PIA: A New Beginning For The Petroleum Industry

The signing of the Petroleum Industry Bill (PIB) into law On Monday, August 16, 2021, by President Muhammadu Buhari, signals a new beginning for the oil industry, just as it has ended about 20 years of legislative work of four parliaments on the bill.

Most prominent of the goals of the new Petroleum Industry Act (PIA) is the distinctive lines between the operational and regulatory functions of government, improved welfare of host communities and a revision of fiscal terms for the industry. As the steering committee is headed by the Honourable Minister of State for Petroleum Resources, Timipre Sylva, to oversee the implementation of the law commences work, the first droppings of the PIA would come in the reorganisation of the national oil company, the Nigerian National Petroleum Corporation (NNPC) from NNPC to NNPC Limited. To be owned by the Ministry of Petroleum Incorporated and the Ministry of Finance Incorporated, the process, as President Buhari has directed the Steering Committee on its announcement on Wednesday this week, should be within the next six months.

While it is expected that the shares of the new NNPC Limited would ultimately be transferable, it would, however, not be in the immediate future as the law had clearly stated that shares held by the government were not transferable unless approved by the government and endorsed by the National Economic Council on behalf of the federation. The listing of the NNPC on the stock exchange, therefore, is unlikely to happen within the next two years.
NNPC Limited is expected to be vested as the concessionaire of all Production Sharing Contracts (PSC), being the national oil company on behalf of the federation and in line with its strength.

The petroleum sector’s administrative functions will be reorganized and the petroleum products pricing regulatory authority (PPPRA) and petroleum equalization fund (PEF) would be merged to provide as the midstream and downstream regulatory authority while the DPR and the Petroleum Inspectorate will be merged to form a national upstream regulatory commission.

Now a commercial venture, NNPC will lift and sell royalty and tax oil on behalf of the Commission and the Federal Inland Revenue Service (FIRS) respectively at an agreed commercial fee. For-profit oil and gas payable to the concessionaire, NNPC Limited will set aside 30 per cent of the profit for Exploration Frontier Fund, remit 60percent to the federation and reserve 10 per cent as a management fee.

Gas utilization is the prima facie top focus of the new law. It targets to move resources from the midstream gas infrastructure fund to boost local gas consumption. The ongoing divestment of onshore and shallow water assets by international oil companies (OICs) could accelerate the government initiative in this respect. With the NNPC becoming fully commercialized to make a profit, declare dividends for its shareholders and retain 20 per cent of the profit to grow its business, an end to petrol subsidies is here soon. Also expected is a gold rush for local asset managers with the formation of host community trusts. Annual fund management inflow from these trusts is expected to be more than USD100 million yearly.

New issued licences by the government for oil prospecting, exploration, production and exploitation will be done under a new hydrocarbon tax regime. Old licences are permitted to continue with the prior tax regime up until the expiration of the leases.

The bill as signed into law on a three (3) per cent charge on apex for host community trust funding would for a while remain irritating to the communities with the gap between their expectations (10 per cent) and the provision in the Act, proving problematic. But if the provisions are faithfully implemented, issues as the Ogoni crisis, which completely polluted and devastated the community, are gone forever with the Abandonment and Decommissioning Fund also coming under the law to assuage whatever the grouse the communities may still harbour over the shortfall in their expectations of the host community fund.

Top 20 Changes Instituted By the PIA

The Act provides a legal, governance, regulatory and fiscal framework for the Petroleum Industry and the development of Host Communities. It contains five (5) Chapters, 319 Sections and eight (8) Schedules and provides among others the following changes:

Chapter 1 – Governance and Institutions

1. The key objective is to ensure good governance and accountability, the creation of a commercially oriented national petroleum company, and fostering a conducive business environment for petroleum operations.

1. Creation of the Nigerian Upstream Regulatory Commission responsible for the technical and commercial regulation of the upstream petroleum operations; and the Nigerian Midstream and Downstream Petroleum Regulatory Authority responsible for the technical and commercial regulation of the midstream and downstream operations in Nigeria. The Commission and Authority are exempted from the provisions of any enactment relating to the taxation of companies or Trust Funds

2. Imposition of up to 1 per cent levy on the wholesale price of petroleum products sold in the country (0.5 per cent each for the Authority Fund and Midstream Gas Infrastructure Fund)

3. Incorporation of a commercial and profit-focused NNPC Limited under CAMA within 6 months from commencement of the new law with ownership vested in the Ministry of Finance Incorporated (and Ministry of Petroleum Incorporated) on behalf of the Federation to take over assets, interests and liabilities of NNPC. This structure is expected to pave the way for the eventual sale of shares to Nigerians.

