Nigeria’s Petroleum Industry Act: Two Legal Regimes for One Industry
The Petroleum Industry Act seeks to redefine the Nigerian oil and gas landscape but Streamsowers & Köhn’s Ibukun Konu and Otome Okolo believe the recent legal overhaul could create new problems.
Ibukun Konu
Otome Okolo
On 16 August 2021, the Petroleum Industry Act 2021 (PIA) was signed into law. The PIA makes sweeping changes to the administration, management, legal, social, fiscal, tax and environmental aspects of the Nigerian petroleum industry.
“Where the provision of any law is inconsistent with the Petroleum Industry Act, the provisions of the Petroleum Industry Act shall prevail.”
The PIA created the Nigerian Upstream Regulatory Commission (NUPRC) and the Nigerian Midstream and Downstream Petroleum Regulatory Authority (“the Authority”) to administer the upstream, the midstream and downstream sectors, thereby replacing the defunct Department of Petroleum Resources.
Two Legal Regimes for the Upstream
The Petroleum Act was the main oil and gas legislation in Nigeria before the PIA, which redefined the legal landscape. The PIA seeks to codify Nigeria’s petroleum laws by making consequential amendments to all existing laws – to the extent that, where the provision of any law is inconsistent with the PIA, the provisions of the PIA shall prevail – and by repealing the following laws:
- the Associated Gas Reinjection Act;
- the Hydrocarbon Oil Refineries Act;
- the Motor Spirit Act;
- the Nigerian National Petroleum Corporation (NNPC) (Projects) Act; and
- the Petroleum Products Pricing Regulatory Agency (Establishment) Act.
The PIA preserves the Petroleum Act and, in order to ensure the continuation of the latter’s legal framework, necessarily preserves the following legislation:
- the Petroleum Profits Tax Act (PPTA);
- the Oil Pipelines Act;
- the Deep Offshore and Inland Basin Production Sharing Contracts Act; and
- any other law consistent with the preservation of the terms and conditions of any oil prospecting licence (OPL) or oil mining lease (OML) until the expiration or termination of all OPLs and OMLs.
In effect, the PIA creates a dual legal system in Nigeria for holders of licences or leases based on whether they were granted under the Petroleum Act or the PIA.
Can leases and licences be converted?
In redefining the legal landscape, the PIA recognises the validity of exploration rights granted under the Petroleum Act and establishes the procedure for the conversion of OPLs to petroleum prospecting licences (PPLs), OMLs to petroleum mining licences (PMLs) and from OPLs to OMLs.
The holder that converts under the PIA:
- benefits from the PIA fiscal provisions;
- must terminate all arbitration or litigation with regard to the licence or lease area; and
- may relinquish up to 60% of the licence area in the case of an OML under a production-sharing contract.
Conversion is not mandatory for licensees under the Petroleum Act and the PIA states that the terms and conditions applicable to OPLs and OMLs prior to the PIA shall continue to apply until termination or expiration of the OPL or OML if the holders do not convert. Further, the PIA states that the PIA will not apply to holders of OPLs and OMLs that have not entered into a conversion contract, thereby retaining the legal framework for OPLs and OMLs under the Petroleum Act.
Highlighted Differences in the Two Co-Existing Laws
Under the Petroleum Act, the Minister of Petroleum Resources grants rights for the exploration of petroleum in Nigeria through:
- the oil exploration licence (OEL);
- the OPL; and
- the OML.
The PIA gives the NUPRC the power to grant petroleum exploration licences (PELs), while the Minister of Petroleum Resources retains the power to grant PPLs and PMLs.
How much tax is payable?
Companies are currently taxed at the following rates:
- holders of OPLs or OMLs pay a PPTA rate of 85% on chargeable profits (or 65.75% if the holder has not started bulk disposal of chargeable oil);
- holders of PPLs pay a hydrocarbon tax rate of 15% on chargeable profits for onshore and shallow water areas; and
- holders of PMLs pay a hydrocarbon tax rate of 30% on chargeable profits for onshore and shallow water areas.
How much is paid in royalties?
Royalty rates on production are calculated as follows.
- Holders of OPLs or OMLs pay royalties of 20% for onshore, 12.5% for deep offshore and 0% for explorations above 1,000 metres water depth.
- Holders of PPLs or PMLs pay lower royalties of 15% for onshore and 7.5% deep for offshore.
Which funds must be contributed to?
Under the PIA, a PPL or PML holder contributes to:
- Environmental Remediation Fund;
- Decommissioning and Abandonment Fund; and
- Host Communities Development Fund.
These funds do not exist under the Petroleum Act, so the OPL or OML holder does not have such financial obligations. However, in accordance with the abandonment programme approved by the Director of Petroleum Resources, a holder does require written permission from the Director of Petroleum Resources to abandon a borehole or existing well.
Who makes the regulations?
The Petroleum Act states that only the Minister of Petroleum Resources can make orders and regulations. The PIA empowers the NUPRC to issue regulations and guidelines and to enforce the defunct DPR’s regulations, policies and guidelines. This is a potential area of conflict because OPL or OML holders may argue that they are not bound by the NUPRC’s regulations, which are made under the PIA.
How are rights transferred?
Under the Petroleum Act, any oilfield that the President identified as a marginal field and could be farmed out of if the marginal field was left unattended for no fewer than ten years from its first discovery. There would typically be a bid round for the marginal field and the farmor had a right to receive overriding royalty interests.
The PIA’s marginal field framework is as follows.
- A producing marginal field continues under the farmout agreement but the farmor must convert to a PML within 18 months of the PIA.
- A non-producing marginal field is relinquished, converted to a PPL and may be subject to a bid round.
- The holder of the OML or PML no longer receives overriding royalty interests.
- Any marginal field that is not transferred to the government within three years and does not have a field development plan is relinquished.
- There will be no more marginal fields under the PIA.
Regulatory Overlap and Duplication of Functions
Creating the NUPRC to regulate the upstream and the Authority to oversee the midstream and downstream sectors has also created instances of regulatory overlap, in which both agencies seemingly have powers to regulate the same activity by operators in the industry. Recently both agencies sought to regulate the sale and delivery of petroleum liquids to bulk customers from export terminals in Nigeria (the NUPRC under Section 7(ee) and the Authority under Sections 174 and 197).
“Regulators have powers to act in some instances yet cannot exert those powers in other situations.”
The issue was resolved on 8 May 2023, when President Muhammadu Buhari – who serves as the Minister of Petroleum Resources – directed the NUPRC to take over the supervision of all crude oil export terminals by virtue of its powers under Section 7(ee) of the PIA. The President also stated that the Authority should cease any regulatory role over existing crude oil export terminals.
The Outlook
The PIA is a solid attempt to codify Nigerian petroleum law and provides clarity in areas that required judicial interpretation. However, concerns remain over areas where there is regulatory overlap or where the regulators have powers to act in some instances yet cannot exert those powers in other situations.
Streamsowers & Köhn
