From Fragmentation to Reform: A Robust Analysis and Understanding of the PIA 2021’s Impact on Upstream Petroleum Operations in Nigeria (Part 2)
CHAPTER 3: HOST COMMUNITIES DEVELOPMENT
Chapter 3 of the Petroleum Industry Act (PIA) 2021 establishes a framework for promoting sustainable development in oil and gas host communities. It mandates that companies engaged in upstream petroleum operations or holding oil prospecting licenses or mining leases contribute a percentage of their annual operating expenditure to a Host Communities Development Trust Fund. This initiative aims to ensure that host communities derive direct social and economic benefits from oil and gas operations, while fostering peaceful coexistence between these communities and operating companies.
The Trust Fund, which enjoys tax-exempt status and whose contributions are tax-deductible, is distinct from the existing statutory 3% contributions to the Niger Delta Development Commission (NDDC). Companies involved in upstream operations are required to contribute between 3% to 5% of their actual operating expenditure from the previous calendar year, while other companies contribute 2%. The funds are to be applied with a structured allocation: 75% is designated for capital projects within the host communities, 20% is set aside as a reserve fund, and 5% is earmarked for administrative expenses.
A critical element of this framework is the establishment of the Host Communities Development Trust by the settlor, typically the oil and gas company, who is responsible for incorporating the Trust, appointing a Board of Trustees in consultation with the host communities, and ensuring compliance with the Act. The Board is composed of individuals of high integrity and professional standing, some of whom may not be residents of the host communities. The Trust is required to be incorporated within specific timelines, depending on the type of license or stage of petroleum operations. For instance, existing mining leases and designated facilities must incorporate the Trust within 12 months of the Act’s commencement, while new prospecting or mining leases must do so prior to field development plan approval or commencement of operations.
The Board of Trustees plays a central role in governing the Trust. It manages the allocation and disbursement of funds to various development programs, approves and oversees project implementation, and appoints fund managers for the reserve fund. The Board also establishes a Host Communities Development Trust Management Committee and determines how funds are allocated to various communities based on a matrix provided by the settlor. Additionally, the settlor is required to conduct a needs assessment for the host communities, engaging with stakeholders including women, youth, and community leaders. This assessment forms the basis for a comprehensive Community Development Plan, which outlines development projects and is submitted for regulatory oversight prior to the Trust’s full operation.
The Commission responsible for petroleum operations holds an oversight role, issuing regulations for the administration of the Trust, monitoring project execution, and ensuring funds are properly managed. It also provides a grievance resolution mechanism to address disputes between settlers and host communities, thereby encouraging transparency and mutual accountability.
Significantly, the Act imposes certain limitations and obligations. If petroleum facilities are damaged due to acts of vandalism, sabotage, or civil unrest linked to a host community, that community may forfeit the equivalent cost of repairs from their Trust Fund entitlements. However, this forfeiture does not apply in cases of technical or natural disruptions. Furthermore, in cases of transfer, surrender, or revocation of licenses or leases, all obligations relating to the Trust and Community Development Plan are deemed to pass on to the successor entity, and surviving obligations must be discharged before the exiting holder is released from responsibility.
Failure to comply with the provisions of Chapter 3, following written notification from the Commission, may result in the revocation of the settlor’s license or lease. Overall, the Act provides a structured, transparent, and participatory mechanism to ensure that host communities are genuine beneficiaries of Nigeria’s oil and gas wealth, while also fostering stability and sustainable development in these regions.
Also read: Fiscal Policy and Transparency in Nigeria’s Oil & Gas Governance
CHAPTER 4: PETROLEUM INDUSTRY FISCAL FRAMEWORK
Chapter 4 of Nigeria’s Petroleum Industry Act (PIA) 2021 establishes a unified and comprehensive fiscal regime tailored to the petroleum industry, with a specific focus on the upstream sector. Its primary objectives are to attract long-term investment, enhance government revenue, and ensure fair returns for investors. The framework introduces a new Hydrocarbon Tax (HCT), which applies to profits from crude oil production at progressive rates ranging from 15% to 30%. This tax, administered by the Federal Inland Revenue Service (FIRS), is imposed alongside the existing Corporate Income Tax (CIT) at 30% and the Education Tax at 2%. Meanwhile, the Nigerian National Petroleum Corporation (NNPC) continues to manage the collection of royalties, rents, and production shares, while the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) retains oversight of technical compliance, including gas flaring penalties.
The fiscal regime applies comprehensively to upstream companies operating in Nigeria and prescribes detailed rules for the calculation of tax liabilities. Deductible expenses include items like royalties, rents, and decommissioning costs, whereas penalties, bonuses, and financial charges unrelated to petroleum operations are not permitted deductions. To control excessive deductions, the Act imposes a 65% cap on the cost-to-revenue ratio for HCT purposes. Additionally, only interest payments on loans that meet regulatory scrutiny are deductible, and expenditures related to head office operations are specifically excluded.
