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Posted on by Damola Adewumi

CRITICAL DEADLINES IN THE PETROLEUM INDUSTRY ACT 2021

by Dr. Adeoye Adefulu & Oludamola Awobokun

The Petroleum Industry Act 2021 (PIA) provides timelines within which certain critical actions must be performed by holders of oil mining leases (OMLs) and oil prospecting licences (OPLs), awardees of marginal fields and settlors[1].

One year after the passage of the PIA, this article details the activities, relevant timelines (some of which have lapsed) & practical considerations, before opining on whether these timelines are realistic. This is done taking into consideration the relevance of the regulations and guidelines that are yet to be issued by both the Nigerian Upstream Petroleum Regulatory Commission (“NUPRC” or the “Commission”) and the Nigerian Midstream and Downstream Regulatory Authority (NMDPRA)[2], which ought to provide guidance in complying with the PIA.

ACTIVITIES POST-PIA AND TIMELINES FOR CONCLUSION

  1. CONVERSION

The PIA allows existing OMLs and OPLs to continue under the old legislative regime[3] and the same terms and conditions until those licenses expire. Where a licensee or a lessee wishes to convert to a PPL or a PML, to benefit from the new fiscal regime, the Act lays down a conversion process.  

  1. Oil Mining Lease

Section 92 (4) of the PIA requires the conclusion of a conversion contract either within 18 months from the effective date of the PIA[4] i.e., February 15, 2023; or at the expiration date of the OML or conversion of an OPL to an OML, whichever occurs earlier.

Prior to February 15, 2023, a holder of an OML including an OML subject to a production sharing contract, that seeks to enter into a conversion contract must perform the following:

  1. Designate areas and zones of the OML as areas and zones which—
  2. in the opinion of the OML holder, merit appraisal and which the holder is prepared to present an appraisal program as required in the PIA;[5]
  3. the OML holder is prepared to make a declaration of commercial discovery and submit a field development plan (FDP)to the Commission in accordance with the PIA;[6]
  4. the OML holder is prepared to make a declaration of a significant gas discovery or a significant crude oil discovery and submit an application for approval of a retention area;
  5. development of a field is underway based on prior approvals after having declared the discovery commercial or if no such declaration was made after having made a final investment decision to develop the field; and
  6. regular commercial production is occurring.
  7. Where the total acreage selected is less than 40% of the area to which the OML applies, the holder may select additional areas covered by the OML for conversion to a petroleum prospecting licence (PPL) in such a manner that the total of all areas selected will not be more than 40% of the OML. Where the total acreage selected in (a) above is more than 40%, the OML holder will be entitled to keep such a larger area, consisting solely of the selected areas.

Note: Selected areas will be based on parcels.

Practical Considerations

Almost 6 months to the deadline for conversion, the NUPRC is yet to issue the final regulations or a draft of the conversion contract.[7] This does not provide sufficient time for license holders to fully consider the implications of conversion. Further, any steps taken with respect to a conversion such as the designation of areas and zones will need to be approved by the NUPRC. The Commission will have a lot of work on its hands in a short period, which may delay the achievement of the deadline.

Nonetheless, it is important that executive management and boards of oil companies begin to analyse their assets and consider the benefits and disadvantages of conversion. Key factors for companies to take into account include:

  1. The benefits of the application of the PIA fiscal regime;
  2. The license expiry date;
  3. The relinquishment obligations of conversion;
  4. The loss of the application of the Petroleum Act;
  5. Termination of all outstanding arbitration and court cases related to the respective OPLs and OMLs, and any stability provisions or guarantees provided by NNPC will be null and void;
  6. Incentive provisions for the utilisation of associated and non-associated gas in the Petroleum Profit Tax Act will no longer apply.
  7.  
  8.  
  9. Marginal Field Conversion

The PIA requires producing marginal fields to convert to petroleum mining leases (PMLs) by February 15, 2023.[8]

Also, a marginal field in which a discovery has been declared prior to January 1, 2021, though not producing is required to be converted to a PPL.[9] The PIA does not stipulate the timeframe within which such conversion should occur.

Though timelines for conversion have been provided in the PIA, the Act is silent on the process of conversion of marginal fields and the activities required to be carried out by the awardees.

The draft Conversion and Renewal (Oil Prospecting Licences & Oil Mining Leases) Regulation issued by the NUPRC in March 2022, specifies the appropriate party to apply for conversion; the procedure for application for conversion of a marginal field, and required documentation to accompany the application. However, this Regulation is in draft form, and is yet to be issued in its final form.

Practical considerations

The provisions of the PIA require the automatic conversion of marginal field licenses. Therefore, the board of directors of marginal field owners does not have an option unlike the conversion of OMLs and OPLs. There are, however, procedural matters which may only be resolved after the Commission issues its final regulations. These include, who may apply, the form of application, relevant costs etcetera.

