In over two decades, crude oil has been the driving force behind Nigerian economy, accounting

for about 90% of her export earnings. This invariably caused several governments to place focus
and priority on this sector by attempting to create an all-encompassing Petroleum Industry Law.

Consequently, in September 2020, President Muhammadu Buhari sent a new Petroleum

Industry Bill to the National Assembly for consideration by the Senate and the House
of Representatives. After several months of scrutiny, a harmonized version of the bill was passed by
both legislative houses on 16th July 2021.

On 16th August 2021, the President signed the much-anticipated Petroleum Industry Bill into law
after two decades of failed attempts. Thus, The Petroleum Industry Act 2021 (‘The Act’), repeals;

 Associated Gas Reinjection Act, 1979 CAP A25 Laws of the Federation (LFN)2004, and its
amendments.
 Hydrocarbon Oil Refineries Act No. 17 of 1965, CAP H5 LFN2004;
 Motor Spirits (Returns) Act, CAP M20 LFN2004;
 Nigerian National Petroleum Corporation Act No. 94 of 1993, CAP N124 LFN2004;
 Nigerian National Petroleum Corporation Act (NNPC) 1977 No, 33 CAP N123LFN as
amended, (when NNPC ceases to exist pursuant to section 54(3) of this Act);
 Petroleum Products Pricing Regulatory Agency Act2003;
 Petroleum Equalization Fund (Management Board etc.) Act No. 9 of 1975, CAPP11 LFN
2004;
 Petroleum Equalization Fund Act,1975;
 Petroleum Profit Tax Act Cap P13 LFN 2004, (PPTA);and
 Deep Offshore and Inland Basin Production Sharing Contract Act(DOIBPSCA), 1993 CAP
D3, LFN 2004 and its
However, the provisions of certain laws are saved until termination or expiration of the relevant
oil prospecting licenses and mining leases including the Petroleum Profit Tax Act, Deep Offshore
and Inland Basin PSC Act.

The Act seeks to provide a framework for the legal, governance, regulatory and fiscal matters of
the Nigerian Petroleum Industry as well as the development of Host Communities. It contains 5
chapters, 319 sections and 8 schedules. This article gives a chapter by chapter review of the newly
enacted petroleum Industry Act and highlights the key points therein which will be discussed
below.
1.  Governance and Institutions 
This chapter focuses on transparency, good governance and accountability in the administration
of petroleum resources in Nigeria.  It further highlights the creation of a commercially oriented
national petroleum company and encouraging friendly business environments for petroleum
operations.

The Act commences with governance and the establishment of the Nigerian petroleum sector’s
institutional framework. The Minister, two new regulatory bodies – the Nigerian Upstream
Regulatory Commission (the “Commission”) and the Midstream and Downstream Regulatory
Authority (the “Authority”), and the Nigeria National Petroleum Company Limited (“NNPC
Limited”) (successor company to the Nigerian National Petroleum Corporation) are the four
distinct players in the sector.

The Minister
 The Act segments the Nigerian petroleum industry into the upstream sector on one hand,
the midstream and downstream sectors on the By virtue of Section 3  of the Act, the
general oversight powers over the petroleum industry (across all segments) is vested in the
Minister of Petroleum (‘The Minister’). It also empowersthe Minister to negotiate treaties
or other international agreements on behalf of the government on petroleum-related
issues. Interestingly, The Act inter alia, restricts the Minister’s powers in granting or
revoking prospecting licenses or mining leases. Previously, such powers were exercised at
the discretion of the Minister. However, the Act mandates such powers be exercised
following the Commission’s recommendation.

Upstream Petroleum Operations and Establishment of The

Commission
 Section 4 of The Act establishes the Nigerian UpstreamRegulatory Commission (‘The
Commission), giving it regulatory powers over the technical and commercial activities of
the upstream petroleum operations. The Commission is further empowered to enforce
compliance with the conditions of all leases, licenses, permits and authorizations issued to
companies in the sector. The Act in Sections 7&8, spells out the functions of The
Commission, granting it powers that were exercised by the Department of Petroleum
Resources (‘DPR’). Thus, Section 10 vests the Commission with the power to enforce the
provisions of any regulations, policies or guidelines formerly administered by the
 Department of Petroleum Resources or the petroleum inspectorate, with respect to
upstream petroleum operations, Thus, the Commission presently acts as a successor to the
DPR and the Petroleum Inspectorate Division. The Commission is to be run by a
governing body which shall be responsible for the policy and general administration of
the Commission.

