by Dr. Adeoye Adefulu & Lateef Bamidele
It’s hard to believe that August 16, 2021, is now two years behind us, signifying the momentous occasion when the Petroleum Industry Act 2021 (“Act” or “PIA”) was enacted into law. Over the past two years, the industry has been navigating and adjusting to the new legislative landscape. While opinions on the progress achieved during this period may differ within the industry, one undeniable fact is the array of significant activities that have unfolded, leaving an indelible mark on the industry’s current trajectory.
In commemorating the first anniversary of the Act, we examined the spectrum of implementation activities that transpired within the initial twelve months following the Act’s enactment. Likewise, we published a newsletter titled Petroleum Industry Act; Implementation Developments and Regulatory Compliance Issues ahead of the eighteen months anniversary. That paper further scrutinized these implementation activities while underscoring the pertinent compliance concerns for the industry. For this edition of our newsletter, we will focus on fresh developments witnessed in the last six months.
As we observe the second anniversary of the Act, our attention now shifts to the novel activities spearheaded by the two industry regulators, the Nigerian Upstream Petroleum Regulatory Commission (“Commission”) and the Nigerian Midstream and Downstream Petroleum Regulatory Authority (“Authority”). These activities shed light on the evolving landscape of the petroleum industry in Nigeria.
Progressing the Industry Draft Regulations to Completion
In our previous newsletter, we noted that the Commission and the Authority had released a total of 38 draft regulations, undergoing stakeholder consultations in phases as per the provisions of the Act. Among these, only five had received approval from the Commission. As we mark the second-year anniversary, a total of twenty-eight regulations have been approved by both regulators, with twelve from the Commission and sixteen from the Authority. These regulations are now published in the National Gazette.
With these approvals, the industry is now equipped with regulations governing licensing activities spanning the upstream, midstream, and downstream sectors. Noteworthy regulations include those overseeing conversion and host community matters, the gas market, domestic delivery responsibilities, and comprehensive environmental regulations. The Commission’s approved regulations can be accessed here while the Authority’s regulations are available through this link.
In July 2023, the Commission released six additional draft regulations for stakeholders’ consultation as well as a draft amendment to the approved Nigeria Upstream Petroleum Host Communities Development Regulations 2022. The draft regulations listed in the table below can be accessed here.
|S/N||NEW COMMISSION’S DRAFT REGULATIONS|
|1||Upstream Petroleum Development Contracts Administration Regulations|
|2||Upstream Revocation of Licenses and Lease Regulations|
|3||Upstream Petroleum (Administration & Harmonisation) Regulations|
|4||Upstream Commercial Operations Regulations|
|5||Upstream Petroleum Code of Conduct & Compliance Regulations|
|6||Upstream Petroleum Assignment of Interest Regulations|
|7||Upstream Petroleum Host Community Development (Amendment) Regulations|
Conversion of Licenses and Leases to PIA Terms
A prominent provision within the PIA allows existing license holders to voluntarily transition to PIA terms, provided specific conditions are met. This process involves entering a conversion contract by a conversion date – which is set at eighteen months following the PIA’s enactment. Failure to meet this conversion contract deadline would leave the licenses governed by the Petroleum Act and Petroleum Profits Tax Act until renewal.
In the past six months, several license holders worked diligently to meet the PIA’s conversion deadline, indicating a bias for the PIA framework. It is important to note that certain crucial mechanisms needed to facilitate these conversions were unavailable. This led to the process unfolding in two distinct phases:
- Conversion Contract Execution: License holders embarked on signing the conversion contract, subject to conditions that were slightly less stringent and somewhat different from those specified in the Conversion Regulations issued by the Commission.
- Concession Contract and PML/PPL Grant: The second phase involved executing a concession contract and obtaining Petroleum Mining Lease (PML) or Petroleum Prospecting Lease (PPL), contingent on satisfying additional prerequisites outlined in the Conversion Regulations.
This bifurcation of events during conversion was dictated by the Commission’s commitment to adhering to the Act and finalizing the conversion contract by the designated date. Fulfillment of other conditions, such as the procedure for establishing decommissioning and abandonment funds, as well as environmental remediation funds, will occur once the relevant Regulations become accessible.
