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The Petroleum Industry Act, 2021 (PIA) mandates the incorporation of host communities’ development trust (the Trust) by companies known as settlors under the PIA. The settlors are companies that have interest in petroleum prospecting licence or petroleum mining lease whose area of operation is located or appurtenant to any community or communities. The incorporation of the Trust is to be done within a particular timeframe stipulated in the PIA. Penalties for non-compliance are stipulated in the PIA as well as the Nigeria Upstream Petroleum Host Communities Development Regulations 2022 (the Regulation) issued by the Nigerian Upstream Petroleum Regulatory Commission (the Commission) on 24 June 2022.
In this article, we offer insight into the viability of the timeframe by taking into account the possibility of conflict or dispute in the appointment and authorisation of the Trust’s Board of Trustees by the settlors. We suggested a liberal and purposive interpretation of the timeframe provided in the PIA in deserving circumstances. Finally, we considered the penalty provisions for non-compliance with the timeframe with a view to understanding the exposure of the settlors as well as the enforceability of the penalty provisions, especially as found in the Regulation.
The timeframe for incorporation
Section 236 of the PIA provides for the timeframe for the incorporation of the Trust. For existing oil mining leases and existing designated facilities, the section requires the Trust to be incorporated within 12 months from the effective date of the Act. That is within 12 months from 21 August 2021 being the effective date. In other words, for existing oil mining leases and designated facilities, the incorporation of the Trust is expected to take place on or before the 20 of August 2022. This timeline for incorporation of the Trust applies to new designated facilities under construction as at the effective date, 21 August 2021.
However, for existing oil prospecting licences, the incorporation of the Trust must be done prior to the application for field development plan. Prior incorporation of the Trust is also required for commencement of commercial operations for licensee of designated facilities granted under the PIA, and the application for field development plan under a petroleum prospecting licence or petroleum mining lease. The implication is that the evidence of incorporation of the Trust is required before a regulatory approval will be given to any field development plan submitted under the PIA or for permission to commence commercial operation by a licensee of designated facilities. The requirement of prior incorporation of the Trust effectively puts community issues on the front burner when it comes to the upstream and midstream oil and gas operations in Nigeria.
Comments on the timeframe for existing oil mining leases and designated facilities
The timeline for incorporation of the trust for existing oil mining leases and designated facilities is clear. Incorporation of the Trust is to be completed on or before the 21 August 2022. However, for varying reasons, existing settlors may not meet up with this timeline. For instance, there could be a problem with the nomination and appointment of trustees for the Trust. Notably, Section 235(4) of the PIA gives the settlor the power to appoint and authorise a Board of Trustees for the purpose of incorporating the Trust. This power must however be exercised by the settlor in consultation with the host communities. That is, the settlor cannot unilaterally appoint members of the Board of Trustee without consulting with the host communities. On the other hand, it is not for the host communities to appoint the trustees or foist some persons on the settlors for appointment as members of the Board of Trustee.
We note that conflicts are bound to arise as to the appropriate persons to be appointed members of the Board of Trustees. This is especially so, in communities with disputed kingship or communities with several conflicted factions. The dispute as to the appointment of trustees by a settlor may end up in court for a judicial determination. An action in court relating to the appointment of trustees or an objection filed by interested members of the public against the incorporation of the Trust may stall the incorporation of the Trust thereby preventing a settlor from complying with the timeline stipulated in the PIA.
We take the view that a settlor cannot be said to have failed to incorporate the Trust where there is an action in court either challenging the incorporation of the Trust or challenging the appointment and authorisation of the trustees by the settlor. Such an action serves as a defence to an accusation of failure to incorporate the Trust envisaged by the PIA. There could be other genuine reasons for non-compliance with the timeframe provided for in the PIA for the incorporation of the Trust.
Comments on prior incorporation of the Trust
As earlier noted, prior incorporation of the Trust is required prior to the commencement of commercial operations for licensee of designated facilities. This prior incorporation of the Trust is also required for the application for field development plan for existing oil prospecting licences or under a petroleum prospecting licence or petroleum mining lease under the PIA. In other words, the PIA appears to confirm that the incorporation of the Trust must precede any such commencement of commercial operations or application for field development plan. This position of the PIA is commendable as well as problematic.
It is problematic in the sense that protracted issues relating to the incorporation of the Trust, especially the appointment and authorisation of the Board of Trustees may have the effect of frustrating an application for a field development plan or the commencement of commercial operations by a licensee of designated facilities. For instance, a settlor’s appointment of trustees after due consultation with the host communities may be challenged in court by dissatisfied community members. Such an action may stultify the incorporation of the Trust, which will in turn affect an application for field development plan or the commencement of commercial operations by a licensee of designated facilities.
