Legal Complexities Affect Downstream Regulatory Compliance – Prof. Ajogwu
Professor Fabian Ajogwu is a Senior Advocate of Nigeria (SAN) and the founding Partner of the law firm of Kenna Partners. He has over two decades experience in law practice specializing in the field of Foreign Direct Investments and Corporate Restructuring in the Financial Services sector, and Natural Resources sector; including Litigation and Arbitration in related fields. Ajogwu chaired one of the sessions at the recent 2018 Oil Trading and Logistics (OTL) Africa Downstream Week and presented this detailed paper on “Downstream Regulatory Compliance: Legal Issues and Role Of In-House Counsel”. MMS Plus brings you his account:
An Overview of the Downstream Sector in the Nigerian Oil & Gas Industry in Nigeria, the downstream operations in the oil & gas industry include four basic subgroups, these are Refining, Importation, Storage and Distribution/Transport. A synergy of the above services is crucial to the process of transforming crude oil into usable products and how these finished products are stored and moved from energy companies to the end users. The downstream operations cover crude oil/gas conversion into refined and petrochemical products and finer chemicals, and gas treatment as well as transportation and marketing of the petroleum products.
Several organizations play various parts in the above process. A good example of and perhaps the most prominent player in the downstream sector is the Nigerian National Petroleum Company (NNPC) which plays a role in all the service subgroups above i.e. Refining, Importation, Storage and Distribution; each of these service areas will be briefly considered below:
An oil refinery is an industrial plant that refines crude oil into petroleum products such as diesel, gasoline and heating oils. Oil refineries essentially serve as the second stage in the production process following the actual extraction of crude oil by rigs.
There are currently five (5) refineries in Nigeria of which four (4) plants are owned by the Nigerian Government through the Nigerian National Petroleum Corporation (NNPC), whilst the fifth is owned and operated by the paper‘Downstream Regulatory Compliance: Legal Issues and the Role of In-House Counsel’ has been prepared by Fabian Ajogwu, a Senior Advocate of Nigeria and Lagos Business School Professor of Corporate Governance, for presentation at the Oil Trading and Logistics (OTL) Africa Downstream Week 2018.
Downstream Regulatory Compliance: Legal Issues and the Role of In-House Counsel
1. Niger Delta Petroleum Resources (NDPR). Two of the refining plants have petrochemical complexes that utilize their refinery intermediates to produce petrochemical precursors.
2. Importation: The importation of petroleum product into Nigeria is significant as only 15% of domestic consumption of petroleum products is met by the production of local refineries and the rest is satisfied by imports. Therefore, it is no great surprise that Nigeria’s top oil import is refined petroleum.
3. All companies duly registered under the Corporate Affairs Commission (CAC) as providers of goods and services in the downstream sector of the Nigerian oil and gas Industry are eligible to apply for Import Permit of Petroleum Products subject to having access to appropriate Storage Facilities which could be owned or leased from third parties. The ‘Guidelines for the Importation of Petroleum Products into Nigeria’ made (by the Honourable Minister for Petroleum Resources via the Department of Petroleum Resources) pursuant to Paragraph 4(1) of the Fourth Schedule to the Petroleum Act CAP P10 LFN 2004 specify the regulatory requirements for the issuance of an importation permit.
Liquid petroleum products such as gasoline, diesel, and kerosene must be stored safely to prevent leaks and spills due to their combustible nature. The storage of petroleum products is also a vital aspect of the downstream sector and is regulated by the Petroleum Regulations under Section 9 of the Petroleum Act, LFN 2004. The regulation stipulates the licenses and permits that must be obtained by any operator for premises in which petroleum products are to be stored and makes provision for the types, construction, maintenance and operation of storage sheds. The regulation provides safety guidelines for the operation of these storage facilities.
Like other sectors of the oil and gas business, the marketing and distribution of petroleum products plays a vital role in the industry. Companies and individuals buy petroleum products at wholesale prices and quantities and through different networks, deliver the said products to the end users.
The Oil Pipelines Act 1995 regulates the construction and operation of oil and gas transportation facilities in Nigeria. Detailed regulations for the design, construction and operation of oil and gas pipelines are set out in the Oil and Gas Pipelines Regulations 1995. The Minister of Petroleum Resources has the power to grant permits to survey routes for gas pipelines, and can grant licences for the construction, maintenance and operation of gas pipelines. About licenses for the transportation of petroleum products (other than by pipelines) however, the Petroleum Regulations under Section 9 of the Petroleum Act, LFN, 2004 makes ample provisions regulating the distribution of petroleum products.