Other than the procedural issues, there are substantive matters which need to be addressed. The PIA is ambiguous on the effect of the conversion of these marginal fields to PMLs and PPLs. For example, what happens to the rights of the marginal field farmors which are typically protected under a farm-out agreement. Would the farm-out agreement continue to subsist post-conversion? Would the marginal field farmees still pay royalties to the farmors? These questions need to be answered explicitly by the Commission by issuing a Guidance Note, or seeking court interpretation.  

  • HOST COMMUNITIES’ DEVELOPMENT TRUST

Section 236 (a – c) requires a Settlor to incorporate host communities’ development trust within 12 months from the effective date (i.e., any date between August 16, 2021, and August 15, 2022) for both existing OMLs and designated facilities, and new designated facilities under construction on August 16, 2021.

In addition, the PIA provides that host communities’ development trust must be incorporated prior to:

  • the application for a field development plan for existing OPLs, and both PPLs and PMLs granted under the PIA; and
  • the commencement of commercial operations for licensees of designated facilities granted under the PIA.[10]

Incorporation of host communities’ development trust entails the following:

  1. Draft the constitution of the host communities’ development trust by the Settlor;
  2. The Settlor in conjunction with the host communities must appoint and authorise a Board of Trustees (BoT), which will apply to be registered by the Corporate Affairs Commission (CAC) as a corporate body under Companies and Allied Matters Act (CAMA);
  3. Obtain approval from the NUPRC for the membership of the BoT; and
  4. Establish a host communities development trust fund, in which funds will be paid into such as the annual contribution of an amount equal to 3% of the Settlors 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.

In addition, the requirements provided for incorporation in the CAMA 2020 as well as on the CAC portal are not as wide as those provided for in the PIA. To avoid delays in the process of incorporation, NUPRC and the CAC need to take a joint position on the content of the constitution for the host communities’ development trust.

Practical Considerations

The Commission, in March 2022, issued a draft Petroleum Host Community (Commission) Regulations and held a stakeholders consultation forum in April 2022 to address comments and recommendations provided by stakeholders in respect of this Regulation and 5 other regulations issued by NUPRC. The final form of the Petroleum Host Community (Commission) Regulation was gazetted on June 24 2022.

The Regulations stipulate the timeline within which certain activities must be concluded which are:

  1. Settlor submission of request to establish Host Community Development Trust to the Commission – 2 months prior to the establishment of the host community development trust (i.e., by June 16, 2022 given the deadline for incorporating the Trust was August 16, 2022 ). It is worth noting that by the date of issuance of the regulations, licensees were already out of time.
  2. Appointment of Board of Trustees by the Settlor upon approval of the submission by the Commission. Approval to be granted not later than 1 month after receipt of the submission from the Settlor.
  3. Annual contribution to the host community development trust fund – first annual contribution to be made within 1 month after the fund has been established by the board of trustees, and thereafter make contributions on a yearly basis on or prior to the anniversary of the first contribution.
  4. Host community needs assessment – to be carried out within 6 months following the grant of the lease.

For existing OPLs and OMLs, the needs assessment will be carried out within 6 months after the Settlor has made the first annual contribution related to its area of operations.

  • Host community development plan – Settlor is required to carry out the preparation of the host communities’ development plan within 1 year following the granting of the lease.

Submit host community development plan upon completion to the host community Advisory Committee for review and preparation of final plan within 2 months after receipt of respective reviews.

  • Settlor to submit an annual report of the host communities’ development trust to the Commission not later than 31st May of each year.

 

  • MIDSTREAM AND DOWNSTREAM OPERATIONS

The PIA requires holders of subsisting leases, licences or permits engaged in activities in midstream or downstream gas and petroleum liquids operations to apply to the Authority for such licence or permit within 18 months from the effective date. These include operating a gas transportation network, wholesale gas supply, liquefied natural gas plants, crude oil refinery, bulk storage of petroleum liquids and distribution of petroleum products amongst others.

Where any of these activities are carried out without the appropriate licence or permit, such licensee or lessee commits an offence and is liable to:

  1. imprisonment for a term of 1 year or a fine prescribed by regulation, in the case of activities requiring a licence; or
  2. 6 months or a fine prescribed by regulation, in the case of activities requiring a permit.

Practical Considerations

Given that the 18-month timeline for both licences and permits is February 2023 which is fast approaching, it is important that the NMDPRA issue regulations and guidelines to direct licensees and lessees in submitting the appropriate documentation to obtain approval.

In the meantime, licensees and lessees should engage with the NMDPRA for guidance on the steps to take to ensure compliance with the PIA.

