THE NIGERIAN PIB: Highlights from a BIG OIL Perspective!

PETROLEUM INDUSTRY BILL: THE NEW GRUNDNORM FOR NIGERIA’S OIL INDUSTRY 

By Mr. Zaid Kolawole

It has been referred to as “a most comprehensive piece of legislation creating a legal and regulatory framework that is 21st century compliant”. This was how the Petroleum Resources Minister, Rilwanu Lukman described the Petroleum Industry Bill (PIB) presently before the National Assembly.

The PIB is the result of the work of the Oil and Gas Sector Reform Implementation Committee which was inaugurated on April 24, 2000 under the chairmanship of Dr. Rilwanu Lukman, then serving as the Presidential Adviser on Petroleum and Energy and charged with the task of making recommendations for a far reaching restructuring of Nigeria’s oil and gas industry.

The need to bring the regulatory framework of Nigeria’s oil and gas industry up to speed with present day reality is self-evident. The Petroleum Act, which is the principal legislation for the industry was enacted in 1969, some 40 years ago.

The PIB aims at sweeping reforms of Nigeria's oil sector. Its main plank is to create new institutions to govern the operations of the industry; transform the existing joint ventures between the multinational oil companies and the Nigerian National Petroleum Corporation (NNPC) into Incorporated Joint Ventures (IJVs); turn the NNPC into a fully-capitalised and profitable National Oil company; institute a new fiscal regime that significantly increases government take; remove confidentiality in industry operations and fully deregulate the downstream sector.

The new agencies to be created under the PIB are:

1.        National Petroleum Directorate (NPD) to replace the Ministry of Petroleum Resources and would be solely devoted to policy formulation and securing maximum benefit of the industry for Nigeria.

1.        National Petroleum Inspectorate (NPI) to replace the Department of Petroleum Resources (DPR) and serve as technical regulator of the industry.

1.        Petroleum Products Regulatory Authority (PPRA) to serve as commercial regulator for the downstream sector.

1.        Nigeria Petroleum Assets Management Agency (NAPAMA) to replace NAPIMS and serve mainly as a cost regulator for the upstream sector managing the country’s investment in the industry by benchmarking to ensure that business is conducted in the most efficient manner.

1.        Nigerian Midstream Regulatory Agency (NIMIRA) to regulate midstream and gas operations.

1.        National Petroleum Research Centre to serve as a world class research institute with mini research centres dedicated to each of the production basins in Nigeria.

Many observers of the industry have characterised these agencies as old wine in new bottles and have questioned if a change of name translates to improved efficiency. Furthermore, with the incorporation of the existing JVs, the need for a NAPAMA as cost regulator is called into question as it is the function of the board and management of the respective IJVs to manage costs in order to be competitive.

Another major proposal of the PIB is the transformation of the existing Joint Ventures (JVs) between the multinational oil companies and the Nigerian National Petroleum Corporation (NNPC) into Incorporated Joint Ventures (IJVs) registered as limited liability companies under the laws of Nigeria. The ownership and staffing structure of the respective IJVs would mirror the present holding of parties in the existing JVs. The IJVs are expected to free the government of JV cash-call obligations as they would have to generate their own funds using their assets as security (where necessary).

It is said that the IJVs would be akin to the Nigeria Liquefied Natural Gas Limited (NLNG) structure. However, many are worried about staffing issues and political interference with a board that will be populated by government nominees (considering the average of 55% NNPC share in existing JVs).

Under the PIB, the NNPC is to be transformed from a government agency (cost centre) into a fully-capitalised and integrated National Oil Company driven by profit objectives (profit centre) to enable it compete with its peers worldwide. The new company to be known as National Petroleum Company of Nigeria (NPCN or NAPCON) will include all existing subsidiaries and departments of the NNPC with purely commercial functions. It will be governed by a board of directors under a non-executive chairman.

The NNPC will thus serve only as operator and no longer serve as both regulator and operator as NAPIMS and the Crude Oil Marketing Department will form the new National Petroleum Assets Management Agency (NAPAMA).

Since its establishment in 1977, the talk has always been for the NNPC to function like other successful state-owned oil companies such as Statoil (Norway), Petrobras (Brazil), Petronas (Malaysia), PDVSA (Venezuela), etc but political interference has always been the stumbling block. With the new NNPC or NPCN to be wholly-owned by government, the company may still be hamstrung.

Moreover, the provision that the new NNPC only pay dividends to government at year end as opposed to the present monthly payment into the federation account may require a constitutional amendment as the 1999 constitution did not envisage a dividend-paying NNPC. Section 162 of the Constitution provides that revenues accruing to government (which mainly is oil revenue) must be paid into the federation account and shared monthly amongst the three tiers of government.

