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Unbundling The PIA: Host Communities Development – Fund Management/ REITs



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INTRODUCTION

The host community development provisions in the Petroleum
Industry Act 2021 (PIA) remain a focal topic of
discourse amongst stakeholders in the Nigerian oil and gas
industry. The reason for this is not farfetched as prior to the
PIA, there were no laws imposing community development obligations
on oil and gas companies.1

Prior to the enactment of the PIA, although not statutorily
required to do so, oil and gas companies addressed the development
of host communities through the instrumentality of Global
Memorandum of Understanding (GMOU), Offshore Memorandum of
Understanding (OMOU) and other means of collaboration with host
communities. The GMOUs and OMOUs were typically entered into
between the oil and gas company, the host communities (represented
by appointed representatives) and the relevant state government. By
the GMOUs and OMOUs, the companies inter alia will
undertake to either provide or fund certain developmental
activities and projects for the benefit of the host communities.
Further, the governing bodies set up under the GMOUs and OMOUs are
responsible for reviewing the developmental projects, ensuring
peaceful co-existence between the host communities and the oil and
gas companies as well as assisting with conflict resolution.

Notwithstanding this existing practice of entering into GMOUs,
the government still saw the huge gap created due to lack of a
legislative framework which imposes host community development
obligations so that it is not just seen as a corporate social
responsibility initiative of the oil & gas companies but rather
a legal obligation that must be complied with, hence the elaborate
provisions on host community development contained in Chapter 3 of
the PIA.

These provisions are aimed at among others, fostering
sustainable prosperity within host communities, providing direct
and social economic benefits from petroleum operations to host
communities and enhancing peaceful and harmonious co-existence
between licensees or lessees and host communities.

ANALYSIS OF KEY HOST COMMUNITY DEVELOPMENT OBLIGATIONS

Obligation to Incorporate a Trust

Each settlor is obligated to incorporate a Host Communities
Development Trust (the Trust) as a body corporate under the
Companies and Allied Matters Act for the benefit of the host
communities for which the settlor is responsible.2

This is required to be done within the following timelines:

  1. For oil mining leases and designated facilities3
    existing as at the effective date of the PIA, within 12 months from
    the effective date of the PIA (i.e., by 15 August 2022);

  2. For designated facilities that were under construction as at
    the effective date of the PIA, within 12 months from the effective
    date of the PIA (i.e., by 15 August 2022);

  3. For oil prospecting licences existing as at the effective date
    of the PIA, prior to the application for field development
    plan;

  4. For petroleum prospecting licences (PPLs) and
    petroleum mining leases (PMLs) granted pursuant to
    the PIA: prior to the application for any field development plan;
    and

  5. For new licensees of designated facilities granted pursuant the
    PIA: prior to commencement of commercial operations.

It should be noted that for unincorporated joint ventures, the
operator is responsible, on behalf of the joint venture partners,
for ensuring compliance with the host community development
provisions in the PIA, including incorporation of the
Trust.4 Notably, failure to incorporate the Trust is a
ground for revocation of the applicable licence or
lease.5

Interestingly, and as noted above, the obligation to incorporate
the Trust and other host community development obligations under
the PIA are imposed on
settlors. By section 318 of the
PIA, a settlor is defined as a holder of interest in a PPL or PML
whose area of operations is in or appurtenant to any community or
communities. Thus, the definition of “settlors” makes
clear that a “settlor” is a company holding a PML or PPL.
Further, section 240 of the PIA provides that three per cent (3%)
of the actual annual operating expenditure of the preceding
financial year in upstream petroleum operations
shall be contributed to the host communities development fund.
Thus, a combined reading of the foregoing provisions makes clear
that the host community obligations under the PIA apply only to PPL
and PML holders and only in respect of their upstream petroleum
operations.

Paradoxically, several other provisions in Chapter 3 of the PIA
appear to indicate that the host community development obligations
are also applicable to midstream and downstream entities. For
example, Section 236 of the PIA provides that the Trust must be set
up within 12 months of the effective date for existing
“designated facilities”6 as well as those
under construction and prior to commencement of commercial
operations for new “designated facilities”. Designated
facilities under the PIA is defined as petroleum transportation
pipelines, bulk storage tank farms, refineries, gas processing
plants in midstream petroleum operations and petrochemical
plants.7 A good number of these facilities are utilised
for midstream and downstream operations and do not pertain to
upstream petroleum operations. Further, the Commission and
Authority (whose powers and functions are limited to midstream and
downstream operations)8 are empowered to: (i) issue
regulations in relation to inter alia the dispute resolution
between settlors and host communities and management of the host
communities development fund;9 and (ii) approve the
membership requirements for the board of the Trust, as
applicable.10 The settlor is also required to submit a
report on its activities in respect of the Trust to either the
Commission or Authority, as the case may be.11 Clearly,
the references to the powers of the Authority as delineated herein
is suggestive of the fact that the PIA contemplates settlors also
being involved in midstream and downstream operations, as opposed
to upstream operations alone.

Despite the foregoing provisions of the PIA, it is arguable that
the intention of the lawmakers was not to include midstream and
downstream companies within the ambit of the host community
development provisions. This is premised on a number of reasons to
wit: (i) the definition of “settlors” is clear and
unambiguous; (ii) the Petroleum Host and Impacted Communities
Development Bill 2018 (the Bill) which was adopted
as Chapter 3 of the PIA, specifically included licensees of
designated midstream and downstream assets within the definition of
“settlors”; however, this was conspicuously excluded from
the definition of “settlors” contained in the PIA. The
fact that the PIA departed from this definition suggests that the
intention was to exclude midstream and downstream companies from
the obligations imposed by Chapter 3.

As a corollary, it is also arguable that the intention of the
lawmakers is for the provisions of Chapter 3 of the PIA to be
extended to the midstream and downstream operations of PPL or PML
holders (where applicable) and not to midstream and downstream
companies who do not engage in any upstream operations.

What is evident from the foregoing is that clarity is required
on whether the host community obligations imposed under the PIA are
applicable to midstream and downstream oil and gas companies. Given
this ambiguity, it remains to be seen how the regulators will
interpret the provisions of the PIA but we expect that regulations
will be issued in due course by the Commission and Authority to
clarify the scope of applicability of Chapter 3.

Click here to continue reading . . .

Footnotes

1. We however note the provisions of
the Community Content Guideline which was issued by the Nigerian
Content Development and Monitoring Board for the establishment of
critical infrastructure to stimulate development in host
communities. In this regard, the Community Content Guidelines
provides for the operators, contractors and project promoter to
sponsor scholarship programmes and upload the list of beneficiaries
to the Board electronically.

2. Section 235(1) and (2) of the
PIA

3. Designated facilities is defined
under Section 318 of the PIA as petroleum transportation pipelines,
bulk storage tank farms, refineries, gas processing plants in
midstream petroleum operations and petrochemical plants

4. Section 235(2) of the PIA

5. Section 238 of the PIA

6. Section 236 (b) (c) and (f) of the
PIA

7. Section 318 of the PIA

8. Section 32 of the PIA

9.9. Section 234(3) and (4), 235(6),
238 of the PIA

10. Section 242(1) of the
PIA

11. Section 255 (d) of the
PIA

Originally published March 14, 2022

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



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