The stiff opposition that greeted the attempt by the Senate last December, to commence deliberations on the Petroleum Industry Bill (PIB), was pointer to the fact that except urgent steps are taken to resolve lingering contentious issues, the bill may not be passed as soon as expected, write Chika Amanze-Nwachuku and Chineme Okafor
Over the years, laws that regulate the Nigerian oil and industry operations had not been updated to reflect the changing dynamics of the global oil and gas industry. Government had reasoned that the main laws – the Petroleum Act 1969, as amended; the amended Petroleum Profits Tax Act 1959 and the amended Nigerian National Petroleum Corporation Act of 1977 – needed to be holistically reviewed to place Nigeria’s oil and gas industry at par with other oil-producing nations of the world.
Consequently, the PIB was drafted about 14 years ago by the Oil and Gas sector Reform Implementation Committee (OGIC), headed by former Minister of Petroleum, Rilwanu Lukman. The idea was to have in place a piece of legislation that will overhaul the entire oil and gas industry and re-write Nigeria’s age-old relationship with international oil companies (IOCs) operating in the country.
The PIB is proposed as a transformative piece of legislation that aims to consolidate 16 different Nigerian petroleum laws into a single document, establish a new legal and regulatory framework as well as new institutions and regulatory authorities.
It also seeks among other objectives: to enhance exploration and exploitation of Nigeria’s petroleum resources; significantly increase domestic gas supplies especially for power and other industry uses; create a competitive business environment for the exploitation of oil and gas resources and establish a fiscal framework that is flexible, stable and competitively attractive to investors across board.
Also, the bill canvasses for the creation of a commercially viable National Oil Company (NOC) to independently engage in operations across the entire oil and gas value chain; create strong and effective regulatory institutions to manage transparent operations in the sector; promote the Nigerian content initiative, which is aimed at improving the capacity of indigenous firms to undertake high-tech activities in a complex sector as the petroleum industry and ultimately promote and protect Health Safety and Environment (HSE) programmes in every operations of the sector. It also provides for the establishment of legal and regulatory framework; institutions and regulatory authorities for the Nigerian petroleum industry as well as stipulates guidelines for operations in the upstream and downstream sectors and for purposes connected with same.
Delay in Passage
The long-delayed reform bill was first presented to the sixth assembly in 2008, but efforts to sign it into law had been hampered by political intrigues and wrangling within the National Assembly and executive. Also, the existence of different versions of the bill was one of the major reasons why it could not be passed by the sixth National Assembly.
Commenting on the long-delayed oil industry reform plan, shortly before he left office, immediate past Group Managing Director (GMD) of the NNPC, Mr. Austen Oniwon, noted that the delay in the passage of the PIB had created investment uncertainties in Nigeria’s petroleum sector and warned that the country risked losing more investments in her petroleum sector due to the long wait for the PIB passage.
“The non-passage of the PIB has caused a lot of uncertainties in the industry and because of these uncertainties; investors are not ready to engage in new projects because they don’t know what is going to happen.
And because we have so many competitors around us; Ghana has discovered oil, Cameroon has also discovered oil as well as Sierra Leone and Liberia. The level of certainty in these countries is higher than ours because the PIB has not been passed and if we are not careful, investments will drift towards these new locations” Oniwon said.
Also, former minister of state for petroleum resources, Mr. Odein Ajumogobia, at a recent oil and gas forum, expressed regrets that the non-passage of the oil reforms bill would continue to delay investment in the oil and gas sector pointing out that potential investors, both local and foreign are reluctant to make huge financial commitment in the sector. He noted that the PIB, when eventually passed into law, would serve as a catalyst for revolution in the industry. Ajumogobia said: “The PIB is an ambitious attempt to revolutionise the oil and gas industry with just one legislation. The PIB, when it is passed, will provide guarantee for potential investors who want to invest their money in the sector. Now, people are conscious about investing because they feel there is no legislation that offers protection for them.”
Taskforce Steps in
To fast track the passage of the bill into an Act of the National Assembly, Minister of Petroleum Resources, Mrs. Diezani Alison-Madueke, had on January 19, 2012 set up a special task force to review the various versions of the PIB submitted to the sixth National Assembly and to produce a new one for presentation to the National Assembly.
The task force, headed by Chairman of the board of Nigeria Securities and Exchange Commission (NSEC), Senator Udoma Udo Udoma, had been directed to work in collaboration with a technical sub-committee headed by the Director General of Department for Petroleum Resources (DPR), Mr. Osten Olorunsola, to produce a clean copy of the bill to be presented to the national assembly and to facilitate its quick passage into law.
The minister, while inaugurating the task force in her office at the NNPC Towers, Abuja, noted that although the members of the Oil and Gas sector Reform Implementation Committee (OGIC), headed by former Minister of Petroleum, Rilwanu Lukman, that drafted the PIB, did a good job, the bill lacked the requirements of the 6th Assembly and needed to be redefined, and gingered up for speedy and very expedient passage by the 7th Assembly.
