NIGERIA'S PIB: HUMPHREY ONYEUKWU RELOADED

Is Nigeria's long-awaited Petroleum Industry Bill (PIB) going to help or hinder investors? That was the question on the lips of many attendees at the 2010 CWC Gulf of Guinea Oil and Gas Conference held in London in late November.

As a group general manager with NNPC and a strong influence on some amendments to the proposed act, Dr Tim Okon, who delivered a presentation outlining the fiscal terms of the PIB, may have been the right person to provide some answers.  The PIB, he pointed out, was designed to deal with a number of issues, notably in the area of who gets what in financial terms.  For example in the current form of the PIB allowable deductions for Nigerian Hydrocarbons Tax (NHT) are simplified but, it seems, eligibility terms have been tightened; there is to be a proposed ‘capture’ of windfall profits on crude prices above US$70bn bbl; and it is proposed to substitute production allowances for what were previously cost-based incentives.

Lawyers and economists are no doubt examining these and the many other proposed terms of the act, even now. One such is Humphrey Onyeukwu, a lawyer with the Oil and Gas Practice Group of Aelex, Nigeria’s foremost commercial law firm, and President of The Lagos Oil Club. He has extensive experience in advising the upstream oil and gas industry on taxation, transaction structuring and business intelligence, which is likely to mean he will be kept busy both before and after the PIB is finalised.

So is Dr Okon right? Will the fiscal terms really act, to use his words “as the contractual balance between the financial objectives of government and the investor company”? Onyeukwu says: “It should be noted that the existing fiscal framework in Nigeria already has a high Nigerian take of 88 per cent for onshore and shallow onshore operations, which have, until the recent advent of deepwater production, been the main focus of production in Nigeria.” He agrees that this is one of the highest takes in the world but, he says “the parties have done business without complaint”. However, he adds, “The real innovation in the PIB is to improve the fiscal terms of the Production Sharing Contracts (PSC), which the industry agrees is at about 67 per cent to the government. The 67 per cent take coupled with all other incentives such as the capital investment allowances is too low compared to other centres of operations around the world such as Angola.”

He also notes with approval the introduction of the two-tier royalty regime referred to earlier, allowing the government to benefit when oil prices are above US$70 per barrel. “Therefore,” Onyeukwu says, “if the real objective of the operators is to make a decent return on investment, then the PIB fiscal reforms guarantee that while at the same time ensuring that the government takes due to Nigeria are consistent with comparable terrains around the world and the principle that government should benefit from any windfall accruing from higher prices. 

A preference for Nigerian goods and services is also built into the PIB through alignment with the National Content Act. Is the preference for Nigerian goods and services viable? It may be, but that is not necessarily the point, suggests Onyeukwu.

“It is important that we keep in view the main objective of the Nigerian Content Act as well as where the industry in Nigeria is coming from,” he says.

The objective of the law is to drive a progressive improvement in every aspect of the industry in terms of Nigerian participation, be it goods and services, manpower participation or local investment. “This is bearing in mind,” says Onyeukwu, “that Nigerian participation in the entire industry after about 60 years of operations is still at an absymal low of about 10 per cent.”

Nigeria does not necessarily have to wait until all the local requirements can be satisfied by the local market before enacting a law that sets Nigerian participation targets, he argues; the Nigerian Content Act is meant to be a catalyst to drive the emplacement of Nigerian content.

“Therefore,” says Onyeukwu, “the point [about the viability of local supply] is moot. The aim of the law is to ensure that where Nigerian goods and services are not available or inadequate, the stakeholders are to ensure that they are put in place or made adequate in order to meet the national aspirations of improved Nigerianisation.”

Particular emphasis on deepwater

Deepwater, as Onyeukwu has hinted, is a particular emphasis of the proposed act. Government revenues from deepwater exploration were described in the presentation as low. Hence, perhaps, proposals to establish a single fiscal system for all existing deepwater contracts. Another proposal is to consolidate for tax purposes all deepwater areas in order to encourage current operators to invest in the new blocks of 2000 and 2005 PSCs in which there is currently no production. It is also proposed in the PIB to establish a new and lower profit oil scale, which will apply on a field by field basis, so each field benefits from a low profit oil share to the concessionaire during the initial phase of production.

