Ijeoma Nwogwugwu: Time to stop toying with the PIB (1)

by Ijeoma Nwogwugwu

Nigeria's Minister of Petroleum Diezani Allison-Madueke speaks at a media briefing on a new gas price regime in the capital of Abuja

But as the legislators on both side of the divide bicker and employ delay tactics over what really are inconsequential issues that could easily be resolved, they have ignored the issues that have a greater impact on the Nigerian economy and its ability to attract investments into the sector.

For 13 years, the Petroleum Industry Bill has been on a very long, tortuous journey. Deriving its roots from the reforms initiated by the Oil and Gas Sector Reform Committee set up by the National Council on Privatisation in 2000 (which was succeeded by the Oil and Gas Implementation Committee), the bill has been through several alterations to suit the whims and caprices of those responsible for managing the nation’s hydrocarbon resources. It went through the legislative process in the 6th National Assembly without its passage into law, and is now in danger of passing through a similar fate in the 7th National Assembly.

One easy way of defining the PIB is to look at it as an amalgam of the Petroleum Act of 1969; the Petroleum Profits Tax Act; the Nigerian National Petroleum Corporation Act of 1990, as amended; the Deep Offshore and Inland Basin Production Sharing Contracts Act of 1999, as amended; the Oil Pipelines Act; the Petroleum Products Pricing Regulatory Agency Act; the Petroleum Technology Development Fund Act, and all other oil and gas industry legislations considered inadequate and outdated.

A much broader perspective is to view the bill as one that seeks to establish a new legal and regulatory framework for upstream and downstream oil and gas operations. It shall achieve this by maximising the nation’s economic rent from the oil and gas sector while not jeopardising investment and growth in the industry; separating and redefining the roles of the different public sector agencies operating within the industry; infusing strict commercial orientation into all aspects of the industry; increasing transparency, accountability and ensuring that processes are auditable; strengthening of regulatory and inspectorate institutions that promote transparency, safety and consumer rights; repositioning the Nigerian oil and gas industry in view of the contemporary challenges within the sector both globally and domestically; meeting the nations needs for fuels at a competitive price all times; maximising local content and the development of Nigerian capacity; and employing the industry as the engine and catalyst for diversification of the economy.
In a nutshell, the significance of the PIB cannot be down played. It is without contention the most significant legislation that has been presented to the Nigerian parliament under the current democratic dispensation. Only the Electric Power Sector Reform Act, 2005, comes close to the PIB in importance and impact.

Despite its importance, the PIB has suffered repeated delays and has been subjected to political gamesmanship by one section of the country or the other. On one side, legislators from the southern states, especially those representing the oil producing states, have pushed for its passage primarily because the bill provides for the establishment of a Petroleum Host Community Fund that shall coordinate conditional participation of host communities in the oil and gas sector. Through the host community fund, the architects of the PIB believe that by giving the host communities some ownership stake in the hydrocarbon resources produced in their backyards, this would serve as an incentive to enhance the security of oil and gas infrastructure in the Niger Delta.

But legislators, backed by their governors from the north, have kicked up a fuss against the host community fund. They argue that the oil producing states are already entitled to 13 per cent derivation from the Federation Account; have two intervention agencies – Niger Delta Development Commission and Ministry of Niger Delta – set up for the sole purpose of rolling out development projects in the region; and the Presidential Amnesty Programme set up to rehabilitate and reintegrate Niger Delta ex-militants who gave up their agitation for a greater share of the nation’s oil wealth.

The legislators from the north find it difficult to understand why despite the efforts to bend over backwards for the Niger Delta, in recognition of the region’s contribution to the nation’s wealth and the environmental damage caused by oil and gas exploration in the area, the Niger Delta remains impoverished. They are therefore not convinced that the host community fund would make much of a difference in terms of development and see it as a ruse to transfer more distributable resources to the oil producing states.
In return, they have demanded that the National Frontier Exploration Services Department, as contemplated by the PIB, be upgraded to a fully-fledged government agency for the sole purpose of promoting frontend data acquisition of hydrocarbons in hinterland Nigeria.

But as the legislators on both side of the divide bicker and employ delay tactics over what really are inconsequential issues that could easily be resolved, they have ignored the issues that have a greater impact on the Nigerian economy and its ability to attract investments into the sector. Since its initial presentation in 2008 to the federal legislature and its representation, albeit as a modified version in 2012, the PIB has been of great concern to the international oil companies (IOCs), which account for almost 90 per cent of the country’s oil and gas output.

