Nigeria: Posers And Answers: The Petroleum Industry Act 2021, Production Sharing Contracts And Stabilisation Issues

Introduction

The enactment of the Petroleum Industry Act 2021¹ (PIA) in August 2021 was deservedly greeted with great relief by both the local and international community who had watched – with dismay - the inertia around Nigeria's inability to implement her declared industry wide reform since the Petroleum Industry Bill (PIB) was first proposed as an executive bill in the late 2000s.² Nigeria's loss as a result of the unpardonable failure to enact wholesale reform legislation for her oil and gas industry was nothing less than colossal.³

The Buhari administration deserves high marks for seeing through major legislative initiatives as exemplified by the three recent Finance Acts,⁴ the Deep Offshore and Inland Basins (Production Sharing Contracts) (Amendment) Act 2019⁵ (PSCAA) and specifically, enactment of the PIA, especially after several failed attempts on the latter.⁶ Whilst the PIA has expectedly, changed the fiscal landscape of the Nigerian oil and gas industry; in the process, it has 'given birth' to many necessary questions that require reflections and answers.

Such questions include: what is the impact of the fiscal changes on the erstwhile subsisting contractual relationships in petroleum contracts, especially the early 1990s and subsequent PSCs with International Oil Companies (IOCs) that had stabilisation clauses? Has the stabilisation clauses been effectively rendered nurgatory? What wiggle room does PSC contractors/co-venturers have to craft responsive strategies that does not leave them with near nugatory stabilisation provisions?

This article discusses stabilisation implications of the fiscal changes introduced by the PIA, whilst trying to answer the above questions and other related ones, within the current Nigerian upstream (fiscal) regulatory context.⁷ Whilst the PIA presents an immediate basis to consider stabilisation rights and issues, the truth is that prior developments such as: the various PSC crude entitlement (CRE) disputes between the NNPC and PSC Contractors from the late 2000s and resultant arbitration and litigation;⁸ enacted PSCAA provisions and other regulatory changes have had stabilisation implications, and affected players must have been pondering them, whilst weighing their options in terms of responsive strategy.⁹

Exemplifying the foregoing is that some sections of our March 2019 joint article, 'PSC Contractors Get Ready! Fiscal Implications of the Supreme Court Decision in A-G Rivers State & Ors v. A-G Federation SC964/2016',¹⁰ featured high level stabilisation discussions in the context of the referenced decision.¹¹ It has now become necessary to undertake a more comprehensive stabilisation conversation, given the wholesale provisions of the PIA,¹² particularly because of the firm jurisprudential underpinning that parties are generally bound by the terms of their contracts.¹³

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Footnotes

1. Act No. 6 of 2021 published in the Federal Republic of Nigeria Official Gazette No. 142, Vol.108 of 27.08.2021, available at: http://www.petroleumindustrybill.com/wp-content/uploads/2021/09/Official-Gazette-of-the-Petroleum-Industry-Act-2021.pdf (last accessed 28.04.2023).

2. See excerpts from Taiwo Amodu et al, 'The Politics, History of Petroleum Industry Bill', Nigerian Tribune, 05.07. 2021: https://tribuneonlineng.com/the-politics-history-of-petroleum-industry-bill/ (accessed 20.04.2022). "The initiative to reform the oil sector was first taken by the ... Obasanjo administration who in April 2000 inaugurated the Oil and Gas Reform Implementation Committee, with a mandate to review and streamline all existing petroleum laws and establish an all-inclusive regulatory framework for the industry. The first Executive Bill on the PIB was in 2008 sent to the sixth National Assembly by ...President Umar Yar'Adua. Checks revealed that passage of the bill suffered setback as a result of disagreement over 10% as dedicated fund for the development of Host Communities and sharing of oil profit among the [IOCs]. In July 2012, a revised draft was again presented to the seventh National Assembly by the Goodluck Jonathan administration but it was passed by only the House of Representatives as it was dogged by same controversy over sharing formula. In the first tenure of President Muhammadu Buhari, the eighth National Assembly broke the jinx, when it passed the Petroleum Industry Governance Bill sent to it by President Muhammadu Buhari. ...To fast track its passage, the ninth NASS split the bill into four parts – the Petroleum Industry Governance Bill, Petroleum Industry Administration Bill, Petroleum Industry Fiscal Bill and Petroleum Host Community Bill. Checks revealed that President Muhammadu Buhari however declined the Bill presidential assent. ...A year after winning election for a second term, President Buhari, in September 2020, dispatched PIB 2020 to the NASS as an Executive bill." Emphasis (on timelines) supplied.

