Petroleum Industry Saviour: A Terse Breakdown Of The Petroleum Industry Act

By Okediya Peter O., ACIArb

The world’s biggest oil company, Saudi Aramco, recently revealed
its plans to build a nearly $1 billion solar power plant
^[1]. This is a part of their steps to expand renewable
energy supply. During the course of the week, I completed an online
course with the Chartered Institute of Arbitrators and I was sent
an e-certificate instead of a paper one because they aim ‘to reduce
their carbon footprints.” Well, I could keep identifying instances
portraying global economy’s transition to green energy however,
this paper is to serve another imminent purpose. The question is,
where does Nigeria stand in the global scheme of things as regards
the energy industry?

The ‘newly’ passed Petroleum Industry Act 2021 has been
portrayed as Nigeria’s saviour from economic woes and the crippling
oil and gas industry, however the Act started off as a bill which
was dragged and delayed for nearly twenty years. This directly
means the application of the Act was due twenty years ago, save for
amendments and modifications by various administrations.

On August 16 2021, President Buhari signed the 5-chapter bill
into law. This was met with heart-warming jubilations and
self-aggrandizement by the political class, and while there is a
reason to celebrate, it is quite unfortunate to note that what
should have been done thirteen years ago when the bill was first
presented to the House, is just being done today. Major oil
producing countries have exceeded these stages and are taking up
new advancements that will open their economies to global
prosperity. The ineluctability of future upheavals is a core reason
why we cannot dwell long on this ecstasy-cloned catastrophe, as
much is still left undone.

We must as such, as a country, seek to forge ahead. On this
backdrop, I will extrapolate some germane topics in the Petroleum
Industry Act in order to provide clarity, expunge misconceptions,
proffer proper recommendations and save us from a show of
international opprobrium.

THE NEW REGULATORS: COMMISSION AND
AUTHORITY.

Prior to the enactment of the Petroleum Industries Act
(hereafter referred to as the ‘PIA’), the Nigerian National
Petroleum Corporation (NNPC) was a body that stood and acted as an
operator and a regulator. This made the roles of the NNPC nebulous
and susceptible to maladministration and exponential losses.

The PIA 2021 now provides for the bifurcation of regulation
duties in two regulating bodies, namely, the Nigeria Upstream
Regulatory Commission and the Nigeria Midstream and Downstream
Petroleum Regulating Authority. The former is with respect to the
upstream petroleum operations while the latter is for the midstream
and downstream operations. This is an impressive initiative from
the drafters of the PIA because the arrangement ensures
accountability, coordination and transparency in the oil and gas
sector.

PRIVATIZATION OR COMMERCIALIZATION: THE NNPC
LTD.

For the record, by the virtue of section 53(1) of the PIA 2021,
the NNPC will be renamed Nigerian National Petroleum Company
Limited (NNPC Ltd).

It is now pertinent to draw the distinction between
privatization and commercialization because this has led to some
misleading interpretations of the Act. Privatization means a
private company taking over some or all operational
responsibilities, compensated either through user fees or a
fee-for-service paid by the government. On the other hand,
commercialization is the process of transforming a transaction into
a commercial activity in which goods or services acquire monetary
value. ^[2]

Upon sighting the words “…Company Limited” for the NNPC Ltd, the
spontaneous reaction of most people was a conclusion that the NNPC
has been privatized. The appropriate meaning in line with the
statutory provision is that NNPC Ltd will be formed from the NNPC
but will be incorporated under the Companies and Allied Matters Act
and commercially focused. The government owns the shares in the
company, held by the Ministry of Finance Incorporated and the
Ministry of Petroleum Incorporated on its behalf.
^[3]

For the sake of emphasis, the provision of Section 53(3) is
reproduced below:

Ownership of all shares in NNPC Limited shall be vested in
the Government at incorporation and held by the Ministry of Finance
Incorporated and the Ministry of Petroleum Incorporated in equal
portions on behalf of the federation and the Ministry of Petroleum
Incorporated is incorporated under the provisions of the eight
schedule to this Act.

While some people may frown at this development, it is pertinent
to note that the NNPC had not been working with a lucid strategy on
whether to make profits or serve the public’s interest. Amidst this
confusion, we have seen the price of fuel increase rapidly despite
millions of naira spent on subsidies. The path to sustainable
efficiency is productivity. When losses are made annually by the
NNPC, their services will no longer serve the public’s interest but
will only bring about hardship and indecisiveness in the economy as
we have seen in the previous years. Commercialization ensures that
the oil and gas sector is productive and profitable to the economy.
Market-oriented solutions such as this have proven to be more
effective.

