The Nigeria Petroleum Industry Legislation
–Explanatory Memorandum for Governance & Institutional Reforms
Background and Introduction
This executive summary note narrates the principles and intent of the 2015 Petroleum Industry Legislation being prepared by the Technical Committee for submission to the National Assembly.
The Technical Committee mandates include:
a. Review the Oil and Gas Policy approved in 2007, for appropriateness;
Review all available materials and information of the past reforms the Petroleum Industry Bill (PIB) 2008, 2012 and in addition to the PIB version passed by the House of Representatives in May 2015;
c Consult and engage as necessary;
d. Debrief relevant authorities as frequently as needed to ensure alignment and adequate guidance; and
e. Redraft, present and commence submission of the PIB 2015, ensuring alignment with the Policy.
It was expedient to go back and review the circumstances that led to the inability to establish an acceptable document and to enact the intended Petroleum Industry Bill in the past, which suffered a multiplicity of assaults from various players/stakeholders
To arrive at the present proposition for the Petroleum Industry legislation-2015, this committee has employed thorough review of past documents, made comparative review of similar and competitive jurisdictions, and ensured international best practices in content and in style.
1.1 Role of Petroleum to National Growth and Development
Oil and gas have been, and will remain for years to come, Nigeria’s most important non-renewable energy source, currently contributing over 90% of country’s foreign exchange earnings and about 80% of recurrent and capital expenditure. The industry is therefore critical to the economic and social development of Nigeria.
While the government’s vision and aspiration continue to target diversification of the economy, the petroleum sector remains the primary source of revenues to make that happen as well as sustain the country for the foreseeable future.
Nigeria currently produces about 2 million barrels of light, sweet quality crude oil per day, still the largest in Sub-Saharan Africa. It has proven oil plus condensate reserves of about 37 billion barrels. Both current oil production and reserves are far short of growth levels envisaged in the Vision 20:2020.
Similarly, Nigeria produces approximately 8 bcf of gas daily of which some 50% goes for export while 13% (mainly associated gas) is flared. Natural gas reserves are substantial at about 183 trillion cubic feet (TCF), representing 3 percent of the world’s total. Incidentally, gas is also not sufficiently addressed in the existing petroleum industry legislation.
2. History of Petroleum Sector Regulation
The history of petroleum legislations may be classified into three periods:-
a) Pre- colonial, under the British Colony, giving authority to the “Crown” for issuance of licences and taxation under the Minerals Ordinance Act of 1914;
b) Post Independence Nigeria, (1960-1971), whereby only taxes were paid by companies involved in petroleum operations; and,
c) Since joining the Organisation of Petroleum Exporting Countries (OPEC) in 1971, that created the enabling environment for greater involvement by the Government, taking equity in petroleum assets and in operations, and as a prelude, ushered authority from 1969 of the Minister to create an Inspectorate Unit in the then Ministry of Mines & Power, as well as promulgate rules and regulations for the sector.
This authority was upped by the 1977 legislation creating a commercial entity, the Nigerian National Corporation (NNPC), alongside with the Department of Inspectorate, renamed, the Department of Petroleum Resources (DPR), under the office of the Minister in 1991.
Since then, petroleum sector realised several ad-hoc legislations mostly on need basis without necessarily checking alignment with existing ones.
As at today, our nation is in energy crisis. There has been a sustained imbalance between domestic Supply and Demand, not arising from lack of endowed energy resources but from inability to manage our resources efficiently. We still import today over 90% of needed petroleum products (petrol and chemicals), flare substantial gas produced, have damaged our eco-systems and polluted our communities and cannot supply adequate electricity to homes and industry. This situation has undermined our citizens’ standard of living, life expectancy, our national energy security and has resulted to other unforeseen fall-outs like: labour unrest; fuel queues; high cost of delivery of products; high cost of delivery of overall services in the total economy; and a share waste of unquantifiable productivity.
The Existing joint ventures (JVs) and PSCs fiscal policies, require review with respect to “windfall profits” to private companies based on incentives that have distorted normal market economics as well as need harmonisation because they are dispersed along the nature or type of product, company or project specific. In doing so, the indigenous “Sole Risk”/ independent players, should command attention under the nations priority policy that ensures indigenous capacity expansion in the petroleum value chain in Nigeria.