3. See for example, Collins Olayinka, et al, 'Nigeria Loses N1.7 Trillion Deals to Non-Passage of PIB', The Guardian, 04.05.2016: https://guardian.ng/news/nigeria-loses-n1-7-trillion-deals-to-non-passage-of-pib/; Tony Akowe, 'Nigeria Loses $235b to Non-Passage of PIB', The Nation, 11.03.2021: https://thenationonlineng.net/nigeria-loses-235b-to-non-passage-of-pib/; Femi Adekoya, 'Nigeria's Delayed PIB and Disappearing Opportunities', The Guardian, 03.06.2020: https://guardian.ng/energy/nigerias-delayed-pib-and-disappearing-opportunities/; Michael Eboh, 'Investments Drying Up Over Delay in PIB Passage - Experts', Vanguard, 20.07.2020: https://www. vanguardngr.com/2020/07/investments-drying-up-over-delay-in-pib-passage-%E2%80%95-experts/ (all accessed 21.04.2022). According to a commentator, "While Nigerian government has spent the better part of 7 years dithering over enactment of new fiscal regime for its oil and gas sector via the PIB; with several investments stalling as a result (and consequential economic losses), many countries in the Gulf of Guinea have joined or are on their way to becoming competing oil and gas provinces. In recent memory, Angola momentarily overtook Nigeria as leading African producer due to cuts attributable to Niger Delta militants, and ramping up of its production as prolific fields came onstream. The OGEFZ, Onne has not become the operational hub that will serve the Gulf of Guinea as envisaged." See Afolabi Elebiju, 'Musings: Nigerian Business Landscape Improvement Issues', p. 2: https://lelawlegal.com/add111pdfs/Musings-on-Nigerian-Business-Landscape-Improvement-Issues1.pdf (accessed 01.04.2022). Article originally published as 'Why Government Must Adopt a Business Mindset...' in 'Taxspectives by Afolabi Elebiju', ThisDay Lawyer, 29.05.2012, p.7.

4. Finance Acts (FAs) 2019, 2020 and 2021. Given that the first two FAs received presidential assent in January and December 2020 respectively, this author prefers to refer to them as FA1 2020 and FA2 2020. This author and colleagues' commentaries on the FAs include the following: 'Connections, Collections': Issues Arising from the Imposition of Excise Duties on Telecommunications Services in Nigeria', LeLaw Thought Leadership, April 2021: https://lelawlegal.com/add111pdfs/Connections_Collections_.pdf; 'Rendezvous': Implications of Tax Provisions of Nigeria's Finance Act (No.2) 2020 for Non-Residents', LeLaw Thought Leadership Reflections, January 2021: https://lelawlegal.com/add111pdfs/TLR_AE_-_FA2_2020.pdf; 'Nigeria's Finance Act 2020 Tax Amendments - Should the Oil and Gas Sector Be Nervous?', LeLaw Thought Leadership, March 2020: https://lelawlegal.com/add111pdfs/Nigeria-Finance-Act-2020-Oil-Industry-Impact.pdf; and 'Developments: Finance Acts 2020 and the Tax Treatment of Regulated Securities Lending Transactions in Nigeria', LeLaw Thought Leadership, September 2021: https://lelawlegal.com/add111pdfs/AM_Developments_-Finance_Acts_2020_and_the_Tax_Treatment_of_Regulated_Securities_Lending_Transactions_in_Nigeria.pdf .

5. The author, despite several attempts, was unable to sight a copy of the gazetted PSCAA, for purposes of this article – hence we are unable to reference it as "Act No. ...of 2019". However, the author reviewed a copy of the version signed by President Buhari (on 4th November 2019). The President signed the PSCAA into law whilst on medical leave in London, prompting questions whether such is constitutional. However, the related discourse is outside the scope of this article.