Saudi Arabia has been operating with this model through Saudi
Aramco, the official Saudi Arabian oil company with a net income of
49 billion dollars in 2020. ^[4] Therefore, the PIA Act
is in concinnity with international best practices in this
respect.

THE END OF SUBSIDY ERA?

Subsidies on fuel may not stay for long anymore. Over the years,
it has been realized that subsidy only takes from our pocket and
does not add any working value to the economy. It puts us in debts
as it pushes the country to take loans. This does not sound like
proper management in any form. Citizens still buy fuel at
exorbitant rates and subsidies don’t even regulate prices
anymore.

When the PIA 2021 commences, we may likely not have subsidies on
petroleum products anymore. Private oil companies and operators
will be able to determine the price of petroleum products using the
market forces of demand and supply and other economic variables. In
order to prevent inordinate increase in fuel price by private
operators, this will only take effect under the supervision and
control of the two regulatory bodies earlier mentioned.

THE FRONTIER EXPLORATION FUND EXPLAINED.

This brings us closer to the root of the brouhaha that has
occasioned the PIA 2021. The provisions concerning the frontier
exploration fund in the PIA has been met with criticisms and
rancour orchestrated by people sowing seeds of discord among
Nigerians.

In basic terms, the PIA says that 30% of “profit oil and profit
gas” earned shall be invested in frontier exploration. Frontier
exploration refers to the process of exploring hydrocarbons such as
crude oil, natural gas, coal and other energy sources in the inland
basins such as the Anambra basin, the south-eastern sector of the
Chad basin, the mid-Niger basin and the Sokoto basin.

It is pertinent to note that the frontier exploration
encapsulates the whole of Nigeria and not to a particular sect or
tribe. This does not preclude any geopolitical zone. The objective
is to develop new areas for oil exploration in the country.

THE 3 PER CENT VENTS: HOST COMMUNITIES’ LEMON
JUICE

This has to be the most misconstrued provision in the PIA 2021.
The Act, in Section 240(2), stipulates that 3% of the actual annual
operating expenses of an oil company must be paid to the host
communities. This contribution makes up the host communities trust
fund. Note that this does not mean 3% of profits or revenue
generated by oil companies. The 3% of the operating expense by an
oil company is quite reasonable for both investors and the host
communities. This is because the host communities will get paid
whether or not an oil company makes profits and it’s an affordable
fee for oil companies such that it attracts more investments.

This ushers in another tricky issue, who are the host
communities?

According to Section 318 of the Act, 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.

If an operator (an oil company) commences drilling operation in
a community and passes the pipeline and other equipment for oil
exploration through two other communities, such company will have
three communities in its host communities trust fund which he has
to pay 3% of its annual operating expenses into.

More so, addressing the challenge of mismanagement of funds by
host communities, the Act directs the operator to set up a Board of
Trustees who shall manage the host communities trust fund for the
benefits of the host communities.

From the 3% contributed to the communities, 75% of it must go
into infrastructure and projects within the communities, 20% of it
will serve as a reserve fund and 5% will be used to running the
trust by the Board of Trustees.

If there are more than one operator in a community, the
operators cannot validly consolidate their expenses and pay 3%.
Each operator will create their own trust fund, Board of trustees,
and pay 3% separately to such community.

It is my belief that if the PIA Act is strictly implemented, the
host communities will be in a better position to experience massive
development unlike before. It aptly correlates with the saying that
when life gives you lemons, you make lemon juice.

FATE OF CURRENT NNPC’S WORKERS.

As against popular misconception by the public that the
implementation of the PIA will lead to mass retrenchment of
workers, the PIA actually expressly provides for the retention of
workers.

Section 57 of the Act states:

Upon incorporation of NNPC Limited under Section 53 of this
Act, employees of NNPC and its subsidiaries shall be deemed to be
employees of NNPC Limited on terms and conditions not less
favourable than that enjoyed prior to the transfer of service and
shall be deemed to be service for employment related entitlements
as specified under any applicable law.

KEY OBSERVATIONS AND RECOMMENDATIONS

The PIA has been passed into law. We wait patiently for its
commencement, and of course, its implementation. Taking a cue from
the introductory paragraph in this paper, it is palpable that we
have been left behind, or better said, we let ourselves stay
behind. At this moment, we should be deliberating on harnessing
renewable energy for economic growth and creating a legal framework
for sustainable environment.

