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The Petroleum Industry Act, 2021 occasioned the restructuring of the petroleum industry into two main sectors: Upstream sector and Midstream and Downstream sector, by establishing two principal regulatory bodies: Nigerian Upstream Petroleum Regulation Commission (The Commission) and the Nigerian Midstream and Downstream Regulatory Authority (The Authority) to regulate the technical, commercial and operational activities within the sectors.

Activities within the upstream petroleum sector mainly involve extraction, onshore and offshore drilling and exploration of crude oil which involve the conduct of geological surveys in order to determine potential sites for oil and gas drilling and extraction.

In spite of the vast economic contributions to the nation’s Gross Domestic Product (GDP), upstream petroleum operation activities have always had adverse environmental and socio- economic impact on upstream petroleum operations host communities. To mitigate the effects of these adverse impacts, upstream petroleum operators execute a number of corporate social responsibility projects within their host communities.

Prior to the PIA 2021, the relationship between Upstream Petroleum Operators and their Host Communities were regulated by Global Memorandums of Understanding executed between the Settlors (Operators) and representatives of Host Communities which determined host communities benefits, communication channels with grassroots, and dispute resolution mechanisms among a number of other factors which were discretionary in nature. GMOUs were first introduced in 2006 by SPDC and later adopted by other oil companies.

However, the introduction of the PIA 2021 erased the regime of discretionary agreements between upstream petroleum operators and host communities by introducing a more regimented and regulated framework which now controls the relationship between Settlors and their Host Communities.

In order to strike a balance between the marginal benefits of upstream petroleum operations and its marginal social costs to society, the PIA mandates upstream operators to establish Host Communities Development Trusts on behalf of their host communities to foster sustainable development within same.

In essence, the PIA via its mandatory requirement of the establishment of Host Communities Development Trusts aims to foster peaceful coexistence and cooperation between upstream petroleum operators and their host communities, curb restiveness within host communities and in the process enhance seamless operations, provide direct social and economic benefits from petroleum operations to host communities, boost investors’ confidence and provide an enabling environment for sustainable development within host communities.

Host communities are communities situate in or appurtenant to the area of operations of a settlor and any other community as a settlor may determine under Chapter 3 of the PIA.
Essentially, a Host Community Development Trust is a corporate entity or structure established with the sole object of housing and generating funds to be deployed solely for the execution of social and economic projects for the benefit and sustainable development of host communities.

Host Communities Development Trusts must be incorporated within the following timelines:
• Within 12 months from the effective date for existing oil mining leases.
• Within 12 months from the effective date for existing designated facilities.
• Within 12 months from the effective date for new designated facilities under construction on the effective date.
• Prior to the application for field development plan for existing oil prospecting licenses.
• Prior to any application for a field development plan for any petroleum prospecting licenses or petroleum mining licenses granted under this Act.
• Prior to the commencement of commercial operations of licenses of designated facilities under this Act.

Chapter three of the PIA is exclusively dedicated to Host Communities Development Trusts. Section 235 expressly mandates a settlor to incorporate a Host Community Development Trust for its host community for which it shall be responsible. The holder of a lease or license granted under this Act may be exposed to the risk of a potential loss of such license or lease and shall be exposed to and administrative penalty of $2500 or its equivalent in Naira per day from the date of the expiration of the 45 days notice to register upon their failure to comply with the provisions of Chapter 3 of the Act after having been informed of such default in writing, usually within 14 days of such default, by the Commission or Authority.

The Chapter provides for the incorporation of HCDTs, timeframe for the incorporation of HCDTs, the implications of the transfer of a Settlor’s interests and obligations subject to host communities development trusts obligations, Penalty for the failure to incorporate HCDTs, Objectives of HCDTs, Sources of funding for HCDTs, Object of the Trust Funds, Allocation of Funds of HCDTs, Composition and management of HCDTs, Duties and functions of the Board of Trustees, fund distribution matrix, Engagement of fund managers, Composition, powers, duties and functions of the Management Committee, Composition, duties and function of the Advisory Committee, Host Community needs assessment, Host community development plan, Financial year of HCDTs, Accounts and audits, Mid-year annual reports, exemption from income tax, Deduction of payments for the development of petroleum host communities.

The NUPRC being the Nigerian Upstream Petroleum industry regulator, pursuant to its powers derived from section 234 (2) and section 235 (6) of the PIA passed an additional regulation known as the Nigerian Upstream Host Communities Development Regulations 2022 as well as a robust implementation template for HCDTs known as the NUPRC- Host Community Development Template which jointly provide more detailed regulatory guidelines for the establishment and administration of Host Communities Development Trusts.

The PIA mandates the constitution of a HCDT to donate powers to the HCDT to manage and supervise the annual contribution by the Settlor and any other source of funding contemplated under the Act.
Furthermore, the objectives of a HCDT must be specified in the Constitution of the HCDT which shall among others include:
• To finance and execute projects for the benefit and sustainable development of host communities.
• To facilitate economic empowerment opportunities in host communities.
• To facilitate infrastructural development within the sociopolitical of the funds available to the Board within host communities.
• To support healthcare development for host communities.
• To support local initiatives which seek to enhance protection of the environment.
• To advance and propagate educational development for the benefit of members of the host communities.

