Other Commercial and Regulatory Implications of the Order
- The Frontier Exploration Fund
The FEF is established under the PIA to support the exploration and development of petroleum resources in Nigeria’s frontier basins. Under the PIA, the FEF is to be financed through a statutory allocation of 30% of the NNPC’s profit oil and profit gas from production sharing, profit sharing and risk service contracts, ensuring a predictable funding source for capital-intensive frontier exploration activities.
Paragraph 1 of the Order directs that this portion that would otherwise have been allocated to the FEF be remitted instead to the Federation Account. The immediate effect is the suspension in practice of the statutory funding stream contemplated under the PIA, raising questions about the operational viability of the FEF, particularly as no alternative funding source is provided in any law.
The shift from a dedicated to an uncertain funding structure may undermine the strategic objective of the FEF, which was designed to insulate exploration financing from short-term fiscal pressures by tying it directly to upstream petroleum revenues. Reduced funding certainty could slow geological data acquisition and exploratory drilling.
In addition, implementation of exploration programmes previously reliant on the FEF may require reconsideration. For example, where the NNPC undertakes further testing and drilling under section 9(2) of the PIA, it may adjust timelines, seek alternative financing arrangements, or reprioritise basins, potentially affecting efforts to expand and diversify Nigeria’s petroleum resource base.
b. Gas Flaring Penalties
The PIA establishes the MDGIF as a financing avenue for the development of gas infrastructure in Nigeria. The MDGIF is designed to support midstream and downstream gas infrastructure projects necessary to expand domestic gas utilisation and support the Federal Government’s broader gas development objectives.
Under the PIA, the MDGIF is funded from multiple sources, including levies, grants, and other monies that may accrue to the MDGIF. Significantly, the PIA also provides that gas flaring penalties paid by upstream operators are to be remitted into the MDGIF. The rationale for this arrangement is to ensure that penalties imposed for environmentally harmful practices such as gas flaring are channelled toward the development of gas infrastructure that would enable the capture, processing, and commercial utilisation of gas that might be otherwise flared.
Paragraph 3(1) of the Order alters this funding arrangement by directing the Commission to cease remitting gas flaring penalties into the MDGIF and instead pay those proceeds into the Federation Account. The Order further provides that any expenditure from the MDGIF must be undertaken in accordance with applicable public procurement laws, regulations, and policies.
One implication of this directive is that the Order does not significantly alter the MDGIF itself, which remains a statutory fund established under the PIA. However, the Order removes one of the key revenue streams that the PIA expressly designates for it. The practical question is whether the remaining statutory funding sources will be sufficient to support the infrastructure projects contemplated under the PIA.
Another issue concerns the link between gas flaring penalties and environmental remediation. Under the PIA, such penalties are intended not only as a deterrent but also as a mechanism for addressing the environmental and social impacts associated with such practices. Thus, their redirection to the Federation Account suggests a shift in which environmental remediation may be addressed through other statutory mechanisms, such as the Environmental Remediation Fund. If that is the case, the effect of the Order may be to refocus the MDGIF more narrowly on its primary objective of financing gas infrastructure development rather than environmental remediation activities.
c. Joint Project Team
One of the overarching objectives of the PIA is to establish efficient and effective governing institutions, with clearly delineated regulatory responsibilities across the petroleum value chain. In furtherance of this objective, the PIA establishes the Commission and the Authority as separate regulators for upstream and midstream and downstream petroleum operations collectively.
However, the PIA recognises that certain petroleum activities may span multiple segments of the value chain. In particular, integrated projects such as upstream gas production linked to processing plants, export terminals, or other midstream facilities, may involve operational activities that fall within the regulatory remit of both the Commission and the Authority.
Prior to the issuance of the Order, a Presidential directive dated 26 June 2023 (the “Directive”) issued pursuant to sections 7(ee) and 32 of the PIA, sought to clarify the regulatory interface between the Commission and the Authority. It provides that the Commission is the exclusive technical and commercial regulator for upstream petroleum operations and facilities, covering activities from the point of extraction up to crude export terminals and gas processing delivery points. Conversely, the Authority oversees operations from the exit point of crude export terminal and the entry gate of natural gas processing plants.
