PIB: What you need to know about proposed law to regulate Nigeria’s oil industry

 



By Bakare Majeed

July 8, 2021

After a 20-year journey, the Petroleum Industry Bill (PIB) on Thursday crossed a major landmark as the two chambers of the National Assembly considered the reports of their respective committees on the bill.

The beginning of the bill could be traced to the Oil and Gas Reforms Committee (OGRC) constituted by former President Olusegun Obasanjo’s administration. The report of the committee formed parts of the bill which was first introduced to the National Assembly by former President Umar Yar’Adua’s administration in 2008.

Mr Yar’Adua had constituted a committee on the implementation of the OGRC report. A subcommittee chaired by Yinka Omorogbe drafted the bill but that particular bill was marred by controversy. Segun Adeniyi, the spokesperson of the late president, detailed some of the controversies that bedevilled the bill in his book: Power, Politics and Death.

One of the controversies was the sponsorship of some senators to a seminar in Ghana by the Oil Producer Traders Section (OPTS). Eleven senators attended the seminar. According to the book, the bill languished in the 6th Assembly without making any headway.

It was again reintroduced in 2012 by former President Goodluck Jonathan’s administration. It was passed by the House, just a few days to the end of that administration, but the Senate failed to pass the bill.

In the 8th Assembly, lawmakers decided to introduce the PIB in parts. The bill was broken down into the Petroleum Industry Governance Bill (PIGB), Petroleum Industry Fiscal Bill, Host Communities Entitlement and Protection Bill and the Petroleum Industry Administration Bill.

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Several lawmakers introduced different versions of the bills, but the PIGB sponsored by Tayo Alasoadura and Pally Iriase, was the version passed by both chambers and harmonised. The bill was transmitted to President Muhammadu Buhari but he rejected it.

Although the two chambers reconsidered and passed the bill again, it was still not assented to by Mr Buhari, until that House adjourned sine die.

The Present bill

Unlike in the 8th Assembly, this bill is an Executive Bill. The bill was sent to the National Assembly in September 2020.


Breakdown of the bill

The bill can be divided into fiscal, administration, governance and institutions, and host communities components.

Under governance, the bill seeks to establish Nigerian Upstream Regulatory Commission, which will be responsible for regulating the upstream sector. The commission’s functions are divided into technical and commercial functions.

The commission will be headed by a chief executive officer, who will be nominated by the president and subject to the approval of the Senate. This commission will be taking over the functions of the Department of Petroleum Resources and the Petroleum Inspectorate.

 


The original bill proposed first line charge funding for the commission but the House deleted the provision. Furthermore, the commission will also have a special investigative unit to carry its regulations.

Frontier Exploration Fund: 30 per cent of NNPC Limited profit

The bill is seeking the establishment of a fund for the exploration of unassigned frontier basins. The bill proposed 10 per cent of rents on petroleum prospecting licences and petroleum mining lease, however, the committee on PIB proposed 10 per cent of rents on petroleum prospecting licences, 10 per cent rents on prospective mining lease and 30 per cent of NNPC Limited’s oil and gas profit and the recommendation was adopted.

The funds are to be used for the exploration of some of the basins across the country. Some of the basins are the Benue Trough, Chad Basin and Sokoto Basin.

Part IV of the bill is proposing Nigerian Midstream and Downstream Regulatory Authority. As the name implies, it will regulate the midstream and downstream sectors, replacing the Petroleum Products Pricing Regulatory Agency (PPPRA) and other regulators in the downstream and midstream.

Midstream Infrastructure Development fund

The midstream authority will be responsible for administering a midstream infrastructure development fund. Section 33(y) of the bills is proposing the fund which will be funded by fines from gas flaring in the downstream sector.

33(y) reads that “Any other matters as may be determined by the authority pursuant to this bill which includes the imposition of gas flare penalty arising from midstream operations which shall be for the credit of the midstream gas infrastructure fund, and shall be utilised for midstream gas infrastructure investment within the host community of a designated facility.”