Creation of Frontier Exploration Fund

 In a bid to encourage activities in frontier basins and to ensure that adequate promotional
activities in this area are undertaken, the Act provides for a Frontier Exploration Fund. By
virtue of Section 9 of the Act, the Frontier Exploration Fund shall consist 30% of the share
of profit from oil and gas of the Nigerian National Petroleum Company Limited (NNPC)
for the development of frontier acreages.

Midstream and Downstream Petroleum Operations and

Establishment of the   Authority
 Another key point in this chapter is the establishment of the Nigerian Midstream and
Downstream Petroleum Regulatory Authority (‘The Authority) responsible for the
technical and commercial regulation of the midstream and downstream operations in
Nigeria. A cursory analysis of Section 29 of the Act would suggest that the sole power to
grant, issue, modify, cancel, or terminate all licenses, permits and authorizations for
midstream and downstream petroleum operations, is vested in the Authority. This is a
departure from what was obtainable in the previous regime whereby such powers were
typically vested in the Minister.
 

 Alsoworthy of note is that Section 47 of the Act provides for the Authority Fund and imposes

a 0.5% levy to be imposed on the wholesale price of petroleum products in Nigeria as the
source of this fund.

Creation of Midstream Gas Infrastructure Fund

 Section 52 of the Act creates a Midstream Gas Infrastructure Fundto “make equity
investments of Government-owned participating or shareholder interests in
infrastructure related to midstream gas operations aimed at – (a) increasing the domestic
consumption of Natural Gas in Nigeria in projects which are financed in part by private
 investment, and (b) encouraging private investment.” The source of the Midstream Gas
Infrastructure Fund shall be 0.5% levy on the wholesale price of petroleum products sold in
Nigeria, and natural gas produced and sold.
 

 A combined overview of Sections 47 & 52 of The Act shows the Impositionof up to 1% levy
on the wholesale price of petroleum products sold in the country (0.5% each for the
Authority Fund and Midstream Gas Infrastructure Fund).

Incorporation of Nigerian National Petroleum Company Limited

 The Act in Section 53 provides for the incorporation of a commercial and profit-focused
Nigerian National Petroleum Company Limited (‘NNPC Limited’) under Companies and
Allied Matters Act within 6 monthsfrom commencement date of the new piece of
legislation. Ownership is to be vested in the Ministry of Finance Incorporated and
Ministry of Petroleum Incorporated on behalf of the Federation to take over assets,
interests and liabilities of NNPC Limited. This structure is expected to pave the way for
eventually sale of shares to Nigerians.
 

 NNPC Limited shall be operated like any other incorporated entity. The Act specifies that
the company pay its fair share of royalties, fees, rents, taxes and other payments due to the
Government and that it should pay out the bulk of its profits as dividends after retaining
25% for reinvestment. Any sale or transfer of shares of NNPC Limited shall be at a fair
market value and subject to an open, transparent and competitive bidding process.
 

 Section 59 further states that the composition of the NNPC Limited board shall be
determined in accordance with the provisions of the Companies and Allied Matters Act
and its Articles of Association.
 

 NNPC Limited will earn 10% of proceeds of the sale of profit oil and profit gas as
management fee while 30% will be remitted to Frontier Exploration Fund for the
development of frontier acreages in addition to 10% of rents on petroleum prospecting
licenses and mining leases.
 
  The Act provides that employees of NNPC shall be deemed to beemployees of NNPC
Limited on terms and conditions not less favorable than those enjoyed prior to the
transfer of service and shall be deemed to be service for employment-related entitlements
as specified under any applicable law upon the incorporation of NNPC Limited.

2. Administration
The key objectives of this chapter is to promote exploration and exploitation of petroleum
products for the benefit of the Nigerian people, ensure sustainable development of the petroleum
industry and create a conducive business environment within the petroleum industry inter alia.

