By Peter Okediya
The basic rule is that a delegated legislation cannot stand on its own. It derives its validity and legal authority from its enabling law which could be the constitution, an Act of the National Assembly or a law of the State House of Assembly. However, the situation is reversed with a guideline issued by the NUPRC.
There was once a view that to generate more revenue from the petroleum sector, the global best practice is to separate the upstream from the midstream for transparent measurement of crude and other value addition activities. And, in fact, this is the ideal. The PIA was enacted to legalize this idea. However, the regulators created for the purpose of making this work say, “No, we prefer the old system”.
Sometime last year, the Presidency issued a Directive to make the NUPRC (an upstream regulator) the sole regulator for crude export activities (a midstream operation). Today, the NUPRC are taking it up a notch by claiming the whole of midstream operations and issuing licenses for midstream activities.
The most interesting part in all these is the clever way through which the NUPRC have made this possible. This piece is not just to tell you they have been caught – but to show you what they did, how they did it and how we demystify it
In this piece, I highlight the undoing of the Petroleum Industry Act by the NUPRC; the legal context of regulatory responsibility over integrated operations; the lack of legal basis for the Guideline; further commentaries on the contradictions in the Guideline; and the implications for the petroleum industry.
There is no doubt that, in practice, upstream and midstream operations are often integrated. Nonetheless, the upstream and midstream components in integrated operations are still identifiable and distinct, both operationally and from a regulatory perspective.
Recognizing this fact, the PIA established the Nigerian Upstream Regulatory Commission (“NUPRC” or “the Commission”) as a separate regulator for the upstream sub-sector and the Nigerian Midstream and Downstream Petroleum Regulatory Authority (“NMDPRA” or “the Authority”) as the regulator for the midstream and downstream sub-sectors. This is further supported by the value chain principle of custody transfer from upstream to midstream.
It all sounded good and straightforward until the NUPRC and the NMDPRA got into a challenge of who regulates the midstream. This conflict initially centered on export activities, expanded to integrated operations, and has now extended to NUPRC assuming authority over midstream operations and licensing, exceeding its regulatory mandate.
With the support of the Presidency[1] and a questionable interpretation of the PIA, the NUPRC issued the Guidelines on Classification of Integrated Upstream and Midstream Petroleum Operations (“the Guideline”) in December 2023, which was, curiously, not made available on the NUPRC’s website until recently, adding to the controversy surrounding the NUPRC’s motives.
Essentially, what the NUPRC achieves through the Guideline is to administer midstream operations using specific and omnibus clauses, and more importantly, issuing midstream licenses.
The NUPRC’s assertion of authority over integrated operations, including midstream components, is based on a perceived loophole in the PIA on the nature of integrated petroleum operations, rather than a genuine legal interpretation. Needless to say, the NUPRC’s claim of regulatory oversight over upstream integrated operations, including the issuance of midstream licenses, as communicated in the Guideline, contradicts the statutory mandate of the NMDPRA, which is responsible for regulating midstream and downstream activities.[2]
This discrepancy raises the need for a closer examination of the legal and commercial implications of the NUPRC’s position in light of the PIA and established industry practices.
To address this, four questions will be answered:
- What is the context of integrated petroleum operations as defined in the PIA?
- What are the regulatory and administrative functions of the NUPRC?
- What are the regulatory and administrative functions of the NMDPRA?
- What are the scope and limits of the NUPRC in relation to integrated operations?
The Context and Use of Integrated Operations in the PIA
To adequately assess the propriety of the Guidelines and appreciate this piece, we need to understand what the PIA regards as integrated operations. The PIA defines integrated petroleum operations solely under upstream operations to refer to a joint use of facilities used exclusively for upstream and midstream operations.[4] This term arose from the need to define activities that have a joint use of utilities and infrastructure required for both upstream and midstream activities in the petroleum industry.
An example of integrated operations is a pipeline network used for both transporting crude oil or natural gas from upstream sites to processing facilities (midstream). Other instances are processing and storage facilities serving an upstream production site.
The PIA, having provided exclusive powers for NUPRC over midstream and NMDPRA over midstream and downstream, defined the term integrated petroleum operations solely under upstream operations and used the provision to reserve powers for the NUPRC to carry out specific regulatory functions on upstream operations that require a combination of midstream operations without requiring approval from NMDPRA as provided in section 48 of the PIA.
