The Petroleum Industry Act, 2021 Is Here. What’s In For Marginal Field Operators?

By Ebere Frankline Chisom*

Introduction

Marginal field operators in Nigeria have over the years been confronted with a number of difficulties and challenges in their operations arising mainly from the provisions of erstwhile and extant body of laws and regulatory frameworks governing their activities to wit inter alia the 1969 Petroleum Act; the Marginal Fields Operations (Fiscal Regime) Regulations, 2005 and the various Guidelines for Farm-out and Operation of Marginal Fields. In regards to the foregoing it is important to note a priori that marginal fields, as an innovative creation of the Nigerian government within the petroleum industry operated under Farm Out Agreements (FOAs) within Oil Mining Leases (OMLs), exist primarily to improve production and enhance output and management of petroleum resources while also stepping up local participation in the petroleum industry. Hence, as affecting these lofty objectives and essences, achievement and headways have been minimal with local content (particularly) in the petroleum industry standing at 30%[1] to the effect that significant expectations have been placed on the government of the day as concerning the revisitation of the legal regulatory regime which by the dint of circumstances is regarded as the major encumbrance to the actualization of the set targets.

Consequently, mindful of these expectations, successive governments in Nigeria have attempted to put in place a comprehensive, modern and tailored regulatory framework to address the myriad of challenges inherent in the petroleum industry and particularly in the operation of marginal fields as arising from extant regulatory frameworks. Hence, the enactment of the Petroleum Industry Act, 2021 by the 9th National Assembly of Nigeria and its further signing into law by President Muhammadu Buhari on the 16th day of August 2021.

This article therefore, by way of a historical comparative appraisal, evaluates the fairings of marginal field operators hinged on the legal regulatory regime in Nigeria as affecting the pre-Petroleum Industry Act, 2021 era and the post Petroleum Industry Act, 2021 dispensation. Ultimately, it exposes findings on the need for an amendment in the newly enacted Petroleum Industry Act, 2021 with specific recommendations in this regard.

Marginal Field Operations Before the Petroleum Industry Act, 2021

Prior to the enactment of the Petroleum Industry Act, 2021, marginal field operations in Nigeria were regulated by a myriad of legislative and executive regulatory instruments all lacking comprehensiveness and tailoring to the effect that the Nigerian oil industry was posited to be governed by obsolete regulatory frameworks which to a large extent worsened transparency and fostered uncertainties in the operation of marginal fields by way of impediments while ultimately decreasing production[2]. Hence, industry players in regards to difficulties in the sector contend that the harsh operating environment created by Nigerian Laws, further compounded by prevailing realities in the international oil market create an elusive outlook for activities within the sector.[3]

In the light of the foregoing, we note a number of impediments in the regulatory frameworks in force prior to the enactment of the Petroleum Industry Act (PIA), 2021. These refers to such provisions as those under the 1969 Petroleum Act (repealed by the Petroleum Industry Act, 2021) which purports to give the petroleum minister very broad and near subjective powers to award Oil Mining Leases and Oil Prospecting Licences as well as to terminate such licences and leases upon award.[4] This is definitely not without consequence on Marginal Field Operations as OMLs form the basis of FOAs under which Marginal Fields are operated. Consequent to this, in previous bid rounds such as those of 2003 and 2020, the sheer existence of these discretionary powers in the allocation of oil fields led to serious distortions and sub-optimal outcomes with legion of litigation trailing the outcome. While we do not assert that there were irregularities in the process, realities however suggest same.

Yet, these issues as are evident may not be unconnected to the military background of the Principal legislation in the industry à savoir the 1969 Petroleum Act which prefatorily situates the definition of Marginal Fields within the exclusive preserve of the President while allowing an opaque power of awarding oil blocks through the same President.[5] Further deplorably, the erstwhile regulatory frameworks allowed both participatory rights and regulatory powers to the same governmental agency viz the defunct Nigerian National Petroleum Corporation (NNPC) which raises questions of impartiality and efficacy.[6] Although the NNPC had never being a participant in Marginal Field Operations, it seemed that its powers in this regard were more extended. This arises by the dint of the provisions of the Guidelines for Farmout And Operation of Marginal Fields issued in 2001 and 2013 which are to the effect that on the Basis of Operation, that “the Farmee shall operate on a sole risk basis but with the understanding that Government reserves the right to a participating interest at any time.”[7]

The existence of such clauses in such critical legal instruments goes a long way in affecting the attitudes of investors who for the fear of eventual governmental intervention have their investment activities curtailed. Ordinarily, while governmental involvement in such ventures are laudable particularly in such unique environments as those obtainable in Nigeria, yet well-defined and clear-cut circumstances for such interventions are strongly encouraged.

