By Toyin Akinosho
The latest version of Nigeria’s Petroleum Industry Bill, the long-awaited reform legislation currently in debate at the National Assembly, is a regulator’s dream.
It whittles down the powers of the minister of petroleum and grants extensive responsibilities to two regulatory agencies.
One is the Nigerian Upstream Petroleum Regulatory Commission; the other is the Nigerian Midstream and Downstream Petroleum Regulatory Authority.
The minister is in charge of policy; s/he supervises the ministry, promotes an enabling environment for investment, attends the Federal Executive Council Meetings and speaks for the country’s Petroleum sector at the International fora. But the new law annuls discretionary allocations of acreage licences. The Nigerian Minister of Petroleum will no longer-on his own- be the authority to issue, modify, amend, extend, suspend, review, cancel, reissue, revoke and /or terminate upstream licences in the country.
In the new law, s/he grants Petroleum Prospecting Licences and Petroleum Mining Leases through the processes established in the law “upon the recommendation of the Commission”.
The Minister also, “upon the recommendation of the Commission, revokes and assigns interests in Petroleum Prospecting Licences and Petroleum Mining Leases”.
The minister “upon the recommendation of the Commission or the Authority, direct in writing the suspension of petroleum operations in any area…”
The Minister “upon the recommendation of the Commission or Authority approve the fees for services rendered by the Commission or Authority in Regulations”..
These agencies have lots of work to do and the law backs them, unlike the key regulatory agency in the extant law, the Department of Petroleum Resources (DPR), which essentially operates like the secretariat of the minister. The DPR’s powers, in the extant law, derive from the Minister’s assignments.
The Regulatory Commission is proposed to be governed by a nine-man board comprised of a) a one non-executive chairman;
(b) two non-executive commissioners;
(c) the chief executive of the Commission (the “Commission Chief Executive”); two other executive commissioners who are responsible for Finance and Accounts and Exploration and Acreage Management;
(e) one representative of the Authority not below the rank of director;
(f) one representative of the Ministry not below the rank of director; and
(g) one representative of the Ministry of Finance not below the rank of director.
The Upstream Petroleum Regulatory Commission will be funded by appropriation through the National Assembly.
The Midstream and Downstream Petroleum Regulatory Authority is similarly constituted and funded likewise.
The NNPC, No Longer Performing Regulatory Duties, Will Become Commercial, but entirely Government Owned
The Bill does not call for the privatization of the Nigeria National Petroleum Corporation (NNPC). But it has nevertheless created an ongoing conversation in the international media about possible privatization because it says that “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 Nigerian National Petroleum Company Limited (NNPC Limited)”.
That media conversation is largely speculative, because NNPC Limited is also entirely owned by government. The difference is that NNPC, by law, will now be clearly a commercial entity. The Bill says that at the incorporation of NNPC Limited, the Minister of Petroleum will “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 on behalf of the Government. The Ministry of Finance Incorporated in consultation with the Government, may increase the equity capital of NNPC Limited. Shares held by the Government in NNPC Limited are not transferable, including by way of sale, assignment, mortgage or pledge unless approved by the Government.
IJV Will Be Voluntary
Joint Ventures between Nigeria’s state hydrocarbon company NNPC and other parties in the country’s upstream sector can be converted into incorporated joint ventures if the parties so wish, in the eyes of the Petroleum Industry Bill (PIB).
In other words, the decision to incorporate the JVs is voluntary, if the bill is passed into a law in its current form.
“NNPC Limited and other parties to joint operating agreements in respect of upstream petroleum operations, may on a voluntary basis restructure their joint operating agreement as a joint venture carried out by way of a limited liability company, each referred to as an “incorporated joint venture
company” (IJV), based on the principles established in the Second Schedule to this Act”. The incorporated joint venture companies shall not be subject to the provisions of the Fiscal Responsibility
Act and the Public Procurement Act.