The subsisting primary legislation that governed Oil & Gas in Nigeria are:
A. The Petroleum Act, which came into force on 27th November 1969 and has been amended severally. From it , there exist subsidiary legislations (Regulations), as well as other related international Treaties. Accordingly, there are approximately 70 principal Legislations and 30 Regulations that govern the petroleum sector of Nigeria.
The following regulations, amongst others are subsidiary to the Petroleum Act:
• Mineral Oils (Safety) Regulations, Statutory Instrument 1963 No. 45;
• Petroleum (Drilling and Production) Regulations, Statutory Instrument 1969 No. 69;
• Crude Oil(Transportation and Shipment) Regulations, Statutory Instrument 1984 No. 1984;
• The Oil Pipelines Act 1956;
• The Oil Terminal Dues Act 1969;
• The Associated Gas Re-injection Act 1979
• the Associated Gas Re-injection (and Flaring of Gas) Regulations 1979(as amended)
B. The Petroleum Profits Tax (PPT) Act, which came into force on 1st January 1958, and has been amended many times. Its main purpose was to provide for the assessment and imposition of a tax upon the profits of enterprises engaged in the development and production of petroleum in Nigeria.
Some of the amendments include;
• The Deep Offshore and Inland Basin Production Sharing Contracts Act 1999 No. 9 (as amended);
• Various incentives under the Memorandum of Understanding (MOU) of 1986, 1991 and 2000, that were NOT enacted but put in place and implemented by the Tax authorities;
C. The separation or distinction of crude oil and natural gas fiscal structure can be said to have begun with the introduction of incentives terms under the Associated Gas Framework Agreement (AGFA) of 1991. The terms promulgated under AGFA, as a policy and in context, attempted to further differentiate between Associated Gas (AG) and Non-Associated Gas (NAG). The existing legislations and fiscal incentives pertaining to gas are those of:
• The Nigerian Liquefied Natural Gas Act No 39, 1990;
• The Finance (Miscellaneous Taxation Provisions) Act No. 18, 1998 (Amendment to Petroleum Profits Tax Act);
• The Finance (Miscellaneous Taxation Provisions) Act No. 19, 1998 (Amendment to the Petroleum Profits Tax Act)
3. The Nigeria Petroleum Industry Reforms
Recognizing the positive contribution of the oil and gas industry to the Nigerian economy, the real and potential losses due to successive mismanagement of the sector, the Federal Government of Nigeria (FGN) launched a process of broad sector reform which commenced in the year 2000.
The reform was meant to put in place an updated Nigeria Oil and Gas Policy as well as a legislative framework (Petroleum Industry Act) to enhance delivery of the sector objectives with emphasis on complete overhaul of the Nigeria petroleum industry, reforming the operational mechanisms for the upstream, downstream and natural gas sectors, redefinition of the roles and responsibilities of key institutions, enhancement of performance, accountability and transparency, (Governance), licensing and acreage management, bringing operations in line with international standards and, not least, improve on tax codes for both oil and gas.
Although the issues involved are complex, their resolution can be expected to have significant implications for investment flows, industry activity, and government revenues.
The overriding objective of the National Oil and Gas policy was “to maximise the net economic benefit to the nation from oil and gas resources and to enhance the social and economic development of the people while meeting the nation’s needs for fuels at a competitive cost, accomplishing all in an environmentally acceptable manner”.
Maximisation of the net economic benefit would include additions through appropriate fiscal regimes, sustained profitability of the sector, delivery of growth commercial activities, active local content policy and the development of improved direct linkages between the oil sector and the other sectors of the Nigerian economy.
4. The Nigeria Petroleum Industry Bill (PIB)
The Nigeria Petroleum Industry Bill (PIB), has been around in one form or the other since 2008 when it was first introduced. During the 7th National Assembly, additional efforts were made to pass the 2012 version of the PIB but it unfortunately was unsuccessful, similar to attempts at prior parliamentary sessions.
Continuous stalling and delay in passage to law has hampered investments, keeping the country’s future in limbo and denying Nigeria the unique opportunity as oil and gas leader in Sub Sahara Africa.