Alison-Madueke also acknowledged that there were multiple versions of the bill before the sixth Assembly, which contributed to why it could not be passed by the sixth assembly. “As a matter of fact, you are all also aware that at the end of the sixth Assembly, there was more than one version going around. So, government expects that the committee will put up all the indices in place to redefine the bill, look at certain sections and include strategic aspects so that we can get it right,” she said.
The new draft PIB, produced by the team was presented to the Federal Executive Council in July last year and is currently before the National Assembly for consideration.
However, efforts by the government for the expeditious passage of the bill have been thwarted by various interest groups in the oil industry. Multinational oil companies, Shell Petroleum Development Company, Mobil Producing, Agip and Total also picked holes in the fiscal terms provided for in the new draft bill, contending that the tax terms are uncompetitive and could make offshore oil and gas projects unviable. The oil majors are also opposed to the deep-water profit tax, stating that it is a worse deal than most oil majors were getting on existing deep water project.
Chief executives of the IOCs had at different forums, argued that the bill, if passed without significant changes, will stifle investments in the oil and gas sector and hamper government's aspirations to grow the business and the industry.
Also, the northern governors are also opposing the exclusion of the formation of a limited liability company to be known as the Oil Exploration Agency (OEA) in the PIB currently before the National Assembly. Their contention was that the exclusion of the formation of the OEA meant that government plans to discontinue oil search in the North.
Confusion Mars Deliberation
Opposition to the passage of the revised PIB heightened on December 18, when some northern senators openly opposed its consideration. Despite spirited efforts by the Senate Leader, Senator Victor Ndoma Egba, to open the debate on the much-awaited bill for consideration, the senators were said to have showed a general lack of disposition to the bill and eventually stalled the debate on it.
It was reported that consultants asked by the northern establishment to x-ray the bill had reported that the passage of the bill in its current form could lead to the federation pumping more resources to the Niger Delta and could lead to a 10 per cent increase in the resources of the region aside the 13 per cent derivation being enjoyed by oil producing states.
Part of the contentions of the north was that the PIB did not prioritise gas supply to the North and that the revenue accruing to four states, including Akwa Ibom, Bayelsa, Delta and Rivers is bigger than that of the 19 states of the North put together. The northern region also criticised what it called apparent divestment moves through the establishment of a National Oil Company and National Gas Company.
The uproar and confusion that greeted the introduction of the bill compelled the Senate to step down the debate to a later date.
Clarifying the Fiscal Regime
But providing clarifications on the proposed fiscal terms in the Production Sharing Contracts (PSCs), Alison-Madueke noted that the proposed increase in government take in the deep offshore blocks from the current level of 61 percent to a new figure of 73 per cent was necessitated by prevailing realities in the global oil and gas industry.
She explained that the proposed increase of government take was not only competitive but considerate, considering the scale of other entities around the world like Norway, Indonesia and even Angola, with even higher government take.
The minister further stated that based on prevailing realities in the global oil industry it was only natural to review the terms of the PSC to reflect the current trend.
The novel 1993 PSC agreement was based on $20 per barrel price for crude oil real time but records indicate that since the start of production in the PSC fields’ crude prices had been on the upward swing, thus the consensus to have a review of the terms.
Alison-Madueke maintained that the new PIB provides for a refreshing fiscal regime, which has strong incentives for enhanced exploration of new frontiers especially in the Inland Sedimentary Basins as well as providing strong support base for the complete activation of the Gas Master Plan.
Under the new arrangement, the fiscal regime was anchored on royalty and tax that are predicated on production as opposed to terrain and investment as was previously done.
Royalty by production as outlined in the draft bill was designed to capture the output of company as opposed to its location while creating a fair balance between small and big operators operating in the same terrain thus giving operators the opportunity to make fair returns during field decline. It also proposes lower rates on condensate from large fields as well as ultra-deep water fields.
Throwing more light on the contentious issues in her presentation at the 18th session of the National Economic Summit, which held in Abuja, the minister said although the bill had been initiated to give Nigerians maximum benefits from their god- given hydrocarbon resources, it is investment-friendly.
She stated that the revised PIB would re-invigorate the Nigerian oil and gas industry by encouraging a many pronged, much broader echelon of private participation in Nigeria’s oil and gas sector at the same time removing constraints in government funding of operations in the sector.
“At the heart of the PIB is the separation between policy, regulation and monitoring and commercial operations. Based on this model idea, the PIB seeks to build institutions around these core principles.
“The building blocks of these institutional and policy reforms are as follows: the unbundling of Nigeria National Petroleum Corporation (NNPC) as presently constituted through the creation of a National Oil Company that promotes indigenous operational capacity development; creation of 100 per cent Federal Government owned Asset Management Corporation, vested with the Joint Venture (JV) assets and an Asset Management Limited Liability Company to manage the JV assets on behalf of the federation; removal of Nigerian Gas Company (NGC) from NNPC as a separate, partially privatised entity to cater for domestic gas marketing and gas infrastructure development,” she said.