6. See fn 2 above. Whilst the Finance Acts seeks to bring Nigeria's obsolete tax provisions in line with current business realities, the PSCAA followed decades of inaction, even though the principal legislation provided for amendment upon specified triggers and stipulated timeframes. For some background reading on the PIB see 'Government Memorandum on the Petroleum Industry Bill, 2009' which stated in its Executive Summary (at p. 1) that "The Government Memorandum is a comprehensive proposal to amend the PIB submitted in 2009 and is based on the original work of the OGIC." There were also different versions of the PIB, such as PIB 2008 prepared by the OGIC, and PIB 2011.

7. Significant pre-PIA fiscal changes also attracted a lot of discourse. See for example, 'EXPLAINER: What's the Big Deal About This '$1.4bn PSC Law' Just Signed by Buhari?', The Cable, 05.11.2019: https://www.thecable.ng/explainer-whats-the-big-deal-about-this-1-4bn-psc-law-just-signed-by-buhari (accessed 19.03.2022). It was "Adapted by TheCable from the expository article, 'Putting the PSC Act Amendment in Perspective', written by Waziri Adio, the executive secretary of NEITI."

8. Obviously, the CRE disputes had many dimensions. PSC Contractors resorted to arbitration alleging NNPC's breach of the PSCs, on the basis that the disputes are primarily contractual, even if they have tax flavour or elements. The divergent views of the PSC Parties on the appropriate treatment of the tax items in the PSCs resulted in differing lifting allocation computations, with the Contractors claiming that NNPC was over-lifting – in excess of its Contractor computed figures, although NNPC had no tax or lifting computation rights under the PSC. Many of the arbitration proceedings resulted in whole or partly favourable arbitral awards for the Contractors, and which were promptly challenged at the FHC and mostly set aside (on the grounds that the subject matter were tax disputes and therefore not arbitrable), with appeals by Contractors to the CoA, and further appeals cum cross-appeals, to the SC. In Statoil (Nig.) Ltd & Anor. v NNPC & 3 Ors.[2013] 14 NWLR (Pt. 1373), 1 the CoA discharged the ex parte injunction granted by the FHC, in stopping an ongoing CRE arbitration. There are pending appeals at the SC, following CA judgments in many of the matters. See for example, the CoA decisions in EEPNL & Anor. v. FIRS & Anor. [2021] 8 NWLR (Pt. 1777), 43 (CoA); EEPNL & Anor v. NNPC & Anor. Unreported CA/A/507/2012 of 22.07.2016 (Esso No. 1); EEPNL & Anor v. NNPC & Anor. Unreported CA/A/402/2012 of 10.03.2017 (Esso No. 2); SNEPCO & Ors. v. FIRS & Anor. Unreported CA/A/208/2012 of 31.08.2016; EEPNL & Anor. v. FIRS (2015) 17 TLRN 83 (TAT); and CNOOC E&P Nig Ltd & Anor. v. NNPC & Anor. (2017) 32 TLRN 34 (CoA). Tax appeals also resulted from the FIRS assessing Contractors in line with the NNPC's tax computations which reflected higher tax liability than the Contractors believed was due. Some pro-Contractors findings from the tax dispute resolution process include the following: (a) recognition of the taxpayer status of respective PSC Contractors and their entitlement to receive and object to FIRS assessments on the Contract Area and to be issued PPT receipts as taxpayers; (b) incapacity of NNPC to amend/vary, refuse to submit Contractor prepared PPT computations for the contract area to the FIRS and/or submit NNPC prepared PPT returns in lieu thereof, given that the PSCs and PSCA delegated such role to the Contractors. However, NNPC is not a 'post office' and can raise any issues it has with Contractor prepared returns, and filing alternative returns is an extreme step that requires explanations to the Contractor; See for example, Statoil (Nig.) Ltd & Anor. v. FIRS (2016) 24 TLRN 13 (TAT); SNEPCO & Ors. v. FIRS (2016) 24 TLRN 51 (TAT); SNEPCO & Ors. v. FIRS 2016) 21 TLRN 26 (TAT). On the other hand, decisions such as FIRS v. NNPC & 4 Ors. (2012) 6 TLRN 1 (FHC) held that: tax disputes are not arbitrable, that PSC Parties cannot by consent confer jurisdiction vested in the FHC on an arbitral tribunal, PSC tax disputes can only be resolved vide the statutory tax dispute resolution process, the PSC being contract with statutory flavor issued by the FG, involving FG agencies and relating to revenue of the Federation, as well as mines and minerals, are cognisable by section 251 1999 Constitution in the jurisdiction of the FHC. The FIRS, given its statutory duties, has locus standi to challenge decision of PSC arbitral proceeding that borders on taxation even though it was not a party to such proceedings.

