THE PETROLEUM INDUSTRY BILL: FINALLY GETTING IT RIGHT AND BREAKING THE 20-YEAR HIATUS
A Keynote Address By Sen. (Prof.) Oserheimen A. Osunbor at a National Colloquium via Zoom Organised By THE NEWSGURU.COM, Online News Portal on 10 March 2021.
Introduction
It gives me much pleasure to speak at this online National Colloquium on the very important subject of the Petroleum Industry Bill 2020. As the title rightly indicates, there is a pervasive air of cautious optimism that at long last, we are close to the end of a long and tortuous journey spanning about 20 years in efforts to have the Bill passed into law by the National Assembly. This optimism is due, no doubt, to the enthusiasm being demonstrated and assurances given by the President of the Senate Dr. Ahmad Lawan and Speaker of the House of Representatives Hon. Femi Gbajabiamila as well as the generality of members of the National Assembly. The title of this colloquium suggests with confidence that “finally” we are “getting it right and breaking the 20-year hiatus” in the sense that we are about to break the jinx. This may well be so. Nevertheless, it is appropriate to be mindful that some imperfections remain in the Bill which need to be smoothened and overcome as the Bill makes its progress through the National Assembly, particularly at the public hearings when all stakeholders, indeed, every Nigerian, will have a chance to contribute towards the eventual passage of a Petroleum Industry Act that will meet the test of time. I am grateful to the organisers of this programme for availing me of this opportunity to contribute my views on this historic piece of legislation of immense national importance. Much more, I commend them for organising this Colloquium as a contribution towards a deeper understanding and passage of the Petroleum Industry Bill (PIB).
Background to the PIB
Although records indicate that legislation governing the exploration and mining of petroleum existed in the Laws of the Southern Protectorate as early as 1907 and 1909 before amalgamation with the Northern Protectorate in 1914, it was after that event that Nigeria as a country had the Mineral Oils Act of 1914, which was thus the first petroleum industry legislation in Nigeria. It regulated the right to search for, win or work mineral oils but the operation of the law did not develop much until petroleum exploration activities picked up in the 1950s. There were several other legislation pertaining to the petroleum industry such as the Petroleum Act 1969, which provided for the administrative structure of the Industry. The essential attribute of economic nationalism which has been a major feature in our petroleum industry legislation did not feature until 1971 when the Nigeria National Oil Company Decree was promulgated. The early 1970s which coincided with the end of the Nigeria-Biafra civil war on 15 January 1970 marked a new era in the International Economic Order characterised by economic nationalism. In Nigeria there was a growing consciousness that political independence will amount to little unless accompanied by economic independence from the colonial and Western powers. This manifested in the indigenisation policy of government which received legislative backing through the Nigerian Enterprises Promotion Acts of 1972 and 1977. A precursor to this was the indigenisation of the petroleum industry through the establishment of the Nigeria National Oil Company (NNOC) Act in 1971. The Act removed the prohibition of non-British companies from the grant of oil exploration licences. In 1977 the NNOC Act was repealed and replaced by the Nigerian National Petroleum Corporation Act. The NNPC Act remains till date the extant Act regulating the petroleum industry in Nigeria, with the NNPC as the body with responsibility for regulation, supervision, implementation and enforcement of the law as well as being, through its subsidiaries, an active operator itself. In other words, the NNPC has been involved from 1977 till datein the entire gamut of the petroleum industry from upstream to downstream. Nevertheless, the NNPC Act was heavily tilted in favour of transnational corporations and foreign investors over and above local operators[1]. It is against this background that the PIB was introduced to redress the weaknesses, shortcomings and obsolescence in the existing system that has basically remained unchanged since 1977.
From as far back as the 4thNational Assembly (1999-2003) the necessity for an all-embracing Petroleum Industry Bill was recognised and the foundations for
such legislation started to receive serious attention. However, it was not until the 6th National Assembly that a PIB was finalised and presented as an Executive Bill in the House of Representatives in 2007 and the Senate in 2008 but was not passed before the end of the Assembly. It was presented again to the 8th National Assembly (2015-2019) and passed by the Senate on 25 May 2017 as the Petroleum Industry Governance Bill but this did not receive the concurrence of the House of Representatives. The PIB now before the National Assembly was presented afresh to the 9thNational Assembly inaugurated in 2019. The Bill comes in 318 clauses or sections grouped into Five Chapters, namely –
- Governance and Institutions
- Administration
- Host Communities
- Fiscal Framework and
- Miscellaneous provisions.
In terms of sheer size the PIB ranks at the same level as the Constitution of the Federal Republic of Nigeria 1999 and the Companies and Allied Matters Act 2020 with 319 and 613 sections, respectively. Due to this huge volume any analysis of the Bill has, of necessity, to be selective and focus on some of the key elements as we propose to do in this Keynote Address.
