Petroleum Industry Act 2021

The petroleum industry in Nigeria had long been governed by a series of laws passed over the years, some of which were outdated and were not conducive to the practices of the modern industry. Starting in the early 2000s, successive governments have proposed comprehensive reforms.^[5]

The Petroleum Industry Bill (PIB) was first introduced in the Olusegun Obasanjo administration in 2000 based on the recommendations of the Oil and Gas Sector Reform Implementation Committee (OGIC). Several drafts of the bill were then introduced under the auspices of Presidents Umaru Musa Yar'Adua, Goodluck Jonathan, and Muhammadu Buhari, but were postponed because of differences in the fiscal aspects, governance framework, resource ownership, and benefits to the host communities.^[6]

The Buhari government presented a new Petroleum Industry Bill to the National Assembly on 29 September 2020. The bill was extensively discussed in the legislature, passed by both houses on 1 July 2021, and assented to by the President on 16 August 2021.^[7][8]

The Act was enacted to establish a common law, governance, regulatory and fiscal regime for Nigeria's petroleum industry. It aims to define the government institutions' responsibilities and to distinguish between regulatory and commercial activities and encourage the rational exploration, production, processing, transportation and distribution of petroleum. The fiscal provisions aimed to reconcile the need for government revenue with the need to attract investment and its transparency provisions were designed to ensure a more transparent reporting and accountability process in the administration of petroleum resources.^[1]

The bill also intends to promote sustainable development in the petroleum-producing communities by offering direct economic and social benefits to the communities through Host Communities Development Trusts. It also created separate regulators for the upstream and midstream as well as the downstream sector, while it converted the former Nigerian National Petroleum Corporation into NNPC Limited which is commercial and aims to earn profits without regular government funding.^[9]

The Petroleum Industry Act 2021 (PIA) restructured the governance of Nigeria's petroleum industry into two parts: policymaking and regulatory functions, and commercial operations. The Minister of Petroleum Resources was given overall supervision of the industry, with responsibility for formulating, tracking, and enforcing federal petroleum policy. The minister's power to make, cancel or approve transfers of petroleum licences and petroleum leases, however, was limited to the recommendation of the appropriate regulatory agency and the provisions of the Act.^[10]

The Act split the regulatory responsibility between two new institutions. The Nigerian Upstream Petroleum Regulatory Commission was given the responsibility for the technical and commercial regulation of upstream petroleum operations, while the Nigerian Midstream and Downstream Petroleum Regulatory Authority was tasked with the oversight of midstream and downstream petroleum operations. The Commission took over the functions, assets, rights and liabilities of the Petroleum Inspectorate and the Department of Petroleum Resources which relate to the upstream sector. The Authority, in its place, replaced the Petroleum Products Pricing Regulatory Agency and the Petroleum Equalisation Fund Management Board. Both regulators have boards of directors to oversee their policies and day-to-day operations, with members appointed by the president. They are still generally supervised by the minister.^[10]

The Act also provided for the incorporation of the Nigerian National Petroleum Company Limited under the Companies and Allied Matters Act. The shares are held in the name of the Federation by the Ministry of Finance Incorporated and the Ministry of Petroleum Incorporated. Unlike the previous statutory NNPC, NNPC Limited is supposed to be a business-driven entity. All transfers and sales of its shares shall be conducted in accordance with an open and competitive bidding process and shall be in accordance with fair market value. The company will also be required to pay royalties, rents, fees, taxes, profit-oil obligations and other amounts due to the federal government, with the ability to use 20 per cent of its profits for reinvestment. Overall, the reforms created sharper institutional boundaries, with the minister given policy direction, two specialised agencies taking over regulatory responsibilities, and the government’s commercial petroleum operations placed in NNPC Limited.^[10]

One of the key changes of the Act was the transformation of the Nigerian National Petroleum Corporation (NNPC) to the Nigerian National Petroleum Company Limited (NNPCL). NNPCL was incorporated under the Companies and Allied Matters Act (CAMA) in September 2021 and was officially unveiled on 19 July 2022.^[11] Its shares were held in equal proportion in the name of the federation by the Ministry of Finance Incorporated and the Ministry of Petroleum Incorporated at the time of its formation. The company was, however, still fully owned by the federal government, and incorporation was not actually privatisation but commercialisation.^[12]

Unlike the previous statutory corporation, NNPCL was established as a for-profit corporation, which is not regularly funded by the government. It has to pay taxes, royalties, rents and other statutory charges; declare dividends to its shareholders; and set aside a portion of its profits for reinvestment. The Act also provided for the transfer of designated assets, liabilities and employees of the former corporation to the new company. Government sales or transfers of shares shall be made in the future at fair market value through an open and competitive sale.^[1] The upstream portion of the regulation was assigned to the NUPRC, and the midstream and downstream were transferred to the NMDPRA.