Principles of Negotiating Incorporated Joint Ventures- Part of the Second Schedule of the imminent law says (1) An incorporated joint venture company may be created for an existing joint operating agreement. Each incorporated joint venture company shall be formed under the Companies and Allied Matters Act. NNPC Limited shall enter into negotiations with the other parties to such existing joint operating agreements with a view to, among other things- (a) agreeing and executing a shareholders’ agreement in respect of the applicable incorporated joint venture company; (b) agreeing the provisions of the memorandum and articles of association of the applicable incorporated joint venture company; and (c) incorporating the applicable incorporated joint venture company. (2) Prior to the incorporation of each incorporated joint venture company, the parties to each applicable joint operating agreement shall continue to carry out their obligations under such joint operating agreement in the ordinary course of business.
Natural Gas is Big in the New Law
The Nigerian government has always wanted Natural Gas investment to take off. “A large share of the massive gas reserves of 203 Trillion Cubic Feet (Tcf) can be produced at reasonable cost”, Timipre Sylva, the minister of state for Petroleum, said at an investor’ dialogue in August 2020. “A significant network of additional gas pipelines needs to be constructed to connect all major economic centers of Nigeria to natural gas, he explained. “The development of an optimal framework for electricity generation based on natural gas will create a strong basis for providing electricity to all Nigerians”. This statement foreshadowed the September 29 2020 presentation of the PIB to the National Assembly.
The domestic base price, the price at which Nigerian gas producers are to sell to Power Plants, will be $3.2 per Million British Thermal Units (MMBtu), beginning from January 1, 2021, if the bill is passed into law in its current form. The draft legislation also stipulates that the price at which the gas-based industry, comprising companies which produce methanol, fertilizer (urea, ammonia), polypropylene, etc., will purchase natural gas, can be as low as $1.5 per MMbtu. That price is special and it is calculated from a formula. Gas users outside the power sector and the gas-based industry will pay at least $0.5 higher than $3.2 per MMbtu, and their cost of purchase will depend on negotiations with their suppliers.
The domestic base price -$3.2per MMBtu- which is specified in the third schedule of the bill, shall be increased every year by $ 0.05 per MMBtu until 2037, when a price of $ 4.00 per MMBtu will apply for that year and future years. The Midstream and Downstream Regulatory Authority, “may, by regulations, change the domestic base price and the yearly increase) to reflect changed market conditions and supply frameworks”, says the bill.
In the Midstream, the bill creates a big Parastatal: The Midstream Gas Infrastructure Fund, which shall be “(a) a body corporate with perpetual succession and a common seal”. The purpose of the Fund shall be to make equity investments of Government owned participating or shareholder interests in infrastructure related to midstream gas operations aimed at –
(a) increasing the domestic consumption of Natural Gas in Nigeria in projects which are financed in part by private investment; and (b) encouraging private investment.
For the Fund, the draft legislation creates a Transaction Advisor, “who shall be responsible for providing transaction advisory services, including technical and commercial evaluation of proposals, defining project screening criteria and profitability target for projects and any other duty as may be assigned by the Council on behalf of the Fund”.
Host communities will be adequately covered to foster sustainable prosperity
A passage that sticks out in the PIB is this statement: “Failure by any holder of a licence or lease to incorporate a trust for the benefit of the host communities in the licence area may be grounds for revocation of the licence or lease”. The law says that “each settlor, where applicable through the operator, shall make an annual contribution to the applicable host community development trust fund of an amount equal to 2.5% of its actual operating expenditure in the immediately preceding calendar year in respect of all petroleum operations affecting the host communities for which the applicable host community development trust was established”, says the 252 page draft legislation.
Host community issues are some of the most intractable items in the development of Nigeria’s oil and gas industry. Some companies have robust Host Community plans while several do not.
In the PIB’s definition, a “settlor” is a holder of an interest in a petroleum prospecting licence or petroleum mining lease or a holder of an interest in a licence for midstream petroleum operations, whose area of operations is located in or appurtenant to any community or communities. “Where there is a collectivity of settlors operating under a joint operating agreement with respect to upstream petroleum operations, the operator appointed under the agreement shall be responsible for compliance with the law on behalf of the Settlors”.