The minister explained that the intention was to accelerate gas infrastructure development for gas industries and power through private participation of up to 49 percent of its equity similar to the Nigerian Liquefied Natural Gas model, but with government holding 51 percent equity.
She said: “In straightforward terms, the PIB when operational will change the role of the NNPC, which will then metamorphose into a dynamic NOC with the capacity to match the likes of Brazil’s Petrobras and Malaysia’s Petronas.
“Currently, all NNPC’s revenues arising from the management of Federal Government assets flow directly to the Federation Account and its funding for the JVs is then provided by the government. This role will now be taken over by the Asset Management Company, which will be capitalised with a two-year loan and would later be expected to be self-funding through the retention of its earnings. All royalties and taxes would however be paid to the government, as and when due.”
New National Oil Company
The minister stated that the new National Oil Company (NOC) would broadly consist of the PSC assets, which shall be used to capitalise the National Oil Company, the National Petroleum Development Company (NPDC), the current three domestic refineries at Warri, Kaduna and Port Harcourt and the Pipelines and Products Marketing Company (PPMC).
According to the minister, the new NOC will also be partially privatised and it is expected that up to 30 percent equity shall be divested to provide private participation as it is in similar NOCs such as Petrobras of Brazil and Petronas of Malaysia. Government expects also that partial privatisation will provide a culture change to a fully accountable and commercial company.
She further stated that the unbundling of NNPC would be complemented by two new regulatory institutions – the Upstream Petroleum Inspectorate and the Downstream Petroleum Regulatory Agency – which will be created to promote effective regulation and monitoring in line with operational best practices.
Alison-Madueke said both regulatory entities are expected to perform commercial and technical regulation in the upstream and downstream petroleum sectors respectively, and that Nigeria’s quest to grow its reserves would be engendered in the proposed new PIB through a robust acreage management system to be superintended by the Upstream Petroleum Inspectorate.
Progressive Fiscal Regime
Providing further clarification on the fiscal reforms, the minister stated that the PIB represents the largest overhaul of the government petroleum revenue system in the last four decades. This overhaul, according to her, has four central objectives- to simplify the collection of government revenues; capture windfall profits in the case of high oil prices; collect more revenues from large profitable fields in the deep offshore waters and create Nigerian employment and business opportunities; by encouraging investment in small oil and gas fields.”
She refuted claims that the fiscal regime in the PIB was retrogressive and capable of hurting investment in the sector. According to her, a simplified collection of government revenues from the sector is accomplished through extensive revision of allowable deductions for the purpose of tax given the recent upward movement in the price of oil.
She said: “All cost-based incentives have now been replaced with production based incentives because government revenues come from production and not from cost. This therefore imposes strict discipline on cost escalations and de-incentivises gold plating. The proposed new fiscal regime also seeks to harmonise oil and gas fiscal systems.
“Gas fiscal terms are fully integrated into oil fiscal systems for the first time in Nigeria. I wish to state that Nigeria is not alone in “tightening” of fiscal terms during successive bid rounds or ad-hoc awards. The goal has always been to achieve a fair balance between government and contractor share. This is to ensure that risks do not outweigh rewards.”
The minister noted that Nigeria remains one of the most attractive countries in terms of fiscal regimes. “As an indicator of competitiveness, the latest Angola rounds shows government take (GT) at the level of Nigeria’s 2005 PSC terms, which is less favourable to contractors than the current terms proposed in PIB 2012.
“Interestingly, these terms will also apply to the National Oil Company, as it is not intended to be discriminatory. Of course, with fiscal changes there may be concerns by investors as to project profitability and long term sustainability of production in Nigeria, but from our models of profitability, the proposed fiscal terms in the case of onshore/offshore JV projects delivers comparable value to investors to the current system, but additionally improves the economics of small fields, significantly, through generous production allowances and smaller royalty rates,” she added.
Gains of PIB
The minister further explained that the bill would increase participation of new players in the Nigerian oil and gas industry through the proposed new acreage management system that involves the release of acreages that had been held without activity due to one constraint or another.
She said: “Contrary to some widely held views that fiscal regime is the cause of low exploration activity. Rather it is the lack of open acreage and limited funding in the JVs that is limiting exploration activity. The proposed new acreage management system would release new acreage for exploration. Throughout the world, new successful exploration plays are being developed not by the majors but smaller independents. Nigeria intends to benefit from this trend.
“Nigeria has a robust and fair fiscal system accompanied with significant undiscovered potential. In the area of gas for example, estimates of about 600 Trillion cubic feet of gas resources have been made.”
Irrespective of the stiff oppositions, the minister has maintained that the proposed fiscal regime in the new PIB is favourable to both big and small players as well as foreign and local investors, irrespective that it was initiated to give Nigerians maximum benefits from their god’s given hydrocarbon resources. She has therefore called on investors across the world to embrace the various business opportunities, which the oil reform law has on offer.