To ensure compliance and transparency, the Act mandates strict timelines for filing tax returns. Under Section 277, all upstream petroleum companies must submit audited financial statements and tax returns within five months of the end of each calendar year. Newly incorporated companies have up to 18 months from incorporation to comply. The Act treats accounting periods prior to bulk sale or disposal of chargeable oil as part of the preceding financial period. Delays in filing attract a ₦10 million penalty on the first day of default and ₦2 million for each additional day of non-compliance. FIRS may request further documentation, conduct audits, and issue directives on record-keeping. Any such directive may be appealed before the Tax Appeal Tribunal.
Alongside audited returns, companies must also file estimated tax returns in advance for each accounting period under Section 280. These returns must reflect projected profits, expenditures, disposals, allowances, and tax obligations. In the event of significant market or operational changes, monthly revisions are required. Failure to file estimated returns attracts penalties similar to those for audited filings, including daily fines and interest charged at LIBOR plus 10%. Although FIRS may accept self-assessments, it reserves the right to challenge and reject any return it finds inaccurate. Where understatements are identified, FIRS may issue revised assessments up to six years after the relevant period, with this limitation lifted in cases of fraud or deliberate default.
Tax liabilities must be paid in U.S. dollars in twelve equal monthly instalments beginning in the third month of the accounting period. A balancing payment is due at the end of the period along with the final return. While an objection or appeal may temporarily suspend the collection of disputed sums, undisputed liabilities remain enforceable. Any delay in payment results in a 10% penalty and interest calculated at LIBOR plus 10%. FIRS may issue demand notices and commence recovery actions after one month of non-payment. Excess payments may be refunded or credited, and errors corrected within six years, provided the original filing reflected accepted tax practices at the time.
FIRS also retains strong enforcement powers. If payment is still outstanding after objections or appeals are resolved, it may initiate court proceedings. A certified demand notice serves as admissible evidence in such proceedings. Companies that believe they overpaid taxes due to an error may apply for refunds or offsets, but unjustified claims attract penalties and interest. Where no specific penalty is prescribed under Chapter 4, non-compliance attracts a default fine of ₦10 million and ₦2 million for each additional day of default. More serious offences, such as failure to respond to FIRS directives, refusal to attend hearings, or providing false information, are criminalised and carry penalties of up to ₦20 million, daily fines, and imprisonment for up to six months.
Companies that submit incorrect accounts to understate profits or overstate losses face fines of ₦15 million or 1% of the understated tax, whichever is higher, alongside the obligation to pay the full tax owed. Similar penalties apply to false declarations, fraudulent refund claims, and misleading information. These financial and administrative sanctions operate independently of any criminal charges and do not absolve companies from paying the principal tax due.
To reflect the complexity of petroleum operations, the PIA requires corporate separation between different segments of the industry. Companies involved in multiple value streams upstream, midstream, or downstream must incorporate separate entities for each, unless formally exempted. For Integrated Strategic Projects (ISPs), investments in upstream and midstream infrastructure may be consolidated for tax purposes, though all inter-segment transactions must be conducted at arm’s length. Importantly, midstream investment allowances cannot be applied to offset midstream income under upstream tax obligations.
To combat tax avoidance, Section 269 empowers the FIRS to recharacterise any artificial transactions and enforce Nigeria’s existing transfer pricing rules. These rules aim to prevent revenue loss through non-arm’s-length dealings within related-party structures. The Act also introduces detailed provisions for tax treatment during corporate restructuring, including mergers, acquisitions, asset transfers, and winding up. In such cases, tax liabilities must be settled before any asset distribution or change in control takes effect.
Responsibility for administering various revenue streams is divided: FIRS handles taxes (HCT, CIT, and Education Tax); NNPC oversees royalties and production entitlements; and NUPRC is responsible for enforcing technical standards, monitoring projects, and imposing penalties for gas flaring. Notably, natural gas and its derivatives transferred for midstream operations are not taxed under the HCT, but instead fall under the Corporate Income Tax Act. For gas and associated liquids, tax valuations are based on either the actual sales value or the deemed value at the point of transfer.
To support the development of Nigeria’s petroleum resources and diversify energy supply, the PIA includes fiscal incentives such as royalty reductions based on production location and fuel type, price-based royalties that adjust with market conditions, tax holidays for gas infrastructure investments, and incentives for gas utilisation projects. These measures are designed to promote a shift toward cleaner energy sources and ensure a more sustainable, investment-driven upstream sector.
