PIA 2021: Petroleum license conversion and implications for oil and gas operators

1. Petroleum Industry Act
2021: Petroleum Licence
Conversion and
implications for operators
in the Oil and Gas Sector
Kayode Adebiyi, Sept 2023

2. Our Roadmap
Overview
of the oil
and Gas
industry
Conversion
of marginal
fields
Conversion
guidelines
Relinquish
ment
Impact and
success
factors s

3. Crude Oil Characterization
Hidden
underground
High risk and
uncertainty
Unlimited potential
as a raw material
The world runs on oil.
Liquid, easy to
transport and
convert
Preferred energy
source
Crude Oil
Characterization
Main characteristics of
crude oil and gas.

4. Value Chain

5. Upstream Business Characteristics

6. E&P cycle
ATA
Appraisal drilling
Field
Development
Plan
Abandonment
Acreage acquisition
Basin
analysis
Prospect
generation
Economic
analysis
Wildcat Drilling Field development
Facilities design
Facilities
construction
Facilities
installation
Operations
Reservoir
Mgt
NIGERIA
QI
T
CAMEROU
N
Exploration
and
Production
Life
Cycle
Economic
analysis
QI L
LAG
O S
6

7. 7
The entire value chain of the oil and gas sector is known as the petroleum industry. The
industry is divided into three major sectors:
Midstream
Upstream
Finding, lifting, and processing crude oil & gas from
subsurface into surface and ready for transportation. Also
known as Exploration and Production (E&P).
Downstream
Transportation and storage of crude oil and natural gas from
E&P plant for further processing by pipeline, railway, road, or
tanker.
Further processing of crude oil and natural gas into useful final
product or raw material for other industries.
Overview of Oil and Gas – Industry Sectors

8. 8
Pre-drilling
Exploration
Leasehold/ License
Acquisition
Exploratory and
Development Drilling
Production
Abandonment
The Upstream Sector - The Upstream Life Cycle

9. 9
• Acquire data
• Submit proposals
1
Pre-drilling Exploration
• Preparatory work
• Seismic and drilling activities
• Evaluate results and appraise economics
• Submit development plans / abandon / suspend
• Evaluate results and appraise economics
• Submit development plans / abandon / suspend
3
Exploratory and Development
Drilling
• Evaluate results and appraise economics
• Submit development plans / abandon /
suspend
4
Production
• Negotiate contracts
• Pay signing bonuses
2
Leasehold/ License
Acquisition
• End of economic life of the well
• Plugging of oil well
• Removal of facilities
• Restoration of site
5
Abandonment
The Upstream Sector - The Upstream Life Cycle

10. Objectives of PIA

11. PIA: ADMINISTRATION OBJECTIVES
1
2
3
4

12. Prospecting
Exploration
Mining
Upstream
PIA: Upstream petroleum
operations
12

13. 13
• This involves applying for block(s) for exploration under an Oil Exploration License (OEL) or Oil
Prospecting License (OPL). Upon discovery of commercial quantities of hydrocarbon, the licensee
is eligible to apply for conversion of the OEL/OPL to an Oil Mining Lease (OML).
PEL PPL OML/PML
• Grants a non-exclusive rights to carry
out petroleum exploration operations
within the area provided for in the
Iicence.
• It may cover an area that includes
PPL or PML, provided that the
holders of such licences or leases,
will have no obligation to purchase
the results of any survey conducted
under the PEL
• Grants an exclusive right to drill
exploration and appraisal wells and
non-exclusive right to carry out
petroleum exploration operations within
the area provided for in the licence.
• the area provided for in a PPL will not
exceed: 350 sqkm for any onshore or
shallow water acreages; 1,000 sqkm
for any deep offshore acreages; and 1,
500 sqkm for any frontier acreages
• Granted to win, work, carry away and
dispose of crude oil, condensates and
natural gas on an exclusive basis.
• drill exploration and appraisal wells
and carry out the related test
production on an exclusive basis
• carry out petroleum exploration
operations on a non-exclusive basis.
The Upstream Sector- Obtaining a Right to Mine
S/N PIA Regime PPTA Regime
1 Petroleum Exploration Licence (PEL) Oil Exploration Licence (OEL)
2 Petroleum Prospecting Licence (PPL) Oil Prospecting Licence (OPL)
3 Petroleum Mining Lease (PML) Oil Mining Lease (OML)