Specifically, the main objectives remain relatively the same, spanning the spectrum of the industry to:-
1. Enhance exploration and exploitation of petroleum resources;
2. Significantly increase domestic gas supplies especially for power generation and industrial development;
3. Create a peaceful business environment that enables petroleum operations;
4. Establish a fiscal framework that is flexible, stable, progressive and competitively attractive;
5. Create a commercially viable National Oil Company;
6. Deregulate downstream petroleum business;
7. Create efficient regulatory entity;
8. Engender transparency and accountability;
9. Promote active Nigerian Content and make Nigeria the hub of the western African petroleum province, and
10. Promote and protect Health Safety and Environment.
Apart from content issues with prior versions, one of the major drawbacks to passage was the bogus packaging of the PIB as a single legal instrument.
Consequently, although this 2015 attempt contains enhanced quality work on content, the bill has been split into logical smaller pieces for submission to the 8th National Assembly, a complete departure from all prior efforts.
This way, the pieces can be expeditiously considered and passed one after the other. And where amendments are required in the future, the relevant piece can be separately considered rather than opening up the whole Act for review.
Accordingly, the following pieces of legislation will be considered for the Nigeria Petroleum Industry Bill – 2015.
1. Petroleum Industry (Governance & Institutional Reforms) Bill
2. Petroleum Industry (Upstream Petroleum Administration Reforms) Bill
3. Petroleum Industry (Downstream Petroleum Administration Reforms) Bill
4. Petroleum Industry (Fiscal Framework & Reforms) Bill
5. Petroleum Industry (Revenue Management Reforms) Bill.
A. Petroleum Industry (Governance & Institutional Reforms) Bill
A1.0 Principles & Structure
It is widely acknowledged that major reforms in the governance and institutional structure for the sector are necessary and urgent.
A major drawback of the existing framework is the lack of clarity of roles, self- regulation, conflicts and unnecessary overlaps.
For example, while the Minister is in charge of the Ministry of Petroleum Resources, and indirectly supervises the Department of Petroleum Resources (supposed to be an independent Regulator), he is also the Chairman of the Board of the Nigerian National Petroleum Corporation (NNPC) by law.
The Minister therefore operates in a quasi- executive capacity across all facets of government involvement in the industry giving ample room for sustained failures in governance and performance.
In addition, and in particular, the country is being robbed of huge revenues as a result of mismanagement of the NNPC, the intrusive control of the government in the affairs of the corporation, the confusion with the Regulator as well as funding difficulties. These continue revenues are needed primarily to grow the sector as well as support the much talked about diversification of the economy.
The key objectives of the Petroleum Industry (Governance & Institutional Reforms) Bill are to:-
a) create efficient and effective governing institutions with clear and separate roles for the petroleum industry;
b) establish a framework for the creation of commercially oriented and profit driven petroleum entities that ensures value addition and internationalization of the petroleum industry;
c) promote transparency in the administration of the petroleum resources of Nigeria;
d) create a conducive business environment for petroleum industry operations.
In defining the new petroleum industry institutional landscape, the following principles were used to guide the overall framework:-
a) Clear delineation of government roles and responsibilities across the industry (Policy formulation, Regulatory oversight and Commercial operations);
b) Simple and lean structure, devoid of unnecessary overlaps;
c) Streamline the coordination role of the Minister;
d) Creation of a single strong industry regulator;
e) Unbundling of the existing NNPC to two Commercial entities limited by shares – the NOC, and the National Assets Management Company;
f) Ensuring strong governance, transparency and accountability in all institutions.
Based on these principles, the institutions proposed in the Petroleum Industry (Governance & Institutional Reforms) Bill are as follows:-
1) The Minister, who shall be responsible for policy formulation and coordinating the affairs of the petroleum industry on behalf of the Federal Government.
2) The Petroleum Regulatory Commission, who shall be the industry Regulator and Watchdog, responsible for licensing, monitoring, supervision of petroleum operations, enforcing laws, regulations and standards across the value chain.
3) The National Petroleum Company, who will operate as a commercial entity, fully integrated across the value chain.
4) The National Assets Management Company, who shall ensure maximum value for the Federation through prudent management of the Federation’s oil and gas investments in assets where Government is relieved of upfront funding obligations; eg. PSC assets.
These institutions constitute the key structures necessary to assure effective governance and efficiency of the petroleum industry. It is recognised however that the following agencies do exist and contribute in one way or the other to the running of the industry.