4. Any assets, interest and liabilities not transferred to NNPC Limited will remain with NNPC until extinguished or transferred to the government after which NNPC shall cease to exist. Transfer and sale of the shares are subject to approval by the government and endorsement by the National Economic Council.

5. NNPC Limited will earn 10 per cent of the proceeds of the sale of profit oil and profit gas as management fee while 30percent will be remitted to Frontier Exploration Fund for the development of frontier acreages in addition to 10percent of rents on petroleum prospecting licences and mining leases.

Chapter 2 – Administration

7. The main objective is to promote the exploration and exploitation of petroleum resources in Nigeria for the benefit of the Nigerian people and promote sustainable development of the industry, ensure safe, efficient transportation and distribution infrastructure and transparency and accountability in the administration of petroleum resources in Nigeria.

1. Avoid economic distortions and ensure a competitive market for the sale and distribution of petroleum products and natural gas in Nigeria; and avoid cross-subsidies among different categories of consumers.

2. The Commission is required to develop a model licence and model lease to include a carried interest provision giving NNPC Limited the right to participate up to 60 per cent in a contract.

Chapter 3 – Host communities’ development

10. The main objective is to foster sustainable prosperity within host communities, provide direct social and economic benefits and enhance harmonious co-existence.

1. Any company granted an oil prospecting licence or mining lease or an operating company on behalf of joint venture partners (the settlor) is required to contribute 3% – 5% (upstream Companies) and 2% (other companies) of its actual operating expenditure in the immediately preceding calendar year to the host communities development trust fund. This is in addition to the existing contribution of 3% to the NDDC. The Fund is tax-exempt and any contributions by a settlor are tax-deductible.

2. Board of trustees and executive members of the management committee may include persons of high integrity and professional standing who may not necessarily come from any of the host communities.

3. Available funds are to be allocated 75% for capital projects, 20% as a reserve and 5% for administrative expenses. However, a community will forfeit the cost of repairs in the event of vandalism, sabotage and other civil unrest causing damage to petroleum facilities or disruption of production activities.

Chapter 4 – Fiscal framework

14. The key objective is to establish a progressive fiscal framework that encourages investment in the Nigerian petroleum industry, provides clarity, and enhances revenues for the government while ensuring a fair return for investors.

1. FIRS to collect Hydrocarbon Tax of 15% – 30% on profits from crude oil production, CIT at 30% and Education Tax at 2% which will no longer be tax-deductible. The Commission will collect rents, royalties and production shares as applicable while the Authority will collect gas flare penalty from midstream operations. Late filing of tax returns will attract N10m on the first day and N2m for each subsequent day the failure continues. An N20m fine is applicable to an offence where no penalty is prescribed.

2. Generally, expenses must be wholly, reasonably, exclusively and necessarily incurred to be tax-deductible. However, a cost price ratio limit of 65% of gross revenue is imposed for hydrocarbon tax deduction purposes, any excess cost incurred may be carried forward.

3. No tax deduction for head office costs while tax deduction of interest on monies borrowed is subject to the satisfaction of the commission that the fund was employed for upstream operations and the interest rates reflect market conditions.

4. Royalties are payable at the rates of 15% for onshore areas, 12.5% for shallow water, and 7.5% for deep offshore and frontier basins, 2.5% – 5% for natural gas. In addition, a price-based royalty ranging from 0% -“10% is payable to be credited to the Nigerian Sovereign Investment Authority.

5. Gas utilisation incentive will apply to midstream petroleum operations and large-scale gas utilisation industries. An additional 5-year tax holiday will be granted to investors in gas pipelines.

Chapter 5 – Miscellaneous provisions

1. The PIA repeals about 10 laws including the Associated Gas Reinjection Act; Hydrocarbon Oil Refineries Act; Motor Spirit Act; NNPC (Projects) Act; NNPC Act (when NNPC ceases to exist); PPPRA Act; Petroleum Equalisation Fund Act; PPTA; and Deep Offshore and Inland Basin PSC Act. It amends the Pre-Shipment Inspection of Oil Exports Act while the provisions of certain laws are saved until termination or expiration of the relevant oil prospecting licences and mining leases including the Petroleum Act, PPTA, Oil Pipelines Act, Deep Offshore and Inland Basin PSC Act.

Schedules:

1. Dealing with Rights of Preemption
2.  Incorporated Joint Ventures
3. Domestic Base Price and Pricing Framework
4. Pricing Formula for Gas Price for the Gas Based Industries
5. Capital Allowances
6. Production Allowances and Cost Price Ratio Limit
7. Petroleum Fees, Rents and Royalty
8. Creation of the Ministry of Petroleum Incorporated