Managing Expectations from PIA

There have been excitements and optimisms in many quarters since the signing of the Petroleum Industry Bill into law, with many of the commentators appearing to say that the PIA will do some magic and turn the Nigerian economy and the oil and gas industry around suddenly. However, some experts have called for caution and moderation of such high expectations as only the law cannot solve all the problems manifestly holding Nigeria’s economy and the oil and gas industry back for decades, Peter Uzoho reports

The Petroleum Industry Bill (PIB) recently signed into an Act by President Muhammadu Buhari has continued to elicit positive and negative reactions from the Nigerian public, particularly from oil and gas players, political leaders, oil producing communities, public policy analysts, and civil society groups, amongst others.

Commendations and applauses have continued to pour on those who played one role or the other towards achieving such historic feat. The federal government and those who see the Act as solution to the lack of investment in the Nigerian oil sector and the non optimisation of the oil and gas resources have been speaking optimistically about how those ugly scenarios would be kissed good bye in a matter of one year or two.

Intended Benefits

On August 16, 2021, President Buhari signed the Petroleum Industry Bill (PIB) into law, giving rise to what is now known as the Petroleum Industry Act (PIA). The presidential assent to the bill brought to an end the enactment process that had lasted for about 20 years. The assent was sequel to the earlier passage of the bill in July 2021 by both chambers of the National Assembly.

The Act seeks to provide legal, governance, regulatory and fiscal framework for operation and participation in the Nigerian oil and gas industry and development of host communities. Its major target was to boost foreign direct investments (FDIs) in the oil sector, create jobs, increase oil and gas explorations, increased revenue flow to the government, and bring other associated values to the Nigerian economy.

For the oil and gas industry in particular, the law seeks to bring clarity to the fiscal terms by removing legal and regulatory uncertainties that have held back the industry’s growth for decade.

It is aimed at encouraging high-level investments into the industry from existing and prospective investors and players.

The Act is also intended to ensure that companies playing in the upstream, midstream and downstream segments of the industry have attractive investment climate where they can operate and get commensurate returns on their investment. It equally ensures that host communities are well cater to.

The PIA now replaced the Petroleum Act of 1969, which had been described as obsolete and no longer relevant to the current realities in the global oil and gas industry.

However, the PIB in its 20 year sojourn with the National Assembly was enmeshed with controversies, arising from agitations from oil companies, the host communities, the government and even regions who were advancing their respective interests in the bill. The PIB witnessed four presidents -Presidents Olusegun Obasanjo, Umaru Musa Yar’adua (late), Goodluck Jonathan and Muhammadu Buhari. It also witnessed nine different sessions of the National Assembly before it was final passage and assented into law.

However, while the wide excitements, optimism and high expectations that are trailing the passage and signing of the PIB into law are yet to subside, there are signs that the pushbacks against some controversial provisions in the law may not go away any time soon.

This is owing to the controversies arising from the allocation of three per cent of oil companies’ operating expenditure for the preceding year to host communities while gifting 30 per cent of the Nigeria National Petroleum Corporation (NNPC)’s profit oil and gas to frontier explorations. This leaves the PIA implementation committee with the onerous task of embarking on a renewed stakeholder engagements, and harmonisation of contentious provisions in order to prevent or manage potential crisis that may rubbish all the achievements recorded so far.

PIA’s Key Provisions

The PIA seeks to provide legal, governance, regulatory and fiscal framework for the Nigerian petroleum industry and development of host communities, and contains five chapters, 319 sections and eight schedules.

The PIA prescribes the established the Nigerian Upstream Regulatory Commission saddled with the responsibility of ensuring technical and commercial regulation of the upstream petroleum operations.

It also prescribed the creation of the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDRA) responsible for the technical and commercial regulation of the midstream and downstream operations in Nigeria.

It scrapped the exiting regulators -the Department of Petroleum Resources (DPR), the Petroleum Products Pricing Regulatory Authority (PPPRA), and the Petroleum Equalisation Fund (PEF).

The PIA authorises the incorporation of a commercial and profit focused NNPC Limited under the Companies and Allied Matters Act (CAMA) within six months from commencement of the new law with ownership vested in the Ministry of Finance Incorporated (and Ministry of Petroleum Incorporated) on behalf of the Federation to take over assets, interests and liabilities of NNPC. This structure is expected to pave the way for eventually sale of shares to Nigerians.

It says NNPC Limited will earn 10 per cent of proceeds of the sale of profit oil and profit gas as management fee while 30 per cent will be remitted to Frontier Exploration Fund for the development of frontier acreages in addition to 10 per cent of rents on petroleum prospecting licences and mining leases.