The Directive further provides that where petroleum operations span both upstream and midstream segments in an integrated manner, such activities may be treated as upstream operations and therefore fall within the regulatory authority of the Commission. In this regard, the Commission is empowered to classify facilities as integrated facilities based on established guidelines and objective criteria, while both regulators are expected to maintain close consultation to prevent regulatory overlap pending any legislative amendment of the PIA.
Against this background, paragraph 4(2) of the Order mandates the Commission and the Authority to constitute a Joint Project Team (the “JPT”) for the technical regulation of integrated petroleum operations, with the Commission as the primary interface with licensees and lessees. The JPT is tasked with developing guidelines for integrated facilities, identifying applicable licenses, permits and fees, facilitating information, and proposing a framework for allocating regulatory fees based on activity classification.
The establishment of the JPT represents a pragmatic administrative response to one of the complex structural consequences of the PIA: the bifurcation of regulatory oversight across value chains that are commercially and operationally integrated. Through coordinated technical review and regulatory collaboration, the JPT may help streamline the regulatory engagement and reduce the risk of duplicative oversight.
Nevertheless, the implementation of the JPT raises important questions regarding licensing and regulatory coordination under the PIA. Integrated petroleum operations, by their nature, combine upstream and midstream/downstream activities within a single project structure, often in a manner that is technically and commercially inseparable. Therefore, applying the regulatory framework in the PIA will not always align seamlessly as the PIA’s regulatory framework was designed to apply to distinct value chain segments.
The practical issue, therefore, extends beyond whether multiple licences will be required. It raises the more fundamental question of whether a licence granted in respect of one segment of an integrated project can effectively accommodate activities that would ordinarily fall within the regulatory remit of another regulator. In other words, where upstream and midstream/downstream functions are operationally intertwined, it remains unclear whether the existing licensing structure can be applied in a strictly segmented manner without creating duplication, inefficiency, or regulatory uncertainty.
Although the Directive contemplates that certain integrated operations may be classified as upstream under the Commission’s purview, this approach does not fully resolve the licensing implications for project components that would ordinarily require authorisation from the Authority. Also, it is uncertain whether regulatory frameworks for standalone upstream or midstream/downstream activities will apply unchanged to integrated operations, or whether bespoke regulatory approaches will be required. For instance, it is unclear whether the tariff structures, permitting requirements, and technical standards applicable to midstream infrastructure would apply in the same manner where such infrastructure forms part of an integrated upstream project. The absence of clarity on this point may create uncertainty for operators in structuring projects and forecasting regulatory costs.
Thus, the designation of the Commission as the primary interface for licensees and lessees will streamline administrative engagement and underscores the importance of the JPT’s role in developing operational guidelines for integrated facilities to resolve these uncertainties. As a joint body comprising both regulators, it is well positioned to develop coordinated regulatory approaches, which may subsequently be formalised through instruments issued pursuant to the respective statutory mandates of the Commission and the Authority.
Conclusion
The Order represents a significant shift in Nigeria’s petroleum governance by redirecting key oil and gas revenues to the Federation Account, thereby reinforcing the constitutional mandate under section 162 that all Federation revenues be centrally collected. Nevertheless, it also highlights tensions with existing statutory funding mechanisms under the PIA, creating some legal and operational uncertainty. Resolving this tension through legislative amendments would provide greater clarity and stability. At the same time, the Order has practical implications, including potential changes to the financing of frontier exploration and gas infrastructure, as well as regulatory coordination through the JPT for integrated operations. Ultimately, its effectiveness will depend on how well its fiscal and regulatory adjustments are aligned with the PIA, ensuring regulatory certainty, investor confidence, and long-term stability in Nigeria’s petroleum sector.Bottom of Form
AELEX is a full service commercial & dispute resolution Law Firm with offices in Nigeria and Ghana. Contact us @Aelexpartners on LinkedIn, Twitter, Instagram and Facebook.
AELEX NOTES is a dedicated column, managed by AELEX Legal Practitioners and Arbitrators, featuring Legal Developments and Insights.
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