Petroleum Industry Act (2021) & You

The Petroleum Industry Act 2021 is “an Act to provide legal, governance, regulatory and fiscal framework for the Nigerian Petroleum industry, the development of host communities; and for related matters.”

From its citation, it is apparent that the development of the host communities is at the heart of the PIA 2021.

The Petroleum Industry Act (PIA) 2021 updates and harmonizes the slew of disparate legislations and ordinances governing Nigeria’s petroleum industry pre-2021. It delivers a more efficient legal, fiscal, and regulatory framework for the petroleum industry.

Most importantly, the Act prescribes a coordinated legal framework to address the issues pertaining to the communities where petroleum exploration, development and production occur. This framework ensures that the communities benefit from the petroleum resource activities in their domains in a democratic, clear and transparent way.

Chapter three, section 234 states the objectives as being to:

1. Foster sustainable prosperity within the host communities;
2. Provide direct social and economic benefits from petroleum operations to host communities;

3. Enhance peaceful and harmonious co-existence between licensees or lessees and host communities; and

4. Create a framework to support the development of host communities.

The settlor is “a holder of an interest in a petroleum prospecting licence or petroleum mining lease whose area of operation is located in or appurtenant to any community or communities”

According to the Act, host communities are “communities situated in or appurtenant to the area of operation of a settlor, and any other community as a settlor may determine”

“For settlors operating in shallow water and deep offshore, the littoral communities and any other community determined by the settlors shall be host communities for the purpose of this Act.”

The area of operation is “the territory which hosts a lessee’s or licensee’s operation or designated facilities and any other ancillary facilities related to upstream and midstream petroleum operations.”

The Host Communities Development Trusts are the legal vehicle for managing host communities’ development and resolving accompanying conflicts. Each Trust is a legal entity, incorporated by the settlor on behalf of the host communities, with the full representation of the host communities, and managed by the appointed representatives of the host communities.

The beautiful thing about the HCDT (the Trust) is that whatever issues the community wants to address can be addressed directly and effectively by the communities. This is done by ensuring adequate representation for the communities on the Board of Trustees, the Management Committee and the Advisory Committee of the HCDT. Whether it is jobs, health, social safety nets, roads, business seed or grants, housing, fishing and agriculture, host communities now have a chance to direct their development. The HCDTs thus present an unparalleled opportunity for proactive communities and visionary leaders to unleash tremendous progress for their constituents.

The HCDTs give host communities something to look forward to, year after year, and the ability to track the communities’ progress on the development path.

The HCDT has three operational organs, all of which are nominated directly or indirectly by the host communities. These include the Board of Directors, the Management Committee, and the Advisory Committee.

The gazetted regulation for the HCDT specifically mandates that settlors submit the proof of the host communities meeting during which community representatives were appointed as part of the prerequisites for approval in setting up the Trust.

 Section 235 – Host communities development trust

1. “The settlor shall incorporate host communities development trust for the benefit of the host communities for which the settlor is responsible.

2. Where there is a collectivity of settlors operating under a joint operating agreement with respect to upstream petroleum operations, the operator appointed under the agreement shall be responsible for compliance with this chapter on behalf of the settlors.

3. For settlors operating in shallow water and deep offshore, the littoral communities and any other community determined by the settlors shall be host communities for the purpose of this Act.

4. The settlor shall for the purpose of setting up the trust, in consultation with the host communities, appoint and authorize a board of trustees, which shall apply to be registered by the Corporate Affairs Commission as a corporate body under the Companies and Allied Matters Act…”

Subsection 7

“The settlor shall undertake needs assessment that will metamorphose into the community development plan for the purpose of determining the projects to be undertaken by the host communities development trust.”

Section 238

“… failure by any holder of a licence or lease…to comply with its obligations under this chapter, after having been informed of such failure in writing by the commission…may be grounds for revocation of the applicable licence or lease”

Section 239, Subsection 1

“The constitution of the host communities development trust shall allow the host communities development trust to manage and supervise the administration of the annual contribution of the settlor contemplated under this chapter and any other sources of funding.”

