The host community development provisions in the Petroleum Industry Act 2021 (PIA) remain a focal topic of discourse amongst stakeholders in the Nigerian oil and gas industry. The reason for this is not farfetched as prior to the PIA, there were no laws imposing community development obligations on oil and gas companies.1

Prior to the enactment of the PIA, although not statutorily required to do so, oil and gas companies addressed the development of host communities through the instrumentality of Global Memorandum of Understanding (GMOU), Offshore Memorandum of Understanding (OMOU) and other means of collaboration with host communities. The GMOUs and OMOUs were typically entered into between the oil and gas company, the host communities (represented by appointed representatives) and the relevant state government. By the GMOUs and OMOUs, the companies inter alia will undertake to either provide or fund certain developmental activities and projects for the benefit of the host communities. Further, the governing bodies set up under the GMOUs and OMOUs are responsible for reviewing the developmental projects, ensuring peaceful co-existence between the host communities and the oil and gas companies as well as assisting with conflict resolution.

Notwithstanding this existing practice of entering into GMOUs, the government still saw the huge gap created due to lack of a legislative framework which imposes host community development obligations so that it is not just seen as a corporate social responsibility initiative of the oil & gas companies but rather a legal obligation that must be complied with, hence the elaborate provisions on host community development contained in Chapter 3 of the PIA.

These provisions are aimed at among others, fostering sustainable prosperity within host communities, providing direct and social economic benefits from petroleum operations to host communities and enhancing peaceful and harmonious co-existence between licensees or lessees and host communities.


Obligation to Incorporate a Trust

Each settlor is obligated to incorporate a Host Communities Development Trust (the Trust) as a body corporate under the Companies and Allied Matters Act for the benefit of the host communities for which the settlor is responsible.2

This is required to be done within the following timelines:

  1. For oil mining leases and designated facilities3 existing as at the effective date of the PIA, within 12 months from the effective date of the PIA (i.e., by 15 August 2022);
  2. For designated facilities that were under construction as at the effective date of the PIA, within 12 months from the effective date of the PIA (i.e., by 15 August 2022);
  3. For oil prospecting licences existing as at the effective date of the PIA, prior to the application for field development plan;
  4. For petroleum prospecting licences (PPLs) and petroleum mining leases (PMLs) granted pursuant to the PIA: prior to the application for any field development plan; and
  5. For new licensees of designated facilities granted pursuant the PIA: prior to commencement of commercial operations.

It should be noted that for unincorporated joint ventures, the operator is responsible, on behalf of the joint venture partners, for ensuring compliance with the host community development provisions in the PIA, including incorporation of the Trust.4 Notably, failure to incorporate the Trust is a ground for revocation of the applicable licence or lease.5

Interestingly, and as noted above, the obligation to incorporate the Trust and other host community development obligations under the PIA are imposed on 'settlors'. By section 318 of the PIA, a settlor is defined as a holder of interest in a PPL or PML whose area of operations is in or appurtenant to any community or communities. Thus, the definition of "settlors" makes clear that a "settlor" is a company holding a PML or PPL. Further, section 240 of the PIA provides that three per cent (3%) of the actual annual operating expenditure of the preceding financial year in upstream petroleum operations shall be contributed to the host communities development fund. Thus, a combined reading of the foregoing provisions makes clear that the host community obligations under the PIA apply only to PPL and PML holders and only in respect of their upstream petroleum operations.

Paradoxically, several other provisions in Chapter 3 of the PIA appear to indicate that the host community development obligations are also applicable to midstream and downstream entities. For example, Section 236 of the PIA provides that the Trust must be set up within 12 months of the effective date for existing "designated facilities"6 as well as those under construction and prior to commencement of commercial operations for new "designated facilities". Designated facilities under the PIA is defined as petroleum transportation pipelines, bulk storage tank farms, refineries, gas processing plants in midstream petroleum operations and petrochemical plants.7 A good number of these facilities are utilised for midstream and downstream operations and do not pertain to upstream petroleum operations. Further, the Commission and Authority (whose powers and functions are limited to midstream and downstream operations)8 are empowered to: (i) issue regulations in relation to inter alia the dispute resolution between settlors and host communities and management of the host communities development fund;9 and (ii) approve the membership requirements for the board of the Trust, as applicable.10 The settlor is also required to submit a report on its activities in respect of the Trust to either the Commission or Authority, as the case may be.11 Clearly, the references to the powers of the Authority as delineated herein is suggestive of the fact that the PIA contemplates settlors also being involved in midstream and downstream operations, as opposed to upstream operations alone.

Despite the foregoing provisions of the PIA, it is arguable that the intention of the lawmakers was not to include midstream and downstream companies within the ambit of the host community development provisions. This is premised on a number of reasons to wit: (i) the definition of "settlors" is clear and unambiguous; (ii) the Petroleum Host and Impacted Communities Development Bill 2018 (the Bill) which was adopted as Chapter 3 of the PIA, specifically included licensees of designated midstream and downstream assets within the definition of "settlors"; however, this was conspicuously excluded from the definition of "settlors" contained in the PIA. The fact that the PIA departed from this definition suggests that the intention was to exclude midstream and downstream companies from the obligations imposed by Chapter 3.

As a corollary, it is also arguable that the intention of the lawmakers is for the provisions of Chapter 3 of the PIA to be extended to the midstream and downstream operations of PPL or PML holders (where applicable) and not to midstream and downstream companies who do not engage in any upstream operations.

What is evident from the foregoing is that clarity is required on whether the host community obligations imposed under the PIA are applicable to midstream and downstream oil and gas companies. Given this ambiguity, it remains to be seen how the regulators will interpret the provisions of the PIA but we expect that regulations will be issued in due course by the Commission and Authority to clarify the scope of applicability of Chapter 3.

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1. We however note the provisions of the Community Content Guideline which was issued by the Nigerian Content Development and Monitoring Board for the establishment of critical infrastructure to stimulate development in host communities. In this regard, the Community Content Guidelines provides for the operators, contractors and project promoter to sponsor scholarship programmes and upload the list of beneficiaries to the Board electronically.

2. Section 235(1) and (2) of the PIA

3. Designated facilities is defined under Section 318 of the PIA as petroleum transportation pipelines, bulk storage tank farms, refineries, gas processing plants in midstream petroleum operations and petrochemical plants

4. Section 235(2) of the PIA

5. Section 238 of the PIA

6. Section 236 (b) (c) and (f) of the PIA

7. Section 318 of the PIA

8. Section 32 of the PIA

9.9. Section 234(3) and (4), 235(6), 238 of the PIA

10. Section 242(1) of the PIA

11. Section 255 (d) of the PIA

Originally published March 14, 2022

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