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The provision of this section was opposed by the Deputy Senate President, Ovie Omo-Agege, who argued that the money is a penalty for bad behaviour and should be invested in the region, not to be invested in “midstream infrastructure.”

“We don’t want it invested in midstream gas infrastructure. This is a penalty. Gas flaring is harming people. We want the penalty to be used for remediation, investment and development in the communities,” he said.

What happens to NNPC?

The bill is seeking to create an entity called the Nigerian National Petroleum Corporation Limited, a corporate entity incorporated under the Companies and Allied Matters Act. This must be done six months after the commencement of this bill by the Minister of Petroleum.

Section 53(3) provides that the ownership of all shares in the incorporated NNPC shall be vested with the government, and the Ministries of Finance and Petroleum shall hold the shares on behalf of the government. The shares are not transferable.

Sections 53 (7,8) provides that NNPC Limited must operate as an “efficient profit-making entity,” declare dividends and also pay all fees, rents, royalties, profit oil share taxes and other requirements on any lease or licence.

All assets, interests and liabilities of NNPC are to be transferred to NNPC Limited within 18 months of incorporation. At the end of the transfer, NNPC shall cease to exist. The government is to take over all interests, liabilities and asset not transferred to NNPC limited. Sections 55 and 56 provide the process of managing the transition.

Employees of NNPC

Section 57 provides that all employees of NNPC are to be deemed employees of NNPC Limited as soon as the latter is incorporated. Their conditions and terms must not be less favourable than when they were in the NNPC.

Its CEO and board will still be appointed by the president. However, this is to change when the government is owning part of the corporation, not whole. The appointment of the board will be done by shareholders.

As part of its responsibilities, NNPC Limited will manage all petroleum sharing contracts on behalf of the government, lift and sell royalty and tax oil on behalf of the commission and will be vested with the right to natural gas under the production sharing contracts entered into, prior to the commencement of the bill.

Host communities

This section has been the most contentious part of the bill. At the House of Representatives’ public hearing, different factions of the association of host communities engaged in a brawl to determine the right representative.

House of Representatives plenary [PHOTO CREDIT: @HouseNGR]
For people in the oil-producing area, the question of funding of the host communities development was the most important issue. The draft PIB proposed 2.5 per cent of the operating expenditure of the Settlor (operator of an oil licence) to fund development in the area.

However, the House Committee on PIB recommended 5 per cent which was adopted by the House. The Senate proposed the same but Sani Kaita (APC, Katsina) moved an amendment for it to be reduced to 3 per cent. This amendment will have to be harmonised at the joint committee of the National Assembly.

Mr Monguno had told Journalists that the committee will insist on the 5 per cent that the House adopted for the host community.


However, some stakeholders from the regions want a 10 per cent equity share in the lease or licence to operators. During the public hearing by the Senate joint committee, the Minister of State for Petroleum Resources, Timipre Sylva, described the 2.5 per cent Opex as ‘fair’ during his presentation on the bill.

“The 2.5 per cent as proposed in the PIB is fair and of course, I speak as a member of a host community. But if you have to look at it properly, you will see that 10 per cent of profit is different from 10 per cent of operating expenditure.

“Before now, you had a provision of 10 per cent of profit and profit means that if I don’t declare it, you don’t have anything,” he stated.

Summary of the Host communities component in the bill

The bill provides that each settlor must set up a development trust fund and appoint a Board of Trustee which must apply to the Corporate Affairs Commission (CAC) to register the trust as a Host Communities Development Trust.

Clause 236 of the bill gives the time frame for the registration of a trust fund for oil asset. For existing leases and existing designated facilities, the period for setting up the fund is within 12 months of the bill coming into effect.

Existing prospective licences must set up the Fund before application for the field development plan. And failure to comply with setting up of the trust fund in line with the Act, a holder risks revocation of the applicable licence.

The licensed operator will determine the membership of the board, subject to the approval of the regulator, and each member can serve for a period of four years and can be re-appointed for another four years and no more.

Clause 242 gives the licence holder the powers to determine the procedure of meeting, discipline, qualification remuneration, suspension and removal of members of the board of trustees. Furthermore, board members may not necessarily be from the host community.

