Introduction
In the first instalment of our series on the review of the Petroleum Industry Bill 2021 (“PIB”, “Bill”), we focused briefly on ownership of petroleum, objectives and the extent of the powers of the Minister under the PIB as opposed to the subsisting provisions under the Petroleum Act (“PA”) under Chapter One, Parts I and II of the Bill which is focused on Governance and Institutions. In this edition, we will be taking a look at Part III of Chapter One which establishes one of the major institutions under the Bill namely, the Nigerian Upstream Regulatory Commission (the “Commission”).
Establishment and Objectives
The Commission was established under Section 4 of the PIB with the objectives amongst others, to regulate upstream petroleum operations including technical, operational and commercial activities, to implement ministerial industry policy, to ensure compliance with all applicable laws and regulations governing the sector, to determine and implement technical standards, codes, practices, and specifications in line with good international petroleum industry practices and ensure healthy environmental operations.[1]
The primary responsibility of the Commission is the technical, operational and commercial regulation of upstream petroleum operations. If you are conversant with the operations of the Department of Petroleum Resources (“DPR”), which is a division under the Ministry of Petroleum Resources, then note that the Commission was created to more or less take over the role of the DPR but only as far as it relates to upstream operations in the Nigerian oil and gas industry as opposed to the current position where DPR is a single regulator handling regulation of both the technical and commercial aspects of the entire industry value chain, i.e., upstream, midstream, and downstream with strong influence from the Nigerian National Petroleum Corporation (“NNPC”).[2] Going forward, the technical, operational and commercial aspects of the midstream and downstream value chain of the industry will now be regulated by the Nigerian Midstream and Downstream Petroleum Regulatory Authority (the “Authority”).[3] An exception to the separation of upstream from midstream and downstream regulatory oversight is where in situ facilities or fixed or floating platforms or vessels provide for fully integrated[4] upstream and midstream petroleum operations. In such cases, the Commission is empowered to consider such integrated operations as upstream petroleum operations for the purpose of regulatory oversight.
The establishment of two different regulators for the industry under this current PIB is in contradistinction to the Petroleum Industry Governance Bill 2018 which sought to establish the Commission as a single independent regulator across the entire industry value chain with various departments within the institution to deal with different areas of operations as a means of addressing the issue of regulatory overlaps and multiplicity of regulatory agencies and administrative oversight across the industry value chain; an issue which has been the bane of the industry and which results in unnecessary bureaucracy in petroleum operations. This issue had been raised as a concern in the Federal Government’s 2017 National Petroleum Policy (“NPP”, the “Policy”) where the Government had stated categorically that “The Federal Government is determined that there should be a new single regulator for the petroleum sector in Nigeria which will replace the existing regulatory agencies.” We are left to wonder at the abrupt departure from this policy objective. Although having more than one regulator across the oil and gas value chain is not an uncommon occurrence and we have various countries applying this model. Some stakeholders actually prefer this model and are wary of one behemoth industry regulator. However, it is important that roles and functions are clearly delineated and accountability and transparency must be enforced to prevent the issues we have raised above from reoccurring.
Scope of the Commission’s Functions
As earlier discussed, a major departure from current legislation is the removal of the power to make regulations from the Minister and the vesting of same in the Commission as it pertains to upstream operations. The Commission is also entrusted with the role of advising the Minister on fiscal and other issues pertaining to the petroleum industry, a role sought to be vested in the Petroleum Technical Bureau under a previous version of the PIB. The scope of the commercial and technical regulatory role to be performed by the Commission in the upstream sector will encompass amongst others, issues such as licenses, leases and permit terms compliance monitoring[5], administration and enforcement of policies, laws and regulations, environmental and technical standards, control of the exploration of the frontier basins of Nigeria, conduct of bid rounds and other processes for the award of petroleum exploration and production licenses and leases (this we hope will keep rent seeking in the industry to the barest minimum), compute, determine, assess and ensure payment of royalties, rentals, fees, and other charges for upstream petroleum operations, ensuring accurate calibration and certification of equipment used for fiscal measures for the upstream petroleum operations pursuant to applicable laws, issue certificates of quantity and quality to exporters of crude oil, natural gas and petroleum products from integrated operations and crude oil export terminals established prior to the Effective Date of the Bill including the power to monitor and regulate the operations of crude oil export terminals and the responsibility of the Weights and Measures at the crude oil export terminals shall seize to exist from the Effective Date. The weight and measures functions to be vested in the Commission is noteworthy[6] as it seeks to address the issue of overlapping of roles between DPR and the Weight and Measures department of the Federal Ministry of Commerce and Industry. The Commission will also be implementing any cutbacks of crude oil and condensate production ordered by the Minister under section 3(2) of the Bill.
