Understanding the Host Community Development Fund of the PIB

The Nigerian House and Senate passed slightly different but generally same versions of the Petroleum Industry Bill (PIB) last week. It’s a huge deal. When writing this article, the two versions are yet to be harmonized and sent to President Buhari. However, we must understand the main tenents.

What is the PIB?

The PIB is omnibus legislation first introduced by President Olusegun Obasanjo 20 years ago to review and amend legislation, laws, and practices in Nigeria’s crude and gas sector. Specifically, the consolidated Bill seeks to review fiscal terms, cost-sharing and increase the federation’s share from oil and gas assets while reducing direct ownership. It will also create new regulatory bodies to address host community agitations and position the Nigerian oil and gas sector as more dynamic and efficient.

Why is the PIB important?

Ike Kachikwu, former Minister of State for Petroleum, said the non-passage of the PIB costs Nigeria N3 trillion a year. Nigeria’s oil and gas sector generates up to 90% of Nigerian Foreign Exchange earnings. According to Dr Doyin Salami, Nigeria is an “oil dependant nation,” meaning that Nigeria will struggle to meet obligations without the forex revenues generated from crude oil and gas.

What is in this PIB?

• Make NNPC more efficient and transparent by transiting it to NNPC Limited within six months of the Bill’s passage. NNPC Limited can raise outside capital and publish the annual audited report. It will then be solely a commercial entity.
• Improve regulation of the sector by creating just two regulators – the Nigerian Upstream Regulatory Commission (the ‘Commission’) and the Midstream and Downstream Petroleum Regulatory Authority (the ‘Authority’). These two will replace the multitude of regulating bodies in the sector. The regulators will have no commercial role, allowing them to perform oversight.
• New taxes: The current Petroleum Profits Tax (PPT) will be split into two, namely: a new Hydrocarbon Tax (HT) and Companies Income Tax (CIT). The HT and CIT will apply to companies engaged in upstream petroleum operations on a company-wide rather than contract area basis. Petroleum Invest Allowance is gone.
• Host Community Development Fund: The PIB established a Host Communities Development Trust which will oversee all Environmental, Social and Infrastructure projects in the communities where oil and gas assets are located.
• Upgrade environmental and social components by creating an Environmental Remediation Fund. The PIB will also require Environmental Management Plan where an Environmental Impact Assessment is needed and stop using chemicals in the upstream sector unless a permit is granted.
• Gas Flaring: PIB prohibits gas flaring or venting and imposes a fine that is not eligible for cost recovery. The gas production licensee must submit an elimination and monetizing plan for gas within one year of passage.

The PIB is a very complex bill, and I have to do another article just on the tax and operational parts. I want to focus this week on the framework and the Host Community Development Fund.

The Host Community Development (HCDF)

This controversy over the HCDF is a crucial reason why the PIB has not passed prior; the bickering resembled tribal rather than fiscal issues. This HCDF is an essential part of the Bill and may be the only part Nigerians can relate to because of its direct effect.

Set-up

Unlike the 13% derivation payment, which involves payments going from the Consolidated Revenue Fund directly to the State Executive via FAAC transfers, the PIB requires a ‘Settlor” (oil company) to incorporate an HCDT. The Settlor will then appoint and authorize a Board of Trustees (BOT) registered with the Corporate Affairs Commission (CAC). The Settlor will, in effect, set the constitution and memoranda of the HCDT BOT, and they will agree to regulations, qualifications and all matters relating to the BOT.

Needs assessment

The Settlor will then conduct a needs assessment of the community and develop a plan to address these needs. This is to be done within 12 months of the passage of the PIB

Management and advisory

The HCDT BoT will set up a management committee that comprises one representative of each host community as a non-executive member. The management committee will “prepare the fund’s budget, manage project awards on behalf of the Trust, supervise project execution, and other functions that may be assigned to it by the BoT.”

The management community will set up an advisory committee in accordance with the constitution of the BoT. The committee will be responsible for “nominating members to represent the host communities on the management committee, communicating community development projects to the management committee, monitoring the progress of community projects, securing project facilities, and advising the management committee on measures to improve security and peace within the community.”

Funding

The PIB requires each settlor to contribute a percentage of its actual operating expenditure in the preceding calendar year to a fund established by the Trust.

75% of the annual contribution shall fund capital projects while 5% is for administrative costs. 20% is retained as a reserve fund and invested in utilizing the Trust when contributions from the Settlor cease.

Operations

The Settlor will pay directly to the Operator appointed annually to execute the projects in the needs assessment. The annual payment by the Settlor is tax deductable from HT and CIT.

Penalty

“The host community will forfeit its entitlement to any contribution to the extent of the cost to repair damages to the petroleum and designated facilities or disruption to production activities within the host community caused by an act of vandalism, sabotage or civil unrest.”

This part of the Bill is brilliantly written legislatively. My only question is, who is a host community? Is it where the crude oil is? Where there are pipelines? Refineries and deports? All of the above?

In summary, Shell JV will create Shell Community Development Fund, for instance. Shell will then receive nominations from host communities on prospective BOT members; Shell will incorporate the BOT in the CAC and fund the BOT through the appointed operators. The Advisory Committee will work with Shell to approve needs assessment and communicate the progress of contracts back to the community. The Operator can use up to 75% for CAPEX. If any pipeline is broken in the community, Shell will debit its contribution to the BOT.

If this works, Nigeria will see less pipeline vandalism as the hosts now have a direct stake in the oil and gas sector, and consequently, this should see an uptick in volumes pumped and revenues flowing to the federation.

Next week, I will look at specific fiscal and operational issues the PIB will bring

Do follow.