Given the Commission’s release of approved Regulations and the recent execution of concession contracts by numerous license holders, we envisage that these conditions are currently being met. This paves the way for the eventual issuance of PPLs and PMLs under the PIA, alongside the transition to the new fiscal framework.
Commencement of Midstream and Downstream Regulatory Activities
Prior to the enactment of the PIA, the defunct regulator – Department of Petroleum Resources (“DPR”) had regulatory oversight over the entire industry value chain. However, the PIA created two distinct streams within the industry, with each of these streams now falling under the jurisdiction of each of the regulators. This separation of responsibilities resulted in the emergence of a midstream and downstream regulator, which has now initiated its role in regulating midstream and downstream petroleum operations in alignment with the PIA.
The Authority has initiated the licensing of midstream and downstream petroleum operations, directing all upstream companies involved in these activities to establish new entities and apply for relevant licenses under the PIA. This aligns with section 302(3) of the PIA, which mandates companies engaged in multiple streams of operations to register separate entities for each stream.
Furthermore, the Authority has taken over the regulation of all operations and assets within the midstream and downstream operations, including crude oil export terminals. Notably, the PIA empowers the Commission to regulate activities at crude oil export terminals established prior to the Act’s enactment, leading to ongoing conflicts between the two regulators, as discussed in our previous newsletter.
Regulatory Conflict over the Existing Crude Oil Export Terminals
As each regulator positioned itself according to its designated role under the PIA, recent months have witnessed an unending conflict between the Commission and the Authority regarding the jurisdiction of crude oil export terminals. This controversy stems from conflicting provisions within the PIA, which, on one hand, grant the Authority general oversight over crude oil export terminals, while on the other hand, empower the Commission to regulate terminals established before the PIA.
Both regulators assert their jurisdictional authority based on the PIA, resulting in regulatory interventions at export terminals and conflicting directives issued to licensees and terminal operators. The industry, along with interventions by the former President and the 9th National Assembly, has taken the stance that the Commission should regulate the export terminals due to the specificity of the provisions empowering it to do so. This view aligns with the rule of statutory interpretation, which prioritizes specific provisions over conflicting general provisions.
The new President in a bid to resolve this controversy has also issued a directive inviting both the regulators and the industry to comply with the intervention of the previous President which effectively mandates that the Commission is the sole legitimate regulator of the existing crude oil export terminals. The President’s directive, however, went further to direct the regulators to work together with the Special Adviser on Energy to proffer sustainable solutions to this matter including the possibility of amending the provisions of the PIA.
Whether this presidential intervention definitively settles the issue remains to be seen and may be tested by potential approvals required by licensees in the last quarter of 2023. The ongoing imbroglio highlights the potential for amendments to the PIA and raises questions about other potential areas of contention arising from its implementation.
Removal of Subsidy
Amidst legal constraints posed by the PIA, the long-standing subsidy regime, which had gained significant political support over time, has been officially phased out. This momentous change for the industry occurred during the inauguration of the new President, Bola Tinubu, in May 2023.
The decision has been widely seen as a commendable step forward for the industry. While varying perspectives have emerged, particularly regarding perceived government measures to mitigate the economic impact on the public, it’s clear that the PIA mandates unrestricted pricing of petroleum products, a mandate that has now been implemented.
The removal of the subsidy carries diverse implications for both the industry and the broader economy. New licenses have been issued to facilitate the importation and distribution of petroleum products within the country. Additionally, pricing mechanisms are now dictated by market dynamics. Nevertheless, the government’s pace in implementing palliative measures to address challenges stemming from subsidy removal prompts discussions about the sustainability of this decision and whether it will continue to garner support as envisioned by the Act.
In retrospect, as we commemorate the second anniversary of the PIA’s enactment, the journey has been one of transformation and adaptation involving all stakeholders, including regulators. The issuance of new regulations, license conversions, and the strategic commencement of midstream and downstream petroleum regulatory activities together weave a narrative of progress. Amid this advancement, the complex regulatory dynamics surrounding crude oil export terminals have spurred significant discourse, highlighting the intricate interplay between regulatory focus and economic imperatives.
The bold move of subsidy removal has triggered a ripple effect, prompting us to reevaluate our economic course. Reflecting on these multifaceted developments reminds us that the path to sustainable energy progress demands not only strategic foresight but also an unwavering commitment to inclusivity for all relevant stakeholders.