A LEGAL APPRAISAL OF THE SALIENT ISSUES IN THE PETROLEUM INDUSTRY BILL (PIB) PRESENTED TO SENATE COMMITTEE ON PETROLEUM RESOURCES (UP STREAM)

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1 A LEGAL APPRAISAL OF THE SALIENT ISSUES IN THE PETROLEUM INDUSTRY BILL (PIB) PRESENTED TO SENATE COMMITTEE ON PETROLEUM RESOURCES (UP STREAM) PREPARED BY: A.U. Mustapha, Esq. A.U. MUSTAPHA & CO. TreeHouse, No. 32, Mediterranean Street, Maitama District Abuja. Tel: , Fax:

2 A LEGAL APPRAISAL OF THE SALIENT ISSUES IN THE PETROLEUM INDUSTRY BILL The Petroleum Industry Bill, otherwise known as PIB has continue to generate heated attention from various stakeholders in not only the oil and gas sector but also across political divide in the country because the bill seeks to bring far reaching changes in the oil and gas industry, this is not surprising as revenue from oil and gas accounted for about 90% of the country s yearly budget. The PIB originated from the work of the Committee put together by Ex-President Olusegun Obasanjo in 2000 to carry out a reform of the Country s petroleum industry to make it more competitive, efficient and commercial driven for the benefit of the Nigerian people, the private investors and all other stake holders. This was aimed at curbing waste, attract further investments to increase the Country s oil and gas reserve, boost oil production and create an environment conducive for oil production activities amongst others. The Committee known as the Oil and Gas Reform Implementation Committee completed its work in 2007 under the Yar adua administration. The work of the Committee formed the basis of the PIB which was first put together by a second Committee and presented to the National Assembly in 2008, but the passage was frustrated by the various interest stated above. The situation was further compounded by the circulation of several versions of the bill at the National Assembly. The current version of the bill was the product of a review done by the special task force constituted by the current Minister of petroleum Resources, Mrs. Diezani Alison- Madueke to review the various version of the bill. The work of this task force and technical sub-committee culminated in the Petroleum Industry Bill 2012 which was forwarded to the National Assembly for consideration on the 18 th of July The explanatory memorandum to the PIB captured the overall essence of the Bill in summary as follows: This Act provides for a legal, fiscal and regulatory framework for the Nigerian Petroleum Industry and establishes institutions, regulatory and commercial entities for the proper administration and coordination of the operation of the upstream and downstream sectors of the petroleum industry as well as providing for the imposition, assessment and collection of the Nigerian Hydrocarbon tax. 2 A L E G A L A P P R A I S A L O F T H E S A L I E N T I S S U E S I N T H E P E T R O L E U M I N D U S T R Y B I L L

3 The above summary leaves no one in doubt that the PIB is broad, extensive and comprehensive in provisions and contents as it is a unification of all the 16 Laws regulating the nation s petroleum industry. Sitting atop of these Laws is the Petroleum Act 1969 (as Amended), which laws are antiquated and inadequate to meet the modern international demands of the petroleum industry. The purpose of this work is to embark on a critical review of certain provisions in the PIB which seem to be in conflict with other provisions in the Bill and some existing legislations on the one hand, on the other hand we would also be beaming our searchlight on the powers conferred on the Petroleum Minister under the PIB which has generated a lot of debate both in the press and among politicians. Notable areas of conflict in the PIB provisions The focused areas of the PIB for the purpose stated above are; sections 6(c) which provided that the Minister of Petroleum Resources shall report activities in the industry to the Federal Executive Council, 6(g) and 16(a) which seem to grant concurrent powers to the Minister and the Upstream Petroleum Inspectorate to renew, amend and revoke upstream petroleum licences and leases. There is a similar provision in section 45(1)(i), (w) and 46(a) which granted wide powers to the Downstream Petroleum Regulatory Agency to deal with licences and leases in the sector without reference to the Minister. It is also interesting to note sections 17(2)(a), 47(2)(a) which made provisions for the appointment of experienced technocrat as chairmen of the board of the agencies created therein, while in another breath, similar provisions in sections 77(2)(a) and 101(2)(a) appointed the Minister as the chairman of the two other agencies created. Other seemingly controversial provisions that calls for our attention are section 7(3) which is a penal provision that attempted to shift the burden of proof to the offender, section 118(5) dealt with proof of vandalism of oil facilities by the host community, sections 123(2) and 161 which defined the shareholding structures of Corporate legal entities created under the PIB. Also slated for scrutiny are the provisions of section 63 which permitted the DPRA to accept gift from individuals and corporate bodies and section 69 which abridged the right of Judgment/Creditors to levy execution against the Agency. 1. A CRITICAL VIEW OF THE CONFLICTING PROVISIONS I. The Petroleum Resources Minister to Report to the Federal Executive Council Section 6(1)(g) of the PIB provides that: The Minister shall report developments in the Petroleum industry to the Federal Executive Council. 3 A L E G A L A P P R A I S A L O F T H E S A L I E N T I S S U E S I N T H E P E T R O L E U M I N D U S T R Y B I L L