Interesting to note is the fact that the Economic Community of
West African States in its document on ECOWAS Renewable Energy
Policy, set year 2030 as a target for renewable energy penetration
at the regional level to ensure ‘ECOWAS universal access’.
^[5]

While 2030 seems far from now, there is no gainsaying that the
Nigerian government is not prepared to reduce its investment in
petroleum and betting on it for a stable economy. Hence, the target
is utopian for the Nigerian government. In fact, majority of the
IOCs (International Oil Companies) have set up mechanisms for
investments into renewable energy. Nigeria will be in a delirious
position if the government does not invest in the renewable energy
sector early enough.

To this end, the implementation of the PIA should be expanded to
enable investments into renewable energy sources. By so doing,
investors will be attracted, and there will be a smooth transition
to clean energy.

Written By Okediya Peter O., ACIArb, Email:
okediyapi@gmail.com

END NOTES

[1] Bloomberg, ‘Aramco Joins Group Building Giant Solar Plant in
Saudi Arabia [2021] https://www.bloomberg.com/news/articles/2021-08-15/aramco-joins-group-building-giant-solar-plant-in-saudi-arabia^[1]
 accessed 19 August 2021

[2] K Bayliss and T. Kessler, Can Privatization and
Commercialization of Public Services Help Achieve the MDGs?’, GSRDC
Publications, 2006, https://gsdrc.org/document-library/can-privatisation-and-commercialisation-of-public-services-help-achieve-the-mdgs/^[2]
accessed 19 August 2021

[3] TheCable, ‘Commercialization of NNPC, two regulatory bodies
…what you need to know about the new Petroleum Act’ [2021], https://www.thecable.ng/commercialisation-of-nnpc-two-regulatory-agencies-what-you-need-to-know-about-the-new-petroleum-act
accessed 19 August 2021^[3]

[4] Wikipedia, Saudi Aramco, https://en.wikipedia.org/wiki/Saudi_Aramco^[4]
accessed 19 August 2021

[5] ECOWAS Renewable Energy Policy (EREP), 2012, https://www.aecid.es/Centro-Documentacion/Documentos/Instrumentos%20de%20pol%C3%ADtica%20exterior/151012_ecowas_renewable_energy_policy_final.pdf^[5]
accessed 19 August 2021

By Okediya Peter O., ACIArb

The world’s biggest oil company, Saudi Aramco, recently revealed
its plans to build a nearly $1 billion solar power plant
^[1]. This is a part of their steps to expand renewable
energy supply. During the course of the week, I completed an online
course with the Chartered Institute of Arbitrators and I was sent
an e-certificate instead of a paper one because they aim ‘to reduce
their carbon footprints.” Well, I could keep identifying instances
portraying global economy’s transition to green energy however,
this paper is to serve another imminent purpose. The question is,
where does Nigeria stand in the global scheme of things as regards
the energy industry?

The ‘newly’ passed Petroleum Industry Act 2021 has been
portrayed as Nigeria’s saviour from economic woes and the crippling
oil and gas industry, however the Act started off as a bill which
was dragged and delayed for nearly twenty years. This directly
means the application of the Act was due twenty years ago, save for
amendments and modifications by various administrations.

On August 16 2021, President Buhari signed the 5-chapter bill
into law. This was met with heart-warming jubilations and
self-aggrandizement by the political class, and while there is a
reason to celebrate, it is quite unfortunate to note that what
should have been done thirteen years ago when the bill was first
presented to the House, is just being done today. Major oil
producing countries have exceeded these stages and are taking up
new advancements that will open their economies to global
prosperity. The ineluctability of future upheavals is a core reason
why we cannot dwell long on this ecstasy-cloned catastrophe, as
much is still left undone.

We must as such, as a country, seek to forge ahead. On this
backdrop, I will extrapolate some germane topics in the Petroleum
Industry Act in order to provide clarity, expunge misconceptions,
proffer proper recommendations and save us from a show of
international opprobrium.

THE NEW REGULATORS: COMMISSION AND
AUTHORITY.

Prior to the enactment of the Petroleum Industries Act
(hereafter referred to as the ‘PIA’), the Nigerian National
Petroleum Corporation (NNPC) was a body that stood and acted as an
operator and a regulator. This made the roles of the NNPC nebulous
and susceptible to maladministration and exponential losses.

