Nigeria’s Petroleum Industry Act (PIA) is coming into force after 20 years of stalemate and at a time the energy transition has become a dominant topic in the oil and gas ecosystem. Peter Uzoho examines what impact the new Act may have on the industry and the larger economy with growing rejection of fossil fuels by developed nations.
The PIA, now in the process of implementation or operationalisation, became an accepted legal document for the Nigerian oil and gas industry after its signing on August 16, 2021 by President Muhammadu Buhari barely one month after its passage by the National Assembly.
The Act is coming into effect after about 20 years of dilly-dallying due to the politics of interest that was played by several forces and stakeholders, which characterised its enactment process.
Overall, the PIA is summed up as a piece of legislation that seeks to govern the operations of the Nigerian oil and gas industry, from the administration and governance to fiscals, to host community issues, and other relevant provisions.
The Act, which has been described as a watershed, is expected to reposition the oil and gas industry in a way that entrenches sanity, attracts investments into the sector, increases exploration and production activities, and boost hydrocarbon resources utilisation.
Nigeria also expects through the Act to increase Foreign Direct Investment (FDIs) and earnings from oil and gas, create hundreds of thousands if not millions of jobs, and significantly raise the contributions of the oil and gas sector to the economy.
Nevertheless, Nigeria wants to diversify its economy away from oil and gas by leveraging the earnings from the sector to achieve that. The federal government has insisted that it wants to industrialise and develop the nation and pull the country out of under-development and poverty by using the nation’s abundant oil and gas resources, especially gas, as an enabler.
However, with the ensuing war against fossil fuels by climate change movements spearheaded by the developed and industrialised nations who control the world with their wealth, technology and power, all these lofty expectations from the PIA now need more than just talk shows to achieve. The challenge for Nigeria in this energy transition moment is indeed enormous and daunting.
WANING INVESTMENT
The Nigeria oil and gas industry is now facing one of its worst challenges as stakeholders from the developed and industrialised nations are shifting their financial assistance and commitments from fossil fuels towards renewable energy projects, with developing countries being their target beneficiaries.
At the just ended 26th United Nations Convention on Climate Change (COP26) in Glasgow, Scotland, they agreed to commit series of funds, including $100 billion to support climate change projects in developing countries, indicating their rejection of fossil fuels.
Experts believe the withdrawal of funding for fossil fuels projects will have dire consequences for Nigeria considering the inability of oil and gas operators in the country to access the kind of fund they need to undertake critical exploration and production projects.
Executive Secretary of the Nigerian Content Development and Monitoring Board (NCDMB), Mr. Simbi Wabote warned last week that the current pressure by Europe and industrialised nations for banks to stop financing oil and gas projects may soon get to a point where world technology companies will be pressured to halt the development of tools used for oil and gas exploration and exploitation.
He said European countries were at the forefront of the push for energy transition because the level of their hydrocarbon resources had plummeted and they are now looking for renewables as the alternative and trying to force every other country to join the fray.
In its Net Zero 2050 Report, the International Energy Agency (IEA) had called for an immediate halt of fossil fuels supply projects. Some of the major European banks have heeded the call by announcing a halt of financing of hydrocarbon-related projects as part of their support for de-carbonisation efforts.
Wabote said these pronouncements have direct and indirect implications on the global energy ecosystem, as nations, businesses, and individuals adjust to the shifting energy landscape.
“Why am I saying this? Now they have pressured the banks to stop funding hydrocarbon projects. Very soon, they will pressure all the technology companies to stop developing tools required for the exploration and exploitation of hydrocarbon if Africa doesn’t wake up, “he said.
He maintained that the pullback of investment on hydrocarbon development project was a challenge for oil producing countries such as Nigeria.
Managing Director, Newcross Petroleum Limited, Mr Victor Sodje, said the next decade of oil and gas business was going to be very challenging for those who had not positioned themselves strategically.
Sodje said the challenges range from funding limitations by most international banks; geo-political challenges which impact “fiscalised” volumes and the anticipated limited non-African demand for Nigeria’s crude oil.
“However, with over 50 per cent of our national budget being funded by fossil fuel, we as a country will face significant challenges and deficits if we don’t all take the challenge as a holistic national call for service to improve the nation’s revenue resource,” he said.
Sodje said the declaration on the “Decade of Gas’’ was an opportunity to optimise the nation’s gas derivatives and deepen its market participation via infrastructure development and diversify into petrochemical products.
He added that the policy would increase Liquefied Petroleum Gas (LPG) penetration enhanced by the elimination of gas flaring.
IOCs PLAN EXIT
Another challenge before the PIA is the looming exit of the international oil companies (IOCs), the likes of Shell, TotalEnergies, Eni/Agip, Chevron, and ExxonMobil.