Overall, Chapter 4 of the Petroleum Industry Act presents a transparent, enforceable, and investor-oriented fiscal framework for Nigeria’s upstream petroleum industry. Through detailed provisions on tax computation, compliance obligations, enforcement mechanisms, and targeted incentives, the Act lays a solid foundation for fiscal discipline, regulatory certainty, and long-term growth in the upstream oil and gas sector.
CHAPTER 5: MISCELLANEOUS PROVISIONS
The Petroleum Industry Act (PIA) 2021 introduces a transformative legal and regulatory framework for Nigeria’s upstream petroleum sector, replacing a fragmented set of outdated statutes with a consolidated, modern regime. By repealing key legislations such as the Petroleum Profit Tax Act, the Associated Gas Reinjection Act, and the Deep Offshore and Inland Basin Production Sharing Contracts Act, the PIA harmonises the legal landscape and streamlines the administration of exploration and production activities. While many of the former laws are now defunct, certain provisions of the Petroleum Act and the repealed PSC Act continue to apply to existing Oil Prospecting Licences (OPLs) and Oil Mining Leases (OMLs) until they are either converted under the PIA or expire in accordance with their original terms.
In establishing the Nigerian Upstream Petroleum Regulatory Commission (the Commission), the PIA provides for a dedicated regulatory authority to oversee all upstream operations. Legal actions against the Commission or its officers are governed by the Public Officers Protection Act, which imposes a three-month limitation period for initiating suits, unless the act complained of was carried out in bad faith. Furthermore, no legal action may commence without a one-month pre-action notice detailing the cause of action, particulars of the claim, and the relief sought. Such notices, and any legal documents, must be served at the Commission’s headquarters, and no execution of judgment may take place without giving a further three months’ notice.
To ensure operational continuity during the transition to the new regime, the PIA provides robust transitional provisions. OPLs and OMLs issued under the repealed laws continue to subsist until converted or expired, and their holders are required to comply with applicable terms pending conversion. Licences, leases, and approvals previously granted by the defunct Department of Petroleum Resources (DPR) are deemed valid under the PIA and are now administered by the Commission. Similarly, tariffs, rents, royalties, and fiscal obligations assessed under the old regime remain effective until expressly revised or replaced by new regulations issued under the Act.
The PIA preserves existing upstream contractual arrangements, including gas sales agreements, provided they are submitted for review and amended where necessary to align with the new regulatory framework. Subsidiary legislation such as guidelines, directives, and regulations issued under previous laws, continues to apply, so long as they are not inconsistent with the PIA. Importantly, capital allowances relating to upstream petroleum operations remain in force, although investment tax allowances and credits are excluded from the new fiscal structure.
CONCLUSION
The Petroleum Industry Act 2021 marks a watershed moment in the evolution of Nigeria’s oil and gas sector, introducing a far-reaching legal, fiscal, and regulatory regime that directly reshapes the upstream petroleum landscape. By replacing a patchwork of obsolete laws with a unified framework, the PIA delivers regulatory clarity, fiscal predictability, and commercial realism, thus laying the foundation for a modernised and globally competitive industry.
For upstream operators, the Act introduces structured processes for licensing, exploration, prospecting, and field development, accompanied by obligations relating to technical compliance, cost control, and environmental protection. With the introduction of the Hydrocarbon Tax, strict reporting timelines, cost deduction limits, and revised royalty regimes, fiscal discipline is no longer optional it is central to continued participation in the sector. The Act also enforces rigorous standards in gas flaring reduction, environmental remediation, and decommissioning, ensuring sustainability throughout the lifecycle of petroleum operations.
A major innovation under the PIA is the mandatory transfer of all existing host community development schemes to the newly created Host Communities Development Trusts. Upstream operators designated as settlors must migrate corporate social responsibility initiatives and memoranda of understanding into these Trusts, notify the Commission, and make financial contributions. Contributions made within twelve months of the Act’s commencement are recognised as compliant. This development represents a structural shift in the relationship between oil companies and their host communities, institutionalising stakeholder engagement and making social investment a statutory obligation.
Although downstream activities are governed by a separate regulatory authority, the core goals of the PIA, transparency, regulatory certainty, local content enhancement, and investor confidence are equally embedded in the upstream regime. The establishment of clear rules for license conversion, asset transfer, and dispute resolution further affirms the Act’s emphasis on administrative efficiency and commercial accountability.
In sum, the Petroleum Industry Act 2021 is not merely a legislative reform; it is a strategic restructuring of Nigeria’s upstream oil and gas sector. It challenges operators to adapt, comply, and innovate within a framework that prioritises national development, environmental responsibility, and sustainable resource management. For stakeholders with the foresight to align with its provisions, the Act offers a transparent, stable, and growth-oriented platform for long-term investment in Nigeria’s upstream petroleum industry.
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