Module 3 Transcript.docx

1 Lesson Objectives By the end of this section, participants will be able to: Describe the major processes and procedures involved in the administration and management of oil and gas resources in Nigeria, as specified in the PIA. Explain the four (4) funds and how they will be administered. 2 Introd...

1 Lesson Objectives By the end of this section, participants will be able to: Describe the major processes and procedures involved in the administration and management of oil and gas resources in Nigeria, as specified in the PIA. Explain the four (4) funds and how they will be administered. 2 Introduction The Petroleum Industry Act (PIA) and its provisions regarding the administration and management of petroleum resources and their derivatives apply to all activities within or connected to oil and gas industry operations, and to individuals engaged in such activities. Its goal is to advance crude oil exploration and the production of petroleum products for the benefit of Nigerians. Accordingly, effectiveness, efficiency, accountability, competitiveness, safety, and a favorable business environment are among the principles upon which the PIA is based. 3 In furtherance of the Petroleum Administration objectives, the PIA has the following major administrative structures and provisions: Administration of Upstream Petroleum Operations Administration of Midstream and Downstream Petroleum Operations Administration of Midstream and Downstream Gas Operations Click on each to learn more UPSTREAM PETROLEUM ADMINISTRATION Outline We will take a look at the following: The role of the Commission in Administration of Upstream Operations The Petroleum Licensing Regime The role of the Commission in the assignment, mergers, transfer and acquisition of Interests Gas Discovery New definition for Marginal Fields Unitisation in Field Development Environmental Management Decommissioning and Abandonment of fields Gas Flaring Domestic Gas Delivery Obligation (DGDO) and Domestic Crude Supply Obligation (DCSO) 4 Administration of Upstream Petroleum Operations The PIA provides that the Nigerian Upstream Regulatory Commission, "The commission," shall administer any acreage for upstream petroleum operations in Nigeria. The Commission will be responsible for the technical and commercial regulation of upstream petroleum operations previously carried on by the Department of Petroleum Resources (DPR). The following areas will come under the purview of influence of the Commission: Recommendation on the issuance of licenses/lease Environmental management Decommissioning & Abandonment Gas flaring management Domestic crude oil supply obligations Domestic gas delivery obligation Funding for the Authority 4.1 Petroleum Licensing Regime Licenses and Leases The Commission is empowered to advise the Minister on granting operating licenses or leases to companies legally incorporated and operating in Nigeria under the Companies and Allied Matters Act. In addition, the Commission is also responsible for receiving applications for licenses and leases and performing the necessary technical and commercial appraisals that serve as the foundation for its recommendations to the Minister regarding granting licenses/leases to respective applicants. Petroleum Licensing Regime The PIA proclaims the following arrangements in relation to upstream Licences and Leases- The Petroleum Exploration License (PEL) The Petroleum Prospecting License (PPL) and The Petroleum Mining Lease (PML) These replace the existing Oil Prospecting License (OPL) and Oil Mining Lease (OML) Petroleum Exploration License (PEL) This is granted on a non-exclusive basis. It includes- The right to acquire geological and geophysical data Speculative based surveys An initial duration of 3 years with the prospect of renewal for an additional 3 years However, it does not include the right to drill exploration wells Petroleum Prospecting License (PPL) The Commission may grant petroleum prospecting licenses to qualified applicants to drill exploration wells, conduct corresponding test production on an exclusive basis, and carry out petroleum exploration operations on a non-exclusive basis. Licensees therefore have- The right to prospect and explore The right to drill exploration and appraisal wells The right to produce test and win volumes [of oil and gas]. An initial license duration of 3 years with the prospect of renewal for an additional 3 years (6years in total) for onshore and shallow water An initial duration of 5 years with the prospect of renewal for an additional 5 years (10 years in total) for deep offshore and frontier acreage Petroleum Mining Lease (PML) may be granted to qualified applicants to win and carry away produced volumes of oil and gas. Lessees have the following rights- The right to drill development and production wells exclusively The right to conduct petroleum exploration operations on a non-exclusive basis. A minimum License duration of 20 years for all terrains Additionally, the Lessee must secure field development plan approval for grant. 4.2 Awards and Bidding Guidelines Awards and Bidding Guidelines Petroleum prospecting licenses or mining leases shall only be granted following a fair, transparent, and competitive bidding process and under the provisions of this Act and licensing round guidelines issued by the Commission for each licensing round. On the Commission's recommendation, the Minister may grant a winning bidder a petroleum prospecting license or a petroleum mining lease. The PIA states that if the Minister does not act on the Commission's recommendation to award a license within 90 days, the approval is deemed given. 