Production Curtailment and Domestic Crude Oil Supply Obligation Regulations 2023

Has the Upstream Regulator Learnt from the Past Mistakes of DPR?  

This article by Phillip Ayanfe focuses on the Production Curtailment and Domestic Crude Oil Supply Obligation Regulations 2023 issued by the Nigerian Upstream Petroleum Regulatory Commission, whose objective is to provide the general rules for production curtailment and utilisation of the produced petroleum, in relation to export and domestic crude oil supply obligations

Introduction

Under the repealed Petroleum Act of 1969 (PA), the Department of Petroleum Resources (DPR) was recognised as the regulatory agency supervising the Petroleum industry. The legal basis for this was not clear, as DPR was not a creation of statute. Indeed, the Petroleum Inspectorate within the old Nigerian National Petroleum Corporation, responsible for regulation, was detached in 1986 and DPR was recreated. 

DPR issued Regulations and Guidelines (the “Regulations”), to address new developments in the industry. Some of these Regulations were declared illegal for being contradictory to the PA, its principal law. The courts have held that for a subsidiary legislation to be valid, the legislation must not be ultra vires the principal or enabling Act – Ewete v Gyang. Essentially, the power to issue Regulations must be provided under a primary legislation, and these Regulations must not override primary laws. (For an interesting analysis of this, see Adaralegbe B “The Legal Regime for Assignment of Interests in Nigeria’s Upstream Petroleum Sector: A Critique of Moni Pulo v Brass Exploration, DPR’s 2014 and 2021 Guidelines and the Petroleum Industry Act of 2021 (Journal of World Energy Law and Business, Vol. 15 Number 1 February 2022). 

In 2003, the Deep Water Allocations to Companies (Back-in Rights) Regulations was issued by the DPR. The Regulations provided the Government with the right to acquire 5/6 of the licensees’ interest in the relevant Licence or Lease on such terms as the Government may determine. In NNPC v Famfa Oil Ltd, the Supreme Court held that this Regulation was illegal for being contradictory to the PA. In 2019, the Guidelines for the Release of Staff in the Nigerian Oil and Gas Industry was issued by DPR. The Guidelines requires employers in the industry to obtain ministerial approval before terminating their staff’s employment. In PENGASSAN & Ors v Chevron Nigeria Ltd, the National Industrial Court of Nigeria pronounced the Guidelines ultra vires the Minister’s powers. However, in The Shell Petroleum Development Company of Nigeria Limited v the Minister of Petroleum Resources, the NICN held that the Guidelines are not ultra vires the powers of the Minister because the power of the Minister to ‘formulate, monitor and administer government policy in the petroleum industry’, is wide enough to accommodate the Guidelines.  

The Regulator and PC Regulations Under the PIA: An Analysis

Nigerian Upstream Petroleum Regulatory Commission (the “Commission”) has issued several Regulations, which include the Production Curtailment and Domestic Crude Oil Supply Obligation Regulations 2023 (the “PC Regulations”). The PC Regulations is the focus of this article. Please, note that, although the DPR has been replaced by the Commission, the Petroleum Industry Act (PIA) saves Regulations made under the PA, in so far as they are not inconsistent with the PIA. (Section 311 (1) of the PIA). 

In November 2023, the Chief Executive of the Commission, relying on Section 109 of the PIA stated inter alia that “a company that does not comply with domestic crude obligations where a willing buyer exists shall not be granted an export permit for the export of crude oil. He shall incur a penalty of 50 per cent of the fiscal price per barrel not delivered, payable to the commission.” 

At first blush, it would appear that the Commission may be repeating the same error of DPR in using a subsidiary legislation to override and expand the scope of a primary legislation. Does the PIA grant a Lessee exclusive right over the crude oil produced in its field? If so, can the Regulator through the PC Regulations curtail this right? The Commission leaves no one in doubt that it is curtailing the Lessee’s right under the PIA. The word “curtail” means to cut short, reduce or limit something.  