Furthermore, under the more complex and diffused erstwhile regulatory frameworks within the Petroleum Industry, the fiscal and taxation regime was grossly elusive particularly with regards to Marginal Fields operations which has over the years lacked a special tax rate or fiscal system and continues to be subject to those applicable to the Petroleum Industry as a whole despite the abounding peculiarities and differences in marginal fields development and exploitation. In effect, the petroleum profit tax of 65.75% against the general percentage of 85% did not apply only to marginal fields but applied to all upstream oil companies at the first five years of operation;[8] hence, this could be likened to a mere pre-production incentive which means that once a marginal field company operates beyond its first five years, the general 85% petroleum profit tax rate would be applicable to it.[9]

In another light, there seem to be a number of legal questions and contradictions arising from the relationship of the Marginal Field Operators, the OMLs holders and the government through its regulatory bodies. Indeed, Marginal fields raise novel legal title considerations. This can be challenging for investors. These considerations stems from the understanding that the Marginal Field Operator does not hold a direct interest in the OML being the principal letting framework but acquires title to the Marginal Field through the FOA which could be likened to a sub-lease whose validity is subject to the subsistence of the enabling instrument, in this case the OML.[10] The question arising therefore which is still a vexed judicial matter in Nigeria is the fate of a marginal field upon the expiry of an OML.

Moving further, the requirements placed on companies eligible for bidding in excess of the requirement of an indigenous company (implying a company with not less than 51% equity shares by Nigerians)[11] constitute limitations to serious minded foreign investors as foreign participation can still not exceed 40% even in the permitted circumstances which comprise technical and financial partnerships only. This policy in effect is in total disregard to the realities of financing such capital-intensive projects solely by Nigerians and therefore has the potentiality of informing the stultifying of such projects which has over the years been observed in the industry.

The foregoing is further compounded by the unseriousness observed on the part of the Department of Petroleum Resources (DPR) which used to be the technical arm of the Ministry of Petroleum Resources with broad responsibility of implementing government policies, ensuring regulatory compliance, managing collection of oil and gas statutory revenues and licencing of petroleum operations as guided by the Petroleum Laws, Statutes and Subsidiary Legislations.[12] In effect, this unseriousness which is evidenced in the frequency of conducting Bid Rounds for the Award of Marginal Fields is further vividly expressed in the recent revocation of the licenses of 11 marginal field operators on the 6th of April 2020 due to the non-development of the fields 15 years after allocation. In disregard of the seriousness of the matter, the revocation order was conveyed through email.[13] Furthermore, while this is appreciated, note that the concerned operators have contended that the fields did not in effect remain idle and have made the matter subject of multiple lawsuits.

This constituted the climate of operation of marginal fields in Nigeria prior to the enactment of the Petroleum Industry Act, 2021 whose dispensation will be analysed seriatim.

Marginal Field Operations After the Petroleum Industrial Act, 2021

The consummation of the provisions of the Petroleum Industry Act, 2021 would lead to the repeal of several laws including the Associated Gas Reinjection Act, 1979; Hydrocarbon Oil Refineries Act, 1965; Motor Spirit (Returns) Act; Nigerian National Petroleum Corporation (Projects) Act, 1994; Nigerian National Petroleum Corporation Act; Petroleum Products Pricing Regulatory Agency (Establishment) Act, 2003; Petroleum Profit Tax Act; Deep Offshore and Inland Basin Production Sharing Contract  Act, 2019 amongst others with further amendments made here and there on a number of other laws within the petroleum industry such as the Pre Shipment Inspection of Oil Exports Act.[14]

The PIA, 2021 was indeed a much-anticipated law in the Nigerian Petroleum sector and was touted to resolve standing issues in the industry. In discharge of its expectations, the Act attempted to address the myriad of evident problems within the petroleum industry however not without some failures.

Primarily as it affects the subject matter of this research, Section 94 of the PIA, 2021 which is dedicated to marginal fields provides for the conversion of producing Marginal Fields into Petroleum Mining Leases within 18 months of effective date of coming into force through a total relinquishment of such acreages held under the FOAs. This singular provision solves a number of dichotomies in Marginal Fields Operations such as the long standing questions of legal relationship between the Marginal Field Operators, the OML (now Petroleum Mining Lease [PML] under the PIA, 2021[15]) holders and the government regulatory agencies Essentially, on this matter, the Marginal Fields ceases to form sub-leases of PMLs but acquires a new legal status equivalent to PMLs. By the dint of subsequent provisions specifically Section 94 (2), non-producing marginal fields declared any time before 1^st of January 2021 are to be converted to Petroleum Prospecting Licences with applicable terms of acreages under Chapter IV of the PIA, 2021 relating to the Fiscal Framework of the Petroleum Industry.