4 The above provision created a mandatory obligation on the Minster to submit reports of developments in the petroleum industry to the Federal Cabinet which is otherwise known as the Federal Executive Council and the membership is constituted of the president, vice-president and the Ministers appointed by the president. By virtue of section 5(1) (a) of the Constitution of the Federal Republic of Nigeria 1999 (As Amended), the executive powers of the federation is vested in the president who exercises the power for the good and security of the nation with the assistance of the Ministers appointed by him. The Federal Executive Council is therefore a forum where the president meets with his cabinet ministers to discuss policy decisions. However, the Federal Executive Council is not an office recognized by the Constitution and is therefore not an office vested with any executive powers of the president as any resolution or decision taken at the Federal Executive Council can only have legal validity upon it being sanctioned by the President. Based on the above, we view the provisions of Section 6(1)(g) of the PIB as an anomaly to the extent that it mandates the minister to Report the activities in the petroleum industry to the Federal Executive Council which neither assigned or delegate any duty to the minister nor does it have the legal vires to do so. Taken from the above position, it is more appropriate if that sub-section had mandated the Minister to make the Report to the president for presentation to the Federal Executive Council. This is anchored on the logic that the power being exercised by the Minister is delegated to it by the President, who may opt to exercise that power directly, it is thus apt that the Minister reports to the person who delegated the power to it, this will be in accord with the spirit and letters of the constitution. II. Power of grant and control over licences and leases By virtue of the provisions of sections 6(1) (g) and 6(1) (h), the Minister is vested with the power to grant, amend, renew, extend or revoke licences and leases for petroleum activities upon the advice of the Inspectorate (i.e. the Upstream Petroleum Inspectorate) if it pertains to the upstream petroleum sub-sector while the Minister exercises the same power based on the advice of the Agency (i.e. the Downstream Petroleum Regulatory Agency) where it concerns the downstream sub-sector. Specifically, sub-section 6(1) (g) make the following provision: 4 A L E G A L A P P R A I S A L O F T H E S A L I E N T I S S U E S I N T H E P E T R O L E U M I N D U S T R Y B I L L