Indeed, the oil majors, under the auspices of the Oil Producers Trade Section (OPTS) of the Lagos Chamber of Commerce and Industry, have instituted a powerful lobby against the PIB right from inception. Whilst in principle they all concur that reforms are necessary for the sector and that the national oil company – NNPC – must be restructured to a more efficient, commercially orientated company like its peers oversees, they have grave concerns over the new fiscal terms, which they say will significantly increase the government’s take and make Nigeria less competitive and thus unattractive as an investment destination relative to other oil producers on the continent and beyond.
The resultant impact of their position, coupled with the uncertainty caused by the delay in the passage of the PIB, is that the IOCs have significantly scaled down their investments in Nigeria, especially in deep water acreages, where risks and funding requirements are much higher. This is made worse by the fact that more than a dozen joint venture oil leases, which expired in 2008, have still not be renewed by the Ministry of Petroleum Resources; again, owing to the uncertainty caused by the PIB.

This in turn is impeding Nigeria’s goal to increase output to 4.0 million barrels per day and reserves to 40 billion barrels. A bigger danger is the impact this could have on the government’s revenue, as crude oil still accounts for 80 per cent of total revenue, notwithstanding efforts to diversify the economy.

A review of some of the contentious issues shows that IOCs are very dissatisfied with the new fiscal terms in the PIB. Specifically, presentations made by the OPTS in recent months highlight the Domestic Gas Supply Obligations (DGSOs) that would kick in with the passage of the PIB. The IOCs contend that whereas the government has set out bold objectives to optimise gas supply for power generation and industrial development, the country, the oil major maintain, is lacking in gas supply infrastructure linking upstream gas fields to the main domestic consumer regions. The gas supply industry is also characterised by relatively low domestic gas prices regulated at $0.1/mmBtu, recently rising to $1-1.5/mmBtu, the IOCs say.

Under the PIB, they add that the fiscal terms (comprising royalties, tax rate, allowances and tax credit) are much harsher than current terms and render majority of the new gas projects unviable, as they cannot guaranty a hurdle rate of 15 per cent. The hurdle rate for any investor is the minimum rate of return at which projects may be able to attract international capital funds.
Also, the oil companies say that the imposition of DGSOs without addressing key issues such as the infrastructure deficit and low pricing would not increase gas supply needed for power generation. They argue that most countries with DGSOs only use them in exceptional cases and do not restrict gas exports from liquefied natural gas projects as a penalty. To buttress their point, they claim that only Argentina imposes DSGOs and restricts gas exports as a penalty. The long and short, the IOCs believe that PIB gas fiscals would make the country’s gas sector extremely uncompetitive as the government’s take will increase from 75 per cent to 91 per cent, making it the highest among major gas producers like Nigeria.

On deep water acreages, the oil multinationals acknowledge that deep water production has contributed significantly to Nigeria’s oil growth, accounting for 40 per cent of liquids production. Despite the fact that deep water projects are technically and financially more challenging requiring humongous upfront investments, Nigeria between 1993 and 2011, the oil majors claim, has received 65 to 70 per cent of net revenue.

Governed by Production Sharing Contracts (PSCs), the deep water projects, the companies say, have gulped $46 billion as upfront investments during the 18-year period, from which the government has generated returns of $48 billion while the IOCs have generated $11 billion. This is one an assertion that even a lay investment analyst would find very difficult to swallow but will be dealt with in the second or third part of this article.

With the PIB, the oil companies hold the view that the fiscal terms for the deep water projects are unattractive. In their presentations, they contend that relative to other oil producing countries, and at an assumed production rate of 150,000 barrels per day and a price of $80 to $120 per barrel, the Nigerian government will be increasing its take from the current 70 to 96 per cent, making it the highest in the world.

The story is no different for the joint venture onshore and shallow water acreages, where the oil companies say declining production and aging infrastructure, coupled with rising oil theft and insecurity, requires increased investment to continue production. However, with the PIB, onshore and shallow production has been put at risk, as 30 per cent of production from currently planned projects, valued at $10 billion, will be deferred. Also, the government’s take under the PIB will go up marginally from 90 to 92 per cent. The only country with a higher government take than Nigeria for joint venture production will be Libya at 97 per cent.

Added to the fiscal concerns are non-fiscal concerns, which the oil majors would also want addressed. These cover licences and leases, contract sanctity, dispute resolution, and the transitional timelines and arrangements for the implementation of the PIB, among others.

Without doubt, the PIB, its weightiness aside, is also one of the most complex pieces of legislations ever to be debated in the annals of Nigeria’s legislature. It has the capacity to challenge the technical acuity of even the most experienced energy or oil and gas economist; much less our federal legislators who are more concerned with the perks of office and their constituency projects. Perhaps, for this reason, the legislators have preferred to focus on trifling issues while ignoring the substance of the PIB. Next week, this column will attempt to summarise the government’s position and/or response to the IOCs on the PIB, before drawing a conclusion on middle of the road measures that could fast track its passage.

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Read this article in the Thisday Newspapers

Op-ed pieces and contributions are the opinions of the writers only and do not represent the opinions of Y!/YNaija.

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