9. Exemplifying the view that stabilisation issues cannot be seen to be catching PSC Contractors by surprise is: 'Deepwater PSCs Will Take A Hit in New Nigerian Law', Africa Oil & Gas Report, 25.04.2018: https://africaoilgasreport.com/2018/04/farm-in-farm-out/deepwater-pscs-will-take-a-hit-in-new-nigerian-law/ (accessed 23.04.2022).

10. LeLaw Thought Leadership Insights, March 2019, pp.1-12: https://lelawlegal.com/add111pdfs/PSC_CONTRACTORS .pdf; also available on Mondaq and Lexology websites, at: https://www.mondaq.com/nigeria/oil-gas-electricity/ 908904/psc-contractors-get-ready-fiscal-implications-of-the-supreme-court-decision-in-a-g-rivers-state-ors-v-a-g-federation-sc9642016; and https://www.lexology.com/library/detail.aspx?g=850387e9-181e-4469-90bd-4e6c8f d99d46, respectively (all accessed 19.03.2022).

11. See 'What Manner of Review: PSC Stabilisation Clause Provision Issues' at pp. 8 -10; and 'PSC Contractors: Next Steps?' at pp. 10 – 11.

12. Questions may also be asked on the status of changes that triggered stabilisation clauses, but which were not acted upon by PSC Contractors and have now been overtaken by PIA changes? Will any stabilisation claims no because Contractors need to first conclude the judicial process determining the validity of government actions/decisions before the issue of stabilisation would arise. Thus in the CRE disputes, if the arbitral awards enforcement/challenge process appeals end up in favour of the Contractors, there would be no need for stabilisation (unless if they only succeed in part). However, if the Government (represented by the NNPC and the FIRS) wins, then the stabilisation clauses will be triggered; although how far that would go may also be discoverable by reviewing PIA provisions.

13. It was in pursuance of this trite principle that the SC awarded the Appellant damages for breach of the Respondent's binding obligation under their contract of carriage in Mekwunye v. Emirates Airlines [2019] 9 NWLR (Pt. 1677) 191. Also, in Delmas v. Sunny Ositex Int'l Ltd [2019] 9 NWLR (Pt. 1677), 305 at 320B, the SC (per Kekere-Ekun, JSC) held, affirming an earlier SC decision, Nikka Fishing Co. Ltd v. Lavina Corpn. [2008] 16 NWLR (Pt.1114), 509 that: "a bill of lading contains the contractual terms between the parties and is binding on them and where there is no ambiguity in the bill of lading, effect must be given to the plain, clear and unambiguous meaning of the words used." Emphasis supplied. According to Peter-Odili, JSC in her concurring judgment in Julius Berger Nig. Plc & Anor. v. Toki Rainbow Community Bank Ltd [2019] 5 NWLR (Pt.1665) 219 at 257A-B: "...the parties are bound by the terms of their contract and are not expected to read into the contract what is not in it either in subtraction or addition". In Mekwunye v. Imoukhuede [2019] 3 NWLR (Pt. 1690) 439, the SC held at 500H that: "the consensual nature of the agreement to refer disputes to arbitration is the most distinguishing feature of arbitration be bifurcated into: pre and post PIA? Some are sui generis and therefore, exempt from this enquiry proceedings"; and at 502D even "a pathological clause" could not stop the SC from endorsing the trail judge's decision seeking "to give effect to the decision of the parties as manifested by their agreement to submit to arbitration." See also Optimum C&P Dev. Ltd v. Ake Shareholdings Ltd [2021] 18 NWLR (Pt.1807), 148 at 187A-H. Because terms of contracts are binding is why the Court in ascertaining the intention of the parties, has regard to the terms of the contract, the conduct of the parties and the circumstances of the case: Mekwunye v. WAEC [2020] 6 NWLR (Pt. 1719) 1 at 40E. Thus, even where a party impliedly adopts an agreement by conduct in dealing with the other party, the parties will be bound by the terms of the agreement as if they executed it: Vital Inv. Ltd v. Cap Plc [2022] 4 NWLR (Pt.1820), 205. See also Zebbra Energy Ltd. v. FGN [2002] 18 NWLR (Pt. 798), 162.

Originally published June 14, 2023

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