Exclusive Functions of the NUPRC
This is a fact in issue, hence, it is important we lay it bare. Upstream is simply the petroleum exploration and production stage and activities therein include seismic operations, development, exploration, production, calculation of royalties and disposal to midstream. The PIA in section 18 (2) established, under the NUPRC, the positions of Executive Commissioners to be in charge Exploration and Acreage Management (EAM) and Development and Production (D & P) respectively to effectively manage upstream operations. This is in furtherance of the objective of the NUPRC to regulate upstream petroleum operations and ensure compliance with all applicable laws governing upstream petroleum operations.
The Act further states that the technical regulatory functions of the Commission include to administer, monitor and enforce compliance with the terms and conditions of leases, licenses, permits and authorizations in respect of upstream petroleum operations. The licenses relate to the Petroleum Prospecting License, Petroleum Exploration License and the Petroleum Mining Lease.
The point I drive at here is: the licensing powers, object and functions of the NUPRC are limited to upstream petroleum operations (save for a certain category of approval that will be explained shortly).
More important to this subject is section 8(d) of the PIA which provides that the Commission, in exercising its commercial regulatory functions, considers and is in charge of integrated operation in situations where in situ facilities or fixed or floating fixed platforms or vessels provide for fully integrated upstream and midstream petroleum operations.
Exclusive Functions of the NMDPRA
Midstream involves hydrocarbon processing and transportation activities. The downstream captures distribution of petroleum products, depot operations, pricing, retailing and marketing.
The NMDPRA is to regulate and monitor midstream and downstream petroleum operations in Nigeria. Specifically, the Act states that they grant, issue, modify or terminate licenses, permits and authorizations for midstream and downstream petroleum operations. They are further empowered to make regulations establishing midstream and downstream operations to be subject to a license and permits.
Scope of the NUPRC’S Role in Integrated Petroleum Operations
I adopt the 80/20 rule here – this means we don’t have to restate each item in the Guideline because the enabling provisions for the Guideline sufficiently establishes its impropriety. Nonetheless, at the end of the article is a brief analysis of the items in the Guideline and their discrepancies (Further Commentaries).
While the NUPRC says the Guideline was issued in accordance with Section 8(d), 79(2), 79(3), and 318 of the Act, a cursory examination reveals that the provisions of the Guideline disregard, modify, extend and, in fact, replace the provisions of the PIA.
In this part, I compare the cited enabling sections in the Guideline against their actual context in the PIA to examine the scope of NUPRC’s role in integrated operations.
- Section 79(2) and (3) dealing with commercial discovery and field development plan; and the deliberate omission of Section 79(4).
Section 79(2) of the PIA outlines the criteria for approval of a Field Development Plan (FDP). Section 79 (3) provides that in situations where the commercial discovery requires construction of facilities for midstream operations integrated with upstream operations, the holder of the PPL submits the development plan as a single integrated project to be reviewed by the commission.
The undisclosed portion in the Guideline is Section 79(4) which provides that the NUPRC will review and implement the project based on its regulatory responsibilities. By implication, it is not contemplated that the NUPRC will assume the regulatory responsibilities of the NMDPRA in this aspect, but solely based on its own regulatory functions in Section 4 of the Act.
Notably, the regulatory purview of the NUPRC does not include the issuance of midstream licenses, as its responsibilities are limited to the production of hydrocarbons and related upstream activities. It doesn’t extend to activities such as processing, transportation, or wholesale supply (exports or domestic supply), as stated in the Guideline. Hence, the rationale behind the exclusion of Section 79(4) by the NUPRC appears to be rooted in an understanding of the constraints within its authority, albeit with an unlawful willingness to extend its boundaries.
- Issuance of Certificates of quantity and quality (section 7(ee))
The NUPRC is responsible for issuing certificates of quality and quantity to exporters of crude oil, natural gas, and petroleum products from integrated operations and crude oil export terminals established before the effective date of the act.[5] With the enactment of the PIA and by virtue of wholesale supply license prescribed in section 142 and 197 of the Act as the appropriate license for exports and sale of Petroleum Liquids issued by the NMDPRA, exporters of crude oil, natural gas, and petroleum products in Nigeria are license holders under midstream operations. Furthermore, schedule 7 section 7 shows that integrated operations and crude oil export terminals established before the effective date of the act mentioned in section 7ee represent situations where measurement for royalties occur in terminal, gas processing plants and any other midstream facilities.
