Petroleum Industry Act: Issues arising, two years after

BY SURAJ OYEWALE, PETER OKEDIYA AND EMMANUEL AFIMIA

The signing by President Muhammadu Buhari of the Petroleum Industry Act (“PIA” or the “Act”) into an Act of the Nigerian Parliament on 16 August 2021 was welcomed with mixed feelings among citizens of Nigeria as well as local and international investors and other global energy industry analysts and minders. Two years on, we take stock of the journey, examining the highs and lows, the promises fulfilled, and the challenges that lie ahead.

A. Conversion of licenses and leases

The PIA enables holders of Oil Prospecting Licences (OPL) and Oil Mining Licenses (OML) to convert their existing interests into Petroleum Prospecting Licences (PPL) or Petroleum Mining Leases (PML) through Conversion Contracts[1]. This conversion process, which had an 18-month window that closed in February 2023, grants them access to the fiscal terms of the new regime.

To facilitate this transition, the Commission introduced the Conversion and Renewal (Oil Prospecting License and Oil Mining Leases) Regulations. These regulations outline the application procedure for OPL and OML conversion. They also extend to the conversion of producing marginal fields into PML, which concluded on 15 February 2023, as well as the conversion of non-producing or developing marginal fields into PPL. This regulatory framework sets the stage for the issuance of PPLs and PMLs under the PIA, aligning with the transition to the new fiscal framework.

B. Commercialization of the defunct NNPC

The Act ushered in the commercialization of the former NNPC, now Nigerian National Petroleum Company Limited (“NNPC Limited”), a limited liability company. NNPC Limited, incorporated under Companies and Allied Matters Act (“CAMA”) within six months of the commencement of the PIA, has its shares held by the Ministry of Finance Incorporated and Ministry of Petroleum Incorporated on behalf of the Federation[2]. Share transfers require Federal Government approval and National Economic Council endorsement, with sales subject to fair market value and competitive bidding.

The Minister of Petroleum and Minister of Finance are tasked with transferring NNPC’s assets and liabilities to NNPC Limited within 18 months of the Act’s effective date. In the transition period, NNPC Limited was acting as NNPC’s agent for winding down assets, interests, and liabilities.

NNPC Limited was successfully incorporated on 22 September 2021, few weeks after the enactment of the Act, and on 17 February 2023, all assets and liabilities of the defunct NNPC were confirmed to have been transferred to NNPC Limited and/or its subsidiaries. This transition enables NNPC Limited and its subsidiaries to operate as commercial entities, following the provisions of the CAMA and PIA, without recourse to government funds, declaring dividends to its shareholders and retaining 20% of its profits to grow its business.[3]

C. NUPRC V NMDPRA crude oil export terminal regulatory conflict

The Petroleum Industry Act triggered a complex dispute within Nigeria’s petroleum sector, primarily due to jurisdictional ambiguities between the Nigerian Upstream Petroleum Regulatory Commission (“NUPRC” or “Commission”) and the Nigerian Midstream and Downstream Petroleum Regulatory Authority (“NMDPRA” or “Authority”). This dispute highlights the critical need for regulatory clarity in the industry.

The PIA designates the NUPRC as responsible for upstream petroleum operations, including exploration, development, and production, granting it the power to issue certificates for quality and quantity to exporters of crude oil, natural gas and petroleum products from integrated operations and crude oil terminals established prior to the Act’s effective date. The Act further provides that the Commission shall have the power to monitor and regulate the operations of crude oil terminal.[4] However, the discretion in defining “integrated operations” has led to uncertainty, especially for onshore operations, causing jurisdictional disputes.

Conversely, the NMDPRA regulates midstream and downstream petroleum operations, covering storage facilities and export terminals for petroleum liquids, including crude oil export terminals.[5]

The confusion arises from the overlapping roles in regulating crude oil exports, necessitating approvals from both regulators. This dual approval process raises industry costs and introduces potential inconsistencies.