The proposed new deepwater terms are ‘internationally competitive’ Dr Okon’s presentation argued.

But there are also a number of issues with current gas fiscal terms that need to be addressed. A review of all production-sharing contracts and joint ventures revealed for example that the existing gas fiscal terms “subsidised gas production mainly targeted at exports, resulting in negative Government take”.

Similarly the terms did not capture windfall profits under high gas/condensate prices. A further downside, it was suggested, was that these terms encouraged inefficient producers and high production costs; placed too much emphasis on PPT and no focus on royalties especially for deepwater; lacked adequate cost control and accounting procedures; and did not make clear provisions for fiscalising deepwater gas.

Addressing the situation

Addressing this situation will probably mean allowing government take to rise (while remaining competitive, attendees were assured), making onshore and shallow water gas available for exports, and especially making terms attractive for deepwater developments for export gas. Production sharing terms for gas and condensates for deepwater (not previously the case) have been proposed.

One is bound to ask, however, why it has taken so long to do something about the gas question.

Onyeokwu says: “It is good that Nigeria has now mustered the political will and embarked on the right policies towards gas. I would rather say that it is therefore no longer too important why this has taken so long.” However, he adds, “we should not neglect the myriad reasons that have stymied gas policy in Nigeria, ranging from the restricted international markets for gas compared to oil, the investments required to monetise gas and the policy and regulatory inefficiencies in the Nigerian system for which Nigeria is quite infamous.”

He is upbeat about the prospects for gas following the expected passage of the PIB. “With the re-organisation of NNPC into a full fledged commercial entity, the de-coupling of policy/regulatory and commercial functions in NNPC, the Nigerian Gas Master Plan, imposition of a domestic gas obligation and appropriate domestic pricing mechanisms benchmarked through the Henry Hub [the pricing point for natural gas futures contracts traded on the New York Mercantile Exchange], there is no doubt that Nigeria is going to witness an unlocking of its huge potential in the area of gas development and utilisation.”

Good news indeed ― assuming the law takes effect as proposed. Or is there likely to be a lot more tinkering with the act? Nobody can say for certain, Onyeukwu says, but, he adds, “One thing is clear: Nigeria is now being called to make the right choices where the correct and appropriate road maps have being presented. Therefore it doesn’t matter what happens going forward; whatever tinkering may still happen can no longer derail the clear principles and objectives that have being so painstakingly laid down. I am optimistic that what would come out even if there are to be further changes would surpass our every expectation in the way that it would all be geared to ensure that the positive aspirations of the bill are achieved.”

As for what these aspirations are, overall, as Dr Okon sees it, the government’s aims are: the realisation of Nigeria’s economic potential, the development of national expertise, and broad control of overall activity. Investor companies by contrast look to a balanced risk and reward relationship, a stable political and fiscal environment and management of operations on a sound commercial basis.If the PIB,  described by Dr Okon as representing “a complete overhaul of the Nigerian Petroleum Fiscal System”, can successfully perform the balancing act implied by these objectives then it truly would be one of the crowning achievements of Nigeria’s petroleum industry lawmakers.

NUTSHELL:

Humphrey Onyeukwu is breaking grounds and is part of a new generation of Oil and Gas experts carving a niche for themselves within the Nigerian Oil and Gas industry; as such his voice is much sought after on issues such as fiscal and regulatory design of Oil and Gas arrangements. This article will be published in the next issue of Oil Review Africa and has been published in 'Sweet Crude'- an Oil and Gas regular feature in the Vanguard Newspaper- Nigeria, as well as on the CEMPLP Website (his alma mata). 


Now the world must watch with bated breath to see if this much anticipated and analysed, landmark piece of legislation will be passed before the current government (Federal & Legislative) in Nigeria hands over to a new administration. The risk is - if the PIB (Petroleum Industry Bill) is not passed before elections, chances are that the new Senate and Government may tear all this good work up and start all over again. Humphrey to the rescue?