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Thursday, September 29, 2022

Nigeria Amends Oil and Gas Laws Through the Petroleum Industry Act

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Nigeria’s Petroleum Industry Act (the PIA), which was passed on August 16, 2021, contains more than 300 parts spread across five chapters and an additional eight schedules, and it repeals all previous laws pertaining to oil and gas in the country.

The Petroleum Industry Act (PIA) serves as the foundation upon which Nigeria, which is both the world’s largest oil producer and the owner of the continent’s largest natural gas reserves, intends to foster a business environment favorable to petroleum operations and the development of its gas sector, with the goal of having its entire economy powered entirely by gas by 2030. Nigeria’s objectives for the success of the PIA as well as the long-term viability of the Nigerian oil and gas sector, on the other hand, confront significant obstacles.

As a result of the global transition away from fossil fuels and toward renewable sources of energy, as well as commitments made at the United Nations Climate Change Conference (COP26) in 2021 by certain countries, including the United States and the United Kingdom, to end public financing for overseas fossil fuel projects by the end of 2022, international oil companies such as Chevron, ExxonMobil, and Shell of their Nigerian onshore assets, have recently and are planning to divest their onshore assets in Nigeria. The purpose of this article is to provide a high-level summary of some of the most significant developments brought about by the PIA.

REFORMS IN GOVERNANCE

Governmental regulators: The PIA has established two government-sponsored regulators who are each responsible for upstream, midstream, and downstream activities, respectively. The new regulators are as follows:

(a) The Nigerian Upstream Regulatory Commission, which will replace and take over the role of the existing Department of Petroleum Resources and will be responsible for the regulation of technical, operational, commercial, and environmental activities of upstream petroleum operations; and (b) the Nigerian Oil and Gas Regulatory Commission, which will replace and take over the role of the existing Department of Petroleum Resources.

Nigerian Midstream and Downstream Petroleum Regulatory Authority, which will be responsible for the regulation of midstream and downstream petroleum and gas operations, including the issuance of licenses for midstream and downstream operations, as well as the establishment of pricing and tariff frameworks for natural gas and petroleum products in Nigeria; and

It will be replaced by a limited liability company, Nigerian National Petroleum Company Limited, which would transfer its assets to and take over the operations of the present national oil company, Nigerian National Petroleum Corporation, which was established as a statutory corporation (NNPC Limited). Nigerian National Petroleum Corporation Limited, which has recently been established, is a private corporation controlled by the Nigerian government, however it is intended that NNPC Limited operate as an independent commercial entity. Nigerian National Petroleum Corporation Limited (NNPC Limited) will serve as the concessionaire for all production sharing contracts, profit sharing contracts, and risk sharing contracts entered into on behalf of the Nigerian government.

REFORMS IN THE UPSTREAM

Incorporated joint ventures: The PIA provides a framework for NNPC Limited and other parties to establish joint operating agreements in order to voluntarily convert into an incorporated joint venture in accordance with the procedure set out in the second schedule to the PIA. Joint operating agreements must be in place before a joint venture can be incorporated.

The old Oil Exploration Licence (OEL) and Oil Prospecting Licence (OPL) have been superseded by the Petroleum Exploration Licence (PEL) and the Petroleum Prospecting Licence (PPL), which are both issued by the government of the United Kingdom. For three years and with the possibility of renewal, a PEL is issued for the exploratory and nonexclusive exploration of petroleum. A PPL is granted for the exploration of petroleum on an exclusive basis for three years and with the possibility of renewal for an additional three years. A PPL for onshore and shallow water acreages (350 km2) is given for an initial exploration period of three years, with an optional three-year extension period. The initial exploration period is renewable. The PPL will have a five-year initial exploration phase for deep offshore (1000 km2) and frontier (1,500 km2) acreages, with a possible five-year extension period for deep offshore acreages.

According to the terms of the Petroleum Mining Lease (PML), which will take the place of the current Oil Mining Lease (OML), the lease will be given for 20 years and will be renewable if the conditions set out are met.

According to the PIA, current holders of OPLs and OMLs can voluntarily convert to PPLs and PMLs within 18 months of the PIA’s effective date. However, OML holders who voluntarily convert to a PML before the end of their contract term may be required to relinquish up to 60 percent of their OML area under certain conditions. However, the PIA requires that all producing marginal fields convert to PMLs no later than the earliest of (a) 18 months from the commencement of the PIA or (b) the expiration of their current terms, whichever is the later.