5 Upon the advice of the Inspectorate, grant, amend, renew, extend, or revoke upstream petroleum licences and leases pursuant to the provisions of this Act; Immediately following that is sub-section 6(1) (h) which provided thus: Upon the advice of the Agency, grant, amend, renew, extend, or revoke downstream petroleum licences for gas transportation pipeline, gas distribution networks, refineries, LNG and GTL plants, petrochemical plant and gas exports. The above provisions seems clear and direct on who exercises the power of control over licences and leases in both the upstream and downstream subsector of the petroleum industry as the Minister is expressly vested with the powers to grant, amend, renew, extend or revoke licences and leases in both sub-sectors based on the advice of the Inspectorate and the Agency respectively as the case may be. However, the provisions of sections 16(a), 45(1)(i), (w) and 46(a) seem to have introduced a disturbing dimension capable of distorting any attempt made at precisely placing where the power of control over licences and leases lies between the Minister, the Inspectorate and the Agency. Our position is predicated on the fact that these provisions appear to be a contradiction of the powers granted to the Minister under sections 6(g) and 6(h) earlier stated above. The point we are trying to make would lend itself to a clearer understanding upon a closer scrutiny of the seemingly conflicting provisions which are reproduced as follows: Section 16(a) provides thus: In carrying out its functions under this Act, the Inspectorate shall have power to- (a) modify, extend, renew, suspend and revoke any licence or permit issued by it pursuant to the provisions of this Act; Section 45(1)(i) which deals with the downstream Agency similarly provided thus: 5 A L E G A L A P P R A I S A L O F T H E S A L I E N T I S S U E S I N T H E P E T R O L E U M I N D U S T R Y B I L L

6 The functions of the Agency are to: Issue, and renew licences, permits or other authorizations, and modify, amend, extend, suspend, review, cancel and reissue, revoke or terminate such licences, permits or other authorizations; Section 45(1)(w) also specifically made it a function of the Agency when it provided that the Agency is to: Issue, and renew downstream licences or permits or authorizations, and modify, amend, extend, suspend, review, cancel and reissue, revoke or terminate such licences or permits or authorizations and the licences or permits or authorizations shall be for activities connected but not limited to the following: (i) downstream gas distribution; (ii) petroleum products; (iii) storage; (iv) retail outlets; (v) transportation; and (vi) design and construction of all facilities including those for gas and petrochemicals. Finally, section 46(a) specifically empowered the Agency as follows: In carrying out its functions under this Act, the Agency shall have power to- (a) modify, extent, renew, suspend, and revoke any licence or permit issued by it pursuant to the provisions of this Act. The conflicts in sections 16(a), 45(1)(i), (w) and 46(a) with sections 6(g) and 6(h) is further compounded as the Inspectorate and the Agency are given concurrent powers with the Minister to exercise the power of grant, specific and general control over licences and leases in the upstream and downstream sub-sectors respectively without any reference to the Minister. We are of the view that if these conflicting sections are retained up to the passage of the PIB into law, it is a sure recipe for confusion, lack of direction and effective control over such an important, sensitive and critical area as the grant, revocation and administration of licences and leases in the petroleum industry. 6 A L E G A L A P P R A I S A L O F T H E S A L I E N T I S S U E S I N T H E P E T R O L E U M I N D U S T R Y B I L L

7 III. Appointment of Chairmen for Agencies created under the PIB Sections 17(2)(a) and 47(2) (a) of the PIB provides for the appointment of experienced professional as Chairmen of the board of the Inspectorate and the Agency by the President based on the recommendation of the Minister. This is in sharp contrast with the provisions of sections 77(2)(a) and 101(2)(a) which appointed the Minister as the Chairman of the board of the Petroleum Technology Development Fund (PTDF) and the Petroleum Equalization Fund (PEF) respectively. We are unable to decipher the reason behind the inconsistencies highlighted above, but we are of the view that it would have been more prudent for the Minister to also act as chairman of both the Inspectorate and Agency, with powers to delegate the functions in this regard, this will not only be consistent with what is obtainable with PTDF and PEF but will give for better coordination of all the agencies created under the PIB.. IV. Proof of Vandalization of Petroleum Facilities One of the novel provisions in the PIB is the establishment of the Petroleum Host Community Fund under section 116 while section 117 defined the purpose of the fund thus: The PHC Fund shall be utilized for the development of the economic and social infrastructure of the communities within the petroleum producing area. Section 118(1), on the other hand mandated upstream petroleum producing companies to remit 10% of their net profit on a monthly basis to the PHC Fund., this in our respective view is a very salutary legislation considering the level of environmental denegation going on in the Delta. The opposition of some politicians to this provision is that this is another income generating stream for the Host state which is been smuggled in to the bill to further impoverish the North, this argument with respect is certainly misplaced, considering the level of neglect the Host communities have endured over a long period, it is only fair for them to be reasonably compensated. Rather than dissipate energy in condemning this provision, the Northern politicians should rather look inwards to develop huge potential in their state which is currently underutilized However, the provision of section 18(5) does not appear to be easily amenable to enforcement due to the inherent difficulties that would be encountered in proving the culpability, involvement or complicity of the community or a member of the community in acts vandalism against petroleum facilities, although it could be easier to ascertain in cases of civil unrest. 7 A L E G A L A P P R A I S A L O F T H E S A L I E N T I S S U E S I N T H E P E T R O L E U M I N D U S T R Y B I L L