To guarantee the achievement of the objectives of this initiative, Settlors are required by law to conduct two crucial exercises which are pre-conditions for the incorporation of a HCDT. These two exercises are:

Host Communities Needs Assessment
This is done within 6 months from the grant of the license or lease to determine existing needs of the host community.

Host Communities Development Plan
This is a scheme of projects designed to be executed within host communities based on the needs assessment report. This plan is to be developed and submitted for approval by the Commission within 30 days of the completion of the needs assessment.

The incorporation process of HCDTs involve four main stages: • Pre-approval / pre-incorporation: At this stage, the Settlor and representatives of the host communities are expected to organise a Communities Meeting, and upon the resolutions reached, the Settlor or its authorised agent shall check for the availability of the proposed incorporated trustee name on the Corporate Affairs Commission Portal and reserve the name agreed upon at the meeting.

It is a mandatory requirement that the proposed name of a HCDT must commence with the words ‘The Incorporated Trustees of ‘ and end with the words ‘Host Community Development Trust ’.

Consequent upon a successful reservation of the proposed name, the Settlor shall then apply to the Commission for approval to establish the Trust.

The settlor is required to make an application for the approval of the registration of the Trust not later than 60 days before the expiration of the timeline stated in section 236 of the Act and Regulation 9 of the Regulations.

The application for approval which must be signed by the Settlor and two of the proposed trustees must be accompanied by the following:

i. Duly completed application form.

ii. Payment of the prescribed application fee.

iii. Two printed copies of the draft constitution of the Trust.

iv. Duly signed copies of the minutes of the Communities Meeting appointing the trustees and authorizing the application, showing the people present and the votes scored.

v. A copy of a valid means of identification for the proposed trustees e.g. international passport, National ID card, Driver's Licence, Permanent Voter's Card.

vi. The profile of each proposed trustee which shall include their respective qualifications and professional background.

vii. In respect of proposed trustees nominated by the respective host communities, evidence that the proposed trustee comes from the relevant host community.

viii. Full details of the criteria for the selection of the proposed trustees.

ix. Copy of the applicant Settlor's license or lease with a map identifying the settlor's area of operations annexed to it.

x. List and location of all proposed host communities to be covered by the trust delineated on the map.

xi. A copy off the Settlor's host communities' development plan; and

xii. The fund matrix for the Trust.

The Commission is required to notify the Settlor of its approval or refusal of the application or require the Settlor to make any changes or provide additional information within 30 days of its receipt of the application and accompanying documents subject to the provisions of the Regulations. The application shall be deemed approved where the Commission does not provide a response within the timeframe stipulated and the Settlor shall be entitled to proceed with incorporation at the Corporate Affairs Commission.

Incorporation at Corporate Affairs Commission
Upon the approval or deemed approval of the Commission, the Settlor acting in conjunction with the Trustees shall register the Trust at the Corporate Affairs Commission in accordance with the Companies and Allied Matters Act.
Within 7 days of the incorporation, a Settlor is required to submit the following documents at the NUPRC:

i. A copy of the certificate of incorporation.

ii. A certified true copy of the constitution of the Trust in type form approved by the Commission.

iii. A certified true copy of Form CAC/IT/01.2

Generally, HCDTs must be administered in accordance with the Act, Regulations, Constitution of the Trust and any other applicable law.
Key players involved in the administration of Trusts include:

The Commission
The NUPRC being the regulator has amongst its principal functions the responsibility of administering the smooth implementation of the Host Communities Development provisions contained in chapter three of the PIA.

The Settlor
The PIA defines a settlor is any holder of an interest in an Oil Prospecting Licence, an Oil Mining Lease, a Petroleum Prospecting Licence, or a Petroleum Mining Lease whose area of operations is in or appurtenant to any community or communities falling within the definition of host communities. Some of the roles of the Settlor include delineation of the host communities, development of the fund matrix, conduct of the needs assessment, management of the administrative costs fund, amongst others.

The Board of Trustees
Prior to the incorporation of the Trust, the Settlor in consultation with the host community is required to set up the Board of Trustees by selecting the first trustees whose appointment shall be subject to the approval of the Commission.

The Management Committee
The Board of Trustees is required to set up and appoint members of the Management Committee which shall comprise of one representative from each host community who shall be a non-executive member and executive members who shall be individuals of high and professional standing within 30 days of setting up the Board. This committee is to be responsible for the general administration of the Trust on an ad-hoc basis and is required to carry out the functions spelt out in section 248 of the PIA.

The Advisory Committee
The Management Committee is required to set up and appoint members of the Advisory Committee which shall comprise of one member from each host community.
It is the responsibility of the Advisory Committee among other obligations contained in section 250 of the PIA to monitor and report progress of projects being executed in the community to the Management Committee.