 The provisions of chapter 2 of The Act applies to activities withinor associated with
petroleum operations and the petroleum industry and persons conducting such activities.
It caters for the administration of Upstream Petroleum operations, Midstream and
Downstream Gas Operations, and Midstream and Downstream Petroleum Operations.
 Administration of Upstream Petroleum operations

 Section 70 of the Act provides for Licenses and Leases related to Upstream Petroleum
operations. The Commission is saddled with receiving applications for licenses and leases
and doing the necessary technical and commercial evaluations in order to make
recommendations to the Minister on the granting of licenses and leases to the appropriate
applicants. The principal licences/lease to be given for upstream operations will take the
following form: Petroleum Exploration License (PEL) is provided in section 71 of the Act
which may be granted to qualified applicants to explore petroleum on a speculative and
non-exclusive basis. The holder of this license shall have non-exclusive right to carry out
petroleum exploration operations within the area provided for in the license. It subsists for
three (3) years and maybe renewable for additional period of three (3) years. This license is
equivalent to the current Oil Exploration License (OEL).
 

 Petroleum Prospecting License (PPL), is provided for under Section 72, it is granted to
qualified applicants to carry out petroleum exploration operations on an exclusive basis. A
petroleum prospecting license for onshore and shallow water acreages must be for a term
of not more than six (6) years, with a three-year initial exploration phase and a three-year
possible extension period. It shall be for a term of not more than ten (10) years for deep
offshore and frontier acreages, with a 5-year initial exploration phase and a 5-year possible
extension period. This license is equivalent to the current Oil Prospecting Licence (OPL).
 
  Petroleum Mining Lease (PML), this is provided for under Section 81 of the Act. It may be
granted to qualified applicants to search for, win, work, carry away and dispose of crude
oil, condensates and natural gas. It shall subsist for a maximum period of twenty (20) years
and maybe renewable for one or more additional period of not more than twenty (20)
years each, subject to meeting specified conditions. This license is equivalent to the current
Oil Mining Lease (OML).
 

 A holder of a Petroleum Prospecting License or Petroleum Mining Lease shall not assign,
novate or transfer his license or lease or any right, power or interest without prior written
consent of the
 

 Upon expiration, all existing OPLs and OMLs would be automatically converted to PPLs
and PMLs. Section 92 of the Act on the otherhand, allows holders of OPLs and OMLs
under the present administration to convert them to PPLs or PMLs freely and voluntarily.
 

 The Act contains a list of condition precedents that must be included inthe Conversion
Contracts. One of such stipulation is that all pending arbitration and court disputes must
be ended, any stability provisions or guarantees provided by NNPC in respect of oil
prospecting licences or oil mining leases to be converted shall be null and void, and the
fiscal stabilization clauses incentive provisions contained in sections 11 and 12 of the
Petroleum Profit Tax Act shall not apply.
 

 In order to guarantee the safety and protection of people and the environment, the
combined provisions of Sections 79&102 respectively states that the Commission requires
an upstream petroleum licensee or lessee to submit an environmental management plan
for approval in respect of projects that need environmental impact assessment within one
year of the Act’s effective date or six months following the award of the related license or
lease. The Commission approves such a plan if it complies with the provisions of the Act
and the applicant hasrequisite capacity to restore and manage negative environmental
impacts. The Act also provides that chemicals shall not be utilized for upstream petroleum
operations, except the Commission grants an applicable permit and approval.
 
  Due to its environmental impact, the Act has upheld the prohibition of gas flaring, save in
limited circumstances when there is no other viable choice than to flare gas.
 

 According to the Act, a licensee or lessee must pay a penalty determined by the
Commission through regulation. The following are the only known few cases where the
Act may authorize gas flaring:

1. in the event of a disaster

2. under the terms of a Commission-issued exception.
3. in accordance with existing regulations, as an acceptable safety practice.