The jurisdictional dispute has raised concerns about efficiency and clarity, with no clear framework for its resolution despite a number of attempts from the two regulatory bodies. President Bola Ahmed Tinubu has responded by providing directives to NUPRC and NMDPRA to clarify their roles and ensure operational stability until necessary PIA amendments are enacted.[6]

For the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), the President’s directives are summarized as follows:

1. NUPRC will exclusively regulate technical and commercial aspects of upstream petroleum operations and facilities. This includes licensing, administration, and monitoring of petroleum facilities connected from extraction to the crude export terminals and the entry point of the natural gas processing plant.

2. Integrated upstream and midstream petroleum operations, as defined by Section 318 of the PIA, will be considered upstream petroleum operations. Therefore, NUPRC will have sole jurisdiction over the technical and commercial regulation of integrated petroleum facilities for upstream operations.

3. The determination of whether facilities qualify as integrated will solely rest with NUPRC. Clear guidelines and criteria will be established by NUPRC to ensure consistent application of these criteria.

For the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA), the directive is as follows:

1. NMDPRA will exclusively regulate technical and commercial aspects of petroleum operations and facilities from the exit of crude export terminals to the entry gate of the natural gas processing plant.

In accordance with the Act, the directive is subject to a review process by the Authority and the Commission and the outcome of the review process will guide compliance.

This decisive action by President Tinubu underscores the government’s commitment to providing clarity and a stable regulatory environment for the oil and gas sector, ensuring efficient operations, attracting investments, and promoting sustainable growth in Nigeria’s energy landscape.

D. Eliminating NNPC’s monopoly with the issuance of crude oil importing licenses

The Authority is the body responsible for issuing licenses for entities to undertake importation of crude oil or petroleum products[7]. In line with this, the Authority issued the Midstream and Downstream Petroleum Operations Regulations to provide procedures for the grant of license, permits, authorizations for importation, exportation, shipping and landing of petroleum, petroleum derivatives and petroleum products. This ends the monopoly previously held by the NNPC Limited as the exclusive importer of petroleum products into Nigeria.

Later in June 2023, the Federal Government granted licenses to six new companies to import petroleum products into the country. This development was marked by Emadeb Energy’s recent reception of a 27 million-litre petrol shipment on 19 July 2023,[8] and marks a noteworthy shift in the country’s fuel supply dynamics.

In the present scenario, where crude oil prices stand at around $85 per barrel and the Nigerian naira has experienced considerable depreciation against the US dollar, the cost of importing petroleum products remains elevated. Consequently, the financial burden extends to consumers, resulting in sustained retail prices that are above N600 per liter.

While the liberalization of importation offers prospects for increased competition and potential market benefits, the interplay between global oil prices, currency fluctuations, and local economic conditions continues to exert a significant influence on the dynamics of fuel pricing.

E. Launch of the NMDPRA oil and gas service portal system

The PIA has led to the introduction of a digital application portal system for Midstream and Downstream Industry Oil and Gas Service Permits (MDOGISPs) by the Authority. These permits are now mandatory for entities engaged in midstream and downstream activities, such as gas suppliers, petroleum liquid transporters, and bulk gas storage companies. Failure to obtain valid permits through this platform results in penalties, including fines, facility closure, and equipment confiscation.

This move streamlines the permit application process, enhances transparency, and strengthens regulatory monitoring. It also aligns with the PIA’s objectives and complements the publication of new regulations for the midstream and downstream sector.

For more information and access to the MDOGISP portal, visit www.mdogisp.mndpra.gov.ng.

F. NUPRC and financing the Frontier Basin Exploration Fund

The Petroleum Industry Act (PIA) introduces the Frontier Exploration Fund (the “Fund”) to support exploration and development in Nigeria’s frontier acreages[9]. These areas include regions like Anambra, Dahomey, Bida, Sokoto, Chad, and Benue where hydrocarbon exploration is yet to occur or remains undeveloped.

The PIA assigns the Commission with several responsibilities, including promoting frontier basin exploration, developing exploration strategies, and increasing knowledge about petroleum resources in these areas. The Fund, constituting 30% of NNPC’s “profit oil and profit gas” from various contracts, will finance exploration and development activities in these frontier acreages.