The Nigerian Upstream Regulatory Commission is expected to produce and publish model forms for each of the PEL, PPL, and PML in advance of bidding rounds for each of the three projects (which must be a transparent and competitive process). A carried interest provision will be included in the relevant model form if the licence/lease is granted as a concession, giving NNPC Limited (on behalf of the Nigerian government) the right to a carried interest participation of up to 60 percent, as well as an obligation on NNPC Limited to refund its proportionate share of the development and production costs, either in cash or in kind, from its share of future production.

COLLECTIVE EXPLORATION OF GAS RESERVES

In addition to establishing a framework for regulating midstream and downstream gas operations, the PIA also introduces various licenses to be granted by the Nigerian Midstream and Downstream Petroleum Regulatory Authority (i.e., operations gas processing licenses, bulk gas storage licenses, gas transportation pipeline licenses, gas transportation network operator licenses, wholesale gas supply licenses, retail gas supply licenses, and domestic gas aggregation licenses), and it establishes a framework for regulating midstream and downstream oil (royalty on production of natural gas has been reduced from 7 percent to 5 percent and while a royalty rate of 2.5 percent will apply to gas produced and used for domestic consumption).

Company in large-scale industries that use natural gas as feedstock are now included in the list of firms that are eligible to benefit from the gas usage incentive provided under the Companies Income Tax Act (the CITA), according to the Philippine Investment Authority (PIA). Investors in natural gas pipelines will now be eligible for an additional five-year tax break, in addition to the existing five-year tax break available to them today.

Meanwhile, the Petroleum Industry Authority (PIA) has established the Midstream and Downstream Gas Infrastructure Fund, which will serve as the Nigerian government’s investment vehicle for making investments in infrastructure related to midstream gas operations with the goal of increasing the country’s domestic natural gas consumption. In order to encourage private investment in gas infrastructure, the Midstream and Downstream Gas Infrastructure Fund will enter into financing and risk sharing arrangements with gas project developers. The fund would be primarily funded by a 0.5 percent surcharge on the wholesale price of petroleum products sold in Nigeria, as well as on the wholesale price of natural gas generated and sold in the country.

REFORMS IN THE FINANCIAL SYSTEM

The PIA provides for lower taxes and royalties, with the exception of existing OPLs and OMLs, which will continue to be subject to the former tax regime until their licence/lease expires or they voluntarily convert to a PPL or PML, whichever occurs first.

The Hydrocarbon Tax has taken the place of the historic Petroleum Profits Tax, which had rates ranging from 50 percent to 65.75 percent and as high as 85 percent in some cases. The new tax will apply to crude oil, condensates, and natural gas liquids produced from associated gas operations, but it will not apply to natural gas produced from any source, including associated and non-related sources. It will be charged on the earnings of upstream firms that operate onshore or in shallow water at a rate of 30 percent in the case of PMLs and 15 percent in the case of PPLs, but the Hydrocarbon Tax will not be charged on the profits of upstream companies that operate in deep offshore projects. Companies engaged in petroleum operations will now be subject to Companies Income Tax under the Companies Income Tax Act (CITA), which will be levied at a rate of 30 percent in addition to the Hydrocarbon Tax. The Tertiary Education Tax (TET), which is levied at a rate of 2 percent of assessable profits, will continue to be in effect. The TET, on the other hand, will no longer be tax deductible, as was the case under the previous fiscal framework.

Deep offshore and frontier basins are now subject to a 15 percent royalty rate, while onshore areas are subject to a 12.5% rate and shallow water is subject to a 7.5 percent rate. Deep offshore fields with production of less than 50,000 barrels of oil per day will be subject to a royalty rate of 5 percent, according to the agreement. In addition, an oil-price-based royalty ranging from 0 percent to 10 percent (if the price of oil exceeds US$150 per barrel) will be due. This rate will rise by 2% per year in comparison to the previous year’s levels. The oil price-based royalty will not be payable in respect of frontier acreages, as previously stated.

The protection and development of host communities are two of the most important aspects of the project’s success.

The PIA also introduces legislation to preserve and improve the economic prospects of local populations in Nigeria’s oil-producing regions, which has suffered from years of social neglect and environmental deterioration.

To benefit the communities in which they operate, all exploration and production companies, or the operating company acting on behalf of joint venture partners or under production-sharing contracts, are now required to establish a “host community development trust” for the benefit of those communities. If a corporation does not establish a host community development trust, it runs the danger of having its license or lease terminated. To be eligible, the trust must be a legally established trust registered in Nigeria, and 3 percent of the relevant company’s real annual operating expenditure for the immediately preceding calendar year must be paid into the trust on an annual basis. Amounts paid into a host community development trust are not subject to taxation and are deductible for the purposes of the Hydrocarbon Tax and the Companies Income Tax. The funds from the trust will be used to pay the costs of repairing any damage caused by vandalism or sabotage on the part of the host community.

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