The PIA 2021 now provides for the bifurcation of regulation
duties in two regulating bodies, namely, the Nigeria Upstream
Regulatory Commission and the Nigeria Midstream and Downstream
Petroleum Regulating Authority. The former is with respect to the
upstream petroleum operations while the latter is for the midstream
and downstream operations. This is an impressive initiative from
the drafters of the PIA because the arrangement ensures
accountability, coordination and transparency in the oil and gas
sector.

PRIVATIZATION OR COMMERCIALIZATION: THE NNPC
LTD.

For the record, by the virtue of section 53(1) of the PIA 2021,
the NNPC will be renamed Nigerian National Petroleum Company
Limited (NNPC Ltd).

It is now pertinent to draw the distinction between
privatization and commercialization because this has led to some
misleading interpretations of the Act. Privatization means a
private company taking over some or all operational
responsibilities, compensated either through user fees or a
fee-for-service paid by the government. On the other hand,
commercialization is the process of transforming a transaction into
a commercial activity in which goods or services acquire monetary
value. ^[2]

Upon sighting the words “…Company Limited” for the NNPC Ltd, the
spontaneous reaction of most people was a conclusion that the NNPC
has been privatized. The appropriate meaning in line with the
statutory provision is that NNPC Ltd will be formed from the NNPC
but will be incorporated under the Companies and Allied Matters Act
and commercially focused. The government owns the shares in the
company, held by the Ministry of Finance Incorporated and the
Ministry of Petroleum Incorporated on its behalf.
^[3]

For the sake of emphasis, the provision of Section 53(3) is
reproduced below:

Ownership of all shares in NNPC Limited shall be vested in
the Government at incorporation and held by the Ministry of Finance
Incorporated and the Ministry of Petroleum Incorporated in equal
portions on behalf of the federation and the Ministry of Petroleum
Incorporated is incorporated under the provisions of the eight
schedule to this Act.

While some people may frown at this development, it is pertinent
to note that the NNPC had not been working with a lucid strategy on
whether to make profits or serve the public’s interest. Amidst this
confusion, we have seen the price of fuel increase rapidly despite
millions of naira spent on subsidies. The path to sustainable
efficiency is productivity. When losses are made annually by the
NNPC, their services will no longer serve the public’s interest but
will only bring about hardship and indecisiveness in the economy as
we have seen in the previous years. Commercialization ensures that
the oil and gas sector is productive and profitable to the economy.
Market-oriented solutions such as this have proven to be more
effective.

Saudi Arabia has been operating with this model through Saudi
Aramco, the official Saudi Arabian oil company with a net income of
49 billion dollars in 2020. ^[4] Therefore, the PIA Act
is in concinnity with international best practices in this
respect.

THE END OF SUBSIDY ERA?

Subsidies on fuel may not stay for long anymore. Over the years,
it has been realized that subsidy only takes from our pocket and
does not add any working value to the economy. It puts us in debts
as it pushes the country to take loans. This does not sound like
proper management in any form. Citizens still buy fuel at
exorbitant rates and subsidies don’t even regulate prices
anymore.

When the PIA 2021 commences, we may likely not have subsidies on
petroleum products anymore. Private oil companies and operators
will be able to determine the price of petroleum products using the
market forces of demand and supply and other economic variables. In
order to prevent inordinate increase in fuel price by private
operators, this will only take effect under the supervision and
control of the two regulatory bodies earlier mentioned.

THE FRONTIER EXPLORATION FUND EXPLAINED.

This brings us closer to the root of the brouhaha that has
occasioned the PIA 2021. The provisions concerning the frontier
exploration fund in the PIA has been met with criticisms and
rancour orchestrated by people sowing seeds of discord among
Nigerians.

In basic terms, the PIA says that 30% of “profit oil and profit
gas” earned shall be invested in frontier exploration. Frontier
exploration refers to the process of exploring hydrocarbons such as
crude oil, natural gas, coal and other energy sources in the inland
basins such as the Anambra basin, the south-eastern sector of the
Chad basin, the mid-Niger basin and the Sokoto basin.

It is pertinent to note that the frontier exploration
encapsulates the whole of Nigeria and not to a particular sect or
tribe. This does not preclude any geopolitical zone. The objective
is to develop new areas for oil exploration in the country.

THE 3 PER CENT VENTS: HOST COMMUNITIES’ LEMON
JUICE

This has to be the most misconstrued provision in the PIA 2021.
The Act, in Section 240(2), stipulates that 3% of the actual annual
operating expenses of an oil company must be paid to the host
communities. This contribution makes up the host communities trust
fund. Note that this does not mean 3% of profits or revenue
generated by oil companies. The 3% of the operating expense by an
oil company is quite reasonable for both investors and the host
communities. This is because the host communities will get paid
whether or not an oil company makes profits and it’s an affordable
fee for oil companies such that it attracts more investments.