The Objectives of the PIB
The legal regime which existed under the Petroleum Act 1969, the NNPC Act 1977 and other related legislation was not conducive for earning maximum benefits from the petroleum industry. The insularity which prevailed at the time was understandable from the standpoint of economic nationalism but it is now recognised that this has limiting effects on the maximisation of benefits to Nigeria and her citizens, compared to other countries. The petroleum industry operates in an international market hence Nigeria has to be investor-friendly in order to attract internationally mobile capital and be competitive. Oil and gas companies are essentially, profit-making entities and not charitable
organisations. They operate to maximise returns on investment. The PIB takes cognisance of these realities and seeks to make the petroleum industry in Nigeria more investor-friendly while promoting transparency and accountability. It sets out deliberately to promote corporate social responsibility and harmonious relationship between oil and gas companies and host communities in a manner that is unprecedented. These objectives are reflected in the long title of the Bill which is for An Act To Provide Legal, Governance, Regulatory and Fiscal Framework for the Nigerian Petroleum Industry, The Development of Host Communities and For Related Matters.
Key Highlights of the PIB
Rather than come as separate pieces of legislation on oil and gas as is currently the case the PIB is conceived as a single document that incorporates and consolidates all relevant legislation into one single Act of the National Assembly covering virtually every aspect of the petroleum industry. This will, hopefully, make for ease of reference, monitoring and implementation. All the existing Acts, numbering 10are repealed in clause 310 of the Bill[1]. The Key highlights are as follows:
- GOVERNANCE and INSTITUTIONS
Chapter One, whilst vesting the property and ownership of petroleum within Nigeria and its territorial waters, continental shelf and Exclusive Economic Zone in the Government of the Federation as before proceeds to set out the objectives of the Chapter as being to –
- create efficient and effective governing institutions, with clear and separate roles for the petroleum industry;
- establish a framework for the creation of a commercially oriented and profit-driven national petroleum company;
- promote transparency, accountability and good governance in the administration of petroleum resources and
- enable a business environment conducive for petroleum operations.
- The main governance bodies and institutions are –
- The Minister of Petroleum (Pt II)
- The Commission (Pt III)
- The Authority ( Pt IV) and
- The Nigerian National Petroleum Company Limited (Pt V).
The Minister has powers under clause 3 to formulate, monitor and administer government policy in the petroleum industry, exercise general supervision over the affairs and operations of the industry, grant petroleum prospecting licences and Petroleum mining leases upon the recommendation of the Commission and revoke such licences or leases upon the recommendation of the Commission, amongst several other powers.
Clause 4 provides for the establishment of Nigerian Upstream Petroleum Regulatory Commission as a body corporate with perpetual succession and a common seal with responsibility for the technical and commercial regulation of upstream petroleum operations. It will also implement government policies for upstream petroleum operations and promote an enabling environment for investment in upstream petroleum operation, among several other responsibilities.
The Nigerian Midstream and Downstream Petroleum Regulatory Authority is established under clause 29 as a distinct body corporate with perpetual succession and a common seal with responsibility for the technical and commercial regulation of midstream and downstream operations in the petroleum industry. It will ensure efficient, safe, effective and sustainable infrastructural development of midstream and downstream operations, promote healthy, safe, efficient and effective conduct of midstream and downstream operations in an environmentally acceptable and sustainable manner, promote a competitive market for midstream and downstream petroleum operations and promote the supply and distribution of natural gas and petroleum products in midstream and downstream petroleum operations and the security of natural gas supply for the domestic gas market, among others.
Clause 53 provides that the Minister of Petroleum shall within six months from the commencement of the Act, cause to be incorporated under the Companies and Allied Matters Act, a limited liability company to be called Nigerian National Petroleum Company Limited (NNPC Ltd). The capitalisation is to be determined by the Minister in consultation with the Minister of Finance. Ownership of all the shares is to be vested in government at the point of incorporation and held on its behalf by the Ministry of Finance Incorporated.
The Ministers of Petroleum and Finance will together determine the assets, interests and liabilities to be transferred to NNPC Ltd or its subsidiaries. NNPC shall then cease to exist after the interests, etc, are extinguished or transferred to government. The Bill spells out the composition of the company’s board of directors when the shares are wholly owned by government and after divestment. Its operations will be governed by the provisions of the Companies and Allied Matters Act and its articles of association. The Bill makes absolutely clear that the new company and any of its subsidiaries are to be run on a commercial basis without recourse to government funding and this must be reflected in their memorandum and articles of association. The board of directors must uphold good governance standards including the principles of accountability.