The PIA also created the Host Community Trust, saying any company granted an oil prospecting licence or mining lease or an operating company on behalf of joint venture partners (settlor) is required to contribute three per cent (upstream companies) and two per cent (other companies) of its actual operating expenditure in the immediately preceding calendar year to the host communities development trust fund. This is in addition to the existing contribution of three per cent to the Niger Delta Development Commission (NDDC). The Fund is tax exempt and any contributions by a settlor is tax deductible.

It prescribes that the board of trustees and executive members of the management committee may include persons of high integrity and professional standing who may not necessarily come from any of the host communities.

It states that available funds are to be allocated 75 per cent for capital projects, 20 per cent as reserve and five per cent for administrative expenses. It says, however, a community will forfeit the cost of repairs in the event of vandalism, sabotage and other civil unrest causing damage to petroleum facilities or disruption of production activities.

Chapter 4 which deals on Fiscal framework, has the key objective to establish a progressive fiscal framework that encourages investment in the Nigerian petroleum industry, provides clarity, enhances revenues for the government while ensuring a fair return for investors.

It mandates the Federal Inland Revenue Service (FIRS) to collect Hydrocarbon Tax of 15 per cent – 30 per cent on profits from crude oil production, CIT at 30 per cent and Education Tax at two per cent, which will no longer be tax deductible. The Commission will collect rents, royalties, and production shares as applicable while the Authority will collect gas flare penalty from midstream operations. Late filing of tax returns will attract N10 million on the first day and N2 million for each subsequent day the failure continues. A N20 million fine is applicable to an offense where no penalty is prescribed.

Generally, according to the Act, expenses must be wholly, reasonably, exclusively and necessarily incurred to be tax deductible. However, a cost price ratio limit of 65 per cent of gross revenue is imposed for hydrocarbon tax deduction purposes, any excess cost incurred may be carried forward.

It prescribes that no tax deduction for head office costs while tax deduction of interest on monies borrowed is subject to the satisfaction of the commission that the fund was employed for upstream operations and the interest rates reflect market conditions. It prescribes that royalties are payable at the rates of 15 per cent for onshore areas, 12.5 per cent for shallow water, and 7.5 per cent for deep offshore and frontier basins, 2.5 – 5 per cent for natural gas.

In addition, the PIA stipulates that a price-based royalty ranging from 0 per cent – 10 per cent is payable to be credited to the Nigerian Sovereign Investment Authority.

It says gas utilisation incentive will apply to midstream petroleum operations and large-scale gas utilisation industries. An additional five-years tax holiday will be granted to investors in gas pipelines.

Managing Expectations

However, while excitements and optimisms continue to trail the PIA, there are those who feel that great inequity and partiality have been meted out to them because of certain controversial provisions in the law, as seen by the pushbacks from the Niger Delta communities and southern governors.

Some oil and gas and legal experts are wondering the rationale behind the wide expectation and the feeling that the El dorado has arrived by the coming on board of the Act. They are wondering what kind of magic the law would do to end the inefficiencies, corruption, mediocrity, injustice and several other ills of the Nigerian society, which have characterised and collapsed the nation’s oil and gas sector and the economy at large.

Rather than spend all the time expecting what the law has to offer, the experts are calling for caution and moderation in expectations. They believe that such law would only produce good result when the nation in itself has reformed and merit and competence take centre stage.

Speaking in Lagos recently at the maiden edition of the National Petroleum Day organised by Platform Petroleum Limited, the Co-Founder and Vice Chairman of Platform Petroleum, Mr. Austin Avuru, warned that the PIA would not do any magic to save the nation from its ugly state if there was no change in the nation

Avuru, who was honoured at the occasion with the launch of a book written in his honour, made his comments while giving a summary of the paper delivered by the guest lecturer and Managing Partner at Olaniwum Ajayi LP, Prof. Konyinsola Ajayi, advised Nigerians to expect less from the Act. The theme of the paper was, “Petroleum Industry Bill (PIB) and the Rest of Us.”

Noting that the Act would have to be interpreted in courts, he added that if the interpretation and implementation of the law falls in line with the usual injustice against the Nigerian oil and gas industry, Nigeria would end up chasing not only foreign investments out of the country but also local investments.

He said so many ills had derailed Nigeria’s economy and plunged the country into the unfortunate situation it is today, noting that some of those ills included poor governance at all levels of government, and the acceptance and celebration of mediocrity in the country.

He said those ills had resulted to the squandering of over $400 billion oil and gas proceeds since the last 60 years, noting that the guest lecturer was in his presentation managing the expectations of Nigerians from the PIA.

Avuru said, “I’m sure that everybody that saw the title of the lecture in the programme would have thought he would come here and dissect the PIA and explain all the sections of the PIA so that you leave here with the fullest understanding of the Petroleum Industry Act.

