Counting the cost and listing the gains of PIB by Ernst and Young

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CBN

Olusola  Bello

The Midstream Gas Infrastructure Fund (MGIF) as contained in the current Petroleum Industry Bill (PIB) is said to portends an opportunity for collaboration across the value chain in the oil and gas industry.

According to Ernst and Young in its analysis of the section in the bill, it viewed that the MGIF  could catalyse private investments in infrastructure towards developing the massive non- associated gas endowment, which have largely been stranded due to non-commerciality of the current framework, and also move gas utilization beyond the dominance of JV assets and also move gas utilization beyond the dominance of JV assets by facilitating investments towards developing Production Sharing Contract gas assets.

The PIB provides for the establishment of the Midstream Gas Infrastructure Fund (MGIF) to take responsibility for equity investment of government owned participating or shareholders interest in infrastructure related to the Midstream gas operations aimed at increasing domestic consumption of natural gas through public private partnerships and encouraging private investments. The MGIF will be funded by a levy of 0.5% derived from wholesale price of petroleum products and natural gas sold in Nigeria.

As regards crude oil delivery obligations the firm says Producers will need to assess if the terms for the supply of crude oil to the local refiners will be favorable relative to what is obtainable in the market. It should also be clear what protections are afforded to producers unable to meet their supply commitments due to force majeure or other events beyond their reasonable control (ab initio not defined as force majeure), particularly given the restive social context in most gas producing  locations.

The PIB has said the Upstream Regulatory Commission will be required to liaise with the Nigerian Midstream and Downstream Regulatory Authority to ensure that in the event of shortfalls in the availability of refined products, leaseholders are able to provide crude oil to holders of crude oil refining license in country. The Upstream Regulatory Commission may issue regulations or guidelines as specified by the PIB on the mechanism for the imposition of a domestic crude oil supply obligation on lessees of upstream petroleum operations. The mechanism and commercial terms for such supply will be agreed by the leaseholder and the holders of crude oil refining licenses. Holders of the crude oil refining license will be required to provide payment guarantees to the leaseholders and payments may be agreed in either Naira or US Dollars.

 

Decommissioning and Abandonment

Contributions to the decommissioning and abandonment Fund  according to PIB  is eligible for cost recovery and will be tax deductible, as long as the cost associated with the decommissioning is disbursed from the Fund. “Leftover amounts in the Fund post decommissioning and abandonment, and upon approval by the Commission or the Authority will be considered income for production sharing or tax purposes and the amount after the withholding of profit oil and any tax will be returned to the licensee or lessee. This provision clarifies the uncertainty around the treatment of the remaining funds in the decommissioning and abandonment escrow account after completion of asset retirement obligations for contractor parties, as any excess funds can now be claimed.”

Ernst and Young says  contractor parties should consider this as part of their modelling of the life cycle cash flows of the project given the potential to claim any excess funds contributed

On Relinquishment of Contract Area: “The PIB specifies that all OPLs and OMLs will be automatically converted to PPLs and PMLs after their expiration. PIB also allows holders of these OPLs and OMLs to voluntarily convert immediately under certain conditions which includes the termination of all on-going arbitration and disputes associated with the OPL and OML. A conversion contract will be concluded at a date which is the earlier of 18months from the effective date of the enactment of the act and the expiration date of the OML.”

OML holders who intend to renew or convert to the existing PML under a PSC arrangement are expected to designate the areas and zones associated with the OML into five broad categories that should only account for 40% of the license area with the other 60% being relinquished.

The firm however believes that the proposed relinquishment of 60% may be a disincentive for holders when executing the conversion contracts. “Contractor parties will have to assess the impact of the termination of all ongoing arbitration and disputes upon conversion, as this might impact any dispute settlement currently being negotiated with the government”

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