1. The Nigerian Content Development &Monitoring Board (NCDMB) whose Act came into effect in April 2011 and already undergoing some amendment, hence remain as is.
2. The Petroleum Technology Development Fund (PTDF) has responsibility for providing funds for human capacity development in the industry. A separate bill has been developed for this to institute appropriate legislative framework which was never in place.
A2.0 Institutions, Roles, Governance and Controls
In line with the proposed structure of the industry, mandates, deliverables and control mechanisms, in particular for the effective governance of the various institutions are clarified in greater detail in the Bill.
This narrative simply provides high level characteristics of each of the new institutions proposed in the Petroleum Industry (Governance & Institutional Reforms) Bill.
A2.1 The Minister
The Minister of Petroleum Resources will exercise general coordination powers and provide full diplomatic cover on all petroleum-related matters on behalf of the country.
Specifically, the Minister shall:-
a) be responsible for the determination, formulation and monitoring of Government policy for the petroleum industry in Nigeria;
b) exercise general coordination over the affairs and operations of the petroleum industry subject to the provisions of this Act;
c) report developments in the petroleum industry to the Federal Executive Council;
d) advise the Government on all matters pertaining to the petroleum industry;
e) represent Nigeria at meetings of international organisations that are primarily concerned with the petroleum industry;
f) negotiate and execute international petroleum treaties and agreements with other sovereign countries, international organizations and other similar bodies on behalf of the Government
g) promote the strategic interest of Nigeria in the global oil and gas industry.
The Minister will be empowered to source professional support on fixed term basis as needed without drawing resources from the Regulatory authority (e.g the DPR) or the National Oil Company (e.g. the NNPC) as currently is the case.
Consideration was given to creating a new institution within the Ministry to cater for this but was subsequently discarded as it does not fit with the civil service framework.
Funding of the office of the Minister shall be by appropriation by the National Assembly.
A2.2 The Petroleum Regulatory Commission
A single and one stop shop Petroleum Regulatory Commission is hereby proposed for the petroleum industry, consolidating such roles currently largely resident in the Department of Petroleum Resources (DPR), the Petroleum Products Pricing Regulatory Agency (PPPRA), and some environmental regulations driven by the National Oil Spill and Detection Agency (NOSDRA).
The core mandates of the Commission are as follows:-
a. promote the healthy, safe and efficient conduct of all petroleum operations;
b. promote the efficient, safe, effective and sustainable infrastructural development of the petroleum industry;
c. ensure compliance with all applicable laws and regulations governing the petroleum industry;
d. determine and ensure the implementation and maintenance of technical standards, codes and specifications applicable to the petroleum industry;
e. subject to the provisions of this Act, execute Government policies for the petroleum industry assigned to it by the Minister;
f. promote an enabling environment for investments in the petroleum industry;
g. ensure that regulations are fair and balanced for all classes of lessees, licensees, permit holders, consumers and other stakeholders; and
h. implement such other objectives as are consistent with the provisions of this Act.
In addition to the above and other roles detailed out in the bill, it shall:-
i. undertake and promote the exploration of the frontier basins of Nigeria.
j. develop exploration strategies and portfolio management for the exploration of unassigned frontier acreages in Nigeria;
k. identify opportunities and increase information about the petroleum resources base within all frontier acreages in Nigeria;
l. undertake studies, analyse and evaluate all unassigned frontier acreages in Nigeria.
Detailed tasks, responsibilities and deliverables are listed in the Bill.
A2.2.2 Governance & Controls
The size and powers of the Commission requires effective governance and controls to assure delivery as envisaged, in addition to reducing abuse to the absolute minimum.
At the same time, there is need to ensure maximum independence of the new Nigeria Petroleum Regulatory Commission and limit political interference in particular on technical decisions.
To this end, the Commission is proposed to be governed by a 9-man board comprised of politically autonomous individuals with proven integrity, relevant competencies and experience to effectively deliver on core functions.
a) a non-executive Chairman;
b) one non-executive Commissioner;
c) the Executive Vice Chairman, who shall also be the accounting officer of the Commission;
d) three Executive Commissioners;
e) a representative of the Ministry of Petroleum Resources who shall not be below the rank of Director;
f) a representative of the Ministry of Finance who shall not be below the rank of Director;
g) a representative of the Ministry of Environment who shall not be below the rank of Director;
All appointments shall be made by the President and confirmed by the Senate. It is expected that the Board will operate outside the 4-year electoral cycle to safeguard continuity.
