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EXPLAINER: Is 3% for host communities in PIB to be taken from 13% derivation?

EXPLAINER: Is 3% for host communities in PIB to be taken from 13% derivation?
July 02
12:43 2021

On Thursday, the national assembly passed the landmark Petroleum Industry Bill (PIB) — a bill that seeks to provide guidance and fiscal framework for the oil and gas industry.

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The bill has been in the works since the tenure of former President Olusegun Obasanjo, who led Nigeria between 1999 and 2007.

In 2018, after the national assembly passed a harmonised version of the bill — the petroleum industry governance bill (PIGB), President Muhammadu Buhari refused assent due to “legal and constitutional reasons”.

The PIB contains 5 chapters, including governance and institutions, administration, host communities development, petroleum industry fiscal framework and miscellaneous provisions in 319 clauses and 8 schedules.

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Stakeholders believe the bill would align activities in the oil and gas sector with the global best practices and ensure the state-owned oil firm operates effectively and efficiently.

During the session on Thursday, fierce argument ensued in the senate over the allocation of 3 percent operating expenditure of oil firms to host communities.

WHERE IS THE 3% COMING FROM?

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Stakeholders, most especially host communities are also asking if the 3 percent will be taken from the 13 percent derivation fund.

This claim is untrue. Unlike the 13 percent of oil revenue that will go to communities through state government, the three percent stated in the PIB will come from the oil company’s operating expenses (OPEX) to the trust fund created for host communities.

While the 13 percent derivation fund comes from the federation revenue to oil-producing communities as enshrined in section 162, sub-section 2 of the Nigerian Constitution, the 3 percent will be from the expenses of oil companies operating in the communities.

According to the bill, the trust would enhance peace and cordial relationship between licensees and lessees and the communities.

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PIB proposes its establishment within 12 months after the commencement date for new or existing oil mining leases.

Here are other highlights of the newly newly passed bill.

HOST COMMUNITY SHARE STILL A CONTEMPLATION

In the house of representatives’ version, the bill provides for a settlor (operator) to make an annual contribution to the host community development trust fund of an amount equal to 5 percent of its actual yearly operating expenditure of the preceding financial year in the upstream and in the midstream and downstream in respect of all petroleum operations affecting the host communities.

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The senate, however, proposes 3 percent to the host community.

This is lower than the 10 percent allocation agitated for by the host communities at a recent public hearing.

30 PERCENT FROM NNPC REVENUE FOR OIL EXPLORATION IN FRONTIER BASINS

The senate committee recommended that 30 percent of Nigeria National Petroleum Corporation (NNPC) profit from oil and gas should be used to fund the exploration of frontier basins.

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According to the bill, the house allocates 10 percent of rents on petroleum prospecting licences and 10 percent rent on petroleum mining leases to the frontier exploration fund.

It also allocates 30 percent of NNPC Limited’s profit oil and profit in the production sharing, profit sharing and risk service contracts for the exploration fund.

The fund would be transferred to a frontier exploration fund escrow account dedicated for the exploration and development activities in the frontier acreages.

VANDALISM, CIVIL UNREST NOW THE RESPONSIBILITY OF HOST COMMUNITIES

According to the bill, the host community will now pay the cost for any act of pipeline vandalism and civil unrest in their domain. The cost of such is to be removed from the host community development fund.

The two chambers added a clause that “provided the interruption is not caused by technical or natural cause”.

THE ESTABLISHMENT OF NNPC LIMITED

The bill established Nigerian National Petroleum Company Limited (NNPC Limited) to be incorporated under the Companies and Allied Matters Act.

The bill still vested ownership of all shares in the government, held by the ministry of finance. The offering of any shares of the company will be considered and approved by the federal executive council and the national council.

The senate opined that the “government may from time to time resort to NNPC Limited for strategic national security interventions, especially where the private commercial entities decided to withdraw from such operations due to unprofitable economics”.

The lawmakers, however, said the reason is for government to ensure adequate supply and distribution of petroleum motor spirit (PMS) for a period not exceeding six months.

“All associated costs shall be for the account of the federation,” the national assembly stated.

NEXT LINE OF ACTION

With the passage of the PIB by both chambers of the national assembly, it is expected that a joint committee would be constituted to harmonise adjustments in the bill and transmit it to the president for assent.

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