  • DECOMMISSIONING AND ABANDONMENT

The PIA provides that where no decommissioning and abandonment plan exists in respect of upstream and midstream petroleum operations, a lessee / licensee is required to submit a decommissioning and abandonment plan based on the criteria established in section 232 (6) of this Act within one year of the effective date i.e., August 15, 2022.

The decommissioning and abandonment plan will establish the yearly amount to be contributed to the respective decommissioning and abandonment fund. The yearly amount to be contributed will be based on:

  1.  a reasonable estimate by the licensee or lessee of the applicable decommissioning and abandonment costs; and
  2. projected forward on a nominal basis and divided by the estimated life of the facilities.

The reasonable cost estimate will be approved by the Commission or Authority, as the case may be.

The NMDPRA and NUPRC in June and August 2022 respectively issued draft decommissioning and abandonment regulations which serve as a guide for compliance with the PIA. These draft regulations stipulate the requirements for the plan, approval and rejection of applications, and the requirement for the establishment of annual contribution to a decommissioning fund in the plan amongst other provisions.

These regulations are yet to be finalised whilst the relevant PIA deadline has elapsed.

  • ENVIRONMENTAL MANAGEMENT PLAN

The PIA requires a licensee or lessee engaged in upstream and midstream petroleum operations to submit for approval and environmental management plan in respect of projects requiring environmental impact assessment to NUPRC or NMDPRA within 1 year of the effective date (i.e., August 15, 2022).

The environmental management plan is required to be in accordance with extant environmental acts such as the Environmental Impact Assessment (EIA) Act, Environmental Guidelines and Standards for the Petroleum Industry in Nigeria (EGASPIN), as well as National Environmental Standards and Regulations Enforcement Agency Act, amongst others.

The plan will be approved where it complies with the environmental acts and the applicant has the capacity or has provided for the capacity to rehabilitate and manage negative impacts on the environment.

Prior to the approval of the environmental management plan, a licensee or lessee is required to pay a financial contribution to an environmental remediation fund established by NUPRC and NMDPRA for the rehabilitation or management of negative environmental impacts with respect to the licence or lease.

The NMDPRA and NUPRC in June and August 2022 respectively issued draft environmental regulations which provide detailed requirements and content of the environmental management plan.[11]

CONCLUDING REMARKS

The timelines provided under the PIA have proven unrealistic for the following reasons:

  • The drafters of the PIA did not take into consideration that a number of the activities required the issuance of subsidiary legislation (regulations) or guidelines before they could be effected.

The subsidiary legislation serves as a guide to licensees for example in making the decision whether or not to convert to a PPL or PML, and in complying with the provisions of the PIA. Most of the relevant regulations have yest to be issued. Whenever these regulations are issued in final form, the time to comply with the PIA deadlines will be gravely shortened compromising the ability of the licensees to comply.

  • The current timeline is not sufficient to perform the requirements for some of the post-PIA activities, as the performance of certain activities require reliance on external parties, for instance incorporation of a host communities development trust, amongst others.

The Regulators should extend the timelines. Ordinarily, such extensions would require an amendment of the PIA. However, given that an amendment of the PIA will be fraught with delays, this is not a pragmatic solution. The Regulators, as enforcers of the provisions of the PIA, noting that the delays have been occasioned by no fault of the licensees, can choose to delay enforcement. The Regulators should issue a notice declaring the extension of the timeline for enforcement, the length of extension and the reasons for such a delay. This will offer sufficient comfort for licensees and allow the PIA mandates to be achieved in a realistic manner.

[1] Section 328 of the PIA defines a “Settlor” as a holder of an interest in a petroleum prospecting licence or petroleum mining lease whose area of operations is located in or appurtenant to any community or communities.

[2] NUPRC and NMDPRA are jointly referred to as “regulatory bodies”.

[3] Petroleum Act, Petroleum Profits Tax Act, Deep Offshore and Inland Basin Production Sharing Contracts Act, amongst others. See Section 311(9) of the PIA.

[4]  The effective date of the PIA is August 16, 2021.

[5] Section 78 of the PIA.

[6] Section 78 & 79 of the PIA.

[7] Draft Conversion and Renewal (Oil Prospecting Licences & Oil Mining Leases) Regulation was issued on 8th March, 2022, and a public hearing was held on 20th – 22nd April, 2022.

[8] Section 94 (1) of the PIA.

[9] Section 94 (2) of the PIA.

[10] Section 236 (d – f) of the PIA.

[11] NMDPRA Regulation is the Environmental Regulation for Midstream and Downstream Operations; and NUPRC Regulation is the Upstream Petroleum Environmental Regulations 2022.

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