8 In any case, the deterrence element intended is appreciated as host communities would be more on their guard in terms of securing petroleum facilities, knowing full well that they risk losing the fund that would have been committed to developing their community to fund the repair of vandalized petroleum facilities. V. The Shareholding Structure of the Corporate Legal Entities Created Under PIB Section 120 of the PIB established the National Petroleum Assets Management Corporation as a statutory entity which would operate on commercial basis as a holding company. Section 123(1) on the other hand provided for the incorporation of a limited liability company to be known as Nigerian Petroleum Assets Management Company Limited within three months of the effective date of the PIB. The shareholding structure of the new Company was specified in section 123(2) to be at the ratio of 99% by the Corporation and 1% by the Permanent Secretary of the Ministry of Petroleum Resources in trust for the Corporation. This structure seem to be technically fraught with legal defects as the entire 100% shares at the ratio stated above can be interpreted to be held by only one legal entity which is the Corporation as the 1% held in trust for the Corporation also belonged to it as the beneficial Owner. In the event where the above interpretation is validated, it would be tantamount to the share of the proposed Company being held by only one legal entity which is a breach of section 18 of the Companies and Allied Matters Act, 2004 which provides that: As from the commencement of this Act, any two or more persons may form and incorporate a company by complying with the requirements of this Act in respect of registration of such company. On the other, the shareholding structure of the proposed National Gas Company Plc stipulated under section 161 appears more tidy as the initial shares of the Company is to be vested in the Ministry of Petroleum Resources and the Ministry of Finance incorporated which are clearly two separate legal entities. We strongly recommend that this structure be adapted for the proposed National Petroleum Assets Management Corporation i.e. where the corporation will hold 99% and Federal Ministry of Finance Incorporated will hold 1%. 8 A L E G A L A P P R A I S A L O F T H E S A L I E N T I S S U E S I N T H E P E T R O L E U M I N D U S T R Y B I L L

9 VI. Power to accept Gift by certain entities created under the PIB The provisions of sections 33(1) and 63(1) respectively of the PIB empowered the Inspectorate and the Agency to accept monetary and other material gifts from person or organization provided such gifts are not inconsistent with their objectives and functions. Although, there is a proviso in section 33(2) and 63(2) stating that it does not imply that members of the Boards of the two entities and their staff are authorized to accept personal gifts, we are of the view that the above provisions is open to abuse and uncalled for in view of the sensitive duties that both the Inspectorate and the Agency are entrusted with in the Petroleum industry. This could also create problem for the enforcement of the Corrupt Practices & Other Related Offences Act, 2000 in the two Parastatals as the Board members and Staff could easily hide under this power to circumvent the enforcement of the provisions that bars giving and acceptance of gratification by public officers, particularly sections 8, 9 and 10 of the Act. VII. Abridgement of Judgment/Creditor s Right to levy execution The provisions of sections 39(1) and 69(1) of the PIB, juxtaposed with sections 20(1) and 20(2), 44 and 46(1) of the Sheriff and Civil Process Act seem to be in direct collision. The above provisions of the PIB expressly bar the issuance of execution or attachment against the physical property of the Inspectorate and the Agency respectively. The express wordings of sections 39(1) and 69(1) seem wide enough to cover the total bar of execution and attachment on all the physical assets and immovable properties of both the Inspectorate and the Agency. The above provisions however, allow the use of garnishee proceedings to attach the funds of both entities but even that on the condition that the judgment/creditor gives a notice of three months before commencement of such the proceedings. We consider the above provisions not only cumbersome but it also amounted to an abridgement of the right of a judgment/creditor to pursue the legitimate process enshrined for the realization of the fruits of his judgment under the Sheriff and Civil Process Act. In any case, we appreciate that the above provisions may be intended to safe guard the sensitive facilities employed in the conduct of petroleum business 9 A L E G A L A P P R A I S A L O F T H E S A L I E N T I S S U E S I N T H E P E T R O L E U M I N D U S T R Y B I L L