14. ❖ May cover petroleum prospecting license
(PPL) and petroleum mining lease (PML).
❖ Onshore and shallow water acreages -
Initial period of 3 years, renewable by 3
years.
 Deep offshore and frontier acreages - Initial
period of 5 years, renewable by 5 years.
Petroleum Exploration License (PEL)
14

15. ❖ Term of the PPL has been increased to:
❖ Onshore and shallow water acreages - Initial period of 3 years,
renewable by 3 years.
 Deep offshore and frontier acreages - Initial period of 5 years,
renewable by 5 years.
❖ The area in a petroleum prospecting licence has a maximum of –
(a)350 square kilometres for onshore or shallow water acreages;
(b)1,000 square kilometres for deep offshore acreages; and
(c)1,500 square kilometres for frontier acreages.
Petroleum Prospecting License (PEL)
15

16.  Maximum period of 20 years; including the development period.
 Where development period is not stated, onshore lease will use 5
years. Lease in shallow water, deep offshore or frontier acreage will
use 7 years.
 Conversion from oil prospecting license to PPL is permitted.
Petroleum Mining Lease
(PML)
© 2021
16

17. Conversion of licenses and leases
All existing OPLs and OMLs will be automatically
converted to PPLs and PMLs, upon their expiration.
However, the PIA allows holders of OPLs and OMLs
under the current regime to voluntarily convert them
to PPLs or PMLs, respectively.
The PIA provides some condition precedents which
are to be contained in the Conversion Contracts.
One such condition, is a stipulation that all on-going
arbitration and court cases will be terminated.

18. Conversion of licenses and leases
This conversion process, which had an 18-month window that closed in February 2023, grants them access t
the fiscal terms of the new regime.
To facilitate this transition, the Commission introduced the Conversion and Renewal (Oil Prospecting License
and Oil Mining Leases) Regulations.
These regulations outline the application procedure for OPL and OML conversion.
They also extend to the conversion of producing marginal fields into PML, which concluded on
5 February 2023, as well as the conversion of non-producing or developing marginal fields into PPL.
Key considerations for upstream operators at this time is determining whether to exercise the right into opt
into the PIA fiscal framework and the downsizing of the license or lease acreages within their portfolio.
The Commission is required to develop a model license and model lease which shall be incorporated into contracts bef
such can be approved, and to include a carried interest provision giving NNPC Limited the right to participate up to 60%
a contract.

19. Obligations for an operator to convert
• Separation of upstream, midstream and downstream operations;
• Incorporation of Host Community Development Trust;
• Establishment of Decommissioning and Abandonment Plan;
• Preparation and submission of Environmental Management Plan;
• Compliance with domestic crude oil and gas supply obligations;
• Submission of a yearly summary of royalties, fee, taxes, profit oil shares
and other payments to Government;
• Submission of annual tax returns and payment of final instalment of
hydrocarbon tax.

20. Additional requirements
• In addition to the supporting documentation for the application, the
applicant is specifically required to provide the following with respect
to the renewal of an OML:
• evidence of payment of the applicable rent,
• the applicable work commitment guarantee, and
• the applicable parent company guarantee.5

21. Other provisions of the Conversion
Regulations
• detailed procedure in respect of the voluntary conversion process for an OPL
and OML where holders of an OPL or OML elect to convert to the PIA regime;
• the compulsory conversion process for a marginal field;
• contributions to funds created under the PIA upon conversion;
• the requirement for the sign-off of the Nigerian National Petroleum Company
Limited for conversion; and
• provisions relating to the model conversion contract to be issued by the
Commission.