In June 2023, the Commission issued Frontier Basins Exploration Administration Regulations, outlining its duties and those of the state-owned oil company (NNPCL) concerning Frontier Basins. These regulations clarify roles to prevent conflicts with respect to the functions of the NNPC Limited in administering the Fund and establish a Frontier Basin Exploration and Development Plan Committee. This Committee is tasked with creating a comprehensive Frontier Basin Exploration and Development Plan (FBED Plan), serving as a vital roadmap for resource development.

The provision that the financial proposal will be the basis for appropriation requests to the National Assembly underscores the importance of legislative oversight in energy policy. It ensures transparent allocation of public funds for Frontier Basin development, ultimately driving economic growth and energy security.

G. 2022 mini-bid round for deep offshore assets

The NUPRC initiated the 2022/23 Mini Bid Round (MBR) under the PIA to boost exploration in deep waters offshore Nigeria. This round included seven offshore blocks, covering around 6,700 km2 in water depths ranging from 1,150m to 3,100m. The MBR aimed to attract global investors with deepwater expertise.

On April 1, 2023, the Commission extended the submission deadline for Technical/Commercial bids to May 19, 2023, and the contract negotiation deadline to 28 July 2023. This extension was designed to complete the process before the transition to a new government and promote collaboration between qualified indigenous companies and multinationals. Notably, 34 petroleum companies and consortiums were pre-qualified to participate in the bid round.

H. Fuel subsidy removal

In May 2023, President Bola Tinubu officially phased out Nigeria’s longstanding petrol subsidy regime, a significant move in the energy sector mandated by the Petroleum Industry Act (PIA). This decision, while lauded by some, has generated mixed opinions, particularly regarding the government’s efforts to mitigate the economic impact on the public.

Under the PIA, petroleum product pricing is now entirely market-driven, marking a crucial shift. New licenses have been issued to facilitate product importation and distribution within the country. However, the pace of implementing supportive measures to address challenges arising from subsidy removal has raised concerns about the decision’s sustainability and its ability to maintain the intended support as outlined in the Act.

I. Impact of the Finance Act 2023 on PIA tax regime

The Finance Act 2023 introduces several amendments to existing tax provisions for petroleum companies, providing clarity on tax obligations and deductions. Here are the key amendments:

1. Amendments to Petroleum Profit Tax Act

The PIA repeals the Petroleum Profit Tax Act (“PPTA”) subject to certain conditions. The PPTA remains in effect for licenses under the old regime (OPL, OML) unless there is a voluntary conversion or renewal of licenses. Hence, it is essential to align the relevant PPTA provisions with the Petroleum Industry Act.

1. Decommissioning and abandonment deduction: Section 15 of the Finance Act amends Section 10 of the PPTA to recognize Decommissioning and Abandonment contributions as tax-deductible expenses. To claim this deduction, companies must provide the Commission with an approved statement of account for the Decommissioning and Abandonment fund.
2. Fiscal oil price by the Commission: The Finance Act further amends PPTA provisions relating to the assessment of chargeable tax on barrels of crude oil for any accounting period of a company. It provides that the total value of the chargeable oil for a company shall be the sum of the multiplications of volume and fiscal oil price as established by the Commission at the measurement point.[10] Prior to the amendment, the chargeable oil value was determined based on the posted price (PP) established through agreements between oil companies and the Government of Nigeria. Disputes frequently arose due to disagreements on price assumptions. The PPTA amendment shifts the responsibility of determining the fiscal price to the Commission, incorporating independently obtained and operator-supplied data.
3. Filing obligations for pre-production phase: Before the amendment, companies in the pre-production phase, meaning those that hadn’t initiated “petroleum operations” as defined in the PPTA, were exempt from submitting tax returns. However, Section 30(3) of the PPTA is now amended to introduce mandatory filing requirements for these companies, accompanied by severe penalties for failure to comply. The submission deadline varies, allowing 18 months from incorporation for new companies and five months after December 31 for others.
4. Increased penalties: The Finance Act also introduces higher penalties for failure to file and late filing of PPT returns, with penalties as high as ₦10 million in the month of default and ₦2 million for subsequent days of default. Convictions may result in penalties of ₦15 million/₦20 million and an additional 1% of undeclared or undercharged taxes.

