Brief Background of the Industry
The Nigerian oil and gas industry, characterised by its complex and peculiar operations, is home to various stakeholders and diverging interests. However, the majority of the players in both its internal and external environment have been in agreement on the industry’s need for policy reform – a near-impossible feat.
It is safe to say most of their prayers were answered on July 1st, 2021 with the passing of the Petroleum Industry Bill 2020 (“PIB”) by the National Assembly. This event is particularly noteworthy as the extensive piece of legislature intends to launch a transparent institutional framework with independent entities, create a profit yielding national oil company and uphold accountability in the management of Nigeria’s petroleum resources.
The Journey so far
▪︎Before the PIB, the Petroleum Act 1969 (“the Act”) had remained the principal law regulating oil and gas exploration activities in Nigeria.
▪︎The Act had become archaic with transparency issues, environmental degradation, gas flaring and oil bunkering plaguing the sector.
▪︎A committee set up to diagnose and proffer solutions on advancing the sector tendered the PIB as a suitable start towards reform in 2007.
▪︎The PIB made its debut at the National Assembly the following year by President Umar Yar’Adua, where it failed to pass.
▪︎President Goodluck Jonathan presented a new version of it to the National Assembly in 2012 that did not pass at the senate level.
▪︎President Muhammadu Buhari in 2015 reintroduced a consolidated version of the PIB, which after years of revision, debates and scrutiny for being verbose, finally passed on July 1st, 2021.
Governance and Institutions
The PIB is clear on what it wants to achieve regarding transparency and good governance especially since the first chapter almost immediately delves into the new institutional framework and how it intends to govern. It establishes The Nigerian Upstream Regulatory Commission (the Commission) and Nigerian Midstream and Downstream Petroleum Regulatory Authority (the Authority) to regulate the technical operations of the upstream and midstream and downstream sectors respectively.
The Commission is presumed to replace or work alongside the Department of Petroleum Resources (the DPR) as it absorbs most of its functions. Additionally, the PIB explicitly states that it has the power to enforce any of its policies. The Authority assumes some of the powers of the Minister (under the previous Act) with powers to grant and revoke licences for midstream and downstream activities.
The Petroleum Minister (the Minister) is empowered to manage the affairs and operations of the petroleum industry. Under the previous Act, the power of the Minister was absolute, and while he retains some of those powers, the PIB introduces some restrictions. They include His powers to grant and revoke licences which are now subject to recommendations from the Commission or Authority. The intent by the PIB to promote accountability is commendable although, the Minister (who is President) may be able to circumvent such restrictions.
In line with establishing a new profit yielding national oil company, the PIB instructs that a new Nigerian National Petroleum Company Limited (NNPC Ltd) be incorporated after six months of commencement. “The assets, interests and liabilities of the current NNPC are to transfer to the NNPC Ltd, and if there are some left, they will transfer to the government upon which the NNPC would cease to exist.” The NNPC Ltd is made to be an independent company, audited annually with its shares available for sale to the general public. The government, however, must approve any transfer and sale of shares. A bold move towards the right direction, as an overhaul of the shady status-quo and corrupt corporate culture of the current NNPC is necessary for the greater good of the Nigerian petroleum industry.
This PIB seeks to harness and maximise the potential of petroleum resources and their derivatives for the good of Nigeria while promoting the sustainable development of the sector.
The PIB advocates for open, competitive bidding and award processes in the administration of upstream petroleum operations. So, this is significant since this area is flawed by bribery and corruption.
The PIB considers the safety of the environment like never before; this is evident in the prohibition of gas flaring and the requirement of environmental management plans in the administration of licences and leases.
Host communities development
An imperative area of the PIB and a concern that stalled its passing in previous sessions was the sharing formula for host communities. The host communities felt under-compensated with what was offered to them considering the under-development, environmental degradation and somewhat permanent damage that had hurt most of them due to oil and gas activities. On the other hand, the government and other stakeholders insist that they are doing just fine thanks to the establishment of agencies like the Niger Delta Development Commission (NDDC). Yet this does not necessarily translate to the host communities receiving the funds as the NDDC has allegations of embezzlement, which played out publicly one year ago.