Although, not all of them have openly indicated their plan to divest out of the country, they have at many times raised concerns on the challenges they face in their course of operations in the country owing to the unfavourable investment climate.
Specifically, the oil majors, which control the largest chunk of the nation’s oil and gas assets, have been complaining of high rate of crude theft, vandalism and sabotage of their assets, multiple taxes and levies, as well as too many litigations against them.
For instance, Shell is currently in discussion with the federal government to sell off its onshore and shallow water assets, saying it would no longer continue to suffer operational risks that are not caused by them.
Some of them are now restructuring their investments and portfolios and aligning them to fit into the emerging energy mix dominated by more efficient and cleaner energy systems as in renewables.
The divestment of the IOCs, according to the Managing Partner of ENR Advisory, Mr. Gbite Adeniji, will impact Nigeria significantly.
Adeniji said: “Now, I’m clear that if our IOC partners exit, it will impact Nigeria significantly. One thing is clear. Our IOC partners are leaving the shore, onshore, and shallow water businesses.
“Now, if they do leave, the question should be, where is the money going to come from to fund those assets. Does the NNPC have the money, no. the PIA says NNPC shall not have recourse to public funds.
“The question is, how is the new NNPC going to be configured to attract money? Or, how are the new comers going to raise money? Who are the new comes by the way?”
He said the current situation calls for urgent action, given that petroleum revenue is what sustains Nigeria and expressed worry about the transition, warning that it could lead to Nigeria having its huge hydrocarbon assets stranded.
Nigeria, He said, needs to urgently de-risk the economy before 2035 when fossil fuel demand would drop by some percentage.
Noting that the Nigerian political system is distracted, Adeniji stated that there is the possibility that Nigeria may not be able to urgently de-risk the sector or even the economy.
He further warned that the failure of the government to de-risk the oil and gas sector and diversify the economy as urgently as the current situation demanded would plunge Nigeria into massive economic crisis.
“We will not have enough money to pay our debt obligations. We will not even have enough revenues to make basic governance in the country. Poverty will magnify in this country and there will be social unrest.
“This is the doomsday scenario and its not an impossible scenario. So, that’s what we really need to be conscious about now,” he said
PROVIDING INVESTMENT INCENTIVES
However, to attract the badly needed investments into the Nigerian oil and gas industry at this time of anti-fossil fuels pressure, Partner, Tax, Ernst & Young, Mr. Temitope Samagbeyi, harped on the need for government to consider introducing tax incentives for the players.
“Are the tax incentives enough to attract investments foreign direct investment? There is a need for the re-introduction of incentives and the removal of disincentives in the Nigerian oil and gas industry.
“To attract investments into the sector, government must look at introducing tax incentives such as tax deferrals, reduced tax, privilege zones, exemptions, allowances, credits, duty exemptions, etc,” Samagbeyi said.
He said that rather than relax and continue to dwell in the euphoria of having the PIA in place, all stakeholders must now rise and collaborate to find ways to harness the benefits of the Act.
He added that the lack of such law to reshape the sector for many years, had led to massive drop in investments and capital flight.
Samagbeyi argued that only about 4 per cent of the total investments that came into Africa’s oil and gas sector in the past decades came to Nigeria owing to the lack of clarity in the governance framework as well as unfavourable fiscal terms.
“Nothing stops us from commanding well over 50 per cent. But because of policy summersaults and implementation that is not geared towards achieving the set goals have pushed all those investments away.
“We need to ask questions as to the appropriateness or otherwise of the incentives that we have in our oil and gas sector,” Samagbeyi added.
DEREGULATION CHALLENGE
Deregulation whether in the area of petrol marketing and the upstream gas has been a major issue in the Nigerian oil and gas industry. Government spends huge amount of the tax payers money subsiding petrol imported into the country.
Although, the PIA has provided for the deregulation of the downstream sector of the petroleum industry but the government has said deregulation will not take place until the second half of 2022 when Dangote refinery must have come on stream.
Industry experts believe that government’s position will not help the industry and the economy especially now that fossil fuel is being challenged by energy transition.
They said it would serve the country better if the government follows the prescription of the law and deregulate petrol marketing now.
Managing Director of 11Plc (formerly Mobil) and immediate-past Chairman of Major Oil Marketers Association of Nigeria (MOMAN), Mr. Tunji Oyebanji, said Nigeria borrows to subsidise petrol, describing it as unsustainable.
According to him: “There is stifled growth and unemployment with the enhancement of fraud and corruption in a situation where other players cannot be involved in the process of supply of major products but determined by few that can easily be compromised with pressure from unscrupulous operators within the system.”
In addition, Oyebanji lamented the degradation of infrastructure in the industry, including decayed pipelines and dwindling industry expertise as companies are closed and a number of technical experts are reduced leading to poor quality of production services.