It is worth noting also that the Commission would be responsible for establishing, monitoring, regulating and enforcing upstream aspects of health, safety and environmental matters in the industry. In the stand-alone version of the Petroleum Industry Governance Bill (“PIGB”), this power was to be exercised in consultation with the Federal Ministry of Environment or any other agency in charge of environmental issues. The power to establish, monitor, regulate and enforce was limited to health and safety measures. The new position under the PIB seems to suggest the exclusion of the Federal Ministry of Environment from involvement in environmental issues in the upstream sector of the Nigerian oil and gas industry. Does this portend the end of the National Oil Spill Detection Agency (“NOSDRA”) as some have recently canvassed? Whatever be the case, multiplicity of regulatory oversight will be greatly reduced by virtue of Section 25 of the Bill, which provides that no Government ministry, department or agency exercising any power or function or taking any action, which may have direct impact on upstream petroleum operations is permitted to issue any regulation, guideline, enforcement order or directive without first consulting with the Commission and the Commission’s decision regarding such regulation shall be binding.
The Commission pursuant to Section 9 of the Bill is also responsible for developing the Frontier Basins[7]. Of note is the opportunity to partner with NNPC in the drilling of identifiable prospects on a service fee basis where no commercial entity expresses an intention of testing or drilling such prospects. Such fees shall be charged to the Frontier Exploration Fund (the “Fund”) set up by the Bill for the purpose of executing the Commission’s mandate under this section. The House of Representatives Ad-Hoc Committee (“House”)’s addition to the PIB provides that the Fund is expected to be funded from 10% of rents on petroleum prospecting licences and 10% rent on petroleum mining leases; and 30% of NNPC Limited’s profit oil and profit gas from the production sharing, profit sharing and risk service contracts. The House’s addition suggests that the functions of NNPC under this section is not only limited to the Frontier Basins but to frontier acreages as a whole. However, this inclusion has been inelegantly drafted and the reference to Basins and acreages has not been clearly delineated. For instance, whilst Section 9(4) states that … The fund shall be applied to all Basins …, Section 9(5) states that NNPC shall transfer the 30% of profit oil and profit gas to the frontier exploration fund escrow account dedicated for the development of frontier acreages only. Does this mean that the 10% rents on licences and leases are solely for the frontier basins whilst the NNPC 30% profits is to be applied to all frontier acreages, whether basins or otherwise? These provisions appear subject to interpretation landmines and should be addressed. Another area of concern is in relation to the application of this Fund. At a time when the world is trying to move away from fossil fuels to renewable energy sources and the environmental degradation resulting from oil and gas exploration is a continued source of concern for host communities, concerns are being raised as to why so much investment is going into exploring frontier acreages. Why not divert this investment into research and development in new energy sources which Nigeria is in dire need of? Particularly since one of the functions of NNPC under Section 64 of the Bill is to engage in the development of renewable resources in competition with private investors.
Exercise of Power
Pursuant to Section 216 of the PIB, both the Commission and its counterpart in the midstream and downstream sector, the Authority are required to go through established procedures in the making of regulations across the industry value chain. Accordingly, to ensure adequate checks and balances in performing its regulatory functions, the Commission is required to consult with stakeholders[8] prior to finalizing any regulations or amendments to regulations in accordance with the procedures outlined in the Bill. However, the requirement for the Commission to have a written basis for decisions or orders made by it in the exercise of its decision-making powers which shall be made accessible to the public, no longer seem to feature in this PIB although same still applies with respect to the Authority. Section 217 also provides for the process to be followed before any action can be taken on a lease, licence or permit where it appears to the Commission that the holder thereof is contravening, has contravened or is likely to contravene any of the conditions of the lease, licence or permit.
To perform the industry watchdog role of the Commission, the Bill established the Special Investigation Unit (the “SIU”) to undertake necessary investigation where there exists a possibility that illegal operations are being undertaken within the upstream petroleum industry. The SIU or any person authorized by the Commission shall have powers to enter premises where an illegal operation is believed to be carried out at any reasonable time, conduct examination on facilities and machineries, and arrest with a warrant in conjunction with any law enforcement agency including the Nigeria Police Force. This is a good departure from the power to arrest without warrant granted to the Minister under the PA.
The SIU may also request individuals or entities undergoing investigation to provide its books of account, and or other records kept by it, in relation to its upstream petroleum operations to officers of the Commission. A failure to comply with any such request or refusing an officer a right of entry or inspection during the process of investigation is an offence punishable with a term of 5 years imprisonment or a minimum fine of N 5,000,000.00 as opposed to the 6 months imprisonment and fine of between N200 and N2000 provided under the PA. The increased fine is of course in keeping with current commercial realities.
