In August 2021, Nigeria signed the Petroleum Industry Bill (PIB) into law. Before signing the bill, there had been concerns over the solvency of the Nigerian National Petroleum Corporation (NNPC), especially as it failed to record profit and the corporation’s revenue accounted for a part of the federal government’s revenue. In this report, we bring to you key points and major highlights of the act especially in relation to the profitability of the NNPC, host communities and gas flaring.
Provisions to Curb Gas Flaring, Compensate Host Communities
The PIA makes provision for the Nigeria Upstream Regulatory Commission, which will be responsible for commercial and technical regulation of upstream petroleum operations.
Upstream refers to the identification, extraction and production of raw materials. Another commission named ‘Nigeria Midstream and Downstream Petroleum Regulatory Authority’ would be responsible for the downstream sector.
One of the key goals of the upstream commission is the elimination of natural gas flaring and venting. Nigeria ranked among the top-10 gas flaring countries in the world as at 2018. A report noted that Nigeria loses $2.5 billion every year to gas flaring.
The act states that monies received from gas flaring penalties will be used for the purpose of environmental remediation and relief of host communities from where the penalties were levied.
A publication by the American Association for the advancement of science, details how gas flaring affects communities in the country.
A provision of the PIA reads that operations shall not destroy any tree or object which is of commercial value or object of importance to people resident within the community.
The commission is also responsible for the review of commercial aspects of field development plans in upstream petroleum operations.
Sections of the act also reads that one of the conditions for renewing a license for a mining lease would be compliance with the environmental obligations required and compliance with host communities obligation.
A host communities development trust is expected to be established in all host communities. The trust is separate from the Niger Delta Development Commission which has been embroiled in corruption. The trust is expected to be incorporated within 12 months from the effective date for existing mining bases. The trust will undertake the infrastructural development of host communities within the scope available.
The trust is also expected to facilitate economic empowerment opportunities in host communities inclusive of healthcare. The act states that settlers (companies) will be expected to contribute 3% of their annual operating expenses of the previous year to the host communities development trust where they are operating.
Seventy-five per cent (75%) of the fund is expected to go to capital projects, 20% to reserves and 5% for administrative purposes and special projects.
Furthermore, the Act makes provision for a midstream and downstream gas fund. 0.5% of the wholesale price of petroleum products and natural gas sold in Nigeria will go to the fund. Funds and grants occurring from multilateral agencies and related institutions will be used for development of infrastructure.
NNPC as a Profit-making Business
In a bid to ensure solvency and profitability, several provisions of the Act are crafted to ensure that only solvent organisations participate in the petroleum industry commercialisation. The act states that no subsidiary will be funded by the government.
“NNPC limited and any of its subsidiaries shall conduct their affairs on a commercial basis in a profitable and efficient manner without recourse to government funds. The organisation shall retain 20% of its funds to grow its business.” the act reads.
A Dataphyte report had chronicled how the government sponsors NNPC subsidiaries especially with bad debts and tax credit. The provision of the new act, if executed, may turn the tide on the commission and its subsidiaries unprofitability.
The act allows for the NNPC to form an Incorporated Joint Venture Company(IJVC) with other parties and it is expected to have a strong commercial orientation and transparent company operations.
Tax Structure and Terms for mining lease
The new act is also going hard after royalties, taxes and other fiscal obligations, setting them as standards for renewing mining licenses. It states that licences will be revoked due to failure to pay rents, royalties or taxes and other payments.
In previous years, NNPC subsidiaries have been accused of refusing to pay tax, with multi-billion naira losses due to this.
The tax structures are 30% of profit from Crude Oil for Petroleum mining license, 15% of profit from Crude Oil for On-shore and shallow water. Hydrocarbon tax and Company income tax are also expected to be paid.
Also a lease will not be more than 20 years. Licenses are also not going to be granted to operations that involve excessive capital or operating expenditures.
The country’s Minister of State, Petroleum Resources, Timipire Sylva, had noted that the act will ensure improvement of petroleum production and help the country harness its petroleum industry potentials.