This ushers in another tricky issue, who are the host
communities?

According to Section 318 of the Act, 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.

If an operator (an oil company) commences drilling operation in
a community and passes the pipeline and other equipment for oil
exploration through two other communities, such company will have
three communities in its host communities trust fund which he has
to pay 3% of its annual operating expenses into.

More so, addressing the challenge of mismanagement of funds by
host communities, the Act directs the operator to set up a Board of
Trustees who shall manage the host communities trust fund for the
benefits of the host communities.

From the 3% contributed to the communities, 75% of it must go
into infrastructure and projects within the communities, 20% of it
will serve as a reserve fund and 5% will be used to running the
trust by the Board of Trustees.

If there are more than one operator in a community, the
operators cannot validly consolidate their expenses and pay 3%.
Each operator will create their own trust fund, Board of trustees,
and pay 3% separately to such community.

It is my belief that if the PIA Act is strictly implemented, the
host communities will be in a better position to experience massive
development unlike before. It aptly correlates with the saying that
when life gives you lemons, you make lemon juice.

FATE OF CURRENT NNPC’S WORKERS.

As against popular misconception by the public that the
implementation of the PIA will lead to mass retrenchment of
workers, the PIA actually expressly provides for the retention of
workers.

Section 57 of the Act states:

Upon incorporation of NNPC Limited under Section 53 of this
Act, employees of NNPC and its subsidiaries shall be deemed to be
employees of NNPC Limited on terms and conditions not less
favourable than that enjoyed prior to the transfer of service and
shall be deemed to be service for employment related entitlements
as specified under any applicable law.

KEY OBSERVATIONS AND RECOMMENDATIONS

The PIA has been passed into law. We wait patiently for its
commencement, and of course, its implementation. Taking a cue from
the introductory paragraph in this paper, it is palpable that we
have been left behind, or better said, we let ourselves stay
behind. At this moment, we should be deliberating on harnessing
renewable energy for economic growth and creating a legal framework
for sustainable environment.

Interesting to note is the fact that the Economic Community of
West African States in its document on ECOWAS Renewable Energy
Policy, set year 2030 as a target for renewable energy penetration
at the regional level to ensure ‘ECOWAS universal access’.
^[5]

While 2030 seems far from now, there is no gainsaying that the
Nigerian government is not prepared to reduce its investment in
petroleum and betting on it for a stable economy. Hence, the target
is utopian for the Nigerian government. In fact, majority of the
IOCs (International Oil Companies) have set up mechanisms for
investments into renewable energy. Nigeria will be in a delirious
position if the government does not invest in the renewable energy
sector early enough.

To this end, the implementation of the PIA should be expanded to
enable investments into renewable energy sources. By so doing,
investors will be attracted, and there will be a smooth transition
to clean energy.

Written By Okediya Peter O., ACIArb, Email:
okediyapi@gmail.com

END NOTES

[1] Bloomberg, ‘Aramco Joins Group Building Giant Solar Plant in
Saudi Arabia [2021] https://www.bloomberg.com/news/articles/2021-08-15/aramco-joins-group-building-giant-solar-plant-in-saudi-arabia^[1]
 accessed 19 August 2021

[2] K Bayliss and T. Kessler, Can Privatization and
Commercialization of Public Services Help Achieve the MDGs?’, GSRDC
Publications, 2006, https://gsdrc.org/document-library/can-privatisation-and-commercialisation-of-public-services-help-achieve-the-mdgs/^[2]
accessed 19 August 2021

[3] TheCable, ‘Commercialization of NNPC, two regulatory bodies
…what you need to know about the new Petroleum Act’ [2021], https://www.thecable.ng/commercialisation-of-nnpc-two-regulatory-agencies-what-you-need-to-know-about-the-new-petroleum-act
accessed 19 August 2021^[3]

[4] Wikipedia, Saudi Aramco, https://en.wikipedia.org/wiki/Saudi_Aramco^[4] accessed 19 August
2021

[5] ECOWAS Renewable Energy Policy (EREP), 2012, https://www.aecid.es/Centro-Documentacion/Documentos/Instrumentos%20de%20pol%C3%ADtica%20exterior/151012_ecowas_renewable_energy_policy_final.pdf^[5]
accessed 19 August 2021