Section 70 (1) (c) of the PIA shows the legal nature of the Lessee’s right. By this provision, a holder of a petroleum mining lease can “win, work, carry away and dispose of crude oil, condensates and natural gas on an exclusive basis.” It is noteworthy, that this right is slightly different under the repealed PA. Section 11 of the PA provides that the holder of an oil mining lease “shall have the exclusive right within the leased area to conduct exploration and prospecting operations and to win, get, work, store, carry away, transport, export or otherwise treat petroleum discovered in or under the leased area.” While it is obvious that the right of the Lessee under the PIA is not as extensive as it was under the PA, it is arguable that since the Lessee has the right to “carry away”, it also has the right to export. Nevertheless, the exclusion of the word “export” from the rights granted to a Lessee is noteworthy.  

The objective of the PC Regulations is to provide the general rules for production curtailment and utilisation of the produced petroleum in relation to export and domestic crude oil supply obligations. By paragraph 15 of the PC Regulations, where production for any given quarter falls below the allocated quota for that quarter, a Lessee shall first fulfil its obligations to supply to the domestic market before any export may be permitted by the Commission. In fact, the Lessee may only export all the production for that quarter where there is no demand by any refinery licence holder in that quarter.  From a policy standpoint, the objective of the Commission to ensure that Nigeria’s hydrocarbon needs are met before the Lessee exports for profit, and Nigeria’s economic need for foreign exchange from crude oil sales, can hardly be questioned especially in an era of fuel subsidy removal. However, has the Regulator executed this objective legally and appropriately in a way that Nigeria is not exposed to expropriation allegations in international courts? Will this curtailment not amount to an excess of its regulatory making powers as we saw with DPR? 

It seems that, while the PIA gives the Lessee the right to carry away crude oil, the PC Regulations restricts that right by allowing the Commission to curtail the export of crude oil. Upon a careful perusal of the PIA and PC Regulations, this writer opines that the Commission acted lawfully. Section 8 (c) of the PIA provides that “the commercial regulatory functions of the Commission shall be to allocate petroleum production quotas for the purpose of curtailing export of petroleum…” Also, Section 109 (2) of the PIA allows the Commission to issue Regulations on the mechanism for the imposition of a domestic crude oil supply obligations on Lessees of upstream petroleum operations. Accordingly, oil producers may be required to allocate a certain portion of their crude oil production to supply for domestic consumption. In essence, the power of the Commission to issue the PC Regulations is directly provided in the PIA. Thus, the PC Regulations does not override the PIA and the issue of using a subsidiary legislation to override a primary legislation does not arise on this point. Also, the PC Regulations is not expropriatory since the PIA establishes expressly the boundaries of the Lessee’s rights and the Regulator’s powers.

Section 109 (2) of the PIA alone does not empower the Commission to curtail the Lessee’s right to export crude oil. It only allows the Commission to issue Guidelines as it relates to domestic crude oil supply obligations. Indeed, Section 8 (c) of the PIA is the clincher. The PC Regulations was issued pursuant to Section 8 (c) and 109 (2) of the PIA. Furthermore, the exclusion of the word “export” from the Lessee’s rights under Section 70 (1) (c) shows that unlike under the PA, the PIA does not intend the Lessee’s right to include an automatic right to export crude oil produced. The drafters of the PIA have intentionally provided a leeway for the Commission to lawfully curtail the export of crude oil through Regulations. Thus, there cannot be a legal basis for the PC Regulations to be struck down by the courts for being ultra vires the PIA.

Conclusion

We are experiencing a very interesting phenomenon, that is bound to spread to other developing oil producing countries like Nigeria. On one hand, it is well known that oil producing companies from Western countries, are dominant in the oil industries of developing countries. This is to satisfy their own domestic needs, known as security of supply following the 1973 oil crisis in the US. On the other hand, by the PC Regulations, there is a paradigm shift by Nigeria from a reliance on her hydrocarbon resources, focused on export and foreign exchange generation, to feedstock for its local refineries to satisfy our domestic fuel consumption needs. 

Both the petroleum industry and the National Assembly have shown that they are mature with the way the PIA was thoughtfully drafted to allow the Regulators to make Regulations that do not expand the scope of primary laws unlike the old regime, thereby allowing Nigeria to meet its policy objectives lawfully. It is hoped that more Regulations like this will be issued by the Commission, and court interventions would be unnecessary, thereby allowing the petroleum industry to grow efficiently. 

Philip O. Ayanfe, Associate, Babalakin and Co.