Although this is not a fact in issue, it is mentioned to describe how the Act specifically limits the NUPRC to specific activities in integrated operations. The foundation of the NUPRC’s gaffe is in Section 8(d) and 318.
- Section 8(d) and 318 – Integrated Operations and the Upstream Sector
By virtue of section 8(d), within its commercial regulatory functions, the NUPRC considers and is in charge of integrated operations where in situ facilities or fixed or floating platforms or vessels provide for fully integrated upstream and midstream petroleum operations. This includes reviewing and ensuring compliance with regulations governing integrated operations that involve both upstream and midstream components. Now, this must be distinguished from the power to grant licenses over midstream operations which the Guidelines appears to have vested in them.
Integrated petroleum operations comprise two components: the upstream component and the midstream component. The Act, in Part IV and V, expressly and exclusively grants the NMDPRA the power issue midstream licenses, detailing specific licenses required for these operations. In layman’s language, when a broad term like ‘in charge’ is used, we tend to presume absolute power. In legal interpretation, however, specific provisions take precedence over general ones. Therefore, while the term ‘in charge of integrated operations’ is used, it doesn’t override the exclusive licensing and administrative functions of the NMPDRA over midstream activities, even within integrated operations. According to the legal principle “Expressio unius est exclusio alterius,” the expression of specific entities or matters implies the exclusion of others ( the principle restated by the Supreme Court in Ehuwa v OSIEC & 3 Ors[3]). Thus, the regulatory functions of administering and licensing midstream operations is expressly and exclusively entrusted to the NMDPRA, precluding the NUPRC from assuming such authority.
Furthermore, since the PIA is designed to establish distinct regulatory bodies for overseeing upstream and midstream activities separately, it would therefore, be counterfactual for the NUPRC to overstep its authority, as doing so would contradict the provisions of the PIA.
By Section 8(d)[4], NUPRC’s involvement in the midstream aspects of integrated operations constitutes a supervisory function. Its role entails ensuring that necessary licenses for midstream operations are obtained from the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA), and that the integrated facility adheres to other PIA provisions governing integrated petroleum operations.
Another source of considerable misinterpretation is section 318 of the PIA (the general interpretation section) which some individuals interpret as conferring upon the NUPRC the power to determine what constitutes integrated operations. However, this interpretation is based on a flawed premise, as section 318 actually refers back to section 8(d):
Section 318: where field facilities or fixed or floating platforms or vessels provide for fully integrated upstream and midstream petroleum operations, the Commission may consider the entire operations as upstream petroleum operations under Section 8(d) of this Act
Section 8(d): the commercial regulatory functions of the Commission shall be to, where in situ facilities or fixed or floating platforms or vessels provide for fully integrated upstream and midstream petroleum operations, the Commission shall consider and the Commission shall be in charge of such integrated operations and petroleum operations may be considered integrated where there is a joint use of utilities used exclusively for the upstream and midstream operations.
From a combined reading of the two sections, it is evident that Section 8(d) outlines that the NUPRC’s commercial regulatory functions to include considering and being in charge of integrated operations where in situ facilities or fixed or floating platforms or vessels are used for fully integrated upstream and midstream petroleum operations; and Section 318 further specifies that in cases where such integration occurs, the Commission has the authority to consider the entire operations as upstream petroleum operations under the Act. This directly implies that the regulatory functions of the NUPRC on upstream petroleum operations extends to integrated operations where both upstream and midstream activities are integrated. None of the regulatory functions of the NUPRC on upstream operations vests it with power to administer and grant midstream licenses. The NMDPRA is specifically designated to handle licensing functions for midstream petroleum operations. Therefore, unless there are additional provisions elsewhere in the Act or other regulations that specifically grant the NUPRC authority over midstream licensing, it would not have the power to usurp such functions from the NMPRA.
