President Muhammadu Buhari signed the Petroleum Industry Bill into law in August 2021. Experts and key players note that the long-awaited law is hoped to cause pivotal changes to conventional norms and practices in the Nigerian oil and gas industry.
With provisions tailored towards an overall improvement of the oil and gas institutional frameworks, fiscal policy, and an increased community development regime, the Petroleum Industry Act is believed to be the solution to the difficulties of doing business in the sector.
Previously, the Petroleum Act 2004 was the existing legislation controlling activities in the sector. Nigeria is one of the world’s biggest producers of petroleum. As its economy battles the issues affecting petroleum production output, there are beliefs that the new Petroleum Industry Act contains varying provisions aimed at increasing productivity in the long run and maintaining Nigeria’s position on the global oil market.
The Act is grouped into five chapters, containing 319 sections with eight schedules. Each chapter deals with a distinct objective. Section 3 of the Act charges the Petroleum Resources minister with the responsibility of administering, formulating, and monitoring activities in the industry.
This work offers insight into the provisions of the Petroleum Industry Act 2021 and how these novel provisions might affect the overall performance of the Nigerian petroleum industry.
Changes in the Nigerian petroleum industry
The expectations for the new Petroleum Industry Act’s success are high, from provisions relating to the development of host communities to others aimed at eliminating excessive bureaucracy in the sector. These are the important changes under the new law.
1. The Commercialization of the Nigerian National Petroleum Company
Perhaps the most pivotal of the changes brought by the Petroleum Industry Act is the commercialization of the Nigerian National Petroleum Company (NNPC). The NNPC is the Nigerian government’s official petroleum company vested with regulatory powers under the old Petroleum Act of 2004. Under the new law, the NNPC is to be re-registered as a private limited liability company with its shares and functions regulated by the provisions of the Companies and Allied Matters Act (CAMA). The new company would be called NNPC Limited.
The shares of the new NNPC Limited would be wholly owned by the federal government and managed jointly on behalf of the federation by the Federal Ministry of Finance and the Federal Ministry of Petroleum Resources. The ministry of finance and the ministry of petroleum resources are directed by Section 53 of the Petroleum Act to run the affairs of the new NNPC Limited as a profit-making venture similar to conventional corporations under CAMA. At all times, NNPC Limited is to retain 20% of its profits after a dividend is declared and shared with its shareholders.
This innovation is viewed by policymakers as long-awaited. It aims to solve the long issues of excessive regulatory bodies in the petroleum industry. The new NNPC Limited, which acts like other oil and gas corporations like Shell, ExxonMobil, and others, is no longer charged with the regulatory functions in the industry as was the case under the old law.
2. Improvement of host communities
The Nigerian oil and gas industry is distinct from other petroleum industries around the world today. The political tussles between the petroleum host communities, the government, and the oil corporations bedeviling the industry cannot be understated. The demands by petroleum host communities to be included in the gains of the industry dates back to 1959 when oil was discovered in Nigeria. Over the years, host communities have been hostile towards oil and gas corporations drilling crude and destroying the environment without reasonable allocation of proceeds to the community’s development.
For the first time, host communities are granted special attention in the sharing formula of the profits from the industry. Section 234 of the Petroleum Industry Act 2021 provides for the allocation of 3% of the corporation’s proceeds to be channeled solely toward the development of petroleum host communities.
In addition, the Act calls for the settlors to incorporate under the Corporate Affairs Commission (CAC) the Host Communities Development Trust as an Incorporated Trustee with its Board of Trustees, common seal, and constitution. The Host Communities Development Trust is charged with the management of the 3% of host community proceeds for the overall development of the community.
The 3% allocation is an innovation expected to cause overwhelming improvement to the already dilapidated infrastructure of the petroleum host communities. Nonetheless, some policymakers consider a 3% allocation a ridiculously undersized amount. Before the passing of the new law, host communities demanded a 5% allocation of petroleum proceeds.
3. A New Regulatory Agency
Another crucial change to the industry is the introduction of a new regulatory agency—not one, but two regulatory agencies. Under the old law, the industry was formerly regulated by the Department of Petroleum Resources (DPR), with other agencies like the NNPC also having regulatory powers. Section 4 of the Petroleum Industry Act 2021 provides for two regulators, which are the Nigerian Midstream and Downstream Petroleum Authority (NMDPA) and the Nigerian Upstream Petroleum Regulatory Commission (UPRC).
As the name indicates, the NMDPA is charged with the administration of midstream and downstream petroleum activities, while the UPRC is charged with administering upstream activities in the industry.
This change is perhaps the most controversial. Industry players have long demanded a simplified and unified regulatory system for the petroleum industry, similar to the Nigerian Communications Commission for the telecommunication sector and the Central Bank for the banking and financial institutions sector. Under the old law, the activities of the industry were stalled by the presence of multiple regulators (DPR and NNPC). The new Petroleum Act 2021 maintains that style of regulator multiplicity.
The new regime is worse than the old, this is because the present petroleum industry has been divided into two different activities, with different regulators on both sides. The implication is that petroleum corporations engaging in the activities of the upstream, midstream, and downstream sectors would have to pass through multiple regulations and differing practices while engaging in a single industry. Eventually, this would cause a reduction in the ease of doing business in the industry.
4. Fiscal Changes
Another controversy is the introduction of additional levies, taxes, and contributions by the already overtaxed industry.
Aside from the 3% allocation of oil and gas corporation’s profits to host communities, Section 260 of the Petroleum Industry Act introduces additional taxes, which are the company income tax at 30% of corporations’ profits; the environmental contribution at 1% of corporations’ profits; and the hydrocarbon tax at 30% for corporations holding an offshore license and 15% for corporations holding an onshore and shallow water license.
The changes in the Petroleum Industry Act 2021 is a step towards Nigeria’s realization as a global player in the oil and gas industry. Despite changes expected to cause an overreaching positive impact in the industry, the new law falls short in various areas, notable of which is the lack of simplicity and a unified regulatory style as is the case with other countries. Experts predict that Nigeria will inevitably be changing its oil and gas framework in the coming years.
Frequently Asked Questions (FAQs)
Settlors are petroleum corporations operation in host communities. Each corporation operating in a host community must establish a separate Host Community Development Trust and contribute 3% of its profits to it annually.
Before granting oil exploration licenses, oil corporations are required by the Petroleum Industry Act to contribute 1 % of their profits to the Environmental Remediation Fund. This sum is tailored towards the protection of the environment of host communities.
Previous governments in Nigeria had refused to pass the Petroleum Industry Act into law. This was motivated by political concerns and the lack of will to cause a shift in Nigeria’s biggest revenue-generating industry.