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FUELING CHANGE: REFLECTING ON TWO YEARS OF PETROLEUM INDUSTRY ACT

by Dr. Adeoye Adefulu & Lateef Bamidele

It’s hard to believe that August 16, 2021, is now two years behind us, signifying the momentous occasion when the Petroleum Industry Act 2021 (“Act” or “PIA”) was enacted into law. Over the past two years, the industry has been navigating and adjusting to the new legislative landscape. While opinions on the progress achieved during this period may differ within the industry, one undeniable fact is the array of significant activities that have unfolded, leaving an indelible mark on the industry’s current trajectory.

In commemorating the first anniversary of the Act, we examined the spectrum of implementation activities that transpired within the initial twelve months following the Act’s enactment. Likewise, we published a newsletter titled Petroleum Industry Act; Implementation Developments and Regulatory Compliance Issues ahead of the eighteen months anniversary. That paper further scrutinized these implementation activities while underscoring the pertinent compliance concerns for the industry. For this edition of our newsletter, we will focus on fresh developments witnessed in the last six months.

As we observe the second anniversary of the Act, our attention now shifts to the novel activities spearheaded by the two industry regulators, the Nigerian Upstream Petroleum Regulatory Commission (“Commission”) and the Nigerian Midstream and Downstream Petroleum Regulatory Authority (“Authority”). These activities shed light on the evolving landscape of the petroleum industry in Nigeria.

Continue reading “FUELING CHANGE: REFLECTING ON TWO YEARS OF PETROLEUM INDUSTRY ACT“
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NUPRC vs NMDPRA: Resolving the Quagmire Over the Regulation of Export Terminals

A popular African proverb states, “When two elephants fight, it is the grass that suffers.” This analogy emphasizes the consequences of conflicts or disputes between powerful entities, where the weaker or less influential ones bear the brunt of the negative effects. In the case of Nigeria’s upstream petroleum industry, the powerful entities are represented by the Nigerian Upstream Petroleum Regulatory Commission (“NUPRC”) and the Nigerian Midstream and Downstream Petroleum Regulatory Authority (“NMDPRA”), while the weaker parties are the upstream companies regulated by them.

In recent months, these two entities have been engaged in a dispute over the authority to regulate terminal operations and the export of crude oil. This conflict stems from ambiguities in the Petroleum Industry Act (“PIA”). This paper traces the origins of the problem and proposes alternative approaches to the adversarial position taken by the regulators.

Continue reading “NUPRC vs NMDPRA: Resolving the Quagmire Over the Regulation of Export Terminals“
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PETROLEUM INDUSTRY ACT; IMPLEMENTATION DEVELOPMENTS AND REGULATORY COMPLIANCE ISSUES!

by Oludamola Awobokun & Lateef Bamidele

We are well into the second year of implementation of the Petroleum Industry Act 2021 (“Act”), and regulatory activities within the walls of the two regulators – the Nigerian Upstream Petroleum Regulatory Commission (“Commission”) and the Nigerian Midstream and Downstream Petroleum Regulatory Authority (“Authority”) (jointly referred to as the “Regulators”) have accelerated.

In our newsletter titled Implementing the Petroleum Industry Act 2021: One Year After, we considered some of the implementation activities that were undertaken within a year of the passage of the Act. In another newsletter, titled Critical Deadlines in the Petroleum Industry Act 2021, we examined some of the possible factors that may impact compliance with the relevant timelines for certain regulatory activities under the Act. As we approach another critical milestone in the implementation of the Act, this newsletter seeks to provide new implementation updates as well as key timelines that the industry must be aware of.

Continue reading “PETROLEUM INDUSTRY ACT; IMPLEMENTATION DEVELOPMENTS AND REGULATORY COMPLIANCE ISSUES!”
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HOW MARGINAL ARE THE MARGINAL FIELDS’ PROVISIONS UNDER THE PETROLEUM INDUCTRY ACT 2021?

by Adeoye Adefulu & Lateef Bamidele

The Petroleum Industry Act 2021 (“PIA” or “Act”) introduced changes across the Nigerian petroleum industry, and one of such changes is the overhaul of the administration of marginal field assets. The Act set a deadline of 18 months (February 15, 2023) for the transition of the existing marginal field assets into the PIA terms[1] and put an end to the regime[2] which has hitherto enabled small and indigenous players to participate in the industry for about two decades. This article examines the transition mechanisms for this category of assets and what it portends for the industry operators.

