Grant of Licences and Permits in Midstream and Downstream Petroleum Operations

The Authority publishes the applications for the grant of licence or renewal in respect of which comments or representations may be made.^[1]There is an obligation to comply with the Land Use Act as it relates to compensation for acquisition of land in respect of which a licence or permit has been issued by the Authority for Midstream and Downstream petroleum operations.^[2]

Licences in Midstream and Downstream Gas Operations

The activities that require a licence in the midstream and downstream gas operations include establishing, constructing or operating a facility for the processing and storage, of natural gas, engaging in wholesale gas supply, etc. ^[3] Licences to be obtained under the Midstream and Downstream gas operations include:

1. Gas processing licence – grants the licensee the right to install and operate gas conditioning plants, gas processing plants, gas to liquids plants, liquefied natural gas (LNG) plants and ethane extraction plants.^[4]

2. Bulk gas storage licence – grants the licensee the right to undertake the bulk storage of natural gas either for its own account or on behalf of customers.^[5]

3. Gas transportation pipeline licence – gives the holder the exclusive right to own, construct, operate and maintain a gas transportation pipeline within a route defined in the licence for its own account with third party access or as common carrier.^[6] The holder cannot supply gas to customers on its own account where it is granted on a common carrier basis.^[7] The licence is also required for unprocessed gas that needs to be transported.^[8]

4. Gas transportation network operator licence – authorises the holder to convey natural gas through the gas transportation network, balance the inputs and off takes from the gas transportation network, charge for the use of the gas transportation network, etc.^[9]

5. Wholesale gas supply licence – authorises the holder to purchase natural gas directly from any lessee or third party and sell and deliver wholesale gas to wholesale customers and gas distributors at any location in Nigeria.^[10]

6. Retail gas supply licence – authorises the holder to sell or retail compressed or liquefied marketable natural gas to customers and establish, construct and operate facilities to deliver compressed natural gas and small-scale facilities for LNG.^[11] It also authorises the holder to purchase marketable natural gas directly from a lessee, wholesale gas supplier or third party, and sell and deliver compressed or LNG to customers at any location in Nigeria on a free market basis.^[12]

7. Gas distribution licence – grants the holder the right to establish, construct, and operate a gas distribution system and to distribute and sell its natural gas to consumers in a local distribution zone,^[13] including retail customers.^[14]

8. Domestic gas aggregation licence – the licence is issued for a period of 2 years and renewal in each instance is also for 2 years.^[15] A domestic gas aggregator supports the implementation of the domestic gas delivery obligation in addition to other functions that it is expected to carry out.^[16] The domestic gas aggregator is required to be a company limited by guarantee established under the Companies and Allied Matters Act.^[17]

Midstream and Downstream Petroleum Liquid Operations

The following licences may be granted to qualified applicants in the midstream and downstream liquid sector:

1. Crude oil refining licence – permits the licensee to procure, construct, install and operate facilities to process crude oil on its own account into derivative chemicals and petroleum products and to sell such chemicals and petroleum products.^[18] The licence gives the holder right of access to facilities which include harbours, jetties, petroleum bulk storage, transportation facilities and pumping installations.^[19]
2. Bulk petroleum liquids storage licence – authorises its holder to undertake the bulk storage of petroleum liquids whether for its own account or on behalf of customers.^[20]

3. Petroleum liquids transportation pipeline licence – grants the holder the exclusive right to own, construct, operate and maintain a transportation pipeline for the transportation of petroleum liquids within a defined route.^[21]

4. Petroleum liquids transportation network operator licence – gives the holder the right to:^[22]
5. Convey petroleum liquids through the transportation network;
6. Balance the inputs and off takes from the transportation network;

5. Wholesale petroleum liquids supply licence – authorises the supplier (the holder) to sell and deliver petroleum liquids to bulk customers in Nigeria or for export.^[23] The company that is entitled to this licence is one that is a lessee producing crude oil or condensates or both or a holder of a crude oil refining licence.^[24]

6. Petroleum products distribution licence – authorises the licensee to distribute petroleum products.^[25] The licensee has the duty to carry out its activities in line with the provisions of the Act.

