The new Petroleum Industry Act 2021 which was recently assented and signed into law by the President of the Federal Republic of Nigeria on August 16th, 2021 to repeal the extant Petroleum Act 2004, has created an array of provisions and innovations that will affect the private, public sector and stakeholders in the oil and gas industry. This article aims at giving a brief overview of the salient provisions of the Act which embodies 5 Chapters, 319 Sections, and 8 Schedules.
The Petroleum Industry Act was enacted to provide for the legal, governance, the regulatory, and fiscal framework for the Nigerian Petroleum Industry, the establishment, and development of host communities and other related matters in the upstream, midstream and downstream sectors of the petroleum industry.
Salient Provisions of the Petroleum Industry Act 2021
As earlier stated, the Act is categorised into 5 Chapters, 319 Sections, and 8 Schedules. Chapter 1 of the Act provides for the governance and institution of the petroleum industry. It lays emphasis on the fact that the ownership and control of petroleum within Nigeria and its territorial waters are vested in the Government of the Federation of Nigeria. The Minister of Petroleum Resources who heads the Petroleum Industry has the powers as vested on him by Section 3(1) to formulate, monitor, and administer government policy in the petroleum industry, amongst other functions.
Introduction of Dual Regulatory Agencies
The Act establishes dual regulators for the petroleum industry called The Nigerian Upstream Petroleum Regulatory Commission (the "Commission"), which is a body corporate with perpetual successions whose functions are limited to only the upstream petroleum activities as provided for in Section 4 of the Act, which provides that "the Commission is responsible for the technical and commercial regulation of the upstream petroleum operations". Amongst other functions of the Commission is that it is established to ensure compliance with all applicable laws and regulations governing upstream petroleum operations.
The other regulatory agency under Section 29 of the Act is the Nigerian Midstream and Downstream Petroleum Authority (the "Authority"). This regulatory authority is responsible for the technical and commercial regulation of the midstream and downstream petroleum operations in the petroleum industry as provided under Section 29(3) of the Act.
Establishment of the Nigerian National Petroleum Company Limited
Furthermore, the Act also established the Nigerian National Petroleum Company Limited (NNPC Limited) under Section 53 of the Act. The NNPC Limited is established to be an agent of the Nigerian National Petroleum Corporation (NNPC) for the purpose of managing the winding down of assets, interest, and liabilities of the NNPC. Section 53 of the Act provides that- "the Minister shall within six months from the commencement of this Act, cause to be incorporated under the Companies and Allied Matters Act, a limited liability company, which shall be called the Nigerian National Petroleum Company Limited".
The ownership of NNPC Limited is vested in the Federal Government at incorporation and held by the Minister of Finance and the Ministry of Petroleum incorporated in equal portions on behalf of the Federation and the Ministry of Petroleum as stated in Section 53(3) of the Act. The Act also establishes incorporated joint companies under Section 65 of the Act. The NNPC Limited is to conduct its affairs on a commercial basis in a profitable manner without recourse to government funds and their memorandum and articles of association shall state these restrictions. The NNPC is also required to declare dividends to its shareholders and retain 20% of profit as retained earnings to grow its business like any other incorporated entity incorporated under the Companies and Allied Matters Act, as provided under Section 53(7) of the Petroleum Industry Act.
General Administration of the Petroleum Industry
Chapter 2 of the Petroleum Industry Act 2021 provides for the general administration, with its objectives to promote the exploration and exploitation of petroleum resources in Nigeria for the benefit of the Nigerian people, to promote the efficient and effective development of the petroleum industry, amongst others. Section 67 of the Act provides that the administration and management of petroleum resources are to be conducted in accordance with the Act and principles of good governance, transparency, and sustainable development in Nigeria.
General Administration of Upstream Petroleum Operations and Environment/ License and Leases under the Act
Under Section 68 of the Act, title to any data and its interpretation relating to upstream, petroleum operations are vested in the Government and shall be administered by the Nigerian Upstream Petroleum Regulatory Commission. Where petroleum discovery is made in a frontier basin, the Minister on the recommendation of the Commissioner will reclassify all or part of the basin from frontier acreages to a general onshore area and the fiscal terms applicable to onshore shall apply to new licenses and leases in the basin after classification and any existing lease upon renewal, provided it is not applied to licenses and leases existing at the moment of reclassification.
A license or lease is granted to only companies incorporated and validly existing in Nigeria under the Companies and Allied Matters Act. The Act renames the existing licenses and leases related to the upstream petroleum operations and replaces it with the following according to Section 70;
- Petroleum Exploration License which may be granted to qualified applicants to carry out petroleum exploration operations on a non-exclusive basis;
- Petroleum Prospecting License which is granted to qualified
- Drill exploration and appraisal wells and do corresponding text production on an exclusive basis and;
- Carry out petroleum exploration on a non-exclusive basis and;
- Petroleum Mining Lease which will be granted to qualified
- Win, work, carry away, and dispose of crude oil, condensates, and natural gas on an exclusive basis;
- Drill exploration and appraisal wells and carry out related test production on an exclusive basis and;
- Carry out petroleum exploration operations on a non-exclusive basis.