Section 239, Subsection 3 (Objectives of the HCDT)

The objectives of the host communities development trust shall include, to –

1. Finance and execute projects for the benefit and sustainable development of the host communities;

2. Undertake infrastructural development of the host communities within the scope of funds available to the Board of Trustees for such purposes;

3. Facilitate economic empowerment opportunities in the host communities;

4. Advance and propagate educational development for the benefit of the members of the host communities;

5. Support healthcare development for the host communities;

6. Support local initiatives within the host communities, which seek to enhance protection of the environment;

7. Support local initiatives within the host communities which seek to enhance security;

8. Invest part of available fund for and on behalf of the host communities; and

9. Assist in any other developmental purpose deemed beneficial to the host communities as may be determined by the Board of Trustees.

Section 242 – Board of Trustees

(2) “The settlor shall, in consultation with the host communities, determine the membership of the Board of Trustees to include persons of high integrity and professional standing, who shall come from the host communities and the Members of the Board of Trustees shall elect a Chairman from amongst themselves.”

4) “Each member of the Board of Trustees shall serve a term of four years in the first instance and may be reappointed for another term of four years and no more.”

Section 243 – Functions of the Board of Trustees

“The Board of Trustees shall be responsible for the general management of the host communities development trust and shall be responsible for –

Determining the criteria, process and proportion of the host communities development trust

1. fund to be allotted to specific development programs;

2. Approving the projects for which the host communities development trust fund shall be utilized;

3. Providing general oversight of the projects for which the host communities development trust fund shall be utilized;

4. Approving the appointment of fund managers for the purposes of managing the reserve fund;

5. Set up the management committee of the hosting communities development trust and appoint its members; and

6. Determine the allocation of trust funds to host communities based on the matrix provided by the settlor.

Section 247 –Management Committee

1. The constitution of the host communities development trust shall contain provisions requiring the Board of Trustees to set up a management committee for the host communities development trust

2. The membership of the management committee shall comprise –

The Host Communities Development Trust Fund (HDCTF) (the Trust Fund) is the primary means through which the activities of the Trust are financed. The fund itself is seeded by a mandatory contribution of 3% of the operational expenses of the settlor in the preceding year, which must be done annually, 3 months before the end of the financial year, for the lifetime of the fund.

The trust fund MUST be used exclusively for the activities of the Trust in the specific host communities in the settlor’s area of operation.

Section 240

1. “The constitution of each host communities development trust shall establish a fund comprising of one or more accounts to be funded under this section.

2. Each settlor, where applicable through the operator, shall make an annual contribution to the applicable host communities development trust fund of an amount equal to 3% of its annual operating expenditure of the preceding financial year in the upstream petroleum operations affecting the host communities for which the applicable host communities development trust fund was established”

Section 241

“The constitution of each host communities development trust shall provide that the applicable host communities development trust fund be used exclusively for the implementation of the applicable host communities development plan.”

Section 244- Funds Management

The Board of Trustees shall in each year and under section 240 of this Act allocate from the host communities development trust fund, a sum equivalent to –

1. 75% to the capital fund out of which the Board of Trustees shall make disbursements for projects in each of the host communities as may be determined by the management committee in furtherance of objectives set out in section 234 of this Act, provided that any sum not utilized in a given financial year shall be rolled over and utilized in subsequent year;

2. 20% to the reserve fund, which sums shall be invested for the utilization of the host communities development trust whenever there is a cessation in the contribution payable by the settlor; and

3. An amount not exceeding 5% to be utilized solely for administrative cost of running the trust and special projects, which shall be entrusted by the Board of Trustee to the settlor, provided that at the end of each financial year, the settlor shall render a full account of the utilization of the fund to the Board of Trustees and where any portion of the fund is not utilized in a given year, it shall be returned to the capital fund.

Section 245 – Fund Distribution Matrix

1. “The settlor shall provide to the Board of Trustees a matrix for distribution of the trust fund to the host communities.

2. The Board of Trustees shall utilize the matrix provided… for distribution of the funds in the host communities development trust fund to each of its host communities.”

