Amina Salihu, Development Sector Specialist, Civil Society
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Subjects of Interest
- Sustainable Development
What you should know about the Petroleum Industry Act 18 Oct 2021
It is said that the journey is as important as the destination. It is a matter of opinion how true that is for legislations in Nigeria, given that the legislative process is usually marked by sheer delays. This is a pain point for legislative advocacy in the country.
On the average, federal laws that have potentials for positive impacts on lives and ensure good governance and accountability take at least two legislative calendars i.e., eight years, to pass. The Freedom of Information Act 2011, took 12 years. The Violence Against Person’s Prohibition (VAPP) Act, 2015, took 14 years. The Disability Act 2019 took 12 years to pass.
The turbulence of the process, political horse-trading, technical scrutiny, and bureaucratic back and forth can be exhausting. But for those of us on the advocacy side, the drawn out legislative process affords opportunities for robust engagement, identify stakeholders that are resistant to change, and learn some important nuances. However, by the time the bill is passed, the fighters are exhausted. Yet the work of implementation needs to begin.
Recently, the Petroleum Industry Bill (PIB) became the Petroleum Industry Act (PIA) after 20 years or five legislative calendars. KPMG asks whether the PIA might be a game changer? Given its potential to be such an important as well as impactful legislation, many observers are curious about this law and its specific provisions. After all the politics and delays, it is nevertheless unsurprising that we do not know exactly what the PIA contains and its implications for change.
Undoubtedly, the new act has some forward-thinking provisions. Some others are not so clearly intentioned. Yet, its implementation timeframes appear fuzzy. For these reasons, the PIA is a legislation that all Nigerian advocates and friends of Nigeria need to understand. I had the opportunity to join a conversation facilitated by the Chartered Financial Analyst (CFA) Society Nigeria, where the guest speaker, Taiwo Oyedele, the Fiscal Policy Partner & Africa Tax Leader at PwC, gave a very interesting breakdown of the PIA. I offer you this brief synopsis and the questions I nevertheless went away with.
The PIA has five main chapters, namely Governance and Institutions, Administration, Host Community, Fiscal Framework, and Miscellaneous Provisions.
Governance and Institutions: The objective of the new law is to foster good resource governance, the right operating environment and accountability in the petroleum industry. In this regard, the PIA establishes the regulatory authorities for the industry it has significantly restructured. The national oil company, Nigerian National Petroleum Corporation (NNPC), is no longer a player and regulator in the same industry. PIA separates both roles. Interestingly, two regulatory bodies – the Nigerian Upstream Regulatory Commission and the Nigerian Midstream and Downstream Petroleum Regulatory Authority – will exercise oversight of the three sub-sectors of the petroleum industry.
Not only was NNPC striped of its aforementioned dual role, it will altogether cease to exist. In its place would be a ‘new’ player: NNPC Limited, which will be registered under the Companies and Allied Matters Act (CAMA), and commercially driven. Assets, liabilities and ownership rights of NNPC will be transferred to NNPC Ltd. “to the extent possible.” (Who determines the possible extent?) Whatever cannot be transferred will remain with NNPC until the assets are realized, or the liabilities are taken care of, or transferred to the federal government.
Accordingly, PIA does not give a timeframe for when NNPC in its current form would cease to exist. (NNPC die hard?). However, the new legislation provides that NNPC Ltd. should be incorporated within six months of the Act coming into force.
Ownership of NNPC Ltd. will be held by the Ministry of Finance Incorporated and Ministry of Petroleum Incorporated, on behalf of the Federation. NNPC Ltd. will not have absolute powers; it will earn management fees of 10 percent of the proceeds from its oil and gas operations. The corporation, which will operate like a private sector business, will set aside 30 percent of its profit for frontier exploration, that is, to search for new oil fields.
Administration: This chapter focuses on licenses, regulations, penalties and compliance. A company can no longer operate in more than one stream. It’s either up, down or midstream. For entities that currently straddle two or three sub-sectors, they have to break up. If such operators want to convert to the PIA regime, they would not have to pay capital gains tax, since it’s a government decision for them to unbundle. But conversion must happen within 18 months. If an entity does not want to convert, it can run its license until it is due for renewal. This is fair, to avoid forcing a change of the rule midway into the game.
The upstream regulatory commission will develop a model license that allows NNPC Ltd. room to hold up to 60 percent stake in its joint ventures. Analysts are sceptical about this, given predictable bureaucratic red tape. They would rather the government only collects royalties and taxes, and avoid dabbling into an area where private investment is to be maximised. This model is considered to be safer, cheaper, more efficient and generates better returns. (Why is the Nigerian state insisting on investing in an industry that is witnessing diminishing investments?)