Administration of Midstream and Downstream Petroleum

Operations
 The Nigerian Midstream and Downstream Petroleum Regulatory Authority (the
“Authority”) has the power to grant, renew, modify or extend individual licenses or
permits but where it relates to the establishment of refineries, the license is to be issued by
the Minister on the recommendation of the
 

 The Authority has the power to set the pricing framework for petroleum transportation,
distribution, and processing through regulations. Tariffs will be set in US dollars or other
foreign currencies as appropriate in order to attract foreign investment in midstream and
downstream petroleum operations, with payments made in the respective foreign currency
mor equivalent value of the naira at the open market rate published by the Central Bank
of Nigeria as applicable under the regulations.

Administration of Midstream and Downstream Gas Operations

 The Act requires that a holder of an existing lease, license, or permit who is involved in
midstream or downstream gas operations prior to the effective date of The Act must apply
to the Authority within 24 months of the effective date, and the Authority may issue the
relevant license or permit, if
 
  According to Section 125, involvement in midstream and downstream or downstream gas
operations without a license or authorization commits an offence and faces a penalty of –
(a) 1 year in prison or a fine imposed by regulation in the case of a license-required
Activity; or (b) 6 months in prison or a fine imposed by regulation in the case of a permit-
required Activity.
 

 The Act in Section 314 proposes that employees of the Department of Petroleum
Resources, Petroleum Pricing and Product Regulatory Agency, the Petroleum
Equalisation Fund (Management Board) and Petroleum Inspectorate be transferred to
their respective regulators.

3. Host Communities Development

Notwithstanding the fact that the host communities want more from the environmental effects
of oil operations, in the light of all the agencies participating in Niger Delta development, the
government considers that adequate measures are currently being carried out in this field.

Chapter 3 of the Act is focused on Petroleum Host Community Development (‘PHCD’). Its key
objective is to encourage sustainable development and prosperity within host communities,
provide host communities with direct social and economic benefits from oil operations, ensure
harmonious coexistence between licensers or leasing parties and host communities and to
establish a framework to facilitate host community growth. This chapter is generally aimed at
increasing the quality of life of the host communities.

Incorporation of Host Community Development Trust (‘The

Trust’)
 Section 235 of the Act instructs that a settlor or group of settlors under a joint operating
agreement must establish a trust for the benefit of the relevant host communities and
where a group of settlors are running operations under a joint operating agreement, the
operator appointed under the agreement is responsible for compliance with this chapter
on behalf of the settlors.
 

 Settlor under the Act is defined as “a holder of an interest in a petroleumprospecting

license or petroleum mining lease or a holder of an interest in a license for midstream
 petroleum operations, whose area of operations is located in or appurtenant to any
community or communities”.
 

 The Act specifies the following timelines for establishing the Trust:for existing OMLs,
within 12 months of the Bill’s effective date; for existing designated facilities, within 12
months of the Bill’s effective date; for existing new designated facilities under
construction on the effective date, within 12 months from the effective date; for existing
oil prospecting licenses, prior to the application for the field development plan; for
petroleum prospecting licenses and petroleum mining leases granted under this Bill, prior
to the application for the field development plan; for licensees of designated facilities
granted under this Bill, prior to commencement of commercial operations.

Introduction of The Host Community Development Trust Fund

 In pursuance tothe Act, each host community development trust must create a fund called
The Host Community Development Trust Fund (‘the Fund’).  Under Section 240 of the
Act, it prescribes the source of funding for the Trust and states that each settlor is expected
to donate a certain percentage of its Actual operational expenses in the previous fiscal year
to the Fund. According to sections 256 & 257 therein, the Fund is tax-exempt, and settlor
contributions are deductible for hydrocarbon tax and companies’ income tax purposes,
respectively. The host community development trust fund may also receive gifts and
donations for the purpose of achieving its objectives and profits accruing to the Trust’s
reserve fund shall also be contributed to the applicable host community development trust
fund.
 

 For the purposes of establishing the Trust, the settlor shall appointand authorize a board
of trustees (the ‘Board of Trustees’), which shall apply to the Corporate Affairs
Commission to be registered as a corporate body under the Companies and Allied Matters
Act in the manner prescribed in this chapter. The Board of trustees and executive members
of the management committee may include persons of high integrity and professional
standing who may not necessarily come from any of the host communities.
 