Not unexpectedly, the proposal in the PIB which has attracted the most strident comments is that which deals with a new fiscal regime for the upstream sector of the industry. Government, believing that its take from the industry is small compared to other countries, wants to improve on tax collection. The PIB abolishes the Petroleum Profit Tax (PPT) and in its place introduces a Hydrocarbon Tax (a resource tax) payable on a company’s production and not profit; subjects oil companies to the payment of the Companies’ Income Tax (from which they are presently exempted); increases royalty rate based on the size of acreage; decouples oil from gas taxes as well as develops a system responsive to fluctuations in oil prices so as to capture any windfall profits. Every company involved in the upstream petroleum industry will under the bill, be subject to the same system of rents, royalties and taxes, depending however on whether they operate in the inland basins or onshore, shallow or deep offshore areas.

Virtually all oil companies, indigenous and multinational have raised alarm over some of the PIB provisions. While affirming their support for the proposed reforms, they fear that some of the provisions of the bill could thwart growth in the sector. They argue that many provisions in the bill "are unclear and open to multiple interpretations which would substantially increase investment risk, comparatively placing Nigeria at a disadvantage for inflow of foreign investment". The companies also believe that the new tax regime will decrease by half the capital investment in the sector in the next 10 years and new oil and gas production will be reduced by nearly 50 percent, with a high proportion of new projects becoming uneconomic. Government economic rents will thus decline in the long-term and overall economic growth will be affected.

The government will have to strike a balance between taking a significantly higher stake from industry operations and ensuring the sustainable growth of the industry to ensure that it can take anything at all.

The PIB is also crafted to eliminate confidentiality in industry operations. The texts of all licences, leases and contracts and any of the changes to such documents would no longer be confidential while payments to the government would be made public. This is intended to fight corruption and move Nigeria from being one of the most opaque oil-producing nations to one of the most open and transparent in the world.

Government’s resolve to fully deregulate the downstream sector of the industry is given legal teeth in the PIB. The government’s belief that Nigeria’s long term energy security is dependent on its ability to deliver petroleum products in the domestic market at cost reflective prices is the propeller for this. However, leaving product prices to market forces in an economy such as ours which is almost entirely dependent on petroleum products will cause tremendous social dislocation.

Additionally under the PIB, Oil Prospecting Licences (OPLs) and Oil Mining Leases (OMLs) will be renamed, Petroleum Prospecting Licences (PPLs) and Petroleum Mining Leases (PMLs) respectively which would only be granted by the Minister through a “truly competitive” bid process which would be open and accessible to all qualified companies. Further to this, the PIB separates oil and gas licenses and leases. Therefore, the holder of a PPL or PML can only explore for and mine either oil or gas and not both as presently obtains. Thus under the PIB we may have the curious possibility of two different operators in one field.

In brief, these are some of the main highlights of the very voluminous bill (over 200 pages). No doubt, the bill will continue to attract comments and opinions as it snakes its way through the legislative process.

Source: http://www.ng.total.com/06_total_nigeria_press/0607_10Aug2009_features_1.htm

NUTSHELL:

I was once asked what I thought about the Nigerian PIB (Petroleum Industry Bill) at a job interview. I responded that it depends on what side of the picture you are on. If I represent the Contractors, Big Oil and other companies in the Oil & Gas Private sector, I will think that the fiscal provisions are rather steep and will threaten investments in the Nigerian Oil and Gas sector. On the flip side, if I were a Government official, I would feel inclined to make the most of shifting risk to the contractors, maximizing my Government take and ensuring that the regulation of the industry takes a blissful turn from its rather chaotic state at present (assuming I am a positive force for change within the Government); yet again if I were a Nigerian citizen who lived in the creeks I would agitate for more than 10% derivation and stronger local content laws; if I were a Nigerian Oil and Gas professional I would wish that significantly more work is done within the local content laws to ensure that ALL POSSIBLE AVENUES to fill work vacancies with Nigerian citizens are explored before seeking such expertise from outside the country (THE UK IS ADEPT AT THIS TECHNIQUE); also if I were a local Exploration & Production company or Local Oil servicing firm, I would be angling to ensure that there is more local participation in engineering contracts, servicing contracts, more local operatorships and so on. Really, if you want to get an opinion on the Nigerian PIB, it depends on what side of the stakeholder balance the respondent is speaking from. The above article is just one of many stakeholder views. Kindly absorb it; indeed it is right- from a 'big oil' perspective. But know that the best decisions are taken from a holistically informed view point. Listen to all sides and then make your final judgement. BUT I think everyone agrees fundamentally that the PIB has been a long time coming!!!