The Guideline concludes with:
“The Commission shall provide regulatory oversight over all upstream integrated operations determined and/or approved by the Commission. This will include the issuance of all Licenses, Permits, Consents, Approvals, and Authorizations arising from development and operations activities of integrated operations, as well as the administration of all applicable statutory fees.”
This is what we call non – sequitur, because, ‘it does not follow’. In the words of Lord Denning, “You cannot put something on nothing and expect it to stay there. It will collapse.” Therefore, this Guideline may face challenges as it contradicts the legal framework that empowers it.
FURTHER COMMENTARIES
Having established that the enabling provisions on which the Guideline was issued by the NUPRC were inaccurately applied, going into the items in the Act then becomes an academic exercise. However, we came here prepared, to provide further clarifications. By comparing them with the provisions of the PIA, you understand why this appears to be an attempt by the NUPRC to repeal the Act itself.
- Paragraph 2 of Section 1.1
The paragraph begins with “These Guidelines are made pursuant to Sections 8(d), 79(2), 79(3) and 318 of the Petroleum Industry Act”. I have explained why 79(3) cannot be read without considering 79(4) which has been omitted in the Guideline. The sub-section limits the scope of the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) in reviewing submitted Field Development Plans (FDPs) to its regulatory responsibilities. Redrafting the paragraph to “…made pursuant to Sections 8(d), 79(2), 79(3), 79(4) and 318” would give a different, but, PIA – compliant, meaning to the scope of NUPRC’s powers, which is, reviewing and approving FDPs based on its regulatory responsibilities.
- Paragraph 3 of Section 1.1
The concept “Produced Gas Flare Elimination Facility” is a clever innovation by the NUPRC to regulate facilities for gas processing and retail gas supply operations aimed towards the production of Compressed Natural Gas (CNG), Liquefied Petroleum Gas (LPG), and Liquefied Natural Gas (LNG) – all defined as midstream. Essentially, it’s a way for them to regulate gas processing, even though it falls outside their jurisdiction, but with the added appeal of a catchy name – “Produced Gas Elimination Facility!”.
- Section 1.2.1
This section includes “export” in the definition of an oil and gas production facility. Under the Petroleum Act of 1969, upstream included exports. However, the Petroleum Industry Act changed this position by making provisions for a distinct midstream segment and designating export as a midstream activity.[9] It is understood that the purpose of production(upstream) is to provide feedstock for the midstream and downstream. Custody transfer to midstream operations marks the termination point of oil and gas production activities. Therefore, the NUPRC lacks the authority to include export under the definition of an oil and gas production facility.
- Section 1.2.2
This section provides for the definition of integrated operations and authorizes the NUPRC to define the same. Generally, by virtue of the PIA, any government agency (including the NUPRC) that intends to take any action which may have direct impact on midstream or downstream petroleum operations shall consult with the NMDPRA before taking such action.[10] The action could relate to issuing a regulation, guideline or exercising a power. To facilitate smooth operations, the PIA introduced integrated operations, allowing NUPRC to carry out regulatory functions within its jurisdiction concerning upstream activities without requiring approval from NMDPRA. Deviating from the definition of integrated petroleum operations in the PIA raises concerns and warrants scrutiny.
Section 2.1: Criteria For Upstream Integrated Operations
In this part, I employ the phrase “In the Guideline…However, in the PIA” to accentuate the crude inconsistencies in each of the nine criteria outlined in the Guideline for determining integrated operations. Therefore, please pardon the repetition as I highlight these contradictions:
- In the Guideline, a production operation is considered integrated if it is considered as a Floating Production, Storage and Offloading facility.[11] However, in the PIA, offloading and export operations are distinct from floating, production and storage facilities (with the former falling under midstream and the latter under upstream activities). Hence, the Act prescribes that the appropriate license for export and petroleum supply activities is the wholesale supply license issued by the NMDPRA. To emphasize NUPRC’s non-involvement in offloading operations even where it involves upstream activities, Section 197(2) of the Act states that upstream operators intending to engage in wholesale petroleum supply or exports must apply for and obtain a wholesale petroleum liquids supply license from the NMDPRA. A similar provision for wholesale gas supply licensing can be found in Section 142 of the Act.