 Section 251 also requires the settlor to perform a host community needs assessment to
evaluate each host community’s needs and develop aCommunity Development Plan to
satisfy those needs.
 

 In order to achieve its key objective, the Act puts in place a framework forthe allocation of
the Fund and states that 75% of available cash will be used for capital projects, 20% for
reserves, and 5% for administrative expenses. In the event of vandalism, sabotage, or other
civil unrest resulting in damage to petroleum facilities or disruption of production
activities, a community will forfeit the cost of repairs. The settlor must give a matrix to
the Board of Trustees which shall be used for the distribution of the Fund to the host
communities.

4. Fiscal Framework
The cardinal objective of this chapter is to create a progressive fiscal framework that encourages
investment in Nigeria’s petroleum industry, offers transparency, increases government revenues,
and ensures a fair return for investors.

Introduction of Hydrocarbon Tax
 This chapter introduces the Hydrocarbon The Federal Inland Revenue Service (FIRS) shall
administer andcollect hydrocarbon tax which will be chargeable from the profits of
upstream petroleum companies in the onshore and shallow water. The hydrocarbon tax,
which applies to crude oil, field condensates and associated gas natural gas liquids, is
subject to different license charges which is 30% on converted PML’s and 15% on converted
PPL’s.
 

 Section 260 of the Act clearly states that hydrocarbon tax will only apply torelated gas
crude oil, condensates, and natural gas liquids. Even if they are then mixed with oil,
associated gas, condensates, and natural gas liquids from non-associated petroleum gas will
be exempt from the tax if the related amounts can be determined at the measurement
locations or at the exit of the gas processing plant. The Act has effectively addressed the
dispute concerning the fiscal legislation that applies to condensates and NGLs that are
then mixed with oil.
 

 For the purpose of ascertaining crude oil revenue of a company, Section 262provides that
the crude oil revenue of a corporation for any accounting period, shall be the value of any
chargeable oil adjusted to the measurement points, based on the – (a) the revenues from
 the sale of all chargeable oil; and (b) the total amount of chargeable oil disposed of. The
aggregate value of crude oil estimated for royalties for all fields will be used to establish the
value of chargeable oil disposed of. As a result, unlike the Petroleum Profit Tax system,
extraction, storage, and transportation costs will no longer be factored into taxable
revenue under the hydrocarbon Furthermore, revenue derived from petroleum operations
would be exempt from taxation under hydrocarbon tax.
 

 To encourage exploratory activity in that area, the HT will not apply to deepoffshore
projects. Due to the fact that hydrocarbon tax is a resource tax, charges that are not
directly related to production will not be deductible. However, such expenses will be
deductible against a company’s income tax.

Deductions under the Hydrocarbon Tax

 Section 263 generally states that expenses must be wholly,reasonably, exclusively and
necessarily incurred to be tax-deductible. However, a cost price ratio limit of 65% of gross
revenue is imposed for hydrocarbon tax deduction purposes, any excess cost incurred may
be carried forward.
 

 In addition to the usual disallowable expenses, section 264 of the Act introduces the
following as nondeductible expenses:Penalties and gas flare fees; Expenditure for the
purchase of information on existence and extent of petroleum deposits, except in respect
of geophysical, geological and geochemical data and information; Financial/ bank
charges; bad debts/ questionable loans; Interest on loans; Arbitration and litigation costs;
Costs incurred outside Nigeria including head office, shared costs, research and
development cost and affiliate costs; All custom duties, amongst others.

Chargeable Profits and Allowance

The Act in section 266 makes key changes to the chargeable profit and allowance calculation in
removing the capital allowance restriction; introduction of Production Allowances to replace
investment tax allowances and credits; deactivation of petroleum investment allowance;
separation of acquisition costs of petroleum rights into the value of rights and value of assets, so
that capital allowance claimable on the value of rights will now be 20% per year for Company
Income Tax purposes. For hydrocarbon tax purposes, however, the yearly allowance on the value of
rights fraction will be 20%, while the value of assets will be tax depreciated at 20%
each year, subject to a 1% retention in the books.