Deregulation of the Downstream Sector
The clamour by several stakeholders in the downstream sector for the full deregulation of the downstream sector has been on for quite some time. Deregulation entails opening up of the market and de-monopolization of the hitherto state-owned and managed oil enterprises by allowing private enterprises to drive productive activities in the economy.
The process of deregulation would carry the advantage of opening up the downstream sector of the Nigerian Oil and gas Industry to competition where the players are able to participate at every segment of the value chain, and the removal of entry barriers in the supply and distribution of petroleum products. Every player is given the opportunity to refine or import petroleum products for use in the country in-so far as the product so refined or imported meet quality specification.
The appeal of the deregulation of the downstream sector is clear in that it would encourage efficiencies in the sector, however, bold reforms will be necessary to allow for private sector bid entry into the downstream sector. These reforms would include downstream capacity enhancements and safe operations, building up strategic product reserves, improved sector logistics; private sector investment in sector infrastructure, permanently removing all petroleum product subsidies amongst others.
Applicable Laws and the Regulatory Regime Nigeria operates a command and control regulatory framework in the oil and gas sector. Under this regulatory framework, regulators are deemed to be acting in the public interest; this type of regulation was prevalent in the United States and Britain during the 1970s and 1980s. This article focuses on the extant public regulatory regime in the oil and gas sector in Nigeria.
Generally, factors, such as red-tape, over-regulation and regulatory capture, amongst others, are some reasons militating against efficiency under a command and control regulatory regime.
The legislative framework regulating the Nigerian oil industry generally is a complex intertwining of statutes and regulations. These include the 1999 Constitution of the Federal Republic of Nigeria (as amended), the Land Use Act, the Associated Gas Re-injection Act, the Environmental Impact Assessment Act (EIA), the Oil Pipelines Act, the Petroleum Act, the Hydrocarbon Oil Refineries Act, the Harmful Waste (Special Criminal Provisions) Act and several regulations amongst others.7 Of these however, only a handful of statutes and regulations apply to the downstream sector of the Nigerian Oil and Gas Industry specifically. One of such statutes is the Petroleum Act, LFN 2004 (as amended) (“the Act”) which is the principal statute regulating the oil industry. There are several regulations issued thereunder and the provisions of the Petroleum Regulations under section 9 of the Act have direct implications on the downstream sector in the Nigerian Oil and Gas Industry. Some of these provisions have been considered above.
The Ministry of Petroleum Resources (headed by the Minister of Petroleum Resources) is responsible for policy formulation and regulating the Nigerian petroleum industry. The Minister is empowered to authorize petroleum activities vide the issuance of licences and permits. The Minister acts primarily through the Department of Petroleum Resources, which carries out bid.
Routine oversight and compliance monitoring functions:
The Department of Petroleum Resources (DPR) is charged with the responsibility of regulation and supervision of all the operations being carried out under licenses and leases in the Oil and Gas industry. Such operations include the exploration, production and marketing of crude oil and refined petroleum products. Other functions and responsibilities of the DPR include:
a. supervising all petroleum industry operations being carried out under licenses and leases in the country in order to ensure compliance with the applicable laws and regulations in line with the good oil producing practices;
b. enforcing safety and environmental regulations and ensuring that those operations conform to national and international industry practices and standards;
c. keeping and updating records on petroleum industry operations, particularly on matters relating to petroleum reserves, production and exports of crude oil, gas and condensate, licenses and leases as well as rendering regular reports on them to Government; advising Government and relevant agencies on technical matters and polices which have impact on the administration and control of petroleum;
d. processing all applications for licenses so as to ensure compliance with laid-down guidelines before making recommendations to the Honourable Minister of Petroleum Recourses;
e. ensuring timely and adequate payments of all rents and royalties as at when due; monitors Government Indigenization policy to ensure that local content philosophy is achievable.
Other regulators with supervisory powers established by various legislations include the Federal Inland Revenue Service, Ministry of Environment, Housing and Urban Development, Petroleum Products Pricing Regulation Agency and the Ministry of Environment.
