With more than 300 sections across five chapters and an additional eight schedules, Nigeria’s Petroleum Industry Act (the PIA), which was passed on August 16, 2021, repeals all previous laws related to oil and gas.
The PIA is the basis on which Nigeria, which is both the largest oil producer and the holder of the largest natural gas reserves in Africa, intends to foster a business environment conducive for petroleum operations and development of its gas sector, with the aim of making its economy entirely gas-powered by 2030. However, Nigeria’s goals for the effectiveness of the PIA and the long-term feasibility of the Nigerian oil and gas sector faces strong challenges.
The global transition from fossil fuels to renewable sources of energy and commitments made at the 2021 UN Climate Change Conference (COP26) 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, has led to recent and planned divestments by international oil companies such as Chevron, ExxonMobil, and Shell of their Nigeria onshore assets. This article provides a high-level overview of certain key changes brought about by the PIA.
Regulators: The PIA has established two regulators with distinct responsibility for upstream, midstream, and downstream operations. The new regulators are:
(a) the Nigerian Upstream Regulatory Commission, which replaces and takes 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 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 licences for midstream and downstream operations and providing pricing and tariff frameworks for natural gas and petroleum products.
Independent national oil company: The Nigerian National Petroleum Corporation, the current national oil company, which was incorporated as a statutory company, is in the process of transferring its assets to and will be replaced by a limited liability company, Nigerian National Petroleum Company Limited (NNPC Limited). The newly incorporated NNPC Limited is a private company owned by the Nigerian government but it is intended that NNPC Limited will operate as an independent commercial entity. NNPC Limited will be the concessionaire under all production sharing contracts, profit sharing, and risk sharing contracts on behalf of the Nigerian government.
Incorporated joint ventures: The PIA provides a framework for NNPC Limited and other parties to establish joint operating agreements to voluntarily convert into an incorporated joint venture following the procedure set out in the second schedule to the PIA.
Licences and leases: The existing Oil Exploration Licence and Oil Prospecting Licence (OPL) have been replaced by the Petroleum Exploration Licence (PEL) and Petroleum Prospecting Licence (PPL), respectively. A PEL is granted for exploration of petroleum on a speculative and nonexclusive basis for three years and may be renewable for an additional three-year period while a PPL is granted for exploration of petroleum on an exclusive basis. A PPL for onshore and shallow water acreages (350 km2) is granted for an initial exploration period of three years and an optional three-year extension period. For deep offshore (1000 km2) and frontier (1,500 km2) acreages, the PPL will have an initial exploration period of five years and an optional five-year extension period.
The Petroleum Mining Lease (PML) replaces the current Oil Mining Lease (OML) and will be granted for a period of 20 years and is renewable, subject to meeting the specified conditions.
The PIA allows current holders of OPLs and OMLs to voluntarily convert to PPLs and PMLs, respectively, within 18 months from the date of the PIA although holders of OMLs that voluntarily convert to a PML before the end of their contract term may be required to relinquish up to 60% of their OML area. In any event, the PIA provides that all producing marginal fields must convert to PMLs on the earlier of (a) 18 months from the date of the PIA and (b) the expiration of their current terms.
The Nigerian Upstream Regulatory Commission is required to develop and publish model forms of each of the PEL, PPL, and PML in advance of bid rounds (which must be a transparent and competitive process). Where the licence/lease is granted as a concession, then the relevant model form will include a carried interest provision giving NNPC Limited (on behalf of the Nigerian government) the right to a carried interest participation of up to 60% and an obligation on NNPC Limited to refund its proportionate share of the development and production costs either with cash or in kind from its share of future production.
The PIA establishes a framework for regulating midstream and downstream gas operations including establishing various licences 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 introduces more commercial rates for natural gas production in an effort to boost utilization of gas reserves rather than flaring of gas (royalty on production of natural gas has been reduced from 7% to 5% and while a royalty rate of 2.5% will apply to gas produced and used for domestic consumption).
The PIA has expanded the list of companies eligible to benefit from the gas utilization incentive granted under the Companies Income Tax Act (the CITA) by including companies in large-scale industries that use natural gas as feedstock. That tax incentive includes a five-year tax holiday and an additional five-year tax holiday will now be granted to investors in gas pipelines.
The PIA also has established the Midstream and Downstream Gas Infrastructure Fund, which will be the Nigerian government’s investment vehicle for making investments in infrastructure related to midstream gas operations with the aim of increasing domestic consumption of natural gas. The Midstream and Downstream Gas Infrastructure Fund also will enter into financing and risk sharing arrangements on gas projects to encourage private investment. The fund will be primarily financed by a 0.5% surcharge on the wholesale price of petroleum products sold and natural gas produced and sold in Nigeria.
The PIA provides for lower taxes and royalties except that existing OPLs and OMLs will be subject to the previous tax regime until licence/lease expiry or voluntary conversion to a PPL or PML, as applicable.
The historic Petroleum Profits Tax, which ranged from 50%, 65.75% and 85%, has been replaced with the Hydrocarbon Tax. The new tax applies to crude oil, condensates, and natural gas liquids produced from associated gas operations but will not apply to associated and non-associated natural gas. The Hydrocarbon Tax will be chargeable on the profits of upstream companies that are onshore or in shallow water at a rate of 30% in respect of PMLs and 15% for PPLs but the Hydrocarbon Tax will not apply in respect of profits from deep offshore projects. In addition to the Hydrocarbon Tax, all companies involved in petroleum operations will now become subject to Companies Income Tax under the CITA at a rate of 30%. The Tertiary Education Tax (TET), at a rate of 2% of assessable profits, remains applicable. However, in a change from the previous fiscal regime, the TET will no longer be tax deductible.
Oil royalties are now payable at 15% for onshore areas, 12.5% for shallow water, and 7.5% for deep offshore and frontier basins. A royalty rate of 5% will apply to deep offshore fields where production is not more that 50,000 barrels of oil per day. An oil price-based royalty ranging from 0% to 10% (if above US$150 per barrel) will also be payable. This rate will increase by 2% annually relative to the values of the previous year. The oil price-based royalty will not be payable in respect of frontier acreages.
Given the years of social neglect and environmental degradation in Nigeria’s oil producing regions, the PIA also introduces laws to protect and boost the economic prospects of the local communities in those regions.
All exploration and production companies, or the operating company on behalf of joint venture partners or under production-sharing contracts, are now required to set up a “host community development trust” for the benefit of the communities where they operate. A company risks having its licence/lease revoked if it does not set up a host community development trust. The trust must be an incorporated trust registered in Nigeria and 3% of the relevant company’s actual annual operating expenditure in the immediately preceding calendar year must be paid annually into the trust. Amounts paid into a host community development trust are tax exempt and are deductible for Hydrocarbon Tax and Companies Income Tax purposes. Funds from the trust will be used to cover the cost of repairing any damage caused by host community vandalism or sabotage.