Host Communities Development: The PIA defines upstream operators as the settlors. Each operator will set up a host community fund and contribute 3 percent of its operational expenditure from the previous year into the fund. Members of the trustees and management of the fund do not have to come from the host community of operation, to allow for expertise. But the host community will be represented on the board of the fund.
Seventy-five percent of the fund is earmarked for capital projects, 20 per cent for investment by way of reserve, and 5 percent is to be allocated to administrative expenses. On paper, this looks good. The combined allocation for investment and savings addresses the concern about human development and the future generations in communities that may be affected by environmental degradation from extractive activities.
Also important, settlor can define ‘community’ to include impacted communities, which might not be the direct host but is affected by the exploration or production work in the primary community, or where the settlor has assets. The 3 percent to be contributed as host community fund could be as high as $500 million per year.
Quite astutely, given the history of vandalization of oil assets by aggrieved members of host communities, or activities of sneak-thieves, and the financial losses this causes multiple stakeholders, mutual interest to safeguard investment is provided for. Investor or settlor and community are jointly responsible for the safety of investments in the community. As such, oil facility repairs due to any wilful damage to company assets by members of the community would be taken from the host community fund.
Fiscal framework: Compared to the previous legal regime for the petroleum industry, PIA is more environmentally responsive in its fiscal provisions. It provides for mitigation of environmental damage.
PIA aims to curb waste and raise more revenue for government. Apart from the existing company income tax, a hydrocarbon tax has newly been introduced. Government can now earn more and also give room for fair returns for investors. The rate of hydrocarbon tax ranges from 15 to 30 per cent for shallow water and onshore. Deep offshore companies will pay only company income tax (CIT) of 30 percent. Education tax is still applicable but not tax deductible.
If an operator fails to file its tax returns on a timely basis, the penalty is N10 million naira from day one. Two million naira additional surcharge applies every day thereafter. Any offence without prescribed penalty attracts N20 million naira.
Companies now have to prove to the tax authority that an expense was reasonable. For hydrocarbon tax, the maximum amount of expense that can be claimed is 65 percent of gross revenue. This indirectly imposes a minimum tax. So, companies must pay tax on at least 35 percent of their revenue. Apart from royalty based on production, there is now royalty based on price. When oil prices per barrel exceeds $50, in addition to royalty for production, producers have to pay royalty based on price, which would be remitted to the country’s sovereign wealth fund, managed by Nigeria Sovereign Investment Authority (NSIA). However, the constitution does not approve diversion of revenue that should go into the Federation Account.
PIA anticipates gas infrastructure investment. Therefore, it provides tax holiday for investors, which is now as high as 10 years, to expedite investment leading to accessible gas distribution.
Miscellaneous: This section lists the laws that the PIA repeals. There are also eight schedules to the PIA, including pricing formula for gas, joint ventures, and incoroporating the ministry of Petroleum.
Apart from clauses that have generated political turmoil, it is good to hear that industry stakeholders are generally happy with the PIA. NNPC is no longer the player and the umpire. Certainly, a better corporate governance framework will attract investment and trust in the country’s business ecosystem. The host communities deserve care, respect and dignity, and the community fund holds the potential to make that realisable.
A future exploration purse and savings kept in the NSIA are forward thinking. However, politics continues to dog the footsteps of the PIA. Some state governors are agitated that the ownership of NNPC Ltd. will be held only by the federal government. However, transfer of shares of the company must be endorsed by the National Economic Council, which comprises all state governors.
Despite the goodwill anticipation on PIA, the need to pay attention to competitiveness and risk mitigation in the industry remains high. Otherwise, Nigeria cannot possibly attract ample new investors into a sector that is already witnessing divestments.
There are concerns that the 30 percent future exploration fund is a slush fund for the north, because that is the only part of the country with any hope of finding new reserves of oil or gas. Some have asked why only 3 percent is going to host communities fund. Constitutional review may be required to back the royalty revenue based on oil price above $50 per barrel, which is to go into the NSIA for management.
Communication and stakeholder engagement also remain crucial. Dialogues with internal and external stakeholders, including communities, labour bodies, media, and indeed the citizens (using social media), is important to avoid uncertainty and misinformation, which would leave room for disinformation. Oyedele is right: conversations are also needed around energy transition, investment promotion, and development of the industry’s value chain for broader participation.
It is good to know that an implementation committee for PIA is already up and running. Deciding the primary implementing ministry early is, however, important, before too many cooks show up with so many ladles. Hopefully, the PIA will change the narrative for Nigeria by fostering greater transparency in licensing rounds, accountability, effective energy transition, and a human-centred development.
Amina Salihu is a development sector specialist.