The Board shall:-
a) be responsible for the general direction and supervision of the Commission;
b) oversee the operations of the Commission;
c) provide general guidelines for the carrying out of the functions of the Commission;
d) review and approve the business, strategic and operating plans of the Commission;
e) Consider and approve the budget of the Commission and monitor its performance;
f) Approve the audited and management accounts of the Commission and undertake consideration of the management letter from the external auditors;
g) determine the terms and conditions of service of employees of the Commission;
h) stipulate remuneration, allowances, benefits and pensions of staff and employees of the Commission in consultation with the National Salaries, Incomes and Wages Commission;
i) structure the Commission into such number of departments as it deems fit for the effective discharge of the functions of the Commission; and
j) carry out such other functions and undertake such other activities which in the opinion of the Board, are necessary to ensure the efficient and effective administration of the Commission in accordance with the provisions of this Act or as may be delegated to the Commission by the Minister.
The Commission shall ensure that all monies accruing from upstream leases, bonuses, lease renewal fees, assignment fees and concession rentals charged under any Act, enactment or any subsidiary legislation or regulation made pursuant to this Act are paid into the Federation Account.
However, the Commission shall establish and maintain a fund (‘the Fund’) from which all expenditures incurred by the Commission shall be defrayed. Such funds shall only be limited to the following sources:-
a) appropriation to the Commission from time to time by the National Assembly;
b) fees charged for services rendered to holders of licences, permits or other authorizations;
c) penalties and fines levied by the Commission
d) income derived from publications produced by the Commission and from reviews of environmental impact assessment reports and environmental evaluation reports and other related activities;
e) fees for services rendered to non-petroleum producing companies and service companies and for other services performed generally;
f) gifts, loans, grants-in-aid; and
g) fees charged for sale of data acquired by the Commission.
The Commission shall apply the proceeds of the Fund:-
a) to meet the administrative and operating costs of the Commission;
b) to provide for the payment of salaries, wages, fees or other remuneration or allowances, pensions and other retirement benefits payable to staff or employees of the Commission;
c) for the maintenance of property acquired by or vested in the Commission.
A2.3 The Commercial Entities
A major proposal in this bill is the commercialisation of the old NNPC by unbundling its assets, liabilities and businesses into two incorporated companies viz:-
a) the National Petroleum Company (NPC) which shall be an integrated oil and gas company operating as a fully commercial entity across the value chain.
b) the Nigeria Petroleum Assets Management Company which shall be responsible for the management of the Federation’s oil and gas investments in assets where government is not obligated to provide any funding.
Both companies will be incorporated within three months of passing this Bill into law.
It is expected that this unbundling will enhance the commercial focus, performance, transparency and accountability, as well as provide the necessary platform for a lasting solution to the perennial funding incapacity of the NNPC.
Why two companies?
A number of factors were taken into account in determining the appropriate approach for the restructuring of NNPC.
One major consideration was the need to create a financially sustainable entity with the ability to source independent (non-budgetary) funding for joint venture operations, which have suffered significantly from inadequate funding. In analysing the assets of the current NNPC, it was observed that some of them, in particular, those under the PSC do not require upfront funding. Therefore these assets are proposed to be warehoused in one entity – the Management Company, whilst the other assets would be held by the National Petroleum Company, which would be able to secure external funding outside of the budgetary system.
Some of the direct and immediate benefits of the break-up of the NNPC include the following:-
a) Smaller, manageable entities
b) Enhance focus on strategic interests as well as cost management
c) Minimise cross subsidisation
d) Enhance revenues to the Federation via distinct and disciplined collection processes
e) Robust liabilities management.
A2.3.1 The National Petroleum Company
A new limited liability National Petroleum Company initially wholly owned by the Nigerian Government will be established to operate as a world class commercial integrated and international entity.
The key mandates for the National Petroleum Company are as follows:-
a) to engage in the commercial business of finding, producing, refining, transporting, storage and marketing hydrocarbons in a profitable manner;
b) exploit hydrocarbon resources within and outside Nigeria;
c) purchase and market crude as well as its by-products.