The PIB aims to “provide direct social and economic benefits from petroleum operations to host communities” through the creation of the host communities and development trust (HCDT). The settlor or the operator in a group of settlors (under a joint operating agreement) is responsible for incorporating this trust for the benefit of the host communities, for which the settlor is responsible. Each settlor is obligated to contribute 2.5% of its actual operating expenditure to the HCDT. This may be paid alongside the current 3% to the NDDC. The settlor’s donations to the HCDT are tax-deductible, while the funds of the HCDT are not subject to income tax.
A breakdown of the fund allocation consists of 75% to capital projects, 5% to administrative costs and special projects and 20% to a reserve fund. The host community entitlement to any contribution is conditional on an absence of destruction of petroleum facilities (on the occasion of vandalism, civil unrest or sabotage), the community will forfeit claims to any funds where these things have occurred. Creating fairness ascribes a level of responsibility to the stakeholders involved. The external parties have a responsibility to improve the host communities where they carry out business operations while the host communities have a responsibility to protect their benefactors’ investment.
The PIB aims to encourage investment in the Nigerian petroleum industry by creating a modern fiscal framework rooted in transparency and fairness that benefits the government and investors alike. The PIB introduces the collection of Hydrocarbon Tax (HT) and Companies Income Tax (CIT) on profits of any company engaged in upstream activities by the Federal Income Revenue Service (FIRS).
It is strict in the administration of taxes as punishment for non-filing of tax returns has significantly increased from N10,000 on the first day and N2,000 the default continues to N10,000,000 and N2,000,000 respectively.
What is perceived as a bid to encourage more gas production operations in the midstream and downstream sector is the PIB provision of gas incentives for large-scale gas utilisation industries.
The PIB allows for tax deductions when the expenses are “wholly, reasonably, exclusively and necessarily incurred in crude oil production during any accounting period”. However, this is now subject to the approval of the Commission and Authority.
One of the more significant stakeholder concerns with regards to the PIB is the calculation of the royalties. Competitive royalty rates are an incentive for new investment in the sector, and with production royalty rates ranging from 5%-18%, they may not be competitive enough. The rates are affected by price changes and are boosted by 2% annually against the previous year rates.
▪︎Establishes a transparent institutional framework; the Commission and Authority now supervised by the Minister,
▪︎Creates a new, independent and commercially driven national oil company: NNPC Ltd,
▪︎Promotes transparency in the administration of oil and gas resources,
▪︎Fosters the interests of the host communities,
▪︎Builds an effective and supportive environment for the current stakeholders while attracting foreign investors.
The passing of the PIB demonstrates a presence of political will towards sector reform, and while it is too early to tell how the PIB will perform once implementation begins, it is undoubtedly a step in the right direction for The Industry. Hopefully, this audacious legislation can attract the investment the Industry needs to scale through its current difficulties.
Anyanechi, C., Ajayi, A., Sowande, S. and Salaudeen, D., 2021. Nigeria: Petroleum Industry Bill (PIB) 2020 – A Game Changer?. [online] Assets.kpmg. Available at: https://assets.kpmg/content/dam/kpmg/ng/pdf/tax/petroleum-industry-bill-(pib)-2020-%20a-game-changer.pdf [Accessed 19 July 2021]
Tax & Business Matters – Nigeria. 2021. The Petroleum Industry Bill (PIB): Top 20 Changes You Should Know!. [online] Available at: https://pwcnigeria.typepad.com/tax_matters_nigeria/2021/07/the-petroleum-industry-bill-pib-top-20-changes-you-should-know.html [Accessed 19 July 2021].
The Petroleum Industry Bill 2020 http://www.petroleumindustrybill.com/wp-content/uploads/2020/09/Petroleum-Industry-Bill-2020.pdf
Thomas, D., 2021. What you need to know about the Nigerian Petroleum Industry Bill. [online] African Business. Available at: https://african.business/2021/07/energy-resources/what-you-need-to-know-about-nigerias-petroleum-industry-bill/ [Accessed 18 July 2021].