The board will have the power to set up a management committee for the host community. Each community will have a representative as a non-executive member, while the board will appoint “Nigerians of high integrity and professional standing, who may not necessarily be from the host communities.”

The management will run the day-to-day activities of the Trust and have the power to nominate a trust manager for the fund, subject to the approval of the board of trustees.

Revenue/expenditure

Asides the five/three per cent operating expenditure, the host community can also take grants, donations, gifts, honoraria and profits and interest from the investment.

For expenditure, 75 per cent of the fund will go into capital expenditure, 20 per cent reserve funds will be invested by the Trust manager and 5 per cent for running cost of the Trust.

Clause 256 exempts the Host Communities Development Trust from tax. Also, Clause 257 provides that in the event of vandalism, the host community trust will forfeit its entitlement to the extent of the repairs of the damages to oil asset within their domain.

“Wherein any year, an act of vandalism, sabotage, or other civil unrest occurs that causes damage to petroleum and designated facilities or disrupts production activities within the host community shall forfeit its entitlement to the extent of the cost of repairs of the damage that resulted from the activity with respect to the provisions of this Act within a financial year, provided that the interruption is not caused by technical or natural cause,” Clauses 257 reads.

Fiscal framework

This is the component the International Oil Companies expressed the most concerns about. The part provides the framework on laws governing taxation, royalties, rents and other incentives. The IOCs under the OTPS had at the hearing expressed reservations on the tax regime, describing it as globally uncompetitive.

Total Nigeria had described the fiscal regime proposed in the new bill as “globally uncompetitive”, warning that it would hurt several deep offshore investments in the country.

Mike Sangster, the Chief Executive Officer of Total Nigeria, had presented the position of the oil companies under the cluster of Oil Producers Trade Section (OPTS) of the Lagos Chamber of Commerce (LCCI) at the hearing. His position was adopted by other oil giants.

Total [PHOTO CREDIT: @bfmbusiness]
“The investments made by Total and OML 130 partners will be excessively penalised by the new PIB as drafted today, particularly the recent Egina project which has been in production for around two years. The proposed changes in the fiscal framework undermine our investment in Nigeria and are unfair and contrary to the spirit of the ‘contract’ between the FGN and the Egina investor group. Moreover, the bill will endanger the viability of further developments on the block,” Mr Sangster had said at the House hearing in January.

Perhaps as a way of compromise, the House committee heavily amended this part of the bill as against what the Executive proposed. Several sections were deleted by the lawmakers.

A total of 107 amendments were made in this section. For instance, section 267 provides the guideline for chargeable tax.

The government proposed the following; “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.

For the 42.5 per cent tax for onshore area mining lease and licence, the committee reduced it to 30 per cent, while 15 per cent was adopted for a prospecting mining lease in shallow water.

Others in the section were deleted by the committee, including the deep offshore tax regime. It would be recalled that Mr Sangster had in January said the bill in its current form will discourage investment in the deep offshore, including the Egina project.

Speaking on the fiscal regime, a member of the ad hoc committee, Kingsley Chima, said the lawmakers resolved to give incentives for investors to continue to invest in the sector.

“To encourage the investors to participate in the oil and gas sector, the National Assembly has a right, in consultation with experts, to do away with such sections. I don’t see it as a compromise, what we tried to do is to make the best law that will meet international standard. Let me tell you why the National Assembly is so much in a hurry to pass this bill.

“You may be well informed that almost all the countries in Africa today are finding oil in commercial quantity. If we are not in a hurry to provide an enabling environment and good governance arrangement, by way of law to encourage investors, we may end up keeping our oil like we have our coal today. We have coal in Enugu, Benue, Kogi and other places, who is going to buy coal? We are trying to use this law to encourage IOCs and other investors.”

According to Mr Chima, the lawmakers made the amendments in consultation with experts and the Executive.

The two chambers still have to harmonise the two versions, while the country waits to see the position of President Buhari on the bill.

 

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