The signing of the Petroleum Industry Act (PIA) into law by President Muhammadu Buhari on the 16th of August 2021 is a welcome development for the Nigerian Gas Association (NGA) and stakeholders in the Nigerian gas sector value chain. Moreso, at a time where Nigeria needs to urgently position and craft a sustainable and viable plan for leveraging and utilizing gas as a transition fuel for its economic and industrial growth in the midst of a world-wide race to net zero carbon emissions.
Overall, the PIA is expected to usher in improved investments in the gas sector. This potential for improved and increased investments must be situated within the larger business environment in Nigeria in terms of a credible and viable commercial framework, certainty of the regulatory framework, security, ease of doing business, provision of infrastructure and other related factors.
From the fiscal regime and pricing viewpoint, the PIA introduces improved fiscal terms for the domestic upstream gas supplier though pricing is still deemed to be regulated without specific triggers for transition to a free market.
In terms of the governance and regulatory framework, the PIA has positively established a delineated framework for the regulation of activities in the upstream, midstream and downstream gas operations as well as the licensing and fiscal framework which in the past had been subsumed under oil exploration and production.
The establishment of the Nigerian Upstream Regulatory Commission (NUPRC) as well as the Nigerian Midstream and Downstream Regulatory Authority (NMDRA) is a step in the right direction and the NGA anticipates that we should see both the NUPRC and NMDRA come into operation assuming the relevant roles of the defunct Department of Petroleum Resources (DPR) and ensuring a smooth transition for both agencies and the stakeholders in the sector.
GAINS/BENEFITS OF THE PIA TO INVESTORS/PROSPECTIVE INVESTORS
The NGA also recognizes and applauds the provisions of the PIA targeted at unlocking the petroleum industry particularly the gas sub-sector and the ingenious approach in terms of the preservatory provisions of the PIA to ensure continuity of existing licensees and protect existing investment and operations. These includes:
*Consideration and treatment of natural gas as a stand-alone resource and providing clarity on the investment framework in the gas sub-sector.
*The introduction of the concept of voluntary conversion, which grants the holder of an Oil Prospecting License (OPL) or Oil Mining Lease (OML) the discretion to convert to a Petroleum Prospecting License (PPL) or Petroleum Mining Lease (PML) respectively, or not convert until the expiration of the OPL or OML. Conversion to a PPL or PML enables the licensee or lessee to immediately benefit from the fiscal gains of the PIA set out in Chapter 4.
*Preservation of existing license, leases, permits as well as the gas sale agreements contracts issued or entered into prior to the effective date of the PIA.
The incorporation of key industry principles, including the Network Code principles, nondiscriminatory Third-Party Access into the PIA which demonstrates consistency that is key to building investor confidence.
*The establishment of the Midstream and Downstream Infrastructure Fund which will help to achieve the pooling of the much needed capital required to develop the deficient gas infrastructure in Nigeria.
*The fiscal framework of the PIA introduces a new reduced royalty and taxation system for gas thereby improving profitability. Also, the PIA provides for an additional 5-years tax holiday to be granted to investors in gas pipelines. This is to incentivize gas utilization in midstream petroleum operation and large scale gas utilization in the country.
SUGGESTED AREAS FOR CONSIDERATION/CLARIFICATION IN THE PIA
Whilst the NGA acknowledges the above strides made by the PIA, there are provisions of the Act that would require further engagement & clarification to ensure unambiguity in their implementation. Some of the areas for clarification include and are by no means exhaustive:
1. Domestic Gas Delivery Obligations (Section 110)- The nature and extent of domestic gas obligations and the scope of the discretion to be wielded by the regulators given the commercial, contractual technical and financial considerations underlying investments to meet such obligations.
2. Clarity on Licensing Requirements (Sections 125(6) & 174(6)) – Lack of clarity on what the specific terms for the licensing of midstream or downstream gas or petroleum liquids post the 18-month transition period.
3. Potential overlaps in the roles of the NUPRC and NMDRA (section 125(6)) –The PIA imposes an obligation on upstream operators under the regulatory purview of NUPRC as well as holders of other licenses or permits who are also engaged in activities in midstream or downstream gas operations prior to the effective date of the PIA to apply to NMDRA within 18 months from the effective date of the PIA for the appropriate licenses or permits, as applicable.
4. Industry Representation on Governing Council of Midstream and Downstream Gas Infrastructure Fund (Section 52(4) – The PIA currently does not provide for industry/private sector representation on the Governing Council of the Midstream and Downstream Gas Infrastructure Fund. This is key for credibility in the administration of the fund.
5. Pricing: The PIA needs to be more specific about time-bound triggers for transitioning from a regulated to a market-driven (willing-buyer-willing-seller) pricing framework as this will ensure investments can be made with definitive and applicable fiscal terms. Some immediate short-term options could be explored while pricing reform is in progress, including allowing producers operate under their existing contracted terms or transition to willing-buyer-willing-seller by 2023. The NGA would like to see a pathway that could be adopted to deliver a pricing reform and long-term liberalization of the domestic gas market.
6. Fiscals: Fiscals for stand-alone non-associated gas developments need to be included in the PIA.
The NGA as a committed stakeholder in the gas sector hopes and expects that these and many other issues that may emanate as the implementation of the PIA progresses will be clarified in the form of regulations and possibly amendments to the Act as required in the near future.
The NGA stands ready to be a part of the consultative process with the relevant agencies and stakeholders to ensure a successful implementation of the PIA and accelerated development of the Nigerian Gas Sector development during this decade of gas.