The role of Nigerian National Petroleum Corporation (NNPC) as a regulator in the Oil and Gas Industry is a popular misconception. The NNPC is vested with the exclusive responsibility for upstream and downstream development, which entails exploiting, refining, and marketing Nigeria’s crude oil. The Corporation supervises and manages government investment in the Oil and Gas Industry. Since its inception, the NNPC and its subsidiaries have undergone strategic restructuring, which have kept it abreast of opportunities in local and international spheres.
NNPC’s oil and gas operations are undertaken both in upstream and downstream operations. In other words, the NNPC does not have regulatory oversight in the downstream sector such as the aforementioned regulatory bodies.
The power of these regulators to impose monetary fines and penalties in recent time has become subject of debate. The Court of Appeal recently in a highly publicized decision held that regulators do not have the powers to impose fines and sanctions. The full effect of this is yet to be seen in the practical operations of the Oil and Gas Industry but this decision of the courts undoubtedly would have a significant impact on how these regulators carry out their duties.
Regulators are also empowered to revoke the lease or licence in question (as a most serious penalty), depending on the nature of the offence and the specific sanction set out in the contravened legislation.
The Issue of Compliance with the Regulatory Regime
Compliance with the regulatory regime has always been an issue in the Oil and Gas Industry both in the Upstream and Downstream Sectors. There is a high rate of non-compliance with the provisions of the applicable laws and regulations and the regulatory bodies are unable to perform their enforcement duties. A plausible explanation for the lax regulatory regime in the oil and gas sector generally could be the role played by the government as both a regulator and a player in the industry. The NNPC is a major player in the Nigerian Oil & Gas Industry and is involved in joint venture agreements with the major International Oil Companies as the majority shareholder. A government as a partner in a business that it regulates is not an uncommon phenomenon; however, unless robust, independent regulatory and oversight mechanisms are in place, conflicts of interests and breaches of the law would almost inevitably occur.
The Department of Petroleum Resources (DPR) upon a consideration of the potentially negative impact on the economic interest of the Nigerian state through the NNPC in the event of a tough regulatory measure, may be unwilling to effectively implement or enforce the applicable laws and regulations as the DPR is not an independent body but an extension of the state. Other regulators also face the same conundrum.
The question that must be answered is how then can full compliance with the regulatory regime be realized? The likely solution to the above stated conundrum is the establishment of an independent regulatory body, which is separate and autonomous from the NNPC and the DPR. Such a body would be an independent entity which is not answerable to a direct government body. This will enable the body to make both visible and active steps at ensuring full regulatory compliance. Furthermore, the presence of an independent body would serve as a physical deterrent to the lax attitude by operators in the downstream sector. Such an independent body ought to be structured in such a way that each department is equipped to enforce specific regulations already for existence.
Role of In-house Counsel in Downstream Sector Operators
The role of in-house counsel of downstream operators can be summarized in a single phrase, “ensuring compliance”. In house counsel are often vested with the responsibility for the operator’s regulatory compliance. Not infrequently, the in-house counsel fills this role based on the premise that compliance is essentially a legal matter, and, after all, the legal department is often the source of the recommendation to create such a position based on its awareness of the relevant applicable laws.
More specifically, it is the duty of in-house counsel to provide advice on how to comply with the law whilst simultaneously balancing their duty to represent their operator’s interests zealously. In house counsel must provide legal advice on, among other things, defining and establishing appropriate operator standards in the context of attaining its business objectives.
Moreover, it is important to note that the role of in-house counsel is no longer strictly limited to managing legal risk associated to operating in the downstream sector. In house counsel must understand the regulatory environment in which they operate.
For counsel to properly meet the demands of the downstream sector, such counsel must play a pivotal role in collaboration with management of the operator in respect of the provision expert legal knowledge which will facilitate the appropriate compliance with the extant laws of Nigeria by downstream sector operators.
It has been often repeated that the key to maximizing the full potential of the downstream sector of the Oil & Gas Industry lies in its deregulation, the key may however not be as complicated.
Dealing with the issue of compliance with the regulatory regime may just be what is needed to unlock the real value in the downstream sector and extend it from mere potential. This would no doubt put an end to the lopsided nature of value derivation and provide an even playing field for all stakeholders.
SOURCE: Money Management Series Plus, 24 November, 2018.