In this concluding part of our series examining the Petroleum Industry Act (PIA) 2021, we take a look at the provisions made for host communities under the Act. We also highlight funds established under the Act as well as other general provisions relating to customer protection, natural gas price for strategic sector, etc. in the Act. The Act makes provisions for host communities which encourages social and economic development and is aimed at promoting mutual cooperation between the host communities and petroleum operators within the community (Settlors).
Incorporation of Host Communities Development Trust
Host communities are communities situated in or appurtenant to the area of operation of a settlor and any other community as a settlor may determine.[1]
The settlor[2] is required to incorporate a Host Community Development Trust ‘the Trust’ in the community where they carry out petroleum operations.[3] The Settlor is also required to appoint the Board of Trustees (the Board) as well as members of each Committee in the said Trust. The failure of a settlor to do so can be a ground for revocation of License or Lease.[4] The settlor is also required to undertake a Needs Assessment which shall metamorphose into the Community Development Plan and determine the project to be undertaken by the Trust.
Timeline for Incorporating the Trust
The timeframe within which the Trust is to be incorporated by the settlors are as follows:
- The settlors with existing Oil Mining Lease, existing designated facilities and new designated facilities under construction – 12 months from the effective date;[5]
- Settlors with existing Oil Prospecting License – prior to the application for field development plan;
- Settlors with Petroleum Prospecting License and Petroleum Mining – prior to the application for any field development plan; and
- Settlors who are licensees of designated facilities granted under the PIA – prior to the Commencement of commercial operations.[6]
Reporting Obligations under the Trust
The Management Committee of the Trust (one of the Committees to be setup under the Trust) has both mid-year and annual reporting obligations to the Board of Trustees which is to be sent respectively not later than 31st August of the preceding year and 28th February of the succeeding year. The Board is also required to report to the Settlor not later than 31st March of that year. The Board shall then submit an annual report to the Commission or Authority (as the case may be) not later than 31st May each year.[7]
Funds under the Petroleum Industry Act
The Act makes provision for the establishment of various Funds. The Funds established or to be established would be used in administering the affairs of the sectors which they apply to.
The Host Communities Development Trust Fund – this Trust Fund is established by the constitution of each Host Community Development Trust and the Settlors are required to make an annual contribution to the applicable community of 3% of its actual operating expenditure of the preceding year in the Upstream Petroleum Operation affecting the community.
The Act protects petroleum operations and activities in host communities by providing that where there is any vandalism, sabotage or any civil unrest which causes damage to any petroleum or designated facilities or disrupts petroleum activities in a host community, such community will forfeit its entitlement to the extent of the cause to repair the damage or the damage that occurred as a result of such disruption.[8]
The Decommissioning and Abandonment Fund (DAF) –
This Fund is to be setup, maintained and managed by each Licensee and Lessee to be held by a financial institution that has no connection with the Licensee and Lessee or its affiliate. It is to be held in an escrow account, accessible to the Commission or Authority. The Fund is to be used for the payment of decommissioning and abandonment costs.
The amount to be contributed yearly into the Fund is to be based on the Decommissioning and Abandonment Plan set out by the licensee or lessee and approved by the Commission or Authority and the amount is to be reviewed every 10 years following the first submission.[9]
A Licensee or Lessee is required to inform the Commission or Authority (as the case may be) of the establishment of this Fund not more than 3 months from the date of commencing upstream petroleum operations or commissioning the facilities for midstream operations. They are also required to submit the Statement of Account of the said Fund to the Authority or Commission on an annual basis and a copy is to be provided to the FIRS. The residue amount in the Fund after the decommissioning and abandonment has been carried out and approved is to be taken as income for production sharing and tax purposes and the remaining amount shall be returned to the Licensee or Lessee after tax deductions.[10]
Midstream and Downstream Infrastructure Fund (MDIF) –
This Fund is established by the Act and is a body corporate capable of suing and being sued.[11] Its source of funds includes 0.5% of the wholesale price of petroleum products and natural gas sold in Nigeria to be collected by the wholesale customers and which is to be paid within 21 days of sale[12], funds and grants from multilateral agencies, bilateral institutions dedicated partly or wholly to midstream and downstream infrastructure in Nigeria, monies received from gas flaring penalties by the commission, etc.
The Fund is to be used to make equity investments of Government owned participating or shareholders interest in infrastructures relating to operations of the midstream and downstream sector.[13]
The Frontier Exploration Fund (FEF)[14] –
This Fund is created to facilitate petroleum exploration activities in Nigeria including drilling and testing of identifiable petroleum prospects and leads, the development of frontier acreages, exploration of frontier basin, etc.