The Act introduced two main taxes for new and converted petroleum operations: Companies Income Tax and Hydrocarbon Tax. The Hydrocarbon Tax is imposed on the profits from onshore and shallow-water crude-oil operations: 30 per cent for petroleum mining leases and 15 per cent for petroleum prospecting licences. Companies Income Tax is also chargeable on qualifying petroleum companies in the general corporate-tax regime. The Federal Inland Revenue Service is responsible for tax assessment and collection, while the Nigerian Upstream Petroleum Regulatory Commission oversees the collection of royalties and monitors production volumes, which are the basis for some government revenues.^[13]

Cost recovery was recast as well. In general under the Act, expenses are not deductible unless the expenses are wholly, reasonably, exclusively and necessarily incurred in petroleum operations. Capital allowances can be claimed for qualifying expenditure on plants, pipelines, storage facilities, drilling and other petroleum infrastructure. But that recovery is not limitless. Deductible expenditure is subject to a cost-to-price ratio which, for Hydrocarbon Tax purposes, is generally limited to 65 per cent. Excluded are certain expenses that were previously deductible, such as borrowing costs, general head-office overheads and bad-debt write-offs. These rules, considered together, restrict the possibilities of subjective cost claims and provide a more definite basis for determining the chargeable profit.^[13]

The framework offers incentives for investments in natural gas and in midstream and downstream activities. These are exclusive tax-free periods and accelerated capital allowances for qualifying projects, among other things. It also makes petroleum finance more directly tied to the communities in which the oil is being produced by requiring that three per cent of the actual operating expenditure of the previous financial year be paid to a host-community development trust for which the upstream licence/lease holder is the producer.^[13]

Host Communities Development Trusts (HCDTs) were set up by the Act for the benefit of the communities affected by the petroleum operations. Companies with petroleum licenses or leases, known as “settlors”, are to create trusts for host communities, and pay 3 per cent of their actual operating expenditure from the previous financial year. Each trust is to be administered by a Board of Trustees, a Management Committee and an Advisory Committee. Its projects are expected to be based on a community needs assessment and community development plan.^[1][14]

The funding formula dictates that 75 per cent of trust funds available will go to capital projects, 20 per cent to a reserve, and up to five per cent to administrative costs. The Act also allows the cost of repairing a petroleum facility that has been damaged by vandalism, sabotage or civil unrest to be deducted from the entitlement of that community. The trusts have been troubled by slow compliance, weak community engagement, and issues surrounding transparency and the continued control by the petroleum companies over the trusts, but the development framework has been improved by making voluntary agreements more binding.^[15][16]

Implementation was started within months of the president's assent. The federal government established the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) and the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) in October 2021 to take over the duties of the Department of Petroleum Resources (DPR), Petroleum Products Pricing Regulatory Agency (PPPRA) and Petroleum Equalisation Fund (PEF).^[17] NNPC Limited was established in September 2021 and officially opened by President Muhammadu Buhari on 19 July 2022, thus becoming a company regulated largely by the Companies and Allied Matters Act.^[18]

The regulatory framework has been phased in. The NUPRC started regulating petroleum licensing rounds, conversion and renewal of licences and leases, royalties, domestic gas delivery and host-community development in 2022.^[19] Additional regulations covered gas flaring, methane emissions, petroleum measurement, interests assignment, decommissioning and environmental remediation and acreage management. However, implementation has been slow, with some aspects relying on implementing regulations, the conversion of existing licences and contracts and the administrative capacity of the new institutions.^[20]

The Act was widely seen by petroleum-industry analysts and professional firms as a major reform, especially since it took nearly 20 years to pass legislation which finally reformed the industry. Analysts quoted by Reuters said it was crucial for bringing investment to the fossil-fuel projects when international investment in the industry was waning^[21] PwC called the law a transformation of governance, regulatory and fiscal frameworks in the industry, but said that its ultimate impact would be contingent upon the implementation of rules and regulations under the law.^[22]

It was more critical in the Niger Delta for reception. Community representatives and regional activists said the levy on the petroleum companies to pay three per cent of their previous year's operating costs into a community trust was too small, considering communities had wanted a much higher percentage.^[23] The Health of Mother Earth Foundation also challenged the level of control over the trusts and the funding for exploration in the frontier-basin by the petroleum companies.^[24] Other assessments doubted the equity of allocating 30 per cent of the profit oil and profit gas under some contracts to the Frontier Exploration Fund, saying it would make less money for the federation and give an unfair advantage to exploration outside the known oil-producing areas.^[25]

• Energy in Nigeria
• Niger Delta Development Commission
• Petroleum industry in Nigeria
• Federal Inland Revenue Service
• Federal Ministry of Petroleum Resources
• Nigerian Upstream Petroleum Regulatory Commission
• Nigerian National Petroleum Company Limited