An Overview of the Petroleum Industry Act 2021

INTRODUCTION

The Petroleum Industry Act was signed into law by President Muhammadu Buhari on Monday, August 16, 2021 after series of amendments and dialogues which spanned about 20 years from the time it was first introduced. The Act provides legal, governance, regulatory and fiscal framework for the Nigerian petroleum industry as well as the development of host communities.

OVERVIEW

• Establishment of the Nigerian Upstream Regulatory Commission

The Commission is saddled with the responsibility of regulating technical, operational and commercial activities in the upstream petroleum sector; monitor compliance with rules regulating the sector; enforce compliance with the terms and conditions of leases, licences, permits and authorisations granted to companies in the upstream petroleum sector; establish and enforce standards relating to upstream petroleum activities and undertake evaluation of national reserves while developing policies for prudent reservoir management practices.

Furthermore, the Commission is mandated to keep public registers detailing beneficial ownership of leases, licences, permits and authorisations issued by it. It is also to develop, maintain and publish a database of upstream petroleum and advise the Minister of Petroleum on all matters relating to upstream petroleum activities.

• Establishment of the Nigerian Midstream and Downstream Regulatory Authority

This body is responsible for the technical and commercial regulation of midstream and downstream petroleum operations. This involves ensuring efficient and effective infrastructural development, compliance with regulations, implementation of government policies, development of a framework on tariff and pricing, amongst others.

• The Nigerian National Petroleum Company Limited

Part V, Chapter 1 of the Act provides for the administration of the Nigerian National Petroleum Company (NNPC) Limited which is to be incorporated with the Corporate Affairs Commission within 6 (six) months of the commencement of the Act with the Ministry of Finance and Ministry of Petroleum Incorporated as shareholders. The assets, interests and liabilities of NNPC are to be transferred to NNPC Ltd or its subsidiaries within 18 months of commencement of the Act after which NNPC shall cease to exist.

• Establishment of Incorporated Joint Venture Companies

The Act permits NNPC Ltd and parties with joint operating agreements in the upstream petroleum sector to voluntarily incorporate joint venture limited liability companies subject to the provisions of the Second Schedule to the Act.

• Introduction of New Licences and Lease for Upstream Operations

The Act introduces the following licences and lease:

i. Petroleum exploration licence to carry out petroleum exploration on a non-exclusive basis

ii. Petroleum prospecting licence to carry out petroleum exploration on a non-exclusive basis and drill wells, do corresponding test production on an exclusive basis

iii. Petroleum mining lease to carry out petroleum exploration on a non-exclusive basis; drill wells, carry out test production, win, work and dispose of crude oil, condensates and natural gas on an exclusive basis.

In the same vein, the Act further restricts the duration of a petroleum prospecting licence for onshore and shallow water acreages to 6 (six) years while that of deep offshore and frontier acreages is limited to 10 (ten) years. The duration for a petroleum mining lease is a maximum of 20 years and it may be extended for further terms of not more than 20 years per renewal.

• Provision for Host Communities Development

In order to allay the longstanding grievances of host communities, the Act dedicates Chapter 3 to their development. It provides for the incorporation of a host communities development trust [section 235(1)] to manage and supervise the administration of the annual contribution of holders of a lease or licence (settlor). A settlor is mandated to contribute 3% of its actual annual operating expenditure of the preceding financial year in the upstream petroleum operations to the fund.

• Provision for Payment of Hydrocarbon Tax (HT) and Companies Income Tax (CIT)

The Act is clear that companies engaged in petroleum operations whether upstream, midstream or downstream are to be subject to companies’ income tax at the rates provided under CITA. In addition to the CIT, companies in the upstream petroleum sector are chargeable to hydrocarbon tax which applies to crude oil, field condensates, liquid natural gas derived from associated gas and produced in the upstream field. However, it is important to note that HT does not apply to deep offshore as well as natural gas operations.

HT is payable at the rate of 15% of profit from crude oil for onshore and shallow water and for petroleum prospecting licences (PPL) while the rate is 30% of the profit from crude oil for petroleum mining leases (PML) with respect to onshore and shallow water areas.

Also, allowable expenses for the purposes of calculating HT must be directly related to the production operations. The non-direct costs will, however, be deductible under CIT.

• Requirement for the Separation of Upstream, Midstream and Downstream Operations

For tax purposes, the Act requires that a company intending to be involved in more than one stream of petroleum operation should register a separate company for each. It further provides an option for the establishment of an Integrated Strategic Project (ISP) for companies in the upstream petroleum sector which seek to produce oil or gas and refine it for wholesale supply subject to the provisions of section 302(4) of the Act.

• Other Fiscal Provisions

Companies engaged in midstream petroleum operations, downstream gas operations, large scale gas utilisation as well as investors in gas pipelines are entitled to incentives under section 39 of CITA which include a tax-free period of 3 years and accelerated capital allowance after the tax-free period among others.

Natural gas transferred from the upstream to the midstream or downstream as well as natural gas liquids and liquid petroleum gases are chargeable to tax under CITA.

Section 302(9) provides that “acquisition costs of petroleum rights shall be eligible for annual allowance at the rate of 20% with a retention value of 1% in the last year until the asset is disposed.”

CONCLUSION

The enactment of the Petroleum Industry Act is a welcome development in the country’s legal and regulatory space especially with respect to the petroleum industry which is the mainstay of our economy. While it is hoped that the provisions of the Act will bring about growth in the petroleum sector, it is recommended that the government should begin to shift its focus towards transitioning to clean energy for the purpose of sustainable development.