The major source of fund for the FEF is 30% of the Nigerian National Petroleum Company Limited profit oil and profit gas in the production sharing, profit sharing and risk service contracts.
A commercial discovery made in a frontier acreage and the identifiable prospect or lead is tested and grilled by the Commission, the NNPC Limited will have the right of first refusal.
The Authority Fund[15] –
This Fund is to be used for the administration and operations of the affairs of the Nigerian Midstream and Downstream Petroleum Regulatory Authority. Its source of fund includes 0.5% of the wholesale price of petroleum products and natural gas sold in Nigeria to be collected from wholesale customers, fees charged by the Authority for services rendered to licensees, fees paid to the Authority, income derived from publications made by the Authority, etc.
The contribution of 0.5% of the wholesale price of petroleum products and natural gas sold in Nigeria to be collected from wholesale customers applicable to this Fund is distinct from the one to be made to the MDIF.
The Commission Fund[16]–
This Fund is to be used for the administration and operations of the affairs of the Nigerian Upstream Petroleum Regulatory Commission. its source of fund includes money appropriated by the National Assembly, fees charged by the Commission for services rendered, income derived from publications by the Commission, etc.
Management of Acreage in the Upstream Sector
The acreage in the upstream sector is to be managed by the Commission on behalf of the Federal Government through a national grid system to be setup after consulting with the Surveyor-General of the Federation.[17] It is to be used particularly for upstream petroleum operations which includes the definition of licence and lease areas, relinquishment, bid procedure, identification of well locations, petroleum conservation measures and other regulatory and acreage management procedures.
Customer Protection
In a bid to protect the interest of customers, the Act empowers the authority to issue regulations requiring suppliers, gas distributors and petroleum product distributors to publish their terms of supply or distribution, establish or facilitate the establishment of a forum at which customers are able to express their views and raise concerns, formulate and adhere to standards of performance and to develop and adhere to customer service codes approved by the authority[18]
Natural Gas Price for Strategic Sector
The PIA empowers the Authority to determine the price of natural gas for the strategic sector which include the power sector, commercial sector and gas-based industries.[19] Gas distributors and gas retailers are not regarded as part of the strategic sectors.[20]
The Act provides that the price of marketable natural gas applicable to the power sector shall be the domestic base price at the marketable natural gas delivery point.[21] For the commercial sector, it shall be the domestic base price at the marketable natural gas delivery point plus $ 0.50 per MMBtu.[22]
The price for the gas-based industries is determined by the authority based on the pricing principles stated in the Fourth Schedule to the Act. The floor price is US $0.90 per MMBtu while the ceiling price is the domestic base price applicable for any particular year.[23]
Conclusion
The Petroleum Industry Act 2021 has introduced several innovative provisions to the Petroleum Industry in Nigeria. The Act puts in place some measures to safeguard investments, facilities and operations of settlors in host communities. On the other hand, to prevent exploitation of host communities, degradation of their environment, etc. the Act mandates the Settlors to establish a Trust and a Trust Fund from which community developmental projects will be carried out.
The Act also establishes or mandates to be established certain Funds which will cater for the needs of the sectors they apply to. This is yet another layer of financial responsibility on the part of the operators which further creates more compliance obligations.
The Act empowers regulators to make regulations on various issues not holistically covered in the Act and recognizes the need to protect consumers.
This piece brings an end our PIA series. Over the last few weeks, we took a look at the newly enacted PIA, which marked an end to the Nigerian National Petroleum Corporation (NNPC) and ushers in the incorporation of the Nigerian National Petroleum Company Limited, as well as the establishment of the Regulatory Commission and Authority. We also looked at the new licensing regime for the Upstream, Midstream and Downstream Petroleum sectors in Nigeria and discussed the new fiscal and tax regime in the Nigerian Petroleum Industry in the third part of our PIA Series.
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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[1] Section 318, Petroleum Industry Act, 2021.
[2] The holder of an interest in Petroleum Prospecting License or Petroleum Mining Lease whose area of operation is located or appurtenant to a community.
[3] Ibid, Section 235
[4] Ibid, Section 238
[5] The date in which the PIA comes into force
[6] Ibid, Section 236
[7] Ibid, Section 255
[8] Ibid, Section 257 (2)
[9] Ibid, Section 233 (4)
[10] Ibid, Section 233
[11] Ibid, Section 52 (1)
[12] Ibid, Section 52 (9)
[13] Ibid, Section 52 (10)
[14] Ibid, Section 9 (4)
[15] Ibid, Section 47
[16] Ibid, Section 24
[17] S. 69 (1)
[18] S. 164
[19] S. 167 (1)
[20] S. 167 (7)
[21] S. 167 (5)
[22] S. 167 (6)
[23] S. 168
