Revisiting the Nigerian Petroleum Industry Bill

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Since 2008, there has been an effort in Nigeria to introduce a new Petroleum Industry Bill (PIB) to replace the existing collection of 16 laws and regulations. The Joint PIB was submitted in March 2020 and updated in September 2020, and the Federal Government of Nigeria (FGN) and the National Assembly (NASS) aim to pass the bill in the first quarter of 2021.

The PIB covers four key areas: Governance, Administration, Host Communities, and Fiscals. While the Petroleum Industry Governance focuses on the Restructuring of industry governance framework (e.g. Commercialisation of NNPC), the Administration focuses on Administration/ regulation of the industry (e.g. stipulates license/ lease requirements, terms, administration).

The Petroleum Host Communities Development aspect talks about the establishment and funding of Trusts for oil and gas Host Communities, while the Petroleum Fiscal framework focuses on introduction of new fiscal terms governing the industry (e.g. taxes, royalties, allowances).

The oil & gas industry (Industry) is the main pillar of Nigeria’s economy. The Industry contributed 65 per cent of all revenues for the Government of Nigeria and 88 per cent of Nigeria’s foreign exchange as of 2018.

Several enabled projects created job opportunities for over 600,000 Nigerians in the last decade, improving the conditions of many people. The Industry has shaped Nigeria into the largest oil producer in Africa and the 5th largest LNG producer in the world.

The desire is that the Nigerian oil and gas industry grows, however, growth requires capital and capital goes where it is competitive and investor confidence resides.

Capital available globally to the oil and gas industry is also decreasing because of increased focus on carbon management and renewables over the long term and independence from oil & gas.

Unlike historical cyclical trends where capital was temporarily redirected away from the sector during low commodity pricing but eventually returned when pricing recovers, the Industry is now seeing an increase in capital being redirected permanently away from the sector and unlikely to return.

2020 and the COVID-19 pandemic demonstrated this impact where commodity pricing for oil & gas will remain lower for longer due to global supply and demand competition.

Over the past several years, a shrinking oil & gas demand is now being further exacerbated by a larger pool of supply made possible through the technology boom.

The world (Africa in particular) is seeing new countries, previously unheard of in this sector, now emerge and be increasingly more effective to attract capital away from Nigeria.

Many countries dependent on oil & gas resources are also not remaining still by aggressively pursuing competitive reforms to see their own resources are developed sooner and in support of their policies of energy independency from foreign supply.

Analysts believe that the right PIB will provide an opportunity to position Nigeria to attract capital by addressing two principles. The first is keeping total government take (i.e. tax, royalty, and NNPC’s share of deep-water profit oil) at globally-competitive rates; and the second is reducing the cost-of-doing-business in Nigeria.

The Nigerian oil and gas industry continues to suffer the highest project and operating costs relative to the rest of the world. Industry studies show that in 2016, Nigeria costs for new projects was 69 per cent higher than the global average and operating costs were 42 per cent higher than the global average.

This is attributable to high security costs,significant administrative costs associated to overlapping government department oversight and duplicity of demands, approval delays, and the inability to allow Industry to optimise.

Additionally, the Industry has been increasingly burdened with a plethora of fees, taxes, and levies which amount to ~10 per cent cost increases.

A PIB which drives down the cost-of-doing businessalone would increase the pool of value available to both Industry and government such that even at lower government takes, government would realize higher incomes attributable to cutting waste and increasing growth by attracting capital.

However, industry watchers maintain that the current 2020 draft PIB does not improve the investment environment for new project FIDs to be taken.

As it is currently, government take on Nigeria’s pre-final investment decision Joint Venture (JV) oil projects is among the highest in the world. Also according to analysts, the PIB terms for Deepwater could lead to Nigeria foregoing over 30 per cent of its production potential in 2030.

Moreover, multiple issues along the gas value chain need to be addressed to maximize gas potential (e.gs. competitive gas terms, resolution of gas investment/revenue currency-mismatch, free market prices, infrastructure availability, adherence to contractual obligations, among others).

While analysts posit that the PIB does present several strengths which the Government should be commended for, they argue that as proposed, the bill does not improve Nigeria’s global competitiveness nor improve investor confidence.

Industry players recommend that the PIB should preserve base businesses, earned benefits, and contractual rights; percentage; ensure legislation which drives down Nigeria’s high cost premium, enable gas development by deregulating pricing, and simplify the tax system and administration to ensure clarity, and include a dispute resolution mechanism.