Author: Sandy Bhadare
After years of review, Nigeria’s Petroleum Industry Act has now been written into law, resulting in positive environmental, social and economic impacts for the Nigerian oil and gas industry.
Nigerian President Muhammadu Buhari signed the Petroleum Industry Bill into law on 16 August 2021, the culmination of ears of review and previous versions, including one which was considered in October last year by Hamish McArdle and Tom Edwards of Baker Botts.
The Act seeks to ensure “an increased level of transparency and accountability in the sector by strengthening the governing institutions to attract investment capital through changes to the governance, administrative, regulatory and fiscal framework of the Nigerian oil and gas industry” according to an alert published by Ernst & Young earlier this year.
The formation of new institutions for the regulation of the Nigerian oil and gas sector, the development of host communities and a fiscal framework “that encourages investment in the Nigerian petroleum industry, provides clarity and enhances revenues for the government while ensuring a fair return for investors” are some of the changes brought in by the act, according to a report by professional services firm KPMG.
A Lagos-based senior associate with Dentons ACAS-Law, says the Act has “changed everything” from the legal to the regulatory and fiscal framework of the Nigerian petroleum industry. Despite it having taken so long to pass the bill, “we all know this is the right time”.
“The world is in an energy transition phase, so we really need to start exploring our natural resources, given the fact that we have major gas reserves in Nigeria,” and the act will also push forward the gas sector in Nigeria, he adds.
FISCAL FRAMEWORK
According to KPMG, although less than 10% of Nigeria’s gross domestic product is attributed to its oil and gas sector, the industry is responsible for nearly all of Nigeria’s foreign exchange income, and 60% of its total income.
The act’s provision of a fiscal framework affecting the onshore, shallow water and deep-water sectors in Nigeria should encourage investment in Nigeria’s oil and gas industryby introducing incentives in these areas says Chinedu.
In particular, these incentives “encourage gas industrialisation in Nigeria” he says. For example, a “gas utilisation incentive will apply to midstream petroleum operations and large-scale gas utilisation industries. An additional five-year tax holiday will be granted to investors in gas pipelines” explained KPMG in its report.
INSTITUTIONAL CHANGES
The formation of two new regulatory entities is a major change, says Chinedu, the Nigerian Upstream Petroleum Regulatory Commission and the Nigerian Midstream and Downstream Petroleum Regulatory Authority.
“Previously, there was no dedicated legal framework for the midstream and downstream sectors from a gas perspective… so the act has created setting scenes in that sector to encourage investors to come in” Chinedu explains.
Furthermore, the Nigerian National Petroleum Corporation (NNPC) will be converted to a limited liability company within six months of the Act coming into law, and it will come under the ownership of the Ministry of Finance Incorporated, a division of the Office of the Accountant-General. The result of this will be the eventual sale of shares in the company to Nigerians in the future.
SOCIAL FRAMEWORK
The Act brings some important societal changes. Any company which secures an oil prospecting licence or mining lease, or an operating company on behalf of joint venture partners, must contribute a portion of its expenses to the host communities development trust fund. The fund is tax exempt.
KPMG emphasised that “the main objective is to foster sustainable prosperity within host communities, provide direct social and economic benefits and enhance harmonious co-existence”.
Chinedu agrees that “the aim is to make the operators walk together with communities”, adding: “The trust or board of trustees would then manage the payment of this to communities for community development.”
“We are excited about it” he continues, saying that the petroleum industry is now making progress after a long time, following the drafting of the old law in 1969. He says the Act “captures developments as we prepare for the energy transition” and that “it has a lot of provisions on gas to encourage gas development in Nigeria”.
ENVIRONMENTAL FRAMEWORK
The act introduces environmental rules “to ensure that companies are operating in line with environmental principles” says Chinedu.
For companies, there is now an obligation to submit an environmental management plan before obtaining their license, said Chinedu. The act also contains some provision addressing the clean energy transition, with Chinedu saying that one of the objectives of the new NNPC Limited “is to get involved in renewable energy”.
From a gas perspective, the act also addresses the issue of gas flaring, which is “a major issue in Nigeria” Chinedu explained. In addition, “the commission has powers to enforce environmental laws, so the aim is that people have no other option but to comply with the environmental obligations of the act”.
DISPUTE RESOLUTION FRAMEWORK
Slow and costly court proceedings have deterred many investors from choosing litigation to resolve their disputes in Nigeria. Investors have therefore been looking to alternative dispute resolutions (ADR), particularly towards arbitration.
The act is a sign that “the government is pushing more towards ADR” says Chinedu, emphasising that the Nigerian government “really wants to explore this”.
He says that the Act includes both arbitration and mediation, adding that “interestingly, before the Act, the Department of Petroleum Resources (DPR) introduced a centre for alternative dispute resolution, for the amicable resolution of disputes, as opposed to going to court”.
Another dispute resolution-focused provision in the Act hones in on tax deductibility, with arbitration and mediation cases not being tax deductible under the new Act. “This reduces the number of case books in the industry,” says Chinedu.
The wider economic impact of the act is to “open the oil and gas industry for investment which is a positive development for the Nigerian economy” he said.