10 in both the upstream and downstream sub-sectors from the disruption that the levying of execution or an attachment could entail. However, the provisions are too wide and over protective of the Inspectorate and the Agency to the detriment of a judgment/debtor as we see no reason why a three months notice must be given before commencement of garnishee proceedings. 2. THE POWER OF THE MINISTER UNDER THE PIB I. General power of supervision and control over the petroleum industry Sections 5 of the PIB gives the Minister the power to co-ordinate and supervise all activities, operation and the institution in the entire petroleum industry in Nigeria. Section 6(1) (a)-(k) on the other hand provide specific details of the power granted to the Minister which amongst others include formulation and monitoring of government policy for the industry, the grant, amendment, renewal, extension or revocation of licences and leases in both the upstream and downstream sub-sectors of the petroleum industry. Section 8 of the PIB confers the Minister with the power to make regulations to give effect and ensure the implementation of the Act. The provision specifically put goes thus: The Minister may, or on the advice of any of the agencies established under this Act and subject to the provisions of subsections (2) and (3) of this section, make regulations necessary to give proper effect to the provisions of this Act. We are of the view that the powers granted to the Minister as stated above is to ensure the smooth and effective control over the activities of the petroleum industry to achieve orderliness and a more predictable administrative regime in the sector as a whole. The above position is given support on a comparative look at the petroleum laws of other countries. A quick look at section 3 of the United Kingdom Petroleum Law which is similar to sections 6 (g) of the PIB which confer on the Minister powers to grant petroleum licences and leases would shed more light on this point. Similar powers are conferred on the Secretary of state under section 3 of the UK Petroleum Law as follows: 10 A L E G A L A P P R A I S A L O F T H E S A L I E N T I S S U E S I N T H E P E T R O L E U M I N D U S T R Y B I L L

11 Licences to search and bore for and get petroleum: (1) The Secretary State, on behalf of Her Majesty, may grant to such persons as he thinks fit licences to search and bore for and get petroleum to which this section applies. (3) Any such licence shall be granted for such consideration (whether by way of royalty or otherwise) as the Secretary of State with the consent of the Treasury may determine, and upon such other terms and conditions as the Secretary of State thinks fit. Similarly, the regulatory powers conferred on the Minister under Section 8 of the PIB above are provided for under section 4 (1) of the UK Petroleum Law thus: The Secretary of State shall make regulations prescribing (a) the manner in which and the persons by whom the applications for licences under this part of this Act may be made; (b) the information to be included in or provided in connection with any such application; (c) the fees to be paid on any such application; (d) the conditions as to the size and shape of areas in respect of which licences may be granted; (e) model clauses which shall, unless he thinks fit to modify or exclude them in any particular case, be incorporated in any such licence. The Norwegian Petroleum Act of 1996 is not an exception as it made similar provisions in section 10(3) as follows: Regulatory supervision of petroleum activities The Ministry carries out regulatory supervision to see that the provisions laid down in or pursuant to this Act are complied with by all who carry out petroleum activities comprised by this Act. The Ministry may issue such orders as are necessary for the implementation of the provisions laid down in or pursuant to this Act. II. Power of Revocation The power of revocation conferred on the Minister under section 6(1) (g) and (h) above, which forms part of his supervisory jurisdiction is not synonymous with the PIB only as section 18 (2) of the UK Petroleum Laws made similar provisions as follows: If it appears to the Secretary of State that the execution of works authorized by a works authorization has not been 11 A L E G A L A P P R A I S A L O F T H E S A L I E N T I S S U E S I N T H E P E T R O L E U M I N D U S T R Y B I L L