Continue reading “HOW MARGINAL ARE THE MARGINAL FIELDS’ PROVISIONS UNDER THE PETROLEUM INDUCTRY ACT 2021?”
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AN ANALYSIS OF THE PETROLEUM INDUSTRY GOVERNANCE BILL 2016 – POWERS OF THE MINISTER

A review of the Petroleum Industry Governance Bill 2016 (“the Bill”), which we reported last week passed first reading on the floor of the Senate shows that it largely retains the content of the first version, introduced late last year as the Petroleum Industry Governance and Institutional Framework Bill 2015, with a few amendments. The renewed attention given to the Petroleum Industry Bill (“PIB”) by the National Assembly by sponsoring this Bill is an indication of the lawmakers’ dissatisfaction with the seeming silence of the Executive on the matter.

Part One of this review focuses on the functions and powers of the Minister.

THE MINISTER

The Bill provides for the functions and powers of the Minister in two sections. Under Section 2(1) paragraphs a-i, the Minister is vested with eight functions similar to those provided in Section 6 of the PIB save for three distinct departures. The power to delegate is conferred under Section 2(2) whilst Section 3 addresses the Minister’s right of pre-emption.

  1. The Bill has done away with the Minister’s advisory and approval role stipulated in the PIB before the President can appoint the Board of the various agencies. The President is empowered to appoint the executive and non-executive members of the Board of the Petroleum Regulatory Commission (the “Commission”) (to be established pursuant to the Bill as the industry regulator) subject to confirmation of the Senate. This is a laudable improvement to the old Bill and extant legislation where the Chief executive of the Petroleum Inspectorate is appointed by the Petroleum Minister, (albeit with the approval of the National Council of Ministers) and is also subject to the direction and control of the Minister (and by extension, the Department of Petroleum Resources (“DPR”) and its Director General).
  1. The power to make regulations which is currently vested in the Minister by virtue of Section 9 of the Petroleum Act and maintained by the PIB has been removed and vested instead in the Commission as the regulatory body for the industry by Section 8(1) of the Bill. This provision deals specifically with regulations necessary to give proper effect to the provisions of the Bill and would not affect the provisions of other laws which grant the Minister powers to make regulations such as, the Nigerian Oil and Gas Industry Content Development Act, 2010. It is also worth noting that the Bill empowers the Minister to promote the development of local content in the Nigerian petroleum industry.
  1. Although the Bill maintains the Minister’s rights of pre-emption, a notable change has been made to this provision which is in keeping with current economic realities. Failure to comply with the Minister’s direction issued in respect of a right of pre-emption to petroleum and petroleum products brought on by a state of national emergency or war and obstruction or interference with the exercise of the powers of the Minister in this regard under the Petroleum Act attracted a maximum fine of NGN2,000 and NGN200 or a maximum prison term of six months or both respectively upon conviction. Under the PIB, the maximum fines for the two offences have been increased to NGN2,500,000 and NGN5,000,000 or a maximum prison term of two years or both respectively. The Bill however increases the fine for non-compliance to a maximum of NGN10,000,000 or a maximum prison term of six months or both; and for obstruction, a maximum of NGN5,000,000 or a maximum prison term of six months or both. The Minister is also empowered to make regulation to increase the financial penalties imposed under the Bill.

Under extant legislation, the Petroleum Act grants the Minister exclusive and unfettered power to grant licenses and leases and amend, renew, extend or revoke same pursuant to the provisions of the Act. The Bill, much like the PIB (save for the replacement of the word “advice” with “recommendation”), fetters the discretion of the Minister to issue licenses and leases for petroleum exploration and production activities. The Minister may now only exercise such powers based on the recommendation of the Commission. Currently, the grant of licenses is governed by the Petroleum (Drilling and Production) Regulations and applications are made to the Minister. It appears this would no longer be the case and such applications would now be required to be made to the Commission. Section 25 of the Petroleum Act entrusts the Minister with discretionary powers to revoke a license or lease based on certain criteria. Under the Bill, this power may only be exercised based on recommendations made by the Commission in this regard. Accordingly, Part 6, Section 84(1) of the Bill provides that the provisions of all existing enactments or laws, including the Petroleum Act, Petroleum Profit Tax Act and the Companies and Allied Matters Act, shall be read with such modifications so as to bring them into conformity with the Bill. We expect that regulations would be made which clearly defines new procedures to be adopted.