4.3 Licensing round guidelines Licensing round guidelines The licensing round guidelines for the bid round must be accompanied by the model license for the petroleum prospecting license or model lease for the petroleum mining lease and must include the following: license or lease acreages, term, and minimum work obligations;  pre-qualification criteria and other requirements to be met by bidders  license or lease acreages, term, and minimum work obligations;  documents required, as well as criteria for assessing interested parties' technical capacity, financial competence, and legal status; and  details and costs for acquiring relevant data and studies. 4.4 Licence Relinquishment Licence Relinquishment A licensee of a petroleum prospecting license may voluntarily relinquish parcels and sub-parcels if the licensee has met the requirements of the petroleum prospecting license and has maintained acreage of shape that is viable for award in a future licensing round. Click on each shape to learn more about the relinquishment of: Existing OPLs and OMLs Converted OPLs and OMLs New Petroleum Prospecting License and Petroleum Mining Leases Existing OPLs and OMLs The Petroleum Act provisions for 50% relinquishment upon conversion of an Oil Prospecting License to Oil Mining Lease, and 50% relinquishment 10 years into the life of an Oil Mining Lease. Converted OPLs and OMLs For converted OPL and OML, where the selected area for conversion is less than 40% of the total area, the holder may select additional area but not more than 40%. The holder can go beyond 40% based on further tight drill or drop processes New Petroleum Prospecting License and Petroleum Mining Leases For New Petroleum Prospecting License and Petroleum Mining Leases the following applies: Migration to optional exploration period is dependent upon fulfilling minimum work programme of drilling on exploration well at the initial period Requires 50% size relinquishment 10 years into life of a Petroleum Mining lease At grant of Petroleum Mining Lease all areas of non-interest must be relinquished All relinquished areas must be bordering, and not separated from each other. 4.5 The role of the Commission in Assignment, mergers, Transfer and acquisition of Interests Assignment, mergers, Transfer and acquisition of Interests A license or permit holder can only assign or transfer their license or permit, or any rights or obligations derived from the license or permit, with the Commission's prior written consent. This includes: license right lease right financial interest Participating interest Contractor rights The Commission will consider the arguments by third parties regarding the application when deciding whether a license or permit is to be assigned or transferred. An application for the assignment or transfer of a license or permit shall be deemed approved if the Commission neither approves nor rejects and fails to notify the applicant of its decision within the required time frame. 4.6 Revocation of License or Interests - Revocation of License or Interests In the event of the following actions, the Commission may revoke a defaulting party's interest and prescription, as well as subsequent takeover of interest by non-defaulting parties: Assignment without consent; Licensee does not exhibit good oil field practice; Fails to pay fees, rents, or royalties when due; Non- compliance with applicable laws, regulations and the conditions of the license If license is controlled by a citizen of a country that does not permit Nigerian citizens or companies to hold and operate petroleum concessions In a case of false representation Non-compliance with Host Community provisions Involvement in corrupt and fraudulent practices Interrupts production for 180-consecutive days Fails to fulfil the terms of field development plan approval Declaration of insolvency or liquidation Failure on environmental obligations Failure to comply with Domestic crude oil supply obligations (DCSO) or Domestic gas delivery obligations (DGDO). 4.7 Renewal of leases and licenses. Renewal of leases and licenses. Renewal of leases and licenses shall be on terms and conditions determined by the Commission and upon satisfaction by the Commission that the licensee or lessee: has fulfilled its obligations relating to the development of the lease or license area; has fully met all payments required under this Act or any other enactment in respect of royalties, rents, taxes, and fees; is not in default of any obligation or condition relating to the lease or license; and has discharged all operational obligations in accordance with applicable laws. 4.8 Work commitment, commercial discovery and significant gas discovery. Work commitment, commercial discovery and significant gas discovery. With respect to significant gas discovery, a licensee shall commit to drill at least one exploration well to a minimum depth specified in the license during the initial exploration period and the optional extension period, except for frontier acreages, where the work program during the initial exploration period may only consist of geophysical work. The following points should be noted during the commercial discovery, appraisal, and field development plan phases. Commercial Discovery Discovery within initial or optional exploration period must be conveyed to Commission within 180 days of the discovery Request for appraisal must be submitted within one year of the discovery to merit an appraisal The Commission must act within 