Regulations, a licensee or lessee (together the “Producer(s)”) is required to set up a decommissioning and abandonment fund (the “Fund”) in respect of petroleum operations under the licence or lease within one hundred and eighty (180) days following the approval of a decommissioning and abandonment plan in respect of the licence or lease by the Commission.2 Under the previous provision in the Regulations, the Fund was required to be set up by Producers within ninety (90) days from the commencement of production while existing Producers were also required to set up the Fund within ninety (90) days from the commencement of the Regulations.3 The Amendment Regulations repeals the 90-day timeline.4
- Housing of the Decommissioning and Abandonment
Fund
Under the Regulations, the Fund was to be deposited in an escrow account to be held with the Central Bank of Nigeria (the “CBN”).5 However, the Amendment Regulations stipulates that the Fund is to be in the form of an escrow account to be held by any of several categories of financial institutions (“FIs”) in Nigeria or abroad as may be applicable under the Amendment Regulations. These FIs include: (i) any Nigerian FI that meets the national rating of A+ or A; or (ii) any foreign FI that meets the minimum credit rating of A+ or its equivalent.6 This is a significant departure from the Regulations as this will allow Nigerian FIs participate and thereby strengthen the banking system within Nigeria.
The Amendment Regulations mandates that all funds under the Regulations must be 100% (one hundred percent) held by a Nigerian FI except that international oil companies (“IOCs”) with a joint venture arrangement with the Nigerian National Petroleum Company Limited (“NNPC Limited”) or a production sharing contract with the NNPC Limited, may make 15% (fifteen percent) of the annual contribution to be made to the Fund with a Nigerian FI.7 The balance of the Contribution is to be held with any foreign FI that meets the credit ratings provided under the Amendment Regulations. The Commission is to subject the 15% (fifteen percent) contribution to be made into the Nigerian FI to review every three (3) years following the assessment of the prevailing credit risk profile of Nigerian FIs.8
The Commission is required to issue guidelines from time-to-time on the administration of the funds and the implementation of the Amendment Regulations.9 Under the Regulations, these guidelines are to be issued in consultation with the CBN.10 No guidelines have been made yet. Guidelines should be made soon, and they should insist on a correlation between the extent of the risk to be covered and the assets of the FI.
- Contribution to the Fund
The Amendment Regulations provides that contributions to the fund will be made by yearly payments of the cash amount in line with the decommissioning and abandonment plan submitted by an Operator and in line with the Guidelines to be issued by the Commission.11 The Regulations limited the manner of contribution only to a Producer's decommissioning and abandonment plan and not to the Guidelines to be issued by the Commission.
- Access to the Fund
Under the Amendment Regulations, a Producer may access the fund in the escrow account after obtaining the approval of a decommissioning or abandonment programme upon obtaining written approval from the Commission. 12 The Regulations had provided that the Commission must co-sign disbursement requests made by a Producer where the need to access the funds in the escrow account arises.13
- Investing of the Contributions in the Escrow
Account
Under the Regulations, the funds held in a foreign financial institution could only be invested in stable investments allowed by the Trustees Investment Act and Pension Reforms Act.14 The Regulations did not make any provisions for investing the funds which was to be housed with the CBN. Under the Amendment Regulations, funds may be invested by the escrow manager in low-risk financial instruments meeting the A+ national ratings for funds domiciled locally and A+ international rating for funds domiciled offshore.15 The Amendment Regulations has not in any way specified what these low-risk financial instruments should be.
- Utilisation of the Fund
Under the Amendment Regulations, where the Commission accesses the Fund upon the failure of an Operator to comply with a decommissioning and abandonment plan, the Commission must ensure that the funds are utilised solely for decommissioning and abandonment purposes.16 This is a departure from the Regulations which provided that the Commission had to manage and apply the Fund in accordance with applicable laws, which were not specified.17 The Amendment Regulations lends clarity that such funds must necessarily be utilized for decommissioning and abandonment purposes.
Recommendation
- Clear Methodology for Determining Contributions to the
Fund
The Amendment Regulations are silent on how Producers are to determine the amount of cash to be contributed to the Fund. Also, there is no clear guidance on whether the contributions to the Fund will be made in advance or in arrears. The expectation is that the Guidelines to be issued by the Commission should lend clarity to the nuances around the contributions to the Fund.
- Flexible Currency Contributions to the
Fund
The Regulations provides that the funds in the escrow account must be dominated in the United States Dollars (“USD”).18 However, the USD should not be the exclusive currency and there should be avenues for Producers to denominate their contributions in Naira or in other foreign currencies. Also, in view of the Amendment Regulations providing that contributions may be deposited with Nigerian FIs, we recommend that contributions to be domiciled in Nigeria are made in the Naira to further strengthen the currency or in the alternative, Producers should be able to determine the currency in which their contributions will be made. The law should allow Naira contributions only in proportion to the proportion of the Naira element in its revenues and potential decommissioning costs.
- Clear Definition of Financial
Institutions
While the Amendment Regulations have now included financial institutions, it is not precise on whether this will be categorized stricto sensu as a bank or other financial institutions as defined in the Banks and other Financial Institutions Act, 2020 (“BOFIA”). To avoid ambiguities, the Amendment Regulations should be clear on whether (i) financial institutions refer to all banks licensed under the Act; (ii) there are specific categories of banks that will be permitted to hold the escrow account; and (iii) other financial institutions, as defined under BOFIA are excluded. The Amendment Regulations can also delimit the scope of “financial institutions” by defining the term. Also, it is unclear whether institutions registered with the Securities and Exchange Commission (the “SEC”) should be allowed to hold the Fund. We recommend that the Fund should be deposited in FIs licensed not just under the CBN but SEC-registered asset managers as well.
Conclusion
Decommissioning and abandonment remain key considerations for Producers in the upstream petroleum industry. It is commendable that the Commission is keenly interested in ensuring that the regime in Nigeria not only meets international standards but is also practicable for the Producers within the Nigerian upstream petroleum industry. As explained above, the Amendment Regulations resolves some issues which the Regulations were fraught with, particularly on the procedure for setting up and administering the Fund.
Footnotes
1. Section 216(1) of the Petroleum Industry Act mandates that the Commission to consult with stakeholders prior to finalising any regulations or amendments to regulations. The Commission held a stakeholders' consultation on the Amendment Regulations in September 2024.
2. Para. 3, Amendment Regulations.
3. Reg. 19(2)(b-c) of the Regulations.
4. Para. 4-5 of the Amendment Regulations.
5. Reg. 19(4) of the Regulations.
6. Para. 6(a) of the Amendment Regulations. The credit ratings include those published by either Standard & Poor 500, Fitch Ratings Inc. or Moody's Investor's Service Inc.
7. Para. 6(b)(i-ii) of the Amendment Regulations.
8. Para. 6(c) of the Amendment Regulations.
9. Para. 8 of the Regulations.
10. Reg. 19(7) of the Regulations.
11. Para. 12 of the Amendment Regulations.
12. Para. 9 of the Amendment Regulations, Reg. 21(2) of the Regulations.
13. Para. 19(c)(i) of the Regulations.
14. Reg. 10(d) of the Regulations.
15. Para. 10 of the Amendment Regulations.
16. Para. 13 of the Amendment Regulations.
17. Reg. 21(11) of the Regulations.
18. Reg. 19(10)(b) of the Regulations.
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.