22. Voluntary Conversion
The Upstream Sector
The holder of an existing OPL or OML may enter into a voluntary conversion contract under the PIA.
Where the licensee or lessee complies with the provisions of the PIA, such licensee or lessee will
benefit from the fiscal provisions under the PIA.
 However, it should be noted that the conversion contract will contain a
termination clause of all outstanding arbitration and court cases related
to the respective OPL or OML and any stabilization provisions or
guarantees provided by NNPC in respect of such OML or OPL will be
null and void.
 Furthermore, the incentive provisions contained in sections 11 and 12 of
the PPTA do not apply (that is, the incentives for the utilization of
associated and non-associated gas).
 Conversion will also result in relinquishment of a portion of the existing
acreage

23. Voluntary Conversion
The Upstream Sector
The date of a conversion contract
is the earlier of:
 18 months from the effective
date of the PIA
 the expiration date of the OML
or date of conversion of the
OPL to and OML
Where the holder of an existing
OPL or OML does not enter into a
conversion contract prior to the
conversion date, the terms and
conditions applicable to the OPL or
OML prior to the effective date of
the PIA will continue to apply to the
OPL or OML, subject to some
provisions in the PIA.

24. Convert-No convert
• Key considerations for upstream operators at this time in determining whether to
exercise the right to opt into the PIA fiscal framework and the downsizing of the
license or lease acreages within their portfolio.
• There are bound to be trade-offs in deciding whether to opt in to the PIA regime
• Upstream businesses must at this time evaluate the best course of action to take in
respect of each license or lease they currently operate;
• Most likely based on the inherent peculiarities of the geological formations within
those assets and the best value that can be derived from exploiting those assets
under the erstwhile regime or the new fiscal regime offered in the PIA.
• Note that the key difference between the outgoing (outgone?) and the new
concessions are the sizes. There is a significant reduction in the overall surface area
granted and retained under PPLs and PMLs as against the OPLs and OMLs.

25. PIA impact assessments
• Project economics, financial and commercial realities, other organizational priorities.
• CBA of converting before or after the mandatory timeline based on the fiscal provisions;
and
• Resulting effective tax rate from the adoption of the PIA vis-à-vis the PPTA for selected
forecast period(s).
• It is pertinent for related parties operating in the Nigerian oil and gas industry to review
their transfer pricing compliance and Service Level Agreements so as to avoid adjustment
of transactions between related parties and intra-group transactions such as:
Pricing related party transactions
Compliance with transfer pricing regulations
Dealing with transfer pricing audits
Designing and implementing effective SLAs

26. Service Level Agreement (SLAs). What will change?
26
# SLA Section Sub-Sections Details
1 Statement of Intent
• Purpose of Service Level Agreement (SLA)
• Duration: Start and End date of SLA
• Functions and Representatives
2 Scope
• Definition of services in scope
• Definition of products in scope
3
Metrics and
Performance
Monitoring
• List of metrics and targets, purpose
• Metrics definition and calculation methodology
• Auditability and controls methods
4
Planning and
Governance
• Roles & Responsibilities
• SLA review frequency
• SLA change process
• SLA resources performance management
5
Deviations from
Standard Processes
and SLA
• Deviations that are allowed versus the standard business process that should be applied
• Process to cover changes in requirements
6
Escalation and Issue
Resolution
• Processes for resolving performance issues and the processes for escalating unresolved issues
7 Signatures • Required signatures for the SLA. The SLA must be signed by the appropriate officers of the SLA to go into effect

27. Boom to Marginal Field Operators
• The Act makes provisions for marginal fields operators to
receive separate forms of license.
• Thus resolving a longstanding lacuna about the legal status
of marginal fields as well as the potential consequences from
the expiry of the OML from which the marginal fields were
carved out.
• MFOs can now enjoy of the PIA terms like HT rate of 15%, CIT
rate at 30% and royalty rates ranging from 5% to 15%
depending on the level of crude oil production per day.

28. Conversion and Marginal Fields
The Upstream Sector
The PIA defines marginal field to mean “a field or discovery which has been declared a
marginal field prior to 1st January 2021 or which has been lying fallow without activity for
seven years after its discovery prior to the effective date of the PIA”.
.
Section 94 of the PIA provides that a producing marginal field must convert to a PML
within 18 months from the effective date of the PIA.
Furthermore, a discovery declared as a marginal field prior to 1st January 2021
and is not producing will be converted to a PPL and will benefit from the terms for new
acreage provided under the PIA. However, no new marginal fields will be declared under
the PIA.