- In the Guideline, a production operation is considered integrated if due to design configuration, logistics, or environmental reason, only two phase (liquid and gas) separation is conducted at flow stations.[12] This exemplifies another instance of the NUPRC venturing outside its legal functions in the PIA into hydrocarbon processing which falls within the NMDPRA’s licensing purview via the HPPITI Directorates.[13]
- In the Guideline, a production operation is considered integrated if the component facilities (which may include a midstream facility) are covered by a single approved Field Development Plan. However, the PIA already provides in section 79(3) and (4) that for any project submitted as a single FDP, the NUPRC should limit its review to its regulatory responsibilities bordering on upstream petroleum operations. The approval of an FDP cannot be achieved without considering midstream operations, hence the need for Sections 79(2)(e), (3) and (4).
- In the Guideline, a production operation is considered integrated if the operations philosophy is designed for allocation measurement to be conducted at flow stations while the associated terminal serves as the fiscal measurement point. However, in the PIA, the methodology already provided in Schedule 7 section 7 for calculation of royalties in terminals and other midstream operations is based on net backing the chargeable volumes to the field and not issuance of licenses. Moreover, the use of terminals as the fiscal measurement point is one of the operational deficiencies the PIA intended to correct as this shortchanges the government of true value of royalties.
- In the Guideline, a production operation is considered integrated if it involves extracting lean gas from Natural Gas for sales while the residual natural gas is sold or converted to NGLs. However, in Section 129 of the PIA, lean gas and natural gas conversion to NGLs require a gas processing license issued by the NMDPRA.
- In the Guideline, a production operation is considered integrated, if it involves a gas plant that is being fed with natural gas feeds.[14] However, in the PIA, any pipeline transporting natural gas to a gas plant require a license from the NMDPRA and the role of NUPRC is limited to providing advice to the NMDPRA on possible third parties and characteristics of the gas. Moreover, by section 129 of the PIA, the operation of gas plants requires a gas processing license issued by the NMDPRA – not the NUPRC as the Guideline purports.
- In the Guideline, a production operation is considered integrated if the value of the produced natural gas for royalty purposes is determined based on the fiscalization at the gas plant. However, in the PIA, royalty calculations for produced natural gas follow specified procedures, excluding midstream licensing or administration.[15]
- In the Guideline, a production operation is considered integrated if the facilities are linked by pipelines. This seems like an omnibus clause as virtually all upstream and midstream facilities are inherently linked by pipelines. Implementing this criterion may potentially diminish the authority of the NMDPRA as stipulated by the PIA regarding midstream operations.
- In the Guideline, a production operation is considered an integrated operation if there is joint use of utilities used exclusively for the upstream and midstream operations. This is another omnibus clause to capture all forms of midstream operations because the Act already defines what constitutes integrated operation and the scope of the NUPRC’s power on such operations.
CONCLUSION
The nature of integrated operations under the PIA effectively eliminates overlap between the upstream and midstream segments for seamless petroleum operations by various operators in the value chain. Various sections of the Act provide for situations where upstream operators may apply to the NMPDRA for midstream licenses. This is in a bid to prevent multiple licensing requirements on operators which, unfortunately, seems to be the direction suggested by the NUPRC’s Guidelines.
Despite the potential for overlaps between regulatory bodies (as a result of transitioning from the DPR-centered regulatory system under the Petroleum Act 1969 to the PIA dual regulatory system), the provisions of the PIA adequately address such concerns. This analysis submits that the NUPRC Guideline lacks practical significance, as it fails to align with the regulatory framework established by the PIA. In the Nigerian public sector, there has often been a disparity between policies and their implementation. The Petroleum Industry Act was widely celebrated to now be counted among the redundant laws suffering from lack of enforcement and misinterpretations by regulators tasked with its implementation rather than its repeal.
Peter Okediya is an energy analyst at Fortrose Consulting Ltd
Footnotes
[1] The Presidential Directive on Regulatory Over Crude Oil Exportation and Integrated Operations released last year
[2] Section 2.2.2 and Section 3 of the Guideline
[3] Ehuwa v O.S.I.E.C & 3 Ors (2006) 18 NWLR (Pt. 1012) 544 at 568 – 569
[4] Reading Section 8(d) with other provisions of the Act