A lot has changed in the sector domestically and globally since the reform efforts began.
By Henry Akinduro
In 2021, the then Nigerian President, Muhammadu Buhari, signed the Petroleum Industry Act (PIA) 2021, bringing to a close, a 20-year effort to reform Nigeria’s oil and gas sector with the aim of creating an environment more conducive for growth of the sector and addressing legitimate grievances of communities most impacted by extractive industries.
A lot has changed in the sector domestically and globally since the reform efforts began.
The number of indigenous oil and gas firms have grown, but so have the number of oil-producing countries in the region. Militancy in oil-rich communities, while remaining, has diminished. Concerns over climate change have fueled aggressive efforts to reduce global consumption of fossil fuels—driving divestment from oil and gas by companies, institutions, and countries.
The PIA represents an effort by Africa’s leading oil-producing country to respond to this changing environment.
In 2019, the oil and gas sector accounted for about 5.8 percent of Nigeria’s real GDP and was responsible for 95 percent of Nigeria’s foreign exchange earnings and 80 percent of its budget revenues. In addition, because the law is far-reaching in its remit, it is complex and not easy to summarize.
If properly and vigorously implemented, the PIA can represent the gold standard of natural resource management, with clear and separate roles for the sub-sectors of the industry; the existence of a commercially-oriented and profit-driven national petroleum company; the codification of transparency, good governance, and accountability in the administration of the petroleum resources of Nigeria; the economic and social development of host communities; environmental remediation; and a business environment conducive for oil and gas operations to thrive in the country.
However, these results are conditional on Nigeria’s political and oil industry leaders overcoming some key challenges that are discussed following the summary of the key provisions of the act.
The PIA overhauls the regulation and governance of the oil and gas industry. The law provides for two regulatory agencies—the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) and the Nigerian Midstream and Downstream Petroleum Regulatory Authority, (NMDPRA)—that will be responsible for the technical and commercial regulation of petroleum operations in their respective sectors, and have the power to acquire, hold, and dispose of property, as well as sue and be sued in their own name.
The law commercializes the perennially loss-making state-owned enterprise, the Nigerian National Petroleum Company (NNPC), turning it into the NNPC Ltd, a quasi-commercial entity the ownership of which shares shall be vested with the government, and the ministries of Finance and Petroleum shall hold the shares on behalf of the government.
Per the PIA, the president of Nigeria will appoint the president of NNPC Ltd as well as heads and members of the regulatory agencies.
Separately, the Minister of Petroleum, then, will head the industry with a wide range of powers to formulate, monitor, and administer government policy under the PIA.
Importantly, the PIA provides that 30 percent of the profits of the NNPC Ltd will fund a new entity, to finance exploration in other basins in the country (Frontier Exploration Fund). Ten percent of rents on petroleum prospecting licenses and 10 percent of rents on petroleum mining leases are also assigned to Frontier exploration.
The act is unclear on whether there will continue to be exploration in existing basins.
The relationship between oil and gas host communities in Nigeria has historically been very poor. The PIA aims to address this problem by creating the Host Community Development Trust Fund (HCDTF) whose purpose will be to, among others, foster sustainable prosperity, provide direct social and economic benefits from petroleum to host communities, and enhance peaceful and harmonious coexistence between licensees or lessees and host communities.
Specifically, the law stipulates that existing host community projects must be transferred to the HCDTF, and each settlor (or oil license holder) must make an annual contribution of an amount equal to 3 percent of its operating expenditure for the relevant operations from the previous year.
The management committee of the trust must include one member of the host community. In addition, the act stipulates a penalty for failure to comply with host community obligations, including revocation of license.
Henry Akinduro is the Chairman of Total Grace Foundation.
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