Under the Petroleum Industry Act (PIA), the term “settlor” refers to a holder of an interest in a petroleum prospecting licence (PPL) or petroleum mining lease (PML) whose area of operations is located in or appurtenant to any community. Important responsibilities have been assigned to settlors both in the establishment of and in the governance of the Host Community Development Trust (the Trust). The Act stipulates that every settlor or the operator of an asset in a joint venture arrangement shall incorporate a Trust for the benefit of the host community for which that settlor is responsible. Thus, where they are many or a collectivity of settlors operating under a joint operating agreement concerning upstream petroleum operations, the operator of that JOA shall have the responsibility of incorporating a Trust for the benefit of the relevant community on behalf of the JOA parties. Individual members of the JOA are not required to incorporate a Trust in this case. In other words, the obligation attaches to PPL or PML assets and not to a corporate entity or entities.
The salient point here is that the responsibility to incorporate a Trust attaches to petroleum licences or a petroleum asset so that only one Trust is required to be incorporated regardless of the number of parties or joint venturers who have an interest in that asset. Thus, it is not a prescription of the Act that every holder of a petroleum prospecting licence or a petroleum mining lease must incorporate a Trust in favor of the host community or communities for which they are responsible. This means that if a community hosts two or more PPLs or PMLs, each of these assets must incorporate a Trust for the benefit of the same host community. This scenario raises the question of the propriety or utility of hypothetically incorporating two or more Trusts in a single community. Is this appropriate or inappropriate? Will such a scenario playing out increase the chances for rapid socio-economic development of such a community or will it be a source of tension, or will it create further social, administration, or bureaucratic complexities? There is no perfect answer to these questions. However, the Act should have created an option to allow petroleum licence holders co-located in the same host community to incorporate a single Trust to which all the (3%) revenue will be contributed into. This will reduce the risk of duplication of projects, duplication of bureaucracies, and lead to waste of resources in terms of avoidable costs and expenditure towards wages, allowances, and related expenses which will be incurred by running multiple trusts in the same community. It is suggested that the principle or rationale which underlines the requirement for co-venturers to incorporate a single Trust for their asset should equally apply here to require the incorporation of a single Trust regardless of the number of petroleum assets in a community. But, noting that many petroleum licences cover a very large expanse of land area, the possibility of establishing more than one Trust in a host community may not necessarily be pervasive. Nevertheless, the rarity of its occurrence does not diminish the potential disadvantages of incorporating multiple trusts in a single community.
Another issue which settlors should note is that the timeframe set for the incorporation of a Trust. The Act specified the timelines for the incorporation of the Trust. For existing oil mining leases, existing designated facilities, and designated facilities under construction on the effective date of PIA which is August 16, 2021, a holder of any of these three licences must incorporate a Trust for each of these three licences within 12 months from the above-stated commencement date. In the case of existing oil prospecting licence, or oil prospecting licence, or oil mining lease granted under the PIA, holders of any of these licences shall incorporate a Trust for the host communities for which they are responsible before an application for field development plan is made or before the commencement of commercial operations in the case of the latter.
Designated facilities mean petroleum crude oil and natural gas transportation pipelines, bulk storage tank farms, refineries, and gas processing plants in midstream petroleum operations and petrochemical plants. Licence holders to any of these facilities are required to incorporate a Trust for the benefit of their host communities
Furthermore, any asset which is subject to the obligation to incorporate a Trust may be transferred by the licence holder subject to the requirements of extant laws in that regard, and subject to what the PIA referred to as ‘surviving obligations. As stated earlier, the obligations of a settlor or a holder of a licence to a designated facility are deemed to attach to the petroleum property or asset. As a result, where a licence holder desires to transfer any petroleum right or a qualifying interest, such a holder shall during the pendency of the transfer arrangement continue to be responsible for all ongoing or unexhausted obligations under chapter three of the PIA. One example of a surviving obligation is the obligation to incorporate a Trust and the performance of activities incidental to such incorporation. Thus, if a settlor or a licensee to a designated facility desires to transfer any of these assets after August 16, 2021, it shall continue to carry out surviving obligation such as the incorporation of a Trust, the constitution of the Board of Trustee, the conduct of a host community needs assessment plan and the community development plan. In other words, none of these programmed obligations must be suspended or kept in abeyance until the acquisition process is complete. The concept of surviving obligations is consistent with the established legal and industry practice in similar circumstances. Failure to incorporate a Trust for the benefit of the settlor’s host community shall be a ground for revocation of title if the default persists after the holder has been informed of their non-compliance by the Commission or the Authority.
One of the most important obligations of a settlor is the obligation to make an annual contribution of an amount equal to 3% of its actual annual operating expenses of the preceding financial year in the upstream sector. From the provision of section 340 which relates to sources of funding of the Trust, it would appear that the obligation to incorporate and fund Trust inures only to upstream operations to the exclusion of midstream and downstream assets. This is contrary to the position in the version of the PIB which was passed by the House of Representatives. It approved an additional 2% rate for midstream and downstream petroleum assets but was reject by the Senate version on the ground that such facilities involve high CAPEX, huge maintenance costs, and a very low revenue base. This suggests that host communities of midstream and downstream facilities are not entitled to have a Trust incorporated for their benefit except where so designated by the settlor under section 235 (3).
Thus, section 236 (f) appears to conflict with the provision of section 240 which limits or restricted the obligation to settlors or operators that are involved in upstream petroleum operations.
Furthermore, it is the responsibility of settlors to facilitate the promulgation of the constitution of a Trust established by it, to establish the Board of Trustees, determine the membership and criteria for appointment into the Board. Appointment of members of the Board must be carried out by the settlors in consultation with their host communities and subject to the approval of the Commission or the Authority, as the case may be. Such criteria shall include the two obligations expressly stated in section 242 (2) such as persons of “high integrity and professional standing.” None of these phrases was defined under the PIA.
Additionally, settlors are required to determine or design the operational systems of the Board’s business, administrative procedures, procedures for meeting financial regulation to which the Board must be subject, remuneration, discipline, qualification, disqualification, suspension, and removal of a Board member.
Finally, settlors are required to submit a matrix for distribution of trust funds to the Board of Trustees. This provision appears innocuous and liable to subversive interpretations. It does not mean the distribution of cash benefits to members of host communities. The old practice involves direct cash payments to chief, very influential community leaders, or those who can undermine or obstruct petroleum activities that are not envisaged or provided for under the PIA. Here, the matrix for distribution of trust fund may relate to the distribution of the income of a Trust into the three categories stated under section 340 and/or distribution or the breakdown of remitted trust revenue where communities are involved, reflecting the quantum of the operational cost expended in each community.
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