12 begun at the expiry of the period specified in subsection(3), he shall serve on the holder a notice stating that the authorization is to cease to be in force at a time specified in the notice. III. Rights of Pre-emption Section 7(1) of the PIB granted the Minister pre-emptive rights over all petroleum resources in times of national emergencies. The content of the provision is captured as follows: In the event of national emergency or war, the Minister shall have the right of pre-emption of all petroleum and petroleum products obtained, marketed or otherwise dealt with under any licence or lease granted under this Act. The above provision should be viewed against the background of the duty of the state to secure the territorial integrity of the Country in times of national emergency and wars, which would necessarily, involved the employment of the power granted by the Minister which is exercised in the interest of the Nigerian people and state. Although, the security of the state seem to have formed a paramount consideration for the enactment of this provision, the commercial interest of the licences and leases are not ignored the 1st Schedule to the Act made ample provision for the payment by the minister for any products requisitioned at a commercial and mutually agreeable rate. The above provision is not confined to Nigeria alone as section 4 13 of the Norwegian Petroleum Act also made similar provisions, thus: Supplies in the event of war, threat of war etc. In the event of war, threat of war or other extraordinary crisis, the King may decide that a licensee shall place petroleum at the disposal of Norwegian authorities. The provisions of section 4 12, second paragraph shall apply correspondingly unless the particular situation warrants otherwise. In such a situation, the King shall with binding effect determine the price. IV. Consent to an Assignment 12 A L E G A L A P P R A I S A L O F T H E S A L I E N T I S S U E S I N T H E P E T R O L E U M I N D U S T R Y B I L L

13 The consent of the Minister is required before the holder of a licence or lease can assign his interest both under the current Petroleum Act of 1990 and the PIB. However, there is a significant shift between the two as the PIB extended the frontiers of this requirement to include a situation where the holder of a licence or lease intended to exchange or transfer its share to third party and this could be by way of merger, acquisition or takeover. This inclusiveness is better appreciated when we look at the combined provisions of sections 194(1) and (2) of the PIB which provided as follows: (1) Where a licensee or lessee or production sharing or service contractor is taken over by another company or merges, or is acquired by another company either by acquisition or exchange of shares, including a change of control of a parent company outside Nigeria, it shall be deemed to be and treated as an assignment within Nigeria and shall be subject to the terms and conditions of this Act and any regulations made under it. (2) A licensee, lessee or contractor shall not assign his licence, lease or contract, or any part thereof, or any right, power or interest therein without the prior written consent of the Minister. This provision can be viewed from the perspective of the desire of the law makers to conferring on the Minister, powers that would enable him exercise control by way of input when there is an alteration or complete change of ownership of a license, lease or contract which could be effected by a share transfer. In view of the above, the above provisions of the PIB can be said to be an improvement on the 1990 Act, as a licensee, lessee or a contractor could circumvent the requirement for the Minister consent by a mere transfer of its share to a third party which would defeat the intention of the law makers. In other words, the above, PIB provisions is intended to give teeth to the intentions of the law makers which is designed to give the Minister powers to be involved in every situation where there is an alteration or change of ownership concerning any concession granted by him. 3. CONCLUSION 13 A L E G A L A P P R A I S A L O F T H E S A L I E N T I S S U E S I N T H E P E T R O L E U M I N D U S T R Y B I L L

14 The PIB is undoubtedly a bill that will bring radical changes to the nation s oil and gas industry which will unlock the potential opportunities in the industry for sustainable development of the Nigeria s oil and gas resources and the Nigerian economy as a whole. The issue is no longer if the bill should be passed or not but the all important issue is that what have we been waiting for and for how long are we still going to wait to get this all important bill passed and implemented. 14 A L E G A L A P P R A I S A L O F T H E S A L I E N T I S S U E S I N T H E P E T R O L E U M I N D U S T R Y B I L L