In the second of our series examining the main provisions of the newly enacted Petroleum Industry Act (PIA), we take a look at the new licensing regimes under the Act. The new licensing regime introduces quite dramatic changes; hence we have broken them into two parts. Part B shall follow next week.
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”.
- 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]
- 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]
- 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:
- In the case of an emergency
- Pursuant to an exception granted by the commission for a specific period and purpose as defined under the Act.[31]
- 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 29th 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)