A220.127.116.11 Governance and Controls
As a company incorporated under CAMA, most of the governance and control elements will be defined in the Articles of Association. At the time of its incorporation, the initial shares of the National Petroleum Company shall be held by the Ministry of Finance Incorporated and the Bureau for Public Enterprises on behalf of the Government.
It will have clear bottom line accountabilities, free of political interference and subject to full compensation.
Within a period of 6 years, up to 30% of the shares will be publicly offered on the Nigerian Stock Exchange. This partial privatization and public listing will hopefully instil and entrench world class corporate governance principles and discipline in the NPC’s business operations.
The company shall be governed by a Board comprising of solid individuals with proven integrity, relevant experience and competencies to effectively deliver its functions.
The Board shall be a 9-member mix of Executive and Non-Executive Directors as follows:-
a) a non-executive Chairman;
b) the Managing Director of the Petroleum Company;
c) 2 other Executive Directors of the Petroleum Company;
d) one non-Executive Director who is distinguished in petroleum management with at least 10 years experience in management position in a petroleum company;
e) 4 other non-Executive Directors.
The procedure for nomination and appointment are described in detail in the Bill.
At take off, it will be necessary for government to provide adequate capitalization for future operations. Thereafter, the NPC is expected to source all its funding similar to all other limited liability companies.
A18.104.22.168 Impact on Government Revenue
The formation of the National Petroleum Company will positively impact government revenue flows in the following ways:-
1 The annual JV cash call obligations (currently at about $5b per annum) will be eliminated. This fund can be channeled to the development of other sectors of the Nigerian economy.
2 There is currently an estimated $5-10bln funding shortfall per annum, due to government’s inability to fully fund its JV investment requirements. Removal of this constraint will enable more investment in JV operations, with the attendant increase in production and revenue. The increased production will lead to more revenue for government through higher royalty and tax receipts.
3 The equity crude currently received by government will no longer be available. However, the impact on government revenue stream will not be significant, as over 95% of government revenue is made from royalties and taxes.
4 The National Petroleum Company will pay dividends to the government out of its profits, similar to what currently obtains in NLNG.
A2.3.2 The National Petroleum Assets Management Company
A new limited liability entity known as the Nigeria Petroleum Assets Management Company shall be established and responsible for the management of the Federation’s oil and gas investments in assets where government is not obligated to provide any funding, investment capital or operating costs. It will be 100% State owned, ensuring maximum value realization for the Federation through rigorous management of the assets and investments vested to it.
Its core mandates will be to:-
a) manage the Federation’s petroleum assets and maximize returns on investment
b) negotiate and enter into new exploration and production agreements on behalf of the Federation
c) monitor costs as well as revenues of its businesses to ensure maximum returns to the Federation.
22.214.171.124 Governance & Controls
The company shall be governed through a Board comprising of solid individuals with proven integrity, relevant experience and competencies to effectively deliver its functions.
The Board shall be a 9-member mix of Executive and Non-Executive Directors as follows:-
f) a non-executive Chairman;
g) the Managing Director of the Management Company;
h) 2 other Executive Directors of the Management Company;
i) one non-Executive Director who is distinguished in petroleum management with at least 10 years experience in management position in a petroleum company;
j) 4 other non-Executive Directors.
The procedure for nomination and appointment are described in detail in the Bill.
Funding will be by Appropriation.
126.96.36.199 Impact on Government Revenue
The National Petroleum Assets Management Company (NPAMC) is designed to be a lean organization, with significantly lower cost than currently obtains in NNPC. Therefore, the funding requirement (through appropriation) will not be significant.
In addition, there will be direct revenue flow into the Federation Account from the investments held by NPAMC (such as the PSCs). This avoids the current scenario where the money first flows into NNPC and may potentially be used to defray costs of other business operations.
2.3.3 Repeals, Transitional and Savings Provisions
From the Effective Date of the Petroleum Industry (Governance and Institutional Reforms) Act, the NNPC Act, NNPC (Projects) Act and NNPC Amendment Act shall be deemed to be repealed on the date that the Minister signifies by legal notice in the Gazette that the assets and liabilities of NNPC are fully vested in successor entities.
And, within three months from the Effective Date, the Minister on the advice of the Commission, or NNPC as the case may be, may make any further transitional and savings provisions as are consistent with the transitional and savings provisions in this Act.