The overall objective of the commission is to “promote healthy, safe, efficient and effective conduct of upstream petroleum operations in an environmentally acceptable and sustainable manner”

In furtherance of this objective, the commission regulates and oversees the implementation and operation of the Trusts and Trust Funds.

According to the Act,

“The commission shall

1. make regulations on the administration, guide and safeguard the utilization of the trust fund; and
2. have the oversight responsibility of ensuring that the projects proposed by the Board of Trustees are implemented.”

In furtherance of its role, the NUPRC has developed regulations and templates guiding the activities of the Trusts and the Trust funds all of which are available on NUPRC’s website.

The PIA introduces strong financial and regulatory deterrents for operators to avoid environmental degradation and respond to environmental and safety accidents promptly and effectively. This is done through the instrumentality of the environmental remediation fund, which is an upfront financial commitment by operators in an account accessible to the commission. It also forbids gas flaring and venting, imposing stiff fines, the proceeds of which serve to address environmental problems in the host communities.

Section 103, subsection 1 of the Act states that “as a condition for the grant of a licence or lease and prior to the approval of the environmental management plan by the commission, a licensee or lessee shall pay a prescribed financial contribution to an environmental remediation fund established by the commission, for the rehabilitation or management of negative environmental impacts with respect to the licence or lease.”

In addition, subsection 4 states that “where licensee or lessee fails to rehabilitate or manage or is unable to undertake the rehabilitation or management of any negative impact on the environment, the commission may upon written notice to the holder apply the fund to rehabilitate or manage the negative environmental impact.”

To strictly eliminate gas flaring and venting, the Act requires all natural gas-producing licensees or lessees to submit a natural gas elimination and monetization plan to the commission within 12 months. The Act also prescribes a fine for gas flaring or venting, which fine “shall be for the purpose of environmental remediation and relief of the host communities of the settlors on which the penalties are levied.”  In addition, such a fine will not be “eligible for cost recovery or be tax deductible.”

Where petroleum wells, installations, structures, utilities, plants, and pipelines on land and offshore are decommissioned, such decommissioning must be done under the provisions of the Act, specifically “Installations and structures on land shall be completely removed and the environment restored to its original condition, except for buried transportation pipelines and gathering lines”, and that must be done “in a manner that guarantees sustainable environmental development” (Section 232)

In addition

“Each lessee and licensee shall set up, maintain and manage a decommissioning and abandonment fund held by a financial institution that is not an affiliate of the lessee or licensee, in the form of an escrow account accessible by the commission.”

“The decommissioning and abandonment fund shall exclusively be used to pay for decommissioning and abandonment costs.”

Finally, “where a lessee or licensee fails to comply with the decommissioning and abandonment plan, the decommissioning and abandonment fund shall be accessed by the commission to pay for the performance by a third part of such lessee’s or licensee’s obligations” (Section 233)

The host communities are required to do the following to gain the maximum benefit from the Act:

1. Nominate representatives to the three levels of leadership of the HCDT.
2. Collaborate with their representatives to ensure their needs are surfaced and prioritized.
3. Monitor the progress of the projects being executed in the communities.
4. Provide an enabling environment for the execution of community projects, the development of petroleum infrastructure, and the improvement of security.

Concerning the last responsibility above, section 257, subsection 2 of the Act states that “where in any year, an act of vandalism, sabotage or other civil unrest occur that causes damage to petroleum and designated facilities or disrupts production activities within the host communities, the community shall forfeit its entitlement to the extent of the costs of repairs of the damage that resulted from the activity with respect to the provisions of this Act within that financial year; provided the interruption is not caused by technical or natural cause.”

In other words, the more petroleum investments communities allow, the more the settlor’s contribution to the HCDTF in the following year. It is also true, that where communities don’t allow investments to happen, or you delay or disrupt equipment installation, their actions directly reduces or eliminates the funding for their specific host communities in the following year.

The representatives of the communities in the HCDT must deal with integrity, transparency, and in the interests of the host communities they represent.

The PIA forbids damage to protected and venerated objects because of an operator’s activities while protecting private property owners’ rights.