- ADMINISTRATION
Chapter Two of the Bill deals with the more technical and operational aspects of the petroleum industry involving a great deal of specialised training and skills. This includes activities within or associated with petroleum operations and the administration and management of petroleum resources and their derivatives. It covers such matters as administration of upstream operations, administration of medium and downstream operations including the grant of licence, leases, environmental management, prohibition of gas flaring and penalties. The Bill sets out to fulfil Nigeria’s obligations under the United Nations Framework Convention on Climate Change and similar Conventions.
- HOST COMMUNITIES DEVELOPMENT
One of the major challenges confronting the petroleum industry in Nigeria is hostility of adjourning host communities towards oil and gas operators and by extension government. Over the years there has been growing resentment in oil bearing communities that despite the several billions of dollars that have been and are being generated from the communities they have little or nothing to show for it except disruptions to their sources of livelihood and community life as well as environmental pollution and degradation. The resultant protests have frequently disrupted the activities of oil and gas companies resulting in a fall of daily production and lost revenue to the companies and the nation. Chapter 3 of the Bill sets out to redress this situation by –
- fostering sustainable prosperity within host communities,
- providing direct social and economic benefits from petroleum operations to host communities,
- enhancing peaceful and harmonious co-existence between licencees or lessees and host communities, and
- creating a framework to support the development of host communities (clause 234).
Every settlor (which is defined as a holder of a licence, lease, petroleum prospecting licence, petroleum mining licence or interest in a licence, etc, whose area of operations is located orappurtenant to any community or communities) must incorporate a trust for the benefit of the host communities for which the settlor is responsible and to be called Host Community Development Trust. The Constitution of each Host Community Development Trust must clearly provide that the applicable host community development fund will be used exclusively for the implementation of the Host Community development plan. The funds so created are exempted from taxation.
The Bill specifies a timeframe for the incorporation of Host Community Development Trust, the objectives of the Trust, composition, tenure and duties of the Board of trustees (BOT), among others. The BOT will appoint a management committee to run the affairs of the Trust Fund.
- PETROLEUM INDUSTRY FISCAL FRAMEWORK
The PIB seeks to establish a progressive fiscal framework that will encourage investment in Nigeria’s petroleum industry, balancing rewards with risk and enhancing revenues to the federation; establish a fiscal framework that expands the revenue base of the Federal Government while ensuring a fair return for investors, simplify the administration of petroleum tax and promote equity and transparency in the petroleum industry fiscal regime. The responsibility to administer and collect revenue on behalf of government is vested in the Federal Inland Revenue Services (FIRS).
Hydrocarbon Tax will replace Petroleum Profit Tax with varying rates specified depending on whether the operations are onshore and shallow fields, deep-water, bituminous and frontier acreages, etc. In addition, Companies Income Tax is payable at specified rates, with provision for appeals to the Tax Appeal Tribunal.
- MISCELLANEOUS
The Miscellaneous provisions in Chapter 5 deal with sundry matters such as legal proceedings, consequential amendments, repeals and savings. Conspicuously omitted here is provision for Alternative Dispute Resolution mechanism which has become nowadays a standard clause in investment-related legislation of this nature. Disagreements are bound to arise in the course of operations and implementation. It is only appropriate therefore to include an arbitration clause in the Bill.
Challenges To be Overcome
In order to ensure that we truly and finally get it right and have the Bill passed into law, there are a number of challenges to be overcome. While the words of reassurances emanating from the leadership of the National Assembly that the Bill will be passed not later than April 2021 are commendable, it is absolutely important to secure the buy-in of every member of the National Assembly. Nothing should be taken for granted or left to chance. I expect that at this point every Senator and Member of the House of Representatives will have more than a passing interest in the Bill and endeavour to have a good understanding of it – at least the general principles, if not the more technical aspects of the Bill. This Colloquium will hopefully contribute to creating this enlightenment and understanding. Furthermore, the Minister of Petroleum must give the Billpriority attention and be readily available, even at short notice, to respond to any issues that may require clarification at the National Assembly.
The public hearings organised by the relevant Committees of the Senate and the House of Representatives, respectively, have provided a useful forum to elicit challenges that need to be overcome. This is in addition to the reservations expressed by critical stakeholders and commentators highlighting aspects of the Bill that call for further attention. They include the following:
- a) Composition of the boards
Having committed to operating the new entities on a commercial basis, it is necessary for the governing boards to enjoy independence from government interference which has been the bane of state-owned enterprises in Nigeria. There is need for a good balance between executive and non-executive directors to ensure such independence. Security of tenure of board members and top management needs also to be guaranteed in order to promote good corporate governance.
