The Petroleum Industry Act, 2021 (PIA or "the Act") waded through many turbulent waters of rejections and approvals to finally emerge on 16 August 2021. Notwithstanding the discontent with aspects of the PIA relating to the allocation of funds/profits, its enactment is a step in the right direction given the potential to provide fiscal certainty for existing and potential investors in the Nigerian Oil and Gas industry
There are high expectations that the PIA will result in significant investments in the Nigerian Petroleum Industry given its fundamental objectives and the clear provisions for transparency and a more conducive business environment. Although there are concerns around the movement of investment capital away from fossil fuels to clean energy, the eventual emergence of the PIA should help regain some lost ground in extracting value from our petroleum resources before the "full" global transition from fossil fuels.
In this article, we examine some of the opportunities that the PIA offers some of the key players in the Nigerian Petroleum Industry
- Nigerian Upstream Regulatory Commission ("the
Amongst other things, the Commission will act as the regulator of upstream petroleum operations in the country and will take over the responsibilities of the Department of Petroleum Resources (DPR) with respect to advising the Minister of Petroleum before the issuance of exploration, mining and prospecting licences. In furtherance of its responsibilities as the regulator of all upstream activities, the Commission would have the opportunity to create enticing investment packs for willing participants in the upstream segment of the Nigerian Petroleum Industry.
Needless to say, the many years of delay in the enactment of the PIA resulted in the flight of huge investments away from Nigerian oil and gas resources. For instance, Foreign Direct Investment to West Africa was reported to have decreased by 21% to $11 billion in 2019. Moreover, the growing efforts of other oil and gas producing countries in Africa and beyond have had far reaching implications for the ability of Nigeria to attract the required investment to fully unlock the benefits of the abundant oil and gas resources.1
Therefore, it is important that the Commission leverages evolving data liberalization techniques and provide saleable packs to effectively woo potential investors into the Nigerian Petroleum Industry given its revised role and the prevailing commercial outlook in the industry.
- Nigerian Midstream and Downstream Petroleum Regulatory
Authority ("the Authority")
Based on the PIA, the Authority is saddled with the regulation of midstream and downstream petroleum operations in Nigeria, as it involves petroleum liquid operations, domestic natural gas operations and export natural gas operations. The Authority will also be responsible for determining the appropriate tariff methodology for processing of natural gas, transportation and transmission of natural gas, transportation of crude oil, bulk storage of crude oil and quality monitoring for service provided.
The Authority is also expected to determine the domestic gas demand requirement and the crude oil required for domestic supply obligation in order to satisfy economic and strategic domestic demands.
Interestingly, the Authority also has the responsibility to develop local refining capabilities and this is backed by some provisions that will help fund the actualization of the objective. For instance, the PIA provides for the establishment of the Midstream and Downstream Gas Infrastructure Fund (MDGIF) where 0.5% of the wholesale prices of petroleum products sold in Nigeria and natural gas produced and sold in Nigeria will be paid into the Fund. It also provides for the earning of fees from issuance of licences, sale of data, as well as fees paid to the Authority for using facilities owned or managed by the Authority.
The MDGIF is primarily for equity investments of Government owned participating or shareholder interests in infrastructure related to midstream gas operations and to reduce or eliminate gas flare because gas flare penalty arising from midstream operations will also be paid into the MDGIF.
- Nigerian National Petroleum Company Limited (NNPC
The PIA establishes NNPC Limited (wholly owned by both the Ministry of Petroleum Incorporated and Ministry of Finance Incorporated) and will operate as a commercial entity. The Act mandates NNPC Limited to pay its fair share of royalties, fees, rents, taxes and other payments due to the Government. Also, it is expected to pay out the chunk of its profits as dividends after retaining 20% for reinvestment.
More interestingly, Section 65 of the PIA encourages NNPC Limited and its joint venture partners to explore the use of incorporated joint venture companies, under the principles enumerated under the Second Schedule to the PIA. It is expected that this nature of partnership will result in sufficient synergy to achieve optimal investment results for both NNPC Limited and other equity partners.
- International Oil Companies (IOCs)
Prior to the enactment of the PIA, final investment decisions were pending on a number of promising projects that were to be operated by the International Oil Companies ("IOCs"). However, it appears that much steam was lost due to the delays in the enactment of the Act.
Due to the considerable involvement of the IOCs in deep offshore operations and the exemption of deep-offshore petroleum operations from hydrocarbon tax (HT), the jury is now out on the degree of effectiveness that the fiscal terms of the PIA would have in triggering new investments given other key considerations such as a perceived lack of sanctity of contracts, global aspirations for clean energy and competing uses of scarce resources.
Nonetheless, the broad expectation is that the IOCs would find the fiscal terms in the PIA generous and would make further investments in the deep offshore frontiers of Nigeria.
- Indigenous Oil and Gas Producing
Given the IOCs' recent divestments from onshore and shallow-water oil blocks, there is a huge expectation for indigenous companies to gain significant entrance into meaningful petroleum operations.
The PIA appears to take into consideration the aspirations of indigenous oil producers e.g. marginal field is now defined as a field or discovery declared a marginal field prior to 1st January 2021 and is not producing. The PIA stipulates that such fields will be converted to petroleum prospecting licences (PPLs) and shall benefit from the terms for new acreage under Chapter Four of the PIA. The HT rate is 15% for PPLs and this is considerably lower than the previous applicable rates for marginal fields under the Petroleum Profits Tax Act.
Operators are also entitled to production allowances rather than investment allowances and investment tax credits. While this may impact the timing for recouping investments under certain circumstances, the philosophy of granting production allowances seems to be targeted at driving more production which will also be reported as a sign of development.
- Host Communities
The PIA requires a settlor or a group of settlors under a joint operating agreement to incorporate a Host Community Development Trust ("the Trust").
The Trust, which is to be funded by 3% of the actual annual operating expenditure of the preceding financial year in the upstream petroleum operations, is to aid the development of the socioeconomic infrastructure of the petroleum-producing communities.
Based on the PIA, the Trust structure is such that the Board of Trustees would consist of community members, constituted upon consultation with the host communities and approved by the Authority or Commission. The Act also provides that 75% of the Funds managed by the Trust will be for capital projects, 20% to be invested and reserved for use at cessation of contribution by the settlor while an amount not exceeding 5% is to be used for administrative or running cost of the Trust and special projects. The expectation is that the host communities will experience the direct impacts of the contributions.
Based on the PIA, gas flare penalties arising from midstream operations will also be credited to the MDGIF for use in midstream and downstream gas infrastructure investment in the affected host communities. Given the above, there is an opportunity for refocused development of the host communities where the provisions of the PIA are dutifully implemented.
The general hope is that the PIA will not only provide regulations that promote transparency but also be a catalyst for investments in the Nigerian Petroleum Industry.
Given the uncertain future of oil, it has become imperative that the fiscal and non-fiscal gains from the implementation of the PIA will be channeled towards diversifying the Nigerian economy, addressing infrastructural deficits and lifting large chunks of the Nigerian populace out of poverty.
Meanwhile, all stakeholders in the Nigerian Petroleum Industry will do well to carry out relevant due diligence and impact analyses on their operations to evaluate the preferred regime from commercial, financial and sustainability perspectives.
1. . Estimated proven gas deposit of 206.53 trillion cubic feet as at June 2021 and crude oil reserves of 36,890 million barrels.
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