60 days of request otherwise the appraisal is deemed approved. Appraisal The Commission must act within 60 days of submission of appraisal programme Upon grant of appraisal, licensee must declare commerciality After the appraisal program is completed, the licensee must declare a commercial discovery, a significant gas or crude oil discovery, or an interest to progress or relinquish. Field Development Plan The licensee shall submit a field development plan within two years of commercial declaration. The Commission will evaluate the technical and commercial terms of the field development plan and will only approve it if the plan: is commercially viable and allows for the efficient and effective use of midstream petroleum operations meets the technical requirements for petroleum operations based on best international petroleum industry practices; includes a plan for decommissioning and abandonment, as well as the elimination of routine natural gas flaring does not conflict with domestic gas delivery obligation ensures maximum economic recovery of crude oil, natural gas, and condensates from applicable reservoirs complies with health, safety, and environmental regulations. complies with the obligations to host communities Failure of the Commission to respond within 180 days of the submission the plan is deemed approved. Once approved, modifications of the plan must be with approvals. The licensee shall submit the phased field development plan created. 4.9 Marginal Fields Marginal Fields According to the PIA, a "marginal field" is defined as a field or discovery that has been declared a marginal field prior to January 1, 2021, or that has been lying fallow without activity for seven years after its discovery prior to the effective date. A producing marginal field may continue to operate under the original royalty rates and farm-out agreements, but must convert to a petroleum mining lease. A marginal field before January 1, 2021 that is no longer producing shall be converted to a petroleum prospecting licence and benefit from the terms for new acreage. Any license holder who has not transferred a marginal field to the government within three years of the effective date must present a field development plan for the marginal field, farm out discovery, or relinquish the field. Failure to submit a field development plan within the time frame specified by the Commission will result in the relinquishment of the marginal field. A relinquished marginal field is transferred to the government and managed by the Commission. From the effective date of this Act, no new marginal fields shall be declared. 4.10 Unitization. Unitization. To ensure the efficient production of the reservoir and to maximize the economic recovery of petroleum from such licenses of the contract area, the following shall apply to unitization: Licensees are required to notify the Commission of any straddling accumulations. License holders are required to enter into Unit Development Agreements. Where licensees cannot do so within a period of time determined by the Commission, the Commission may impose a unit development arrangement and an expert determination at the cost of the parties. The Commission may extend the boundaries of a license or lease to include the entire petroleum reservoir, provided the licensee or lessee submits a field development plan to the Commission. 4.11 Environmental Management Environmental Management As the case may be, the Commission or Authority has a regulatory role in monitoring and ensuring compliance with the PIA regarding environmental sustainability and degradation that may result from petroleum operations of licensees and lessees. Accordingly, an environmental management plan must be submitted for Commission or Authority’s approval within one year of the effective date of the PIA or six months after the applicable License or Lease is granted if the Licensee or Lessee engages in upstream and midstream petroleum operations respectively. A licensee or lessee must pay a prescribed financial contribution to an Environmental Remediation Fund established by the Commission or Authority, as the case may be, to manage any negative environmental impacts related to the license or lease that such licensee or lease has been granted. 4.12 Decommissioning & Abandonment Decommissioning & Abandonment The PIA stipulates that all necessary and sufficient arrangements must be made for the decommissioning and abandonment of onshore and offshore petroleum wells, installations, buildings, utilities, plants, and pipelines for petroleum operations, and conducted in accordance with the Commission’s guidelines and international best practices. Each lessee and licensee under the PIA must establish and maintain a decommissioning and abandonment fund. This fund must be kept in an escrow account open to the Authority or Commission and held by a financial institution. The Commission or the Authority may use the fund for this purpose in cases where the licensee or lessee fails to comply with the abandonment plan. Operators are obligated to contribute to the fund regularly as may be decided from time to time. The Licensee or lessee must notify the Commission or Authority, as the case may be, within three months, after production for upstream petroleum operations or the commissioning of facilities for midstream petroleum operations. They must also provide statements of accounts relating to their decommissioning and abandonment fund on an annual basis. 