The Act also provides for environmental management by the Commission in compliance with the Act in respect to environmental sustainability. Section 102 of the Act provides that a licensee or lessee who engages in upstream or midstream petroleum operations is required to within one year or six months of the effective date or after the grant of the applicable license or lease, submit for approval an environmental management plan in respect of projects which require environmental impact assessment to the Commission or Authority as the case may be. The plan shall be approved where it complies with relevant Environmental Acts and the applicant has the capacity to rehabilitate and manage negative impacts on the environment.
General Administration of Midstream and Downstream Petroleum Operations
The Nigerian Midstream and Downstream Petroleum Authority under Section 111 of the Act may grant, renew, modify or extend individual licenses or permits, provided that where it relates to the establishment of refineries shall be issued by the Minister on the recommendation of the Authority.
A license for midstream and downstream petroleum operations may be granted where it meets the following according to Section 111(3) of the Act;
- It meets the technical standards required for petroleum operations based on good international petroleum industry practices;
- The location and size of the area occupied by the facilities or right of way is acceptable to the Authority;
- It meets the health safety and environmental standards as determined by the Authority and;
- it provides for the efficient and economic use of facilities and pipelines.
By virtue of the Act, the Authority is required to also make regulations and guidelines for the grant or renewal of license for midstream and downstream petroleum operations.
Administration of Midstream and Downstream Gas Operations
Under Section 125 of the Act, the activities requiring a license for midstream and downstream gas operations involves establishing, constructing, or operating a facility for the processing of gas; engaging in bulk transportation of natural gas by rail, barge, or other means of transportation, operating gas transportation network, engaging in wholesale gas supply, engaging in the construction or operation of petrochemical or fertiliser plants, etc.
The Authority is also required under Section 126 of the Act to issue regulations with respect to midstream and downstream gas operations which includes the establishment and operation of a wholesale natural gas market scheme to ensure continuity of supply of natural gas to customers which applies to owners and operators of gas transportation pipelines, shippers of natural gas, holders of natural gas storage and distribution licenses and gas retailers and other matters consequential or ancillary to the activities stated above.
Host Communities Development
Chapter 3 of the Act provides for another salient introduction which is the Petroleum Host Community Development (PHCD) under Section 234 of the Act. The objectives of the PHCD include fostering sustainable prosperity within host communities; providing direct social and economic benefits from petroleum operations to host communities; creating a framework to support the development of host communities, etc.
The Act also provides for the incorporation of host communities development trusts under Section 235 of the Act as the settler is required to incorporate Host Communities Development Trust for the benefit of host communities which the settler is responsible for and the Act provides for the timeline within which to incorporate the Trust. The sources and allocation of the host communities' development trust are also provided under Sections 240 and 244 of the Act. The funds are to be distributed by the Board of Trustees to host communities using a matrix as provided by the settler.
Petroleum Fiscal Industry Framework
Chapter 4 of the Act introduces the Petroleum Fiscal Industry Framework (PIFF). The objectives of PIFF include establishing a progressive fiscal framework that encourages investment in the Nigerian petroleum industry, balancing rewards with risk and enhancing revenues to the Federal Government of Nigeria; provide a forward-looking fiscal framework that is based on core principles of clarity, dynamism, and fiscal rules of general application, etc. the Act provides that all money collected from the petroleum industry that is due to the government are to be transferred to a federal account and such collection of the government revenue in the petroleum industry shall be the function of the Federal Inland Revenue Service (FIRS).
Introduction of Hydrocarbon Tax
The Act introduces the Hydrocarbon Tax under Section 260 of the Act which shall be applicable and levied upon the profits of companies engaged in the upstream petroleum operations in the onshore, shallow water, and deep offshore, payable during each accounting period. Subject to Section 262 of the Act, the crude oil revenue of the company shall be the value of any chargeable oil adjusted to the measuring points based on the proceeds of the chargeable oil sold by the company and the value of all chargeable oil disposed of by the company.
The chargeable tax for any accounting period shall be 30% of the profit from crude oil for petroleum mining leases with respect to offshore and shallow water areas and 15% of the profit from crude oil for onshore and shallow water for petroleum prospecting license. Also, the Company Income Tax (CIT) is now applicable to companies, licensees, concessionaire, lessees, contractors, or subcontractors engaged in the upstream, midstream, or downstream petroleum operations in addition to the hydrocarbon tax as provided in Section 302 of the Act, subject to the Companies and Allied Matters Act.
Failure to comply with this attracts the administrative penalty of N10,000 (Ten Thousand Naira), and where no other penalty is specifically provided for, a person found guilty is liable to a fine of N20 Million Naira or any amount prescribed by the Minister of Finance, as provided under Section 297 of the Act.
In conclusion, chapter 5 of the Act provides for miscellaneous provisions which deal with legal proceedings in relation to any suit instituted by the Commission or Authority or any of its employees. Finally, as earlier stated the Petroleum Industry Act 2021 provides the legal, governance, regulatory and fiscal framework for the Nigerian petroleum industry and also the development of host communities. The above summaries and gives an overview of the Act which was signed into law on the 16th of August 2021.
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.