…The duration tenure and terms are winding down gradually facing the reality of PIA. The timing of the deadline for conversion and financial implications is a bit disruptive for conversions.
-Felix Douglas
The Petroleum Industry Act (PIA) became a legal document to administer Nigeria’s oil and gas industry in 2021 after many issues making it impossible for it to come to fruition. It was a mission accomplished when an Act to govern the industry was brought to bear.
However, stakeholders are of the view that it is not yet uhuru as many gray areas are yet to be addressed stifling the industry. The International Oil Companies (IOCs) are divesting and indigenous oil companies are gradually taking over from the multinationals with operators blaming regulatory activities setting the industry backward. One of the major aspects has been license conversion.
The Centre for Petroleum Information (CPI), a leading energy think-tank, recently had its Oil and Gas Law Forum (webinar), where license conversion under PIA 2021 was discussed by legal experts.
At the webinar, Funmi Adesanya, Head Commercial Legal Services, Nigerian Upstream Petroleum Regulatory Commission (NUPRC) spoke on the theme: PIA 2021 License Conversion: Avoid Pitfalls
Adesanya pointed out that in the PIA, the number of fiscal obligations that are required to be met like filings of estimated returns of profit and loss for ideal Carbon Tax with Federal Inland Revenue Service (FIRS) and tax computations, must be made in dollars to FIRS as obligations to access and collect carbon company income tax.
She said the Commission has the powers to determine and collect royalties, signature bonus and payments. There are penalties for not meeting these obligations as stipulated in section 2774 of the PIA and section 100 of the PIA prescribes payment of royalties, fees and rents and production of profit shares in the amounts and times prescribed. But where these payments remain outstanding for a period of 30 days, PIA considers and prescribes that such amounts will be considered a debt to the Commission with accrued interest and grants it the powers of recovery and enforcement in relation to the debt owed.
The focus of PIA is to ensure that equities are developed in a business like manner to ensure that the targets set by the federal government for production of crude oil are met.
However, it is important to underscore that PIA also gives the Commission rights to enforce powers to issue administrative penalties for non compliance with the provisions of the Act.
Reacting to Adesanya’s statement, Adeoye Adefulu, Partner at Odujirin Adefulu was of the view that the whole conversion discussion is not always irrelevant without velocity, hence stakeholders must ensure they move quickly to develop exploration assets.
Another aspect of velocity that must be encouraged in the industry is getting approvals.
Although the government has already recognised approvals with its executive order but what is the fate of DMB and NNPC approvals?
He said the approval process is not yet active. It therefore means that the process of velocity has not been applied.
On asset disposals, Adefulu believed the idea behind conversion is to be able to take a number of these assets and turn them around. “We’ve had the 2023 licensing round which has not yet concluded while that of 2024 is ongoing.”
What are those things that are affecting quicker pace around these disposals?
The process of transfer of assets is either delayed or slow including the ones recently approved.
He added that the PIA anticipates that NUPRC addresses these issues within a short period, yet it takes time to resolve.
On asset development, there is need for indigenous exploration companies that are major players to have focus on replacing production and develop assets within their territory. These cannot be over emphasised.
Sope Falana is a Senior Partner at Jackson Etti & Edu, shared her thoughts on the topic on the overall objective for the conversion of acreage management.
According to Falana, acreage management is an attempt in the marginal field towards having some level of capturing value from the existing acreages that have been given on under licenses, but yet to be developed.
The conversion contract is also another new piece of capturing value from those equities that lies fallow to find opportunity.
The PIA generally is to ensure that equity management, such that the equities are reduced to attract many investors not lying fallow. However, restraint and non subscription are because of the number of constraints and right of conversion.
According to the Senior Partner at Jackson Etti & Edu, PIA was enacted in August 2021, and it took sometime before those who got anything to do with it put things in right perspectives to regain lost grounds. Irrespective of incentives, it is still disruptive and 18 months may not have been sufficient for high level decision making that was required for those conversions.
Financial implication was also involved. For example, a company that’s already integrated had to separate its upstream, downstream midstream and operations. It has to incorporate host community development trust. Domestic product and gas supply obligations among others should be considered.
Speaking further, Falana said some of the companies involved have five to ten years forecast in terms of commercial production with expectation of profit and returns. When they are met with requirements or applications for conversion, it becomes difficult to come by. Obviously there are factors necessitating reasons why conversion was not embraced as expected but there are lots of opportunities.
The duration tenure and terms are winding down gradually facing the reality of PIA. The timing of the deadline for conversion and financial implications is a bit disruptive for conversions.
Giving his own views, Adeyemi Akisanya, Partner Adeyemi Akisanya Associates, commented on the marginal field status in terms of whether they were mining leases, the PIA has made it clear and definitive on their conversion which is a step forward.
For those who had taken a look at the PIA, there are some things about the new regime that was rather complex compared to the formal.
“It could not be attractive unless there were some real incentives in conversion for you to convert. Those that have opted to go into the new regime have done so either because they had nothing that was militating against them,” Akisanya added.
One of the things that the government needs to look at is that everything cannot be inside an Act. The implications should be considered with legislative interventions.
For example, a lot of the long term financing obligations and commitments done under the old regime did not anticipate some of the new situations and there would have been disruption of some of the financial assumptions that were made, Akisanya added.
“You can’t go in and keep amending the PIA to deal with the situation because financing requirements will always change. We need to go into other areas of government legislature, tax and policies to make a soft landing for compensation which has not been done.”
The PIA has come to say, a new set of lobbying of the government in terms of statutory and policy actions need to begin for necessary regulations and policies to cushion those areas that discourage conversion.
With PIA, the option not to convert was a compromise and not a positive strategy. There must be a positive strategy objective if there is none, adjust policies to deal with the situation.
According to Akisanya, the government needs policy and regulation interventions to deal with some of those areas that have made conversion unattractive.
Ultimately, in ten years, there should be a trial objective test where that dichotomy should be removed. “We should begin to put in place the regulations and policies to meet them on arrival, not when they get there, when we’ll have competition.”
In her own perspective, Chief Sena Anthony, CPI Board member, explained that there ought to be skeletal structure such that more attention will be on regulation, which is easier to amend. Fiscal regime should also be taken care of by regulation not legislation. “There is need for more work to be done on regulations, on seeing how we put into practice, how we entice voluntary conversion, rather than making things mandatory.”
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