4.13 Gas Flaring Gas Flaring Considering the environmental impact of gas flaring, the PIA has upheld the prohibition of gas flaring, except for a few circumstances in which there is no other reasonable option than to flare gas. The PIA states that a licensee or lessee is required to pay a fine specified by a regulation made by the Commission. The following are the only recognized few circumstances in which the PIA may permit gas flaring: in case of an emergency in accordance with the exemption granted by the Commission. in accordance with established safety practices under acceptable regulation. The Commission mandates that upstream operators who produce natural gas submit a natural gas flare elimination and monetisation plan to the Commission within 12 months of the PIA's effective date as part of its efforts to manage gas flaring. The funds obtained from gas flaring fines for upstream petroleum operations are to be used for environmental remediation and relief for the impacted host communities. However, the Midstream and Downstream Gas Infrastructure Fund will receive the gas flare fines related to midstream operations and use them to invest in midstream and downstream gas infrastructure in the host communities. 4.14 DCSO and DGD Domestic Gas Delivery Obligation (DGDO) The Domestic Gas Delivery Obligation aims to promote gas development for domestic utilization to fuel economic activities. The PIA provides for the following with regards to Domestic Gas Delivery Obligation. Reduction in royalty obligation. The Commission may dedicate specific volume of the natural gas produced towards meeting the requirements of the domestic market Under the PIA, a lessee may be required to deliver natural gas to a wholesale customer determined by the domestic gas aggregator at a particular location A lessee Who fails to comply with the domestic gas delivery obligation shall incur a penalty A lessee shall not be penalized for failing to meet its gas delivery obligation if it can demonstrate force majeure, buyer failure to take or pay for gas, or inability to transport gas. Approval for the supply of natural gas for export projects shall be subject to prior compliance by the lessee with its domestic gas delivery obligation. Domestic Crude Supply Obligation (DCSO) The Domestic Crude Supply Obligation aims to guarantee feedstock Supply to local refineries to support refining growth. The PIA provides for the following with regards to Domestic Crude Supply Obligations. The supply of crude oil shall be based on willing supplier and willing buyer basis. crude oil may only be sold to holders of crude oil refining licences, whose refineries are in operation Crude oil Supply to be commercially negotiated in Dollar or Naira denomination In the case of Naira, royalty payable by the supplier is also in Naira. MIDSTREAM AND DOWNSTREAM PETROLEUM ADMINISTRATION Outline In this section we will be looking at: General Administration of the Midstream and Downstream Oil and Gas Industry; and Administration of Midstream and Downstream Gas and Liquid Operations 5 General Administration of Midstream and Downstream The midstream and downstream segments of the Nigerian oil and gas industry shall be managed and administered by the Nigerian Midstream and Downstream Petroleum Regulatory Authority (the "Authority"). The following list includes the Authority's notable administrative spheres of influence: Separation of Licensed Activities Third Party Access to transportation and distribution facilities Tariffs Deregulation of Petroleum Product Prices Competition Regulation Consumer Protection Public Service Obligation Gas Pricing Principles Click on each to learn more Separation of Licensed Activities Commission may require separation by Management, Accounting, and Legal entities The Authority shall implement a no transfer pricing Commission consent will be required for acquiring interest in other licenses Third Party Access The Authority shall provide third party access to transportation and distribution facilities Detailed rules shall be developed by the Commission and Authority The Authority will establish Network codes for gas and petroleum liquids Tariffs The Authority may establish a tariff methodology for monopoly infrastructure The tariff methodology shall be based on transparent pricing principles: Disaggregation of costs, Cost-reflective, Non-discriminatory). Tariffs will be developed by licensees based on tariff methodology Licensees will be consulted in developing the methodology Deregulation of Petroleum Product Prices The authority shall develop transition plan to full market prices NNPC Limited will act as supplier of last resort for six months from effective date Federation will bear cost of service Competition Regulation The Authority shall establish guidelines to Protect against monopoly and foster the development of competitive markets The Authority shall cooperate with the Commission and Federal Competition and Consumer Protection Commission (FCCPC) in this regard. Consumer Protection The Authority shall develop Customer service codes and Service charter, respond to metering emergencies and be involved in Invoices & dispute resolution Public Service Obligation The Authority may issue regulations imposing public service obligations on licensees in relation to economic development and the achievement of broader economic policy objectives The Authority shall perform its social development obligations and promote robust stakeholder engagement Levies are to be borne by consumers Gas Pricing Principles The price calculated by the domestic gas aggregator shall be based on the prices determined by the Authority. The ceiling price of gas shall be the domestic base price applicable for any particular year The Authority may by regulation adjust the price mechanism to add other gas-based industries in line with market realities 5.1 General Administration of Midstream and Downstream Gas and Liquid Operations. The following are the activities requiring a License in Midstream & Downstream Gas and Midstream & Downstream Liquids. Click on each to learn more. ADMINISTRATION OF THE FOUR FUNDS Introduction In this Section we will be looking at Administration of the 4 Funds. 