Corporate & CommercialEnergy & Natural Resources
In the second of our series examining the main provisions of the newly enacted Petroleum Industry Act (PIA), we take a look at the new licensing regimes under the Act. The new licensing regime introduces quite dramatic changes; hence we have broken them into two parts. Part B shall follow next week.
The PIA still categorizes the petroleum sector into three as follows: the Upstream, Midstream and the Downstream sectors. The Nigerian Upstream Petroleum Regulatory Commission (the Commission) is responsible for regulating the Upstream sector. The Commission is responsible for issuing licences to operators in the upstream sector. However, the grant of a licence to operate a refinery is issued by the Minister on the recommendation of the Authority. [1]
A company cannot operate more than one (1) stream. Where a person intends to operate in more than one stream, separate companies must be incorporated for each stream. [2] However, the Act provides for the establishment of an Integrated Specific Project (ISP) where the capital investments associated with the Midstream Petroleum Operations can be consolidated with the Upstream Petroleum Operations (UPO) for tax purposes. An ISP may be established where there is a project by the UPO to produce oil and natural gas, which is to be processed and refined as a final product and sold to the local market. [3]
In this part, we address the licensing regime under the upstream petroleum sector as provided in the PIA.
The PIA seems to have introduced a change in licence type nomenclature. Under the previous regime, there were the oil exploration licence, oil prospecting licence and oil mining lease. Now the word “Oil” has been replaced with the word “Petroleum”.
The holder of the lease has exclusive right to carry out the development and production of petroleum with respect to the area covered by the lease. [15] The lease is granted for a maximum period of 20 years. [16] Its holder must continue commercial production otherwise the lease may be revoked, and title goes to the government. [17]
Any of these licences or lease may only be granted to companies incorporated under the Companies and Allied Matters Act. [18] It is an offence for Individuals and Partnerships other than Companies or partnership between Companies to engage in upstream petroleum operations. Such individual or partnership will also be liable to HCT and CIT on profits so made [19] and will be liable to pay an administrative penalty of N10Million, N2Million for each day the offense continues and upon conviction, the sum of N20Million or Six (6) months imprisonment. [20]
The holder of a Petroleum Prospecting Licence is required to submit to the commission a commitment to a field development plan within a period of 2 years after a commercial discovery declaration to the commission.[21] The field development plan may be submitted in phases.[22] Upon submission, the NURC shall evaluate the technical and commercial terms of the field development plan and shall approve it where it meets certain conditions.[23]
The areas where there is a declaration of commercial discovery in respect of may be developed and worked on, on a unitization basis for the purpose of optimum recovery of petroleum from a petroleum reservoir. This provision on unitization applies to the holders of PPL and PML.[24] The commission may issue regulations on unitization from time to time.[25]
In view of the change in license nomenclature, the PIA has introduced new steps to be taken by license holders under the old regime who intend to switch to the new ones. Generally, present holders of the Oil Prospecting Licence (OPL) and the Oil Mining Lease are not mandated to convert to PPL and PML respectively. However, upon the expiration of their licence, they shall cease to hold any license and would be required to apply for the licences under the PIA. A holder of an OPL or OML who wishes to convert may do so through a Conversion Contract. [26] For the conversion to take place, it is required that all arbitration and court cases related to it be terminated through the termination clause included in the contract. [27]
A producing marginal field is allowed to continue at the original Royalty rates and Farm Out Agreements but is required to convert to petroleum mining lease within 18 months from the effective date of the PIA. [28] On the other hand, a non-producing marginal field shall be converted into a petroleum prospecting licence. [29] It is important to note that new marginal fields shall not be declared under the Act. [30]
Generally, gas flaring or venting by a licensee, lessor or the operator of a marginal field is an offence except it is done:
The fine is imposed on gas flaring or venting is for the remediation of the environment and relief of the host communities of the settlors.[33]
PPL and PML may be revoked by the Minister of Petroleum. However, a notice of default shall be sent to the last known address of the holder in addition to the provision of a remediation period of not less than 60 days. [34] Where a satisfactory remedy is received, the revocation process shall be terminated [35] otherwise it shall be revoked and the fact of revocation shall be published in the Federal Government Gazette. [36]
The PIA introduces some new licensing regimes in the Nigerian petroleum sector. It introduces a change in upstream sector’s license type nomenclature and has replaced the word “Oil” with the word “Petroleum” suggesting that there are more far-reaching licensing requirements. While it is not mandatory for holders of OPL and OML to convert their licences, holders of marginal field are required to do so within 18 months. Licensees are to comply with international best practices and ensure compliance with local laws and regulations to prevent revocation of their licence.
Watch out for the part B which comes out on 29 th September 2021 which will deal with the licenses under midstream and downstream sectors.
Please note that the contents of this Article are for general guidance on the Subject Matter. It is NOT legal advice.
[1] Section 111 (1), Petroleum Industry Act 2021
[2] Ibid, Section 302(3)
[3] Ibid, Section 302(4)
[4] Ibid, Section 70 (1) (a)
[5] Ibid, Section 71 (4)
[6] Ibid, Section 71 (3)
[7] Ibid, Section 70 (1) (b)
[8] Ibid, Section 79 (1)
[9] Ibid, Section 77 (1)
[10] Ibid, Section 77 (2)
[11] Ibid, Section 78 (4) and 79 (6)
[12] Ibid, Section 72 (2)
[13] Ibid, Section 70 (1) (c)
[14] Ibid, Section 81(1)
[15] Ibid, Section 82(1)
[16] Ibid, Section 86(1)
[17] Ibid, Section 86 (2) and (3)
[18] Ibid, Section 70 (2)
[19] Ibid, Section 273(1) & (2)
[20] Ibid, Section 297(1) & (2)
[26] Ibid, Section 92 (1)
[27] Ibid, Section 92 (3)
[28] Ibid, Section 94 (1)
[29] Ibid, Section 94 (2)
[30] Ibid, Section 94 (9)
[34] Ibid, Section 97 (1) (a) and (b)
[35] Ibid, Section 97 (2)
[36] Ibid, Section 97 (6)
Nneka is a partner in our Energy and Natural Resources Practice Groups and is an integral part of our Projects Team. She is a Barrister and Solicitor of the Supreme Court of Nigeria. View all posts
Uba is a managing associate in our commercial litigation department and is an integral part of our projects and infrastructure teams. Prosper is described by his peers and clients as a consummate litigator with an eye for details. View all posts
Shola is an Associate in our Commercial Litigation and Project and Infrastructure teams. He attended Ahmadu Bello University, Zaria, Nigeria, where he obtained a Bachelor of Laws degree, LL.B (Hons.) in 2018. View all posts