7. Licence to construct and operate a facility for retail supply and distribution of petroleum products – authorises the holder to establish, construct and operate a facility to be employed for retail sale of petroleum products.^[26]

8. Licence to operate a facility for the production of petrochemicals – authorises the holder to establish, construct and operate a facility for the production of petrochemicals and sell the petrochemicals produced.^[27]

Environmental Management

Licensee and lessors in upstream and midstream petroleum operations are to submit an environmental management plan to their respective regulators in respect of projects requiring environmental impact assessment.[28]

The Act seeks to ensure an eco-friendly petroleum operation by making contributions towards remediation of environmental damage by licensees and lessees a condition for the grant of the licence or lease.[29]

Conclusion

Under the PIA, the agency that now has the responsibility for licensing the with the midstream and downstream sectors is the Nigerian Midstream and Downstream Regulatory Authority.  There are now a variety of licenses to be obtained either in the gas or petroleum liquid operations under the midstream or downstream sectors. These include Gas processing licence, Bulk gas storage licence, Gas transportation pipeline licence, Gas transportation network operator licence, crude oil refining licence etc.

Watch out for our next publication on the PIA to be published next week and which shall consider the fiscal and tax regimes under the PIA..

Please note that the contents of this Article are for general guidance on the Subject Matter. It is NOT legal advice.

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The post New Licensing Regimes under the Petroleum Industry Act 2021 – GS Series II (Part B) first appeared on Goldsmiths Solicitors.

The PIA still categorizes the petroleum sector into three as follows: the Upstream, Midstream and the Downstream sectors. The Nigerian Upstream Petroleum Regulatory Commission (the Commission) is responsible for regulating the Upstream sector. The Commission is responsible for issuing licences to operators in the upstream sector. However, the grant of a licence to operate a refinery is issued by the Minister on the recommendation of the Authority.^[1]

A company cannot operate more than one (1) stream. Where a person intends to operate in more than one stream, separate companies must be incorporated for each stream.^[2] However, the Act provides for the establishment of an Integrated Specific Project (ISP) where the capital investments associated with the Midstream Petroleum Operations can be consolidated with the Upstream Petroleum Operations (UPO) for tax purposes. An ISP may be established where there is a project by the UPO to produce oil and natural gas, which is to be processed and refined as a final product and sold to the local market.^[3]

In this part, we address the licensing regime under the upstream petroleum sector as provided in the PIA.

Licences/Lease in Upstream Petroleum Operations

The PIA seems to have introduced a change in licence type nomenclature. Under the previous regime, there were the oil exploration licence, oil prospecting licence and oil mining lease. Now the word “Oil” has been replaced with the word “Petroleum”.

1. Petroleum Exploration Licence (PEL) – The license only allows its holder to explore petroleum on a non-exclusive basis.^[4] Exploration under this licence may also cover areas that include the Petroleum Prospecting License (PPL) and Petroleum Mining Lease (PML) provided the holders of the PPL and PML have no obligation to pay for the result of the survey conducted under the PEL.[5] The license is valid for 3 years and renewable for another period of 3 years on the satisfaction of prescribed conditions.^[6]

2. Petroleum Prospecting Licence (PPL) – This license allows its holders to carry out petroleum exploration on a non-exclusive basis and to drill exploration and appraisal wells.^[7] The holder is required to submit to the commission a commitment to a field development plan within a period of 2 years after a commercial discovery declaration to the commission.^[8] In respect of onshore and shallow water acreages, the licence is valid for 3 years and renewable for an additional period of 3 years at the option of the holder^[9] while for deep offshore and frontier acreages, it is valid for an initial period of 5 years and an optional extension period of 5 years.^[10] This licence is not to be extended except in accordance with the PIA.[11] Failure of the holder of the licence to fulfil any term or condition which arises from a force majeure shall not amount to a breach of the licence.^[12]

3. Petroleum Mining Lease (PML) – It is granted to qualified applicants to win, work, carry away and dispose of crude oil, condensates and natural gas on an exclusive basis.^[13] It also allows its holder to explore oil on a non-exclusive basis. The Lease will be granted to the holder of a PPL upon each commercial discovery of crude oil or natural gas or both and where it has satisfied the conditions imposed on it.^[14]

The holder of the lease has exclusive right to carry out the development and production of petroleum with respect to the area covered by the lease.^[15] The lease is granted for a maximum period of 20 years.^[16] Its holder must continue commercial production otherwise the lease may be revoked, and title goes to the government.^[17]

Any of these licences or lease may only be granted to companies incorporated under the Companies and Allied Matters Act.^[18] It is an offence for Individuals and Partnerships other than Companies or partnership between Companies to engage in upstream petroleum operations. Such individual or partnership will also be liable to HCT and CIT on profits so made^[19] and will be liable to pay an administrative penalty of N10Million, N2Million for each day the offense continues and upon conviction, the sum of N20Million or Six (6) months imprisonment.^[20]