6 The Funds The Act makes provision for the establishment of various Funds. The Funds established or to be established would be used to administer the affairs of the sectors to which they apply. They include; Frontier Exploration Fund Midstream and Downstream Gas Infrastructure Fund Environmental Remediation Fund Decommissioning and Abandonment Fund Click on each to learn more Frontier Exploration Fund Objectives: Dedicated for the development of frontier acreages- to carry out exploration and development activities in the frontier acreages subject to appropriation by the National Assembly Funding Mechanism: This will be funded from 30% of NNPC Limited’s profit oil and profit gas as in the production sharing, profit sharing and risk service contracts. Structure: An escrow account will be established Governance: NNPC Limited is responsible for overseeing the control and direction of this fund Midstream and Downstream Gas Infrastructure Fund Objectives: (a) To increase the domestic consumption of natural gas in Nigeria in projects which are financed in part by private investment; (b) To encourage private investment through risk sharing by participating initially in selected high-risk projects and in such other equity investments that encourage investment in midstream and downstream gas infrastructure ; and (c) To reduce or eliminate gas flaring. Funding Mechanism This will be funded through the following: 0.5% of the wholesale price of petroleum products and natural gas sold in Nigeria, which shall be collected from wholesale customers and such levy shall be in addition to the levy provided for under section 47 (2) (c); funds and grants accruing from multilateral agencies, bilateral institutions and related sources dedicated partly or wholly for the development of infrastructure for midstream and downstream gas operations in Nigeria interest, if any, payable in respect of money in Fund any other sum, freely donated or accruing to the Midstream and Fund for development of infrastructure in midstream gas operations. Structure: The Governing Council shall comprise: the Minister, who shall be the Chairman of the Council; A representative of the Central Bank of Nigeria not below the rank of a director; A representative of the Ministry of Finance not below the rank of a director; The Authority Chief Executive; Executive Director Midstream and Downstream Gas Infrastructure Fund; three independent members, who shall be appointed by the President for a term of four years and may be reappointed for another four years and no more; and a Legal Adviser of the Authority who shall serve as the Secretary to the Governing Council. Governance: The Governing Council is responsible for overseeing the control and direction of this fund Environmental Remediation Fund Objectives: Dedicated for the rehabilitation or management of negative environmental impacts with respect to the license or lease Funding Mechanism: A licensee or lessee shall pay a prescribed financial contribution to an environmental remediation fund established by the Commission or Authority, as the case may be. Structure: A licensee or lessee shall, under subsections (1) and (2) assess its environmental liability annually and increase its financial contribution to the satisfaction of the Commission or Authority, as the case may be. Governance: The Commission or the Authority is responsible for overseeing the control and direction of this fund Where the Commission or Authority, as the case may be, is not satisfied with the assessment and financial contribution referred to in this section, the Commission or Authority, may appoint an independent assessor to conduct the assessment and determine the financial contribution. Decommissioning and Abandonment Fund Objectives: The decommissioning and abandonment fund shall exclusively be used to pay for decommissioning and abandonment costs. Funding Mechanism: The decommissioning and abandonment plan shall establish the yearly amount to be contributed to the respective decommissioning and abandonment fund and the yearly amount shall be based on a reasonable estimate by the licensee or lessee of the applicable decommissioning and abandonment costs, projected forward on a nominal basis and divided by the estimated life of the facilities and the reasonable cost estimate shall be approved by the Commission or Authority, as the case may be. Structure: 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 or the Authority Governance: The Commission or the Authority is responsible for the governance of this fund. Where a lessee or a licensee fails to comply with the decommissioning and abandonment plan, the decommissioning and abandonment fund shall be accessed by the Commission or Authority, as the case may be, to pay for the performance by a third party of such lessee’s or licensee’s obligations under section 232 of this Act 7 End of Module Well done! You have come to the end of the module. We trust this was an exciting learning experience for you. The next slide will begin the Progress Test.