1. Amendments to Tertiary Education Tax (TET)

The Finance Act 2023 increases the TET rate from 2.5% to 3% for companies, excluding small companies. This higher rate applies to assessable profits of all companies registered in Nigeria, including petroleum companies.

• Amendments to Companies Income Tax Act (CITA)

Expanded Capital Allowances: In the past, complete offsetting of capital allowances against assessable profits was exclusively available to agricultural and manufacturing companies. However, the Finance Act 2023 brings a crucial alteration to this rule. It extends the privilege of offsetting capital allowances to companies engaged in upstream and midstream gas operations.

Fueling the gas revolution

The Act introduced a comprehensive framework that would redefine the nation’s approach to harnessing its abundant natural gas resources, enhancing energy sustainability, and promoting economic growth.

To expedite the development of gas infrastructure, the PIA introduced the Midstream and Downstream Gas Infrastructure Fund (Gas Infrastructure Fund). This fund is to serve as a catalyst for investments in crucial gas infrastructure projects, facilitating the expansion of infrastructure for alternative fuel sources like Compressed Natural Gas (CNG) and positioning natural gas as a viable alternative to traditional petroleum products.

The PIA also introduces the Domestic Gas Delivery Obligation which compels upstream gas producers to allocate a portion of their gas production for domestic consumption. This is expected to play a crucial role in coordinating and streamlining the supply and distribution of natural gas to various domestic sectors, enhancing accessibility to natural gas, and ensuring efficient delivery to industries, power plants, and households.

The recent partnership between NNPN Limited and NIPCO Gas Limited for the deployment of Compressed Natural Gas (CNG) and, consequently, NNPC Retail’s phased deployment of over fifty CNG stations across the country may signify a commitment to providing a cleaner and more cost-effective energy source.

Conclusion

The introduction of fresh regulations, permit transformations, and the well-planned initiation of regulation in the midstream and downstream segments of the petroleum industry collectively paint a picture of advancement. Within this progress, the regulatory intricacies encircling crude oil export terminals have catalyzed substantial deliberation, underscoring the nuanced relationship between regulatory objectives and economic considerations.

The courageous decision to eliminate subsidies has set in motion a chain reaction, compelling the country to reconsider its economic trajectory. Delving into these multifaceted developments serves as a reminder that achieving sustainable energy progress necessitates not only proactive legislation and strategic planning but also an unyielding dedication to inclusiveness for all pertinent stakeholders.

The expected gains for all stakeholders consequent upon the passage of the PIA have not been fully actualized, but given the processes put in place in the first two years since the passage of the Act, we are still optimistic that the next few years will be better.

Suraj Oyewale and Peter Okediya are energy policy analysts and co-founders of Fortrose Consulting. Emmanuel, an energy economist, is the CEO of Enermics Consulting.

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[1] Section 92 PIA

[2] Section 53 PIA

[3] Section 53 (7) PIA

[4] Section 7 (ee), PIA

[5] Section 32 and 318, PIA (definition of midstream petroleum liquids include transport from export terminals)

[6] Nairametrics, https://nairametrics.com/2023/07/07/the-reasons-behind-tinubus-decision-to-address-regulatory-overlaps-between-the-nuprc-and-nmdpra/ accessed 03 September 2023.

[7] Sections 32 and 174, PIA

[8] The Cable, https://www.thecable.ng/emadeb-energy-ends-nnpc-monopoly-imports-27m-litres-of-petrol accessed 9 August 2023

[9] Section 9(4), PIA

[10] Section 16 Finance Act, amending Section 23 PPTA

Views expressed by contributors are strictly personal and not of TheCable.