It is our firm view that a strict interpretation of the PIA as regards prior incorporation may not be in the best interest of the settlor, the affected communities and the country. A liberal and purposive interpretation, in keeping with the objective of Chapter 3 of the PIA, should be adopted. What this means is that the requirement for prior incorporation of the Trust should not be allowed to frustrate an application for a field development plan or the commencement of commercial operations by a designated licensee where there is a court action regarding such incorporation. This is because it may not be viable to await the outcome of the action before proceeding with an application to commence commercial operations or an application for a field development plan, which must be made within two years of declaration of commercial discovery of petroleum.
In such an instance, an application could still be made by a settlor to the regulator (Nigerian Upstream Petroleum Regulatory Commission or Commission or the Nigeria Midstream and Downstream Petroleum Regulatory or with all the relevant facts placed before the regulator. The facts must be such that the settlor is not complicit in the court action and has shown sufficient good faith and genuine intention to incorporate the Trust. Where this is the case, a liberal and purposeful interpretation of Section 236(d) (e) & (f) of the PIA will support an approval of the settlor’s application by the regulator notwithstanding the absence of incorporation of the Trust due to a court action. In such an instance, an interim arrangement may be made by the regulator and the settlor as to the management of the funds accruing to the host communities pending the outcome of the case in court. We note, however, that such an interim management of funds may be challenged in court for being contrary to provisions of the PIA.
Comments on the penalties for non-compliance
The failure to incorporate the Trust by a settlor is a serious breach of the PIA. The consequences of the failure to incorporate the Trust are articulated in Section 238 of the PIA and paragraph 9 of the Nigeria Upstream Petroleum Host Communities Development Regulations 2022 (the Regulation). Section 238 of the PIA provides that the failure to incorporate the Trust may be a ground for the revocation of the settlor’s licence after the settlor must have been informed of such failure by the Commission or the Authority as the case may be.
Still on the failure of a settlor to incorporate the Trust, paragraph 9(1) of the Regulation provides that the Commission “may within 14 days issue such defaulting settlor or operator where applicable, a notice in writing of its failure to establish a trust and direct the settlor to register the trust within 45 days.” By this paragraph of the Regulation, it is expected that the Commission shall issue notices to defaulting settlors from 21 August 2022 to 4 September 2022. In view of the use of the expression “may” in paragraph 9 of the Regulation, the Commission is entitled to issue notice of default after the 14 days stipulated in the Regulation. In other words, any notice issued after 4 September 2022 is not invalid. The content of the notice (the 45 days grace period) as stipulated in the Regulation is commendable as it affords a settlor an opportunity to remedy the breach of the PIA and the Regulation.
Where a settlor or operator fails to incorporate the Trust after the expiration of 45 days’ timeline contained in the Commission’s notice, the settlor or operator shall be liable to an administrative penalty of $2,500 or its Naira equivalent per day calculated from the date of expiration of the notice until the Trust in incorporated. We note that the enforcement of an administrative penalty like the one imposed under the Regulation is a contested issue. It seems it is only a court of law that can validly impose a fine or penalty in Nigeria. It may not be for any government agency or body to impose a penalty on any person for allegedly committing an offence. Such function appears to be the exclusive preserve of the court. This is to avoid a situation, where such a government agency or body may constitute itself into the accuser, the prosecutor and a judge at the same time. The implication is that the penalty in the Regulation may be not enforced unilaterally by the Commission except an action is taken out in court against the defaulting settlor. The case of NOSDRA v Mobil Prod. (Nig.) Unltd. (2018) 13 NWLR (Pt. 1636) 334 supports this position.
Lastly, the Regulation in its paragraph 9(2) provides that the Commission may make recommendation to the Minister for the revocation of the licence or lease if a settlor who fails to incorporate a trust within 30 days after the expiration of 45 days’ timeline specified by the Commission in its notice to the settlor. From the foregoing, a settlor has a total of 75 days to incorporate a trust upon being notified by the Commission. Failure to do so will expose the settlor to the possibility of revocation of the settlor’s licence.
One thing that is clear from the PIA and paragraph 9 of the Regulation is that a settlor or operator who fails to incorporate the Trust after the timeframe stipulated in the Act is not exposed to any penalty whatsoever until the settlor is issued a notice of default by the Commission. In other words, the revocation of the settlor’s licence or the penalty of $2,500 per day is not automatic upon the failure of the settlor to incorporate the Trust. It is the notice by the Commission that exposes the settlor to a penalty both under the PIA and the regulation.
Ozuo is the founder, VS Law firm, while Cyril-Hart is the firm’s associate.