- Flow of revenue into the Federation Account
The Chairman of the Revenue Mobilisation, Allocation and Fiscal Commission, Elias Mbam, is reported to have expressed concern at the public hearing in the National Assembly that the Bill will disrupt the inflow of revenue to the Federation. According to him, if we have NNPC Ltd that may be paying dividends to its shareholders which would most likely be once in a year, how do we guarantee a continuous inflow of revenue monthly into the Federation Account which is distributed to the three tiers of government at the monthly FAAC meetings? He further expressed reservations about the provisions of taxes to be deducted from hydrocarbon revenue as this goes against the Constitutional requirement that all revenue accruing to government should be paid into the Federation account (s.162).
Furthermore, it is to be observed that there are references in the Bill to payment of revenue to the Federal Government of Nigeria rather than into the Federation Account (see clause 258). They do not mean the same thing.
These apparent contradictions need to be addressed.
- Unresolved Issues on Host Community Development
Perhaps the most contentious aspect of the PIB is Chapter 3 which has introduced copious provisions to address the grievances of Host Communities. This is a welcome innovation unprecedented in the annals of petroleum industry legislation in Nigeria. Nevertheless, there are serious issues which must be handled with caution, otherwise the new intervention will be counter-productive and its purpose defeated. The fracas which broke out between rival representatives of Host Communities during the Public Hearing at the House of Representatives on 28 January 2021[1] is a sad indication as to the dangers that lie ahead unless the knotty issues are resolved. There are obviously problems which may be localised or emanating from rivalry amongst contending members of Host Communities which no legislation can solve but there are others that the Bill can and should address.
When the PIB was introduced in 2007 it provided for Host Communities to be allotted 10% of the equity in the oil and gas companies but instead of equity participation, the current PIB provides that 2.5% of its “actual operating expenditure in operations within the communities” be allocated to the Host Communities Development Trust Fund (clause240). This change may be due to the reality that most, if not all, local communities will lack the money to pay for shares purchase, hence it is more practical to make funds available directly for the benefit of the communities under a properly structured Trust Fund. Even at that there is a need to review the figure upwards to at least 5%, otherwise, the 2.5% may savour of tokenism[2]. Moreover, a percentage share of total production should have been used as this will be more transparent than a percentage of “operating expenditure” which is susceptible to manipulation and will require laborious accounting to determine or verify. We should not lose sight of the fact that the very reason for making these provisions for Host Communities is in order for them to benefit directly from resources being extracted from the communities. It is therefore better that they should get a percentage based on quantum of production within their communities which can easily be ascertained instead of being bogged down by accounting issues as to what is to be classified as “operating expenditure ….. in the immediately preceding calendar year”. Besides, with a stake in sustained production the communities will of their own accord be well disposed to protect the oil and gas installations from disruptions or sabotage whereas having a stake in high operating cost may have the opposite effect. Incidentally, bringing down the cost of production is right now a major concern of operators for which a Conference of Stakeholders was organised by NNPC recently.
The Bill leaves it to the discretion of licencees and lessees (Settlors) to determine who their host community is which is defined as any community situated in or appurtenant to the area of operation of a Settlor and any other community as the Settlor may determine. “Area of operation” is defined as the territory which hosts as Lessee’s or Licencee’s operational or designated facilities and any other ancillary facilities related to upstream and midstream petroleum operations (clause 318). The onus is on both the settlors and the community or communities in and around their areas of operation, working collaboratively, to resolve the issue of who falls within a Host Community. The Bill is flexible enough to accommodate this. Not every problem can be solved by law. Much will depend on the will of the people.
Conclusion
It is gratifying that after twenty years of trying we are finally on the verge of having the Petroleum Industry Bill passed into lawfollowing, perhaps, the widest level of public engagements and stakeholders consultations ever. This is despite the efforts of certain forces, as the President of Senate has alleged, who have tried to frustrate its passage[3]. The Bill as we have seen breaks new grounds. The determination to pass it at this time is due, no doubt, to a recognition of the importance of the petroleum industry to national prosperity, contributing above 80% of Nigeria’s foreign exchange earnings. It is indeed the backbone of Nigeria’s economy. Since petroleum is a wasting asset, the reliance on which is projected to diminish in the next two or three decades as countries around the world shift from fossil fuels to cleaner and renewable energy, it makes sense to hurry up and extract the benefits that Nigeria’s petroleum industry can offer without any further delay.
On a final note, let me express my two expectations from the on-going legislative process. First, that it will lead to the passing of a robust, all-encompassing Act of international standard, that meets the yearnings of Nigerians including the Host Communities, guarantees the interest of existing investors, local or foreign, and is attractive to new investors. Second, that the Petroleum Industry Act, when passed, will be faithfully and efficiently implemented in order to realise its objectives. I urge you all to express your comments and suggestions to enrich the proposed legislation and expedite its passage.
I thank you for your audience