The Act lists areas where operators or licensees cannot take over to include

1. Sacred lands, defined by a customary court
2. Public land
3. Government compounds
4. Areas in a town, village, market, or cemetery
5. A building or within 50yards of buildings, water reservoirs, dams, public roads or tramways or 100meter from a railway track
6. Farmland under active cultivation
7. Other private property without permission from the commission, and payment of fair and adequate compensation to the person in lawful possession.

Operators shall also not –

1. Injure or destroy any tree or objects of commercial value or of veneration in the catchment area
2. Damage or destroy any building or property
3. Disturb or damage surface of the land or any other rights to any person who owns or is in lawful occupation of the surface area covered by the license.

The Nigeria Acreage Management Drilling and Productions Regulations, made pursuant to Part II of the PIA 2021, clearly states that “if the licensee or lessee exercises the rights conferred by his license or lease in such a manner as unreasonably to interfere with the exercise of any fishing rights, he shall pay adequate compensation thereof to any person injured by the exercise of those first-mentioned rights.”

Firstly, it is the law.

Secondly, specific sections of the Act further link the renewal of leases and licences to the performance of these community and environmental obligations, in addition to the commission’s ability to recommend the revocation of leases and licences. It states explicitly that:

“The Commission shall approve an application for renewal pursuant to this paragraph where it is satisfied that the lessee has met all the requirements for renewal, and accepted the conditions under paragraph 27(4) and has fulfilled the terms of his current lease in respect of payment of fees, rents, royalties, taxes, host community obligations, decommissioning and abandonment fund payments, environmental management fund payments and any environmental obligations under the environmental management plan relating to the current lease. (Section 27 subsection 5)

Firstly, it is the law.

Secondly, specific sections of the Act further link the renewal of leases and licences to the performance of these community and environmental obligations, in addition to the commission’s ability to recommend the revocation of leases and licences. It states explicitly that:

“The Commission shall approve an application for renewal pursuant to this paragraph where it is satisfied that the lessee has met all the requirements for renewal, and accepted the conditions under paragraph 27(4) and has fulfilled the terms of his current lease in respect of payment of fees, rents, royalties, taxes, host community obligations, decommissioning and abandonment fund payments, environmental management fund payments and any environmental obligations under the environmental management plan relating to the current lease. (Section 27 subsection 5)Some of the Key Steps Taken by NUPRC in furtherance of the HCDTs and HCDTFs Objective of the Act

In July 2022, the commission released an implementation template for the implementation of the HCDT. The template offers simplified and straight-to-the-point answers to most stakeholders’ concerns. You can get the template from the link here: https://www.nuprc.gov.ng/wp-content/uploads/2022/07/NUPRC-HOST-COMMUNITIES-DEVELOPMENT-TRUST-IMPLEMENTATION-TEMPLATE.pdf

The implementation template above was issued as a follow-up to the Nigeria Upstream-Petroleum Host Communities Development Regulations, made under the Act, and gazetted in June 2022. The regulation details appointments, host communities’ need assessments, host communities development plans and more. It also outlines the dispute resolution mechanisms between communities and settlor(s). A copy of the regulation can be obtained from NUPRC’s website via this link https://www.nuprc.gov.ng/nigeria-upstream-petroleum-host-communities-development-regulations-2022-2/ 

Other frameworks and regulations that may be of interest to host communities concerning the PIA 2021 include the following:

The Upstream Decommissioning and Abandonment Regulations. https://www.nuprc.gov.ng/wp-content/uploads/2022/08/Upstream-Decommissionning-and-Abandonment-Regulations.pdf

Upstream Petroleum Environmental Remediation Fund Regulations  https://www.nuprc.gov.ng/wp-content/uploads/2022/08/Upstream-Petroleum-Environmental-Remediation-Fund-regulation.pdf

and, Template constitution of the HCDT https://www.nuprc.gov.ng/wp-content/uploads/2022/08/TEMPLATE-CONSTITUTION-OF-HOST-COMMUNITIES-TRUST.pdf

All these and more are available from the commission’s website https://www.nuprc.gov.ng/