In our next report, we will continue with an analysis of the proposed sector regulator, the Petroleum Regulatory Commission.

 

 

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Six Reforms the Nigerian Government can Undertake Prior to the Passage of the PIB (Part I)

Introduction

Nigeria’s proposed wide ranging oil and gas industry reform bill, the Petroleum Industry Bill (“PIB”), has failed to secure the approval of the National Assembly since 2008. The bill which seeks to reform government institutions, change the fiscal framework,and institute domestic gas reforms amongst other objectives has stalled at the National Assembly due to a wide range of disputes over its terms and mechanisms. According to Austin Avuru, the Managing Director of Seplat, one of Nigeria’s leading indigenous oil and gas companies, the delay in passing the PIB has contributed considerably to reduced investments into the sector.

 

The fall in investments will have a long term negative impact on Nigeria’s oil and gas industry with a reduction in government revenues, loss of jobs and the damaging effects associated with a failure to replace reserves. In spite of these apparent consequences, the new government is yet to enunciate its proposals with respect to the PIB, its passage and proposed timelines. Indeed, the Senate Majority Leader, Ali Ndume has stated that the passage of the PIB is not currently a priority of this Senate.  In any case, we believe that the new government will seek to make changes to certain aspects of the bill including fiscal & institutional reforms.

Continue reading “Six Reforms the Nigerian Government can Undertake Prior to the Passage of the PIB (Part I)”

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The Petroleum Industry Bill: 5 Things the Incoming Government Must Do

The Petroleum Industry Bill (PIB), which has been with us in one form or the other since 2008, proposes to completely overhaul Nigeria’s petroleum industry. The current draft of the Bill, sent to the National Assembly in 2012, seeks to, amongst others, restruc ture the regulatory and commercial institutions in the petroleum industry, change the fiscal dynamics and reform the operational mechanisms of the upstream, downstream and natural gas industries.

The below article by Dr. Adeoye Adefulu and Dr. Ekpen Omonbude highlights 5 actions the incoming government may take to get oil industry reform back on track.

 

1.   Delay the passage of the PIB

Given the potential impact of the Bill, its passage, at this late stage, will significantly hamstring the incoming government which has not had a chance to give its input. Indeed the current oil price crisis has changed the dynamics of the fiscal bargain and calls for a reconsideration and the introduction of flexible mechanisms to deal with any future crisis (see our point 4 below). Further, the current draft of the Bill remains controversial and it is necessary that the new government is able to take a position on its contents and implementation.

 

2.   Set a timetable and stick to it!

One of the hallmarks of this process has been the failure of the government to keep its promises regarding the passage of the Bill. This failure has kept the industry in limbo, with several companies delaying investment decisions due to the uncertainties surrounding the post PIB fiscal and regulatory regimes. Whilst we have indicated above that it is necessary for the new government to review the Bill, it must do so with a clear and achievable timetable. In our view, it should take no longer than twelve months to undertake the necessary research and pass the Bill or Bills (see next point). Whatever time is agreed, it is important that the government achieves its objective within that framework. This will help to bolster its credibility and reduce investment uncertainties. Our suggested timetable is as follows:

Slide1

3.   Break up the Bill

With 363 sections in over 223 pages the current draft of the Petroleum Industry Bill is unwieldy. The Bill seeks to deal with a wide variety of issues, the majority of which are only peripherally related. This has made it difficult from a political and operational perspective to manage the diverse interests impacted by the Bill. Further, a thorough analysis of the Bill will show that a number of areas, such as the proposed reforms in the downstream petroleum and natural gas sectors, have been inadequately addressed. The new government should break the Bill up into its natural segments. We suggest the industry reforms be taken under the following bills:

  • A fiscal reform bill – which deals with the tax and royalty issues surrounding the industry.
  • Institutional reform bill – this bill will be focused on creating new or reforming existing institutions. This will include the regulatory bodies as well as provisions for the commercial entities to be established and the process for transferring assets, liabilities and staff to these institutions;
  • An Upstream Petroleum Bill – focused on the upstream  oil and gas industry
  • A Petroleum Products Bill – focused on midstream and downstream matters; and
  • A Natural Gas Bill – dealing with the operations of a domestic gas market. This bill should not address gas productions matters.