On a more serious note, it is to be noted that under the PIA, 2021, no marginal field shall henceforth be declared. The consequence of this is that the concept of Marginal Fields is done away with. This may be a cowardly way of solving the tons of legal issues arising from their operations in as much as the benefits of the concept marginal fields operated elsewhere in the World such as in the UK, the UAE and even in Angola cannot be downplayed. This, when further appraised against the lofty objectives set for marginal fields upon its introduction in Nigeria, one is exposed to the nefarious nature of the provisions of Section 94 (9) of the PIA, 2021.

Flowing from the above, it is evident that any improvement on the fairings of erstwhile marginal field operators stem from the conversion to PMLs and not merely as a matter of special or tailored considerations and provisions. Hence, a number of issues hitherto observed under the pre-PIA, 2021 era such as the requirements of 51% Nigerian equity shares and the generalized fiscal regime are dealt with. However, in the area of transparency, one may be justified to contend that not much was done in this regard. In effect, other that the separation of the regulatory government agencies such as the Nigerian Upstream Regulatory Commission and the Nigerian Midstream and Downstream Petroleum Regulatory Authority from the commercially inclined NNPC Limited to be incorporated under the Corporate and Allied Matters Act, 2020, not much were imputed.

Yet, one may not fail to note the laudable progress made in regards to regulating the powers of the Petroleum Minister in relation to the award of PMLs and PPLs (previously OMLs and OPLs respectively) who had hitherto wielded near discretional powers under the repealed 1969 Petroleum Act. In this respect, Section 3 of the Petroleum Industry Act, 2021 which provides for the general powers of the Minister; through the use of such constructions as “recommendation of the Commission (the commission being the Nigerian Upstream Petroleum Regulatory Commission)” “pursuant to the provisions of this Act”, “in accordance to the provisions of this Act” etc. the powers of the Minister more particularly in relation to the award of licences and leases are beautifully reformed and brought within a legal ambit defined by the professional see of the Nigerian Upstream Petroleum Regulatory Commission and the Nigerian Midstream and Downstream Petroleum Regulatory Authority while further through the Act one comes across such constructions interstitially to the effect that all licences and leases granted under the PIA, 2021 are no longer ostensibly transparent but effectively so.

However, as affecting policy formulation and operational matters within the industry, the PIA, 2021 disproportionately preserves the enormous powers and authority on the Minister who by the dint of Section 3 (1) (a) has the power to formulate, monitor and administer government policy in the petroleum industry. These powers which include the elements of legislating as well as executing defies the principles of separation of powers which is the building block of our democracy and can therefore be easily abused by any serving Minister and could prove fatal to every operation within the Nigerian petroleum industry.

Having regards to the foregoing, it therefore follows that there must be an urgent amendment to the Petroleum Industry Act, 2021 for the sustenance or rather revival of the laudable objectives of the marginal fields program.

There Must be an Amendment of the Petroleum Industrial Act, 2021

Indeed, had the Petroleum Industry Act, 2021 delivered on the strong transparency and accountability promises, Nigeria’s oil industry performance would have significantly improved while also enjoying a great boost through marginal field operations. As far as policy formulation within the petroleum industry is concerned, it is trite that transparency discourages illicit behaviour while also encouraging competition which are necessary drives for development. This is particularly critical for Nigeria as it impinges on its petroleum sector which is the backbone of its economy.

The more disappointing part of the PIA, 2021 as affecting this study stems from the provisions of Section 94 (9) which most unfortunately reads: “No new marginal fields shall be declared under this Act.” By this singular provision, as has been hitherto implicitly enunciated, no new thought or consideration in regard to marginal fields can be exclusively made. Hence, all developments in this regard are stultified in disregard of the fact that Nigeria’s marginal fields sub-sector has been the cornerstone of the country’s upstream local content development strategy since early 2000 and previous licencing rounds is the reason Nigeria can boast of strong local and regional African exploration and production (E&P) companies.[16]

Furthermore, appreciating the contribution of marginal fields through a foreign lens establishes the laudability of the initiative. According to RMRI Consulting, marginal fields in the UK continental shelf could create 2,500 jobs and £26 billion of investment, as well as giving the “national economy a much-needed boost”[17] The report further states that the potential post-tax profit based on a $90 per barrel oil price is £22.2 billion for operators and the potential tax income to the Treasury is £19.4bn at total reserves production level. This goes to establish the extent to which the operation of marginal fields is valued even in such developed economies as that of the United Kingdom.