The constitution of the host communities development trust shall contain provisions requiring the Board of Trustees to be set up by the settlor, who shall determine its membership and the criteria for their appointment. The Board of Trustees shall in each year allocate from the host communities development trust fund, a sum equivalent -(a) 75% to the capital fund out of which the Board of Trustees shall make disbursements for projects in each of the host community as may be determined by the management committee, provided that any sums not utilised in a given financial year shall be rolled over and utilized in subsequent year; (b) 20% to the reserve fund, which sums shall be invested for the utilisation of the host community development trust whenever there is a cessation in the contribution payable by the settlor; and (c) to an amount not exceeding 5% to be utilised solely for administrative cost of running the trust and special projects, which shall be entrusted by the Board of Trustee to the settlor. The law also says that host community development plan shall -(a) specify the community development initiatives required to respond to the findings and strategy identified in the host community needs assessment; (b) determine and specify the projects to implement the specified initiatives; (c) provide a detailed timeline for projects; (d) determine and prepare the budget of the host community development plan; (e) set out the reasons and objectives of each project as supported by the host community needs assessment; (f) conform with the Nigerian content requirements provided in the Nigerian Oil and Gas Industry Content Development Act; and (g) provide for ongoing review and reporting to the Commission.
The PIB does not relate this trust fund to the Niger Delta Development Commission (NDDC) which has the legal backing to receive 3% of the total yearly budget of any oil producing company operating onshore and offshore in the Niger Delta area.
Taxes Will Be Lower for Onshore and Shallow Water Licences
The draft law provides, for Taxation, Hydrocarbon Tax and Company Income Tax, which, combined, replaces the Petroleum Profit Tax of the extant law.
The chargeable tax for any accounting period of a company shall be a percentage of the chargeable profit for that period aggregated and it shall be –
- (a) 42.5% of the profit from crude oil for onshore areas for petroleum mining Leases selected pursuant to sections 93(6)(b) and 93(7)(b) of this Act;
(b) 37.5% of the profit from crude oil for shallow water areas for petroleum mining
leases selected pursuant to sections 93(6)(b) and 93(7)(b) of this Act;
(c) 22.5% of profit from crude oil for onshore areas for new licences and leases granted after the commencement of this Act and for marginal fields in onshore areas;
(d) 20.0% of profit from crude oil for shallow water areas for new licences and leases
granted after the commencement of this Act and for marginal fields in shallow water areas;
(e) 5% of the profit from crude oil from deep offshore areas for petroleum mining leases
selected pursuant to sections 93(6)(b) and 93(7)(b) of this Act; and
(f) 10% of profit from crude oil for deep offshore areas for new licences and leases
granted after the commencement of this Act.
Royalties based on production shall be calculated on a field basis.
(2) The royalty shall be at a rate per centum of the chargeable volume of the crude oil and
condensates produced from the field area in the relevant month on terrain basis as follows
in – (a) onshore areas 18 per cent
(b) shallow water (up to 200m water depth) 16
(c) deep offshore (greater than 200m waterdepth) 10 per cent
(d) frontier basins 7.5 per cent
(3) For deep offshore fields with a production d u r i n g a m o n t h o f n o t m o r e t h a n
15,000BOPD, the royalty rate shall be 7.5%.
Production above 15,000BOPD shall be at the royalty rate specified in subparagraph (2) of
this paragraph. (4) Royalties for onshore fields and shallow water fields, including marginal
fields, with crude oil and condensate production not more than 10,000BOPD during a month
shall be at a rate per centum of the chargeable volume of the crude oil and condensates produced from the field area per production day during a month on tranched basis as follows – (a) for the first 5,000BOPD 5per cent (b) for the next 5,000BOPD 7.5 per cent Provided that fields with crude oil and
c o n d e n s a t e p r o d u c t i o n m o r e t h a n 10,000BOPD.
Toyin Akinosho is the Publisher, Africa Oil+Gas Report. So also the Managing partner at Upstream Information Update-Energy Intelligence Consulting.