We believe that this approach is more consistent with the various parts of the oil and gas value chain which require varying degrees of regulatory oversight and fiscal arrangements.  It would also encourage a more thorough coverage of the relevant issues, a robust debate from the impacted stakeholders and quicker timelines in passing the reforms.

4. Reflect further on the fiscal provisions

The provisions concerning the obligation and features of the royalty regime require clearer expression within the Bill. There are 21 references to the word “royalty” or “royalties” in the Bill but nothing is stated in terms of tangible values for any meaningful interpretation or analysis. This implies that the existing royalty regime will continue to hold, subject to amendments or pronouncements in subsequent regulations.

The level of fiscal burden on new investments based on the terms proposed in the Bill amounts to about 82% in effective tax. This compares favourably with other proven jurisdictions such as Norway, Iran, Kuwait and Egypt (at an average of about 85%). However, the fiscal regime offered by the Bill is regressive and should be addressed. The combined fiscal instruments of royalty, Nigerian Hydrocarbon Tax, Companies Income Tax and other fiscal impositions do not flexibly respond to changes in project profitability. The implication is that in the event of an oil or gas price increase or a significant reduction in costs, the State will not get an incremental share of the increased revenues resulting from such positive changes to profitability. Also, there are potentially significant negative implications on investors in the event of an oil or gas price decrease as is currently the case. Therefore the fiscal system requires the inclusion of more progressive mechanisms such as rate of return trackers in order to enable automatic adjustment to changes in economic circumstances of specific projects.

 

5. Fix the cash call challenge

One of the major drivers for energy reform in the first place was the need to address under investment in the joint ventures due to cash call deficiencies. Since one of the proposals to resolve that problem, the incorporated joint venture, was shot down after the first versions of the PIB, no concrete proposals have been put forward. Resolving this challenge should be one of the immediate priorities of the new government. Whilst this is an issue on which the authors do not agree, one of us believes that there is merit in reconsidering the motive behind the IJV structure and the specific risks it seeks to mitigate. Such an exercise will also provide an opportunity to objectively address the concerns within the originally proposed IJV structure in previous versions of the Bill such as the Board and Management compositions. We do however agree that if the IJV is to be reintoduced, it cannot be by compulsion and counterparts must negotiate the terms under which such a structure would be acceptable. In addition to this, consideration should also be given to the rationalisation of the Government stake in the joint venture arrangements through divestment of interests preferably to indigenous players.

Dr. Adeoye Adefulu is an Energy Partner in the law firm of Odujinrin & Adefulu and the Managing Editor of petroleumindustrybill.com; Dr Ekpen Omonbude is an Economic Adviser (Natural Resources) at the Commonwealth Secretariat and a regular contributor to petroleumindustrybill.com

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The Extent of Ministerial Powers under the Petroleum Industry Bill 2012

Feature article

All I want is a warm bed and a kind word and unlimited power.
Ashleigh Brilliant

The phrases, “the Minister may”, “as may be decided or imposed by the Minister” “the Minister shall have the right” are phrases commonly sighted in the Petroleum Act 1969, the principal legislation currently governing the Nigerian petroleum industry as well as subsequent industry legislations. These Ministerial powers cover a multitude of issues ranging from power to grant upstream and downstream petroleum licences, prescribe terms and conditions of licences, control pricing of petroleum products, declare national emergency,[1] order discretionary suspension of petroleum operations and make regulations, to mention a few. These provisions have resulted in the vesting of a huge amount of power in a single office with almost unfettered powers to direct the affairs of this very sensitive industry. The product has been an industry with a record of abuse of power, lack of transparency and accountability and ineffective regulatory oversight, resulting in little or no benefit being derived by the citizenry. Continue reading “The Extent of Ministerial Powers under the Petroleum Industry Bill 2012”