Consolidation of Taxes
 Companies participating in upstream petroleum operations will be subject to company
income tax, and will be required to settle their company income tax liability on an annual
basis, using a similar estimate mechanism to that used for hydrocarbon tax. However, for
company income tax reasons,hydrocarbon tax will not be deductible. The company
income tax will be applied as an entity-based tax, allowing results to be consolidated across
terrains. This means that there are no constraints on individual fields.
 

 Enterprises that purchase loss-making companies in order to benefit from the aforesaid
incentive, however, will not be able to claim the acquiredcompany’s losses.
Sequel to the fierce impact of the global oil price and the COVID-19 pandemic on the world
economy, particularly the oil and gas industry, it is unavoidable that businesses would acquire
bad/questionable loans. As a result of the exclusion of bad/doubtful debt from permissible
deductions, businesses may be forced to pay taxes on profits that are not recoverable.

Furthermore, there is a risk that this provision will impair the cash flow of these companies since
they may be forced to settle their tax bills with capital or funds set aside for additional
investments, with no recourse to reclaim the amounts owing to them by the government.

5. Schedules and Miscellaneous
The Act contains 8 schedules which deals respectively with;

 Dealing with Rights of Preemption;

 Incorporated JointVentures;
 Domestic Base Price and Pricing Framework;
 Pricing Formula for Gas Price for the Gas Based Industries;
 CapitalAllowances;
 Production Allowances and Cost Price RatioLimit;
 Petroleum Fees, Rents and Royalty;
 Creation of the Ministry of Petroleum Incorporated
Few other key points include;
  The 3rdschedule provides that The Authority must consider the following considerations in
setting the domestic base price,

1. The price must be high enough to stimulate voluntary gas production in order to meet
domestic demand.
2. The price shall not be greater than the average of identical natural gas prices in major
emerging countries that are substantial natural gas producers, as determined by the
Authority unless the first condition is
3. The price will be modified annually to take inflation into consideration.
4. Within three months of the Act’s effective date, the Authority must decide the domestic
base price based on regulations and adjust it where circumstances in the domestic market
necessitate it, in accordance with legislation.

 In the 7thschedule, royalties are payable at the rates of 15% for onshore areas, 12.5% for
shallow water, and 7.5% for deep offshore and frontier basins, 2.5% – 5% for natural gas. In
addition, a price-based royalty ranging from 0% – 10% is payable to be credited to the
Nigerian Sovereign Investment

Conclusion
The passage of the long-awaited Act is a major win for the petroleum industry and the country as a
whole, as it sends a strong message to international investors. As a result, the newly enacted
Petroleum Industry Act of 2021 (PIA) is intended to boost investor confidence in Nigeria’s
petroleum industry while also increasing job prospects for the host communities.

Recommendations
The newly enacted Petroleum Industry Act, 2021 is quite a commendable, but imperfect piece of
legislation. Taking into consideration the global advancement across all industries in-terms of
technology and use of expert human resources for the advancement of state economy, the
respective Regulators contemplated by S.314 of the Act should thread carefully. It is critical for the
Regulators to do a complete assessment to determine qualification. Employees should only be
transferred if they can show that they have the necessary experience, knowledge, and abilities to
succeed in their new roles. It’s also critical to do a manpower requirements assessment to identify
how many personnel each regulation requires. Also, for proper accountability and decision-
making, administrative organs should use technology to interface with operators. Licensing
applications, periodic returns, and all other data flows should be digitalized (the accountability
model adopted by the United Arabs Emirates for their oil and gas industry, should be adopted).
This is a necessary foundation for qualitative data that will guide decision-making and successful
sector administration under the Act.

With reference to the establishment of the Petroleum Host Community Fund under the
Act, there are a few lacunas and the questionable relevance of the existing contributions to the
Niger Delta Development Commission (NDDC). The Act does not clearly state if the host
community fund contribution will be combined with the existing contribution of a 3% levy to the
NDDC. There is also the question of whether or not the 3% of annual operating expenditures will
be enough to satisfy the needs of host communities.

Nonetheless, accountability for the prudent use of funds is critical and we can see the efforts of the
Act in ensuring this, by defining the source and ratios of allocating the Funds therein.