In the light of the foregoing, it is strongly recommended that the wordings of Section 94 (9) of the PIA, 2021 be varied to the effect of allowing the declaration or creation of new marginal fields under the instant Act. While this is made, a tailored regulatory framework must be evolved in the regards. More particularly, appropriate lessons and expertise must be drawn from past experiences as well as from other jurisdictions particularly from such countries with similar operational landscape as Angola which has successfully drawn from the potentials of its marginal field operations.

Indeed, attention must be placed on the award process, the fiscal regime and the legal status of such fields in every regulatory framework to be evolved to the effect of making such investor-friendly. In another light, the exploitation of marginal fields must be based on a national blueprint and development strategy to be evolved which must embody all goals and aspirations of a sustainable development. According to Michael Faniran[18], “Past licensing rounds in Nigeria were not tied to any comprehensive asset development strategy or broader economic development plans. Nigeria needs to develop a strategy for managing its natural resource base for current and future generations, and conform licensing rounds to such strategy. Angola, for instance, selects blocks carefully on the basis of articulated, well-planned development strategies.

Furthermore, in line with the laudable concept of incorporating model licenses and leases, the PIA, 2021 should be amended to include a model Guidelines for the Award of Marginal Field which will insist on transparency as the public should be able to access data on a dedicated platform or repository throughout the bidding process so as to assess government management of the process.

In addition, powers of the minister which has been established to be in excess of what is required should be curtailed under an amended Petroleum Industry Act. In effect, the power of the Minister to formulate policies for the Petroleum Industry should be checked by the Legislature. Such policies should be brought subject to the approval of the Legislature in as much as the powers to administer government policies within the Petroleum Industry must be preserved in the Minister.

Conclusion

It is settled that Marginal Fields in Nigeria have the potential of unlocking Nigeria’s petroleum industry to local participation as well as enabling the country achieve its goals of 3mbpd (three million barrel per day). However, the regulatory framework over the years with its amendments have not being able to effectively address the myriad of problems ostensibly inherent in the sub-sector. This, however, is not to say that these problems cannot be effectively addressed through the regulatory frameworks as indeed, in them lies the key to salvation.

The Nigerian government must therefore stand up to the task ahead of it and not act cowardly. Indeed, the regulatory framework must be revisited, at least one more time.

* Ebere Frankline Chisom, LLB Part II, Ahmadu Bello University, Zaria. franklinechisom96@gmail.com. franklinechisom.com. Member, Young Institute for Transnational Arbitration

[1] Ibibo M., (07 May 2021) ‘Marginal field operators will grow Nigeria’s oil if supported’, The Guardian, <https://guardian.ng/business-services/marginal-field-operators-will-grow-nigerias-oil-if-supported> accessed 20 November 2021

[2] Adekoya F., Jeremiah K., and Ebiri K., (10 June 2020), Confusion over bid rounds for 57 oil fields, The Guardian, < https://guardian.ng/news/confusion-over-bid-rounds-for-57-oil-fields >, accessed 20 October 2021

[3] Ibid.

[4] A cumulative reading of the 1969 Petroleum Act in light with the Provisions of Section 2 informs this position

[5] See Section 17, Petroleum Act, 1969

[6] Cumulative reading of the Nigerian National Petroleum Corporation Act (repealed) and the Petroleum Act, 1969

[7] Article 13 (viii), Guidelines for Farmout And Operation of Marginal Fields, 2013

[8] See Section 21 (1) and (2), Petroleum Profits Tax Act (repealed)

[9] Ibid.

[10] Bonnefoy N., Poyntz D., (2014), Nigeria Oil and Gas: Marginal Fields, Ashurst London

[11] See Section 106, Nigerian Oil and Gas Industry Content Development Act, 2010

[12] Cumulative reading of Nigerian Petroleum Laws and regulations

[13] Ibibo M., Op cit.

[14] Section 310, Petroleum Industry Act, 2021

[15] Section 81, Ibid.

[16] Adekoya F., (23 June 2021), Leveraging marginal fields for improved national reserves, local content, The Guardian, < https://guardian.ng/energy/leveraging-marginal-fields-for-improved-national­-reserves-local-content > accessed 27 November 2021

[17] Macnab S., (3 August 2014), Marginal oil fields ‘worth £40bn to UK’, The Scotsman, < https://scotsman.com/business/marginal-oil-fields-worth-ps40bn-uk-1529978> accessed 27 November 2021

[18] Adekoya F., Jeremiah K., and Ebiri K., (10 June 2020), Confusion over bid rounds for 57 oil fields, The Guardian, < https://guardian.ng/news/confusion-over-bid-rounds-for-57-oil-fields >, accessed 20 October 2021