Submission of Field Development Plan and Unitization

The holder of a Petroleum Prospecting Licence is required to submit to the commission a commitment to a field development plan within a period of 2 years after a commercial discovery declaration to the commission.[21] The field development plan may be submitted in phases.[22] Upon submission, the NURC shall evaluate the technical and commercial terms of the field development plan and shall approve it where it meets certain conditions.[23]

The areas where there is a declaration of commercial discovery in respect of may be developed and worked on, on a unitization basis for the purpose of optimum recovery of petroleum from a petroleum reservoir. This provision on unitization applies to the holders of PPL and PML.[24] The commission may issue regulations on unitization from time to time.[25]

Conversion of Oil Prospecting Licence and Oil Mining Lease

In view of the change in license nomenclature, the PIA has introduced new steps to be taken by license holders under the old regime who intend to switch to the new ones. Generally, present holders of the Oil Prospecting Licence (OPL) and the Oil Mining Lease are not mandated to convert to PPL and PML respectively. However, upon the expiration of their licence, they shall cease to hold any license and would be required to apply for the licences under the PIA. A holder of an OPL or OML who wishes to convert may do so through a Conversion Contract.^[26] For the conversion to take place, it is required that all arbitration and court cases related to it be terminated through the termination clause included in the contract.^[27]

Conversion for Marginal Field

A producing marginal field is allowed to continue at the original Royalty rates and Farm Out Agreements but is required to convert to petroleum mining lease within 18 months from the effective date of the PIA.^[28] On the other hand, a non-producing marginal field shall be converted into a petroleum prospecting licence.^[29] It is important to note that new marginal fields shall not be declared under the Act.^[30]

Gas Flaring or Venting

Generally, gas flaring or venting by a licensee, lessor or the operator of a marginal field is an offence except it is done:

1. In the case of an emergency
2. Pursuant to an exception granted by the commission for a specific period and purpose as defined under the Act.[31]
3. As an acceptable safety practice under established regulations.[32]

The fine is imposed on gas flaring or venting is for the remediation of the environment and relief of the host communities of the settlors.[33]

Revocation of Licences/Lease

PPL and PML may be revoked by the Minister of Petroleum. However, a notice of default shall be sent to the last known address of the holder in addition to the provision of a remediation period of not less than 60 days.^[34] Where a satisfactory remedy is received, the revocation process shall be terminated^[35] otherwise it shall be revoked and the fact of revocation shall be published in the Federal Government Gazette.^[36]

Conclusion

The PIA introduces some new licensing regimes in the Nigerian petroleum sector. It introduces a change in upstream sector’s license type nomenclature and has replaced the word “Oil” with the word “Petroleum” suggesting that there are more far-reaching licensing requirements. While it is not mandatory for holders of OPL and OML to convert their licences, holders of marginal field are required to do so within 18 months. Licensees are to comply with international best practices and ensure compliance with local laws and regulations to prevent revocation of their licence.

Watch out for the part B which comes out on 29^th September 2021 which will deal with the licenses under midstream and downstream sectors.

Please note that the contents of this Article are for general guidance on the Subject Matter. It is NOT legal advice.

[1] Section 111 (1), Petroleum Industry Act 2021

[2] Ibid, Section 302(3)

[3] Ibid, Section 302(4)

[4] Ibid, Section 70 (1) (a)

[5] Ibid, Section 71 (4)

[6] Ibid, Section 71 (3)

[7] Ibid, Section 70 (1) (b)

[8] Ibid, Section 79 (1)

[9] Ibid, Section 77 (1)

[10] Ibid, Section 77 (2)

[11] Ibid, Section 78 (4) and 79 (6)

[12] Ibid, Section 72 (2)

[13] Ibid, Section 70 (1) (c)

[14] Ibid, Section 81(1)

[15] Ibid, Section 82(1)

[16] Ibid, Section 86(1)

[17] Ibid, Section 86 (2) and (3)

[18] Ibid, Section 70 (2)

[19] Ibid, Section 273(1) & (2)

[20] Ibid, Section 297(1) & (2)

[21] S. 79 (1)

[22] S. 79 (14)

[23] S. 79 (2)

[24] S. 80

[25] S. 80 (9)

[26] Ibid, Section 92 (1)

[27] Ibid, Section 92 (3)

[28] Ibid, Section 94 (1)

[29] Ibid, Section 94 (2)

[30] Ibid, Section 94 (9)

[31] S. 107

[32] S. 104

[33] S. 104 (4)

[34] Ibid, Section 97 (1) (a) and (b)

[35] Ibid, Section 97 (2)

[36] Ibid, Section 97 (6)

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