“But I tell you what he came to do. The title of his paper could have been ‘managing expectations’. It has taken 20 years, four presidents and nine sessions of the National Assembly to pass the Petroleum Industry Bill into an Act and expectedly, all Nigerians, on the day it was signed into law, had thought that El dorado has arrived, all our problems are hereby solved. And Prof. Ajayi is asking, after 60 years of the oil and gas industry with $400 billion earnings, why have the dividends of this great resource eluded us for 60 years?”

According to him, “Issues of poor governance across board, from local government to the federal level, mediocrity that has been entrenched, our ability as a nation to expect the best as our best, the ease with which we accept mediocrity and celebrate it. These are the core ills that brought us to where we are? These are the core ills that enabled us to squander $400 billion.”

He added that since 2001 till date, oil and gas companies operating in Nigeria had spent over $40 billion through the Niger Delta Development Commission (NDDC) and other channels, for the development of the oil producing Niger Delta communities, with no positive impact on those communities.

According to him, that $40 billion was more than the amount the Arabs used to transform Dubai into the center of attraction it is today.

“What he did not say that is there in his lecture: between the derivation proceeds, the proceeds to NDDC and funds spent by oil and gas companies in the communities in Niger Delta states since 2001. If you put them all together, is in excess of $40 billion. That’s more than what the Arabs spent to transform Dubai from a rural unknown place to what it is today, and yet, what do we see in the Niger Delta?,” he said.

“So, if we don’t address those ills and you think that the PIA is the solution, Prof. Ajayi has managed your expectations. Do not expect too much, that’s the summary of what Prof. has told us today… So, I will join Prof. Ajayi in managing your expectations. If we do not change as a nation, this law may just be as good as we have been in 60 years. Not much will come out of it.

Unfortunately, that is the message and that is my summary of what Prof. Ajayi has said today,” Avuru said.

He wondered why there was so much expectation from the Act that came after 20 years and not more than 30 years to the end of the glorious regime of oil and gas, adding that the law was coming at a time the world was transiting from fossil fuels and at a time the markets were in a hurry to write the obituary of fossil fuels and go into other things.

He said though the geologists know that fossil fuels would still be around and relevant in the next 30 years, their contribution in the energy basket may diminish from 82 per cent as it stands today to 30 per cent in 2050.

“I can tell you this as a geologist or as an oil and gas person. And 30 years from now is half of the 60 years during which we have exploited this resource and earned so much, “Avuru noted.
Earlier in his lecture, Ajayi called for caution and moderation on the expectations of Nigerians from the PIA, warning that the law would be meaningless if it could not impact on the life of the citizens.

In his posers, he asked whether the law took into consideration current realities, both locally and internationally and the problems facing Nigeria as a nation and tries to address them.

He also asked whether the PIA took into account the inefficiencies and mediocrity that had characterised the Nigerian oil and gas industry and made efforts to address them.

Ajayi however questioned the rationale behind allocating a paltry three per cent of oil companies’ operating expenditure to the oil producing communities while using the proceeds from their land to fund others.

He said, “The question is, does the PIA begin to peep into questions of climate change the way it should? Does it begin to peep into some of the major problems that surround our natural resources? Does it peep into our politics?

“Does it peep into the fact that the nature of our government, the centrality of things in Abuja has to do with money from this resource? Does it peep into the fact that a lot of our governors go to Abuja every month with a begging bowl? Does it peep into the inefficiencies and mediocrity that has characterised the industry for quite some time? And these are questions we need to ask ourselves.

“Because, you see, at the end of the day, the PIA is meaningless if it has no impact on the rest of us, and the rest of us are all of us, apart from those that sat down and designed this law and the man that sat behind the table and signed it.”

In a chat with THISDAY, Management Consultant and Oil and Gas Policy Advisor, Mr. Michael Faniran, called for the implementation of the Act according to the provisions, saying the potential values embedded in the new law would not be realised if the provisions were not well implemented.

Need for thorough Implementation

Faniran, who is the Outcome Lead for Industry Restructuring at the Facility for Oil Sector Transformation (FOSTER), a DFID-funded programme, said, “The PIB is not an end in itself but a means to an end. The signing of the Bill into an Act is the end of a journey and the beginning of another journey. The potential values embedded in the new law would not be realised if the provisions are not well implemented. What is required now is implementation. Passing a bill and signing into law is one part, implementing the the provisions of the law is another thing entirely. It is only from the implementation that we can derive the value of the law.”

He said the signing of the PIB into law represents a great milestone in the journey that took about 21 years, adding that though, the process of enactment took longer than necessary, the signing was one of the best things to happen to the Nigerian oil and gas industry in recent times.

According to him, “the new law is expected to jumpstart the needed reforms in the sector. Provisions in the law is expected to improve transparency in the petroleum sector, potentially lowering revenue losses due to inefficiencies and corruption. The new law with clear fiscal provisions is also expected to attract investment into the oil and gas sector, boost production with ultimate positive impact on Nigeria economy.”