The Petroleum Industry Act, 2021 (PIA or “the Act”) was signed into law in August 2021. The PIA introduces significant changes to the legal and governance framework, administrative processes, regulatory and fiscal terms, and host community engagements in the oil and gas industry. There is renewed hope that a robust implementation of the PIA will lead to a transformation of the Nigerian oil and gas industry, thereby attracting the much needed investment into the industry.
The government has been taking the necessary steps to implement and operationalise the PIA within the timelines stipulated in the Act. For instance, the government inaugurated the steering committee responsible for PIA implementation immediately after the PIA was signed into law. The Nigerian Upstream Petroleum Regulatory Commission (NUPRC) has also published several draft regulations and guidelines for review by stakeholders in the industry. Based on the timelines stipulated in the Act and the draft regulations issued by the NUPRC, the deadlines for upstream companies to implement certain provisions of the PIA are fast approaching. As such, it may be instructive for the relevant companies to proactively analyse the impact of the PIA on their operations and identify the compliance requirements, in order to ensure timely implementation.
In this article, we will elaborate on the key compliance imperatives to be considered by upstream companies in implementing the PIA.
Conversion to PIA fiscal regime
The new fiscal framework in the PIA is applicable to existing licences upon renewal, while marginal field operators are required to convert to Petroleum Mining Leases (PMLs) within 18 months from the effective date of the Act. Although the Petroleum Profits Tax Act (PPTA) will continue to apply to existing Oil Mining Leases (OMLs) obtained prior to the emergence of the PIA until the mandatory timeline for conversion, operators can opt for the application of the PIA prior to the renewal of their existing OMLs.
Indeed, the decision to opt for an immediate conversion or wait until the mandatory timeline will be largely driven by project economics, financial and commercial realities amongst other organizational priorities. Therefore, operators are expected to take a comprehensive look at the following:
Based on the draft guidelines issued by the NUPRC on conversion of licences, applications for conversion should be submitted four (4) months before the expiration of the eighteen (18) months’ timeline in the PIA. Given that the PIA was signed on 16 August 2021, applications must be submitted on or before 15 October 2022. Consequently, given the fast approaching deadline, it is important that all industry operators take proactive steps in conducting PIA impact assessments, to ascertain whether a conversion will be beneficial or otherwise. In addition, all operators should begin collating the relevant documents required to be submitted alongside the application for conversion, to avoid last-minute rush.
Decommissioning Considerations
Decommissioning is a general term used to describe the process of returning an oil production site to its pre-lease condition at the end of the useful life of that oil asset. Prior to the enactment of the PIA, companies typically recognised provisions for decommissioning costs in their books in accordance with the provisions of the International Accounting Standard (IAS) 37 “Provisions, Contingent Liabilities and Contingent Assets”. Such provisions were typically not funded by industry operators.
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