So I am introducing a new feature to our publications called the Quick Take Series.
The QT Series will be short reads that try to explain regulatory developments you should be aware of.
For the first edition, we will be discussing 2 principal Funds created under the new Petroleum Industry Act.
In subsequent series, we will touch on the Bodies and Timelines created under the Act.
Following the signing of the PIA, there have been a few reactions online concerning how funds are allocated under the new law (Of course, this is Nigeria). Two themes stick out.
The Frontier Exploration Fund
The Host Communities Development Fund
And people are mixing things up. So.
What is the Frontier Exploration Fund?
The Frontier Exploration Fund is a category of fund created under the Petroleum Industry Act to be managed by the NURC for the purpose of exploring possible frontier oil basins not yet discovered in Nigeria. Now, note that there is only ONE Frontier Exploration Fund (FEF) - this distinction will be important later in the discourse.
Section 9(4) of the PIA provides that the FEF will be made up of 30% of NNPC Limited’s profit oil and profit gas - profits from its oil and gas exploration transactions, I think.
What does that mean? 30% of the profit oil and profit gas in the NNPC’s production sharing, profit sharing, and risk service contracts will be paid into the FEF.
Poser: Is there any accessible data on how much the NNPC generates from its oil and gas transactions?
I’m not a quant but maybe this report of a company under the NNPC offers a picture of what income from oil and gas transactions look like: NPDC 2019 Audited Financial Statement
What is the Host Communities Development Fund?
The Host Communities Development Fund is a category of fund created under the Petroleum Industry Act to be managed by each Host Communities Development Trust set up by settlors (companies with mining and prospecting licenses on a project) for the purpose of contributing economic and social benefits to host communities where oil & gas is being explored.
Now, note that the possibility of having more than one Host Communities Development Trust is highly likely. Setting up a HCDT depends on the number of exploration areas opened up for mining and prospecting.
Section 240(2) of the PIA provides that each settlor shall make an annual contribution of 3% of their actual operating expenditure (OPEX) into the HCDT Fund.
This means, that where an oil company is exploring oil resources through an OML or OPL in the Upstream sector, such a company will have to contribute 3% of their OPEX to Host Communities.
Poser: What is the operating expenditure defined as?
Again, I’m not a quant but maybe we can define operating expenditure of companies as the General and Administrative costs in the audited statement of companies? We can check this Reported Accounts of Seplat, as an example, to ascertain what amounts will be payable to host communities.
If you have any perspectives that could make this thread clearer, please share in the comments section or shoot me an email!
Good stuff. Lots of "emotions" centred around the 30% and 3% conveniently leaving out the base. Would be great to do a side by side with numbers from the financials.
Good stuff. Lots of "emotions" centred around the 30% and 3% conveniently leaving out the base. Would be great to do a side by side with numbers from the financials.