The operations of the Host Communities Development Trusts are to be financed by the Host Community Development Trust Fund.

The PIA and the Regulations require a Settlor to establish a Trust Fund within a month of the Trust incorporation, which shall comprise of four accounts namely the Collection Fund, Capital Fund, Reserve Fund and the Administrative Costs Funds.

The Regulations direct that the funds maintained in each account be kept distinct and prohibits the co-mingling of monies maintained in these accounts.

These accounts are to be maintained in a commercial bank duly licensed by the Central Bank of Nigeria with a minimum credit rating of ‘BBB’ by at least two rating agencies, one of which must be incorporated in Nigeria and registered with the Securities and Exchange Commission.

The resources contained in the Fund are required to be used solely for the implementation of the Host Communities Development Plan.

The Trust Fund is primarily funded by an annual contribution to the Collection Fund of an amount equal to 3% of the operating expenditure of the Settlor’s preceding financial year. The first payment of the annual contribution to the fund by the Settlor is to be made within a month of the incorporation of the Trust by the BOT, after which subsequent contributions are to be made on a yearly basis within three (3) months of the end of each year.

HCDTs are also permitted by law to receive donations, gifts or honoraria donated to it for the fulfilment of its objectives.

Host Communities Development Trusts may also generate funding by investment of their Reserve funds.

The PIA requires the funds in the Reserve Fund to be invested by the Fund Manager on behalf of the Host Community members. Consequently, profits and interests accruing to the Reserve Fund shall be contributed to the Trust Fund.

However, the power of the Fund Manager to invest resources in the Reserve Fund is not at large but subject to certain pre-conditions contained in the Regulations.

The Regulation contains robust provisions for the management and administration of the accounts of the Fund which provide for the utilization of the funds, the pre-conditions for withdrawal from the Fund, reduction of administrative costs, criteria for the appointment of the Fund Manager.

More specifically, the Regulations vests the responsibility for the management of the distinct accounts which make up the Fund in different arms of the governing body as well as the Fund Manager.

To ensure proper management and transparency in the management of funds, the Regulations require Settlors to file quarterly returns at the Commission to aid the Commission in monitoring cash flow in the fund and ensure that monies are being utilized in accordance with the Act and the Host Community Development Plan. The Regulations stipulate an administrative penalty of the sum of $10,000 or its equivalent in Naira and where the offence is continuous offence an administrative penalty of $1,000 or its equivalent in Naira.

The Act and Regulations mandate the various arms of the governing body of Trust to file mid-year and annual reports on the activity of the Managing Committee and the Host Community Development Trust accompanied by their audited accounts within specified timeframes.

The Act and Regulations stipulate the hierarchy through which these reports must be filed.

These reports are meant to flow from the Management Committee – Board of Trustees – Settlor – Commission.

While the PIA is silent on the procedure for the resolution of possible disputes which may arise in relation to the Trust, the Fund or upstream petroleum operations, the Regulation provide robust provisions on dispute resolution procedures.

Dispute between host communities:
• Aggrieved community – Dispute notice + relevant documents – Settlors & BOT Dispute between a Host Community/Communities and Settlor.

• BOT – Dispute Notice + Relevant Documents – Chairman BOD of Settlors Dispute notices must also be served at the Commission.

Where the interveners in these two scenarios fail to resolve the dispute within 30 days after service of the dispute notice, any of the parties may refer the dispute to the ADR Center of the Nigerian Oil & Gas Excellence Center for Mediation.

Mediation is initiated by the aggrieved party serving a Mediation Notice on the other party or parties to the dispute, referring the dispute to mediation. A copy of the mediation notice must be served on the Commission.

Unless disputing parties agree otherwise, mediation process shall be concluded within 45 days of the service of the mediation notice.

The mediation meetings shall be held at a venue agreed upon by the disputing parties. Where they fail to agree upon a venue, the meetings shall be held in the State Capital of the host community. Any settlement reached by the disputing parties following hothead mediation, and duly signed by the parties or their representatives shall be final and binding.

Where the dispute is not resolved within 30 days after the commencement of the mediation, or any aggrieved party fails or ceases to participate in the mediation process before the 30 days expiry period or the mediation terminates before 30 days, an aggrieved party may refer the dispute to the Commission who shall attempt in good faith to resolve the dispute.

Where the Commission is unable to resolve the dispute within 45 days of the dispute being referred to it, the disputing parties may refer the dispute to an Arbitrator under the Arbitration and Conciliation Act.

While the codification of the rights of Host Communities indigenes is applaudable, there remains yet a white elephant in the room to be considered: the practicability of HCDTs. A denumerable number of challenges betide the implementation practicability of HCDTs.

Some of these challenges include the following:

• Implementation and regulation challenges.

• Distrust between host communities and settlors, intra-host communities disputes.

• Lack of foresight on the part of host communities.

• Tax exemptions for HCDTs

• Qualified tax exemptions for upstream petroleum operators.

• Codification of socio-economic benefits.

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