29. ● Marginal field, prior to 1st January, 2021, that is not producing will
convert to PPL. A producing field will continue under the old royalty
rates and farm-out arrangements but convert into a PPL within 18
months from the effective date.
Requirements
● Field development plan
● Environmental management plan: Within 1 year from effective date
or 6 months after the grant of license.
● Natural gas flare elimination and monetization plan: Within 12
months from effective date.
● Transfer of rights in a license or permit is disallowed except withprior
approval
Marginal fields
© 2021
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30. Elements of Administration:
Drill or Drop Concept With respect to onshore and shallow
water The current work and
relinquishment requirements under
OPLs and OMLs are relatively “lax”.
Most countries have tougher
requirements.
It is common to apply a “drill or drop”
system, which means that companies
either carry out exploratory drilling
and appraisal drilling or drop
(relinquish) the acreage.
The PIA implements this more
rigorous system in order to ensure an
optimal work program on the acreage
that is being granted
Drill or Drop

32. Elements of Administration:
Relinquishment … Deep Rights
A Licensee may voluntarily relinquish
acreage provided the Licensee has
complied with all related obligations.
Ten years after the granting of the PML,
the Lessee shall relinquish:
All areas not in production, and
Formations deeper than the deepest
producing formation (deep rights
relinquishment)
All relinquished areas shall vest with the
Government and be managed by the
Commission.

33. Re-designation of acreages
• Other conditions are that the fiscal stabilization clauses, will not be
grandfathered.
• PML holders will need to designate their acreages into five broad
classes:
– parcels that merit an appraisal (for exploration);
– parcels to make a declaration of commercial discovery, for which a
field development plan is to be submitted;
– parcels that have a significant gas discovery;
– parcels which already have development programs underway;
– parcels in which regular commercial production is occurring.

34. What is the target of any upstream oil and gas company?
Is to find large amount of oil and gas?
to make a profit ?
Finding oil and gas not necessary ensures that you will make a
profit, profit depend on commercial success
OR
Discussion – Impact of PIA

35. Does commercial success only means, find large amount of
hydrocarbons?
NO
Commercial success simply depend finding large amount
of hydrocarbons that can be produced economically.

36. 36
So how does PIA conversion impact?
1 Finding large amounts of oil and gas
2 Meeting commerciality criteria
3 Transparency and accuracy of information
4 Making profit
5 Sustainable development for the benefit of future generations

37. Kayode Adebiyi
Managing Director
HoneyRock Multiconsult Ltd
I8B Bayo Ajayi Street
Off Hakeem Balogun Street
Marwa Brooks Estate
Agidingbi – Ikeja
Lagos
08033181225, 07064078211
hmlconsultancyltd@gmail.com

38. Profile of Mr Kayode Adebiyi
Kayode Adebiyi holds an MBA from the University of Lagos and he is both a Fellow of the Institute of
Chartered Accountants of Nigeria (ICAN) and Chartered Institute of Taxation of Nigeria (CITN).
His working experience is rounded - spanning from the manufacturing industry to academics and
Management Consulting. He rose to the position of Executive Consultant before joining NNPC in 1991
as a Senior Accountant.
In NNPC, he worked in various SBUs - IDSL, CHQ. NAPIMS and NPDC where he acquired cognate
experience in oil and gas accounting, taxation, managing Joint Ventures (JVs), Production Sharing
Contracts (PSC) and Service Contracts (SC).
With his vast exposure, extensive training, work attachment and self-development, he is an acclaimed
subject matter expert in Oil and Gas Accounting and Taxation in the Nigerian Oil and Gas industry.
He rose to the position of Executive Director, Shared Service in the Petroleum Products Marketing
Company (a subsidiary of the Nigerian National Petroleum Corporation) before retiring from NNPC in
March 2020 to start his financial and management consulting practice.
He has authored three books, the most notable of which is "Petroleum Accounting and Taxation in
Nigeria" which he co-authored with Dr. R. U. Uche, a former President of the Institute of Chartered
Accountants of Nigeria.
A notable conference speaker, he has presented papers to the most distinguished audiences in his
professional domains. He has recently been appointed A Guest Lecturer in the Department of
Accounting, Covenant University, Ota, Ogun State, Nigeria
He is presently the Managing Director of HoneyRock Multiconsult Ltd, a financial and management
consulting firm based in Lagos and Abuja, Nigeria. Mr. Adebiyi is a member of the Institute of Directors
(IoD).