PETROLEUM INDUSTRY ACT: Critical Points You Need To Know

compiled by Oyagiri Chime-emele

With the President signing of the Petroleum Industry Bill, PIB, into law and now to be known as Petroleum Industry Act, PIA, the entire framework for doing business in the oil and gas sector changes fundamentally.

Below are critical points embedded in the new Act that will now govern operations in the sector going forward

• FG to conclude Commercialisation of NNPC by February 2022

• Act retains 3% for host communities, 30% for frontier basins

• New law creates two regulatory agencies for oil industry

• Commission to collect rents, royalties, production share

• Downstream authority to collect gas flare from midstream

• PIA imposes 1% levy on wholesale price of petroleum products

• Corporation to retain 10% of profit oil, gas as management fee

• Oil companies to be sanctioned for understating profits, overstating losses

• New legislation repeals 10 existing laws

• BoT, executive members of host communities’ board may not be indigenes

• Oil areas to distribute funds for capital projects (75%), reserve (20%), administrative (5%)

• Bill divided into fiscal, administrative, governance and institutions as well as host communities

• Host communities’ fund to be set up within 12 months from yesterday

• All employees of NNPC deemed new staff of NNPC limited

• When incorporated, board appointments to be made by shareholders, not the president alone

• Host communities to forfeit entitlement to extent of damage in cases of vandalism

The new Act commercializes the Nigerian National Petroleum Corporation (NNPC) within the next six months, effectively transforming the national oil company into a limited liability company.

Establishment of the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), which shall be responsible for the technical and commercial regulation of upstream petroleum operations.

The commission will ensure compliance with all applicable laws and regulations governing upstream petroleum operations in a manner to minimise waste and achieve optimal government revenue as well as promote healthy, safe, efficient and effective conduct of upstream petroleum operations.

New Act gives 3% of total expenditure by the oil companies for the previous year for oil-producing areas and 30 per cent of NNPC Limited’s profit oil and gas in product sharing, profit sharing and risk service contract for frontier basins exploration.

Established is the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) which shall be responsible for the technical and commercial regulation of midstream and downstream petroleum operations in the petroleum industry.

The NMDPR, which effectively means the extinction of the Department of Petroleum Resources (DPR) will ensure efficient, safe, effective and sustainable infrastructural development of midstream and downstream petroleum operation as well as promote healthy, safe, efficient and effective conduct of midstream and downstream petroleum.

Amongst others, the new body will promote a competitive market for midstream and downstream petroleum operations; promote the supply and distribution of natural gas and petroleum products and ensure the security of natural gas supply for the domestic gas market as well as ensure crude oil supply for domestic refineries.

Midstream and Downstream Gas Infrastructure Fund (MDGIF) which shall be funded from 0.5 per cent of the wholesale price of petroleum products and natural gas sold in Nigeria, which shall be collected from wholesale customers.

Other sources of funding for the new body are grants accruing from multilateral agencies, bilateral institutions and related sources dedicated partly or wholly for the development of infrastructure for midstream and downstream gas operations in Nigeria and interest payable in respect of money in the fund.

Monies received from gas flaring penalties by the commission for the purpose of environmental remediation and relief of the host communities of the settlor on which the penalties are levied and any other sum freely donated shall be paid into the fund.

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 (NNPC Limited).

The Minister shall at the incorporation of NNPC Limited, consult with the minister of finance to determine the number and nominal value of the shares to be allotted, which shall form the initial paid-up share capital of NNPC Limited and the government shall subscribe and pay cash for the shares.

Ownership of all shares in NNPC Limited shall be vested in the government at incorporation and held by the ministry of finance incorporated and the ministry of petroleum incorporated in equal portions on behalf of the federation and the ministry.

The document further states that assets, interests and liabilities of NNPC not transferred to NNPC Limited or its subsidiary under subsection (1), shall remain the assets, interests and liabilities of NNPC until they become extinguished or transferred to the government in six months following the determination while the minister of finance and the attorney general of the federation shall develop a framework for the payment of the liabilities.

NNPC shall cease to exist after its remaining assets, interests and liabilities other than its assets, interests and liabilities transferred to NNPC Limited or its subsidiaries under subsection (1) shall have been extinguished or transferred to the government.

To allay the fears expressed by beneficiaries of host community funds that oil companies may continue to under-declare expenses or profits and overstate losses, the law also set out appropriate punishments for any person who makes incorrect accounts by omitting or understating any profits or overstating any losses of which he is required under the act to make accounts.

A person who prepares or causes to be prepared any incorrect schedule or statement required to be prepared under section 277 of this Act by overstating any expenditure or overstating any royalties or other sums or by omitting or understating any amounts repaid, refunded, waived or released, or gives or causes to be given any false;

Or misleading information in relation to any matter or thing affecting his liability to hydrocarbon tax is liable to an administrative penalty of the sum of N15,000,000 or 1 per cent of the amount of tax which has been undercharged in consequence of such incorrect account.

As part of the implementation process, the law mandated the minister to within 24 months of the effective date cause an inter agency transfer of any staff of the institutions to the commission, the authority or NNPC Limited based on skills and competence requirements of the new institutions.

It stated that every settlor shall transfer any existing host communities development project or scheme under its corporate social responsibility or memorandum of understanding or any other agreement to a host communities development trust established under the act.

Every applicable settlor shall notify the commission or authority, as the case may be, upon completion of any transfer under subsection (1) to any one or more host communities development trusts of any of its existing host communities development projects or schemes.

Any financial contribution made by a settlor from the effective date until the date falling 12 months after the effective date to any ongoing host communities development project or scheme in accordance with their terms, shall be deemed to constitute a contribution made by such holder or holder nominee under section 240 (2) of this act.

It stressed that rules, orders, notices or other subsidiary legislation made under the Petroleum Act, the Petroleum Profits Tax Act and the Deep Offshore and Inland Basin Production Sharing Contract Act shall continue to have effect as if made under the corresponding provisions of the Act.

The new act further mandated each settlor through its operator to make the 3 per cent available for the host communities, with each of the trusts allowed to receive donations, gifts, grants or honoraria that are provided to such host communities development trust for the attainment of its objectives.

Each settlor, where applicable through the operator, shall make an annual contribution to the applicable host communities development trust fund of an amount equal to 3 per cent of its actual annual operating expenditure of the preceding financial year in the upstream petroleum operations affecting the host communities for which the applicable host communities development trust fund was established.