Governance Structure
The Commission shall be governed by a Board, which will oversee its policy and general administration. The Board shall provide strategic direction to the Commission, including the determination of employee’s terms and conditions of service, budgetary approval, structuring of the Commission into different departments and the recommendation of employee’s remuneration, allowances, and benefits. Members of the Board shall consist of one non-executive chairman, two non-executive commissioners; the chief executive of the Commission, two other executive commissioners who are responsible for Finance and Accounts and Exploration and Acreage Management, one representative of the Authority not below the rank of director, one representative of the Ministry not below the rank of director, and one representative of the Ministry of Finance not below the rank of Director. We note the absence of the Minister or its appointees from the membership of the Board as a welcomed development. However, we find it puzzling and irregular that although the Bill under Section 18(2) provides for six executive commissioners each responsible for six different portfolios namely: Exploration and Acreage Management, Development and Production, Health, Safety, Environment and Community, Economic Regulations and Strategic Planning, Corporate Services and Administration, and Finance and Accounts; only two of these commissioners are admitted into the Board. The supervisory oversight of the leadership of the Commission’s Chief Executive and Executive Commissioners by the Board should provide checks and balances in the administration of the affairs of the Commission.
Appointment of members to the Board is made by the President, subject to the confirmation of the Senate except for the appointment of ex-officio members as listed in the Bill. The President is also empowered to suspend or remove a member of the Board for reasons as enumerated in Section 14 of the Bill. This we hope to a certain extent will prevent arbitrary exercise of the power of removal by the President and allow for a level of independence of the Commission.
The Fund
The Commission is expected to establish and maintain a Fund comprising monies derived from National Assembly appropriation, fees charged for services rendered, penalties and fines, grants, gifts and other sources of income as specified. The Commission is however required to pay all monies accruing from royalties and rents into the Federation Account. The Commission is also required by the end of each financial year, to pay any money that accrued to the Fund as enumerated above, which have not been utilized for approved budgetary obligations, administrative and operating costs, payment of remuneration etc., into the Consolidated Revenue Fund.[9] A cursory reading of this provision may suggest that only moneys which have not been utilized by the Commission is paid into the Consolidated Revenue Fund. However, when read in the light of the provision of Section 24(1) which categorically states that all expenditures of the Commission shall be subject to appropriation by the National Assembly, it becomes clearer that monies in the Fund are regarded as revenue generated by the Commission for the Government of the Federation, a percentage of which is then appropriated to the Commission as determined by the National Assembly. Surpluses in the Fund at the end of each financial year which was not utilized for the activities of the Commission shall also be paid into the Consolidated Revenue Fund. This is in line with the directive given by the President in 2015, requiring all revenue generating agencies to pay all their revenues into the Consolidated Revenue Fund. Agencies are therefore required to submit budgets for appropriation to meet their expenditure needs annually after their revenue had been remitted. It would therefore no longer be possible for any agency to first withdraw money for its funding needs from its generated revenue prior to remitting same to government coffers as was the case with NNPC. The drafting of this Section may need to be revisited for clarity.
The Commission is required to present to the National Assembly, a statement of its estimated income and expenditure not later than 30th of September each year or such other date as may be stated by the Minister for Budget and National Planning. Additionally, the Bill has put in place a measure of accountability by requiring the Commission to keep books of accounts, submit its audited financial statement to the Minister, and to publish its annual report and financial statement on its website.
In our next publication, we will be taking a critical look at the Nigerian Midstream and Downstream Petroleum Regulatory Authority.
Footnotes
[1] See section 6 of the Bill
[2] In addition, certain aspects are handled by other agencies/departments such as the Nigerian Content Development and Monitoring Board, the Petroleum Inspectorate and the Petroleum Products Pricing Regulatory Agency amongst others with the overarching oversight of the Ministry of Petroleum Resources.
[3] The Authority and its functions will be discussed in Part Three of this series.
[4] The Bill stipulates that petroleum operations is considered integrated where there is a joint use of utilities used exclusively for the upstream and midstream operations and ‘possible assistance to host communities’. We are not quite clear on what the host communities qualification means.
[5] With regard to the revocation or suspension of licences or leases, including the exercise of its power to renew licences and leases, the approval of the Minister is required upon recommendation by the Commission.
[6] Previous versions of the PIB have also sought to exclusive vest this role in the industry regulator and have been met with resistance from the Federal Ministry of Commerce and Industry
[7] What constitute Frontier Basins shall be as defined under Regulation to be issued by the Commission.
[8] The relevant stakeholders are lessees, licensees and permit holders that may be impacted by the regulations and such other persons that may be interested in the subject matter of the proposed regulation.
[9] Section 24(5)