by Ijeoma Nwogwugwu

The PIB can no longer be delayed. The oil companies must stop pussyfooting and tell the government what exactly they want. It is not enough to say the PIB, as presently constituted, will deter investment. Nigeria’s objective is very clear: It intends to maximise the nation’s economic rent from the oil and gas sector while not jeopardising investment and growth in the industry.

Read: Time to stop toying with the PIB bill (Pt.1)

Read: Time to stop toying with the PIB bill (Pt.2)

Since I started the serialisation, two weeks ago, on the Petroleum Industry Bill (PIB), I have been bombarded with reactions, sometimes from the most unexpected quarters such as the diplomatic community. From the international oil companies and energy/financial advisory firms – the latter, often working hand-in-hand with the oil majors – I have been given information overload. It’s been difficult keeping pace with the data I have been sent in the last two weeks and would require more time to completely absorb the charts, tables and presentations for and against the bill.
On the part of government, comprising the legislature, which is expected to pass the bill but has been completely distracted by the politics of 2015; and Ministry of Petroleum Resources, which should be championing the bill, there’s been absolute silence. Credit, nonetheless, must be given to Mr. Abiye Membere, Group Executive Director, Exploration and Production of the Nigerian National Petroleum Corporation (NNPC), who in his capacity as the government’s Implementation Team Leader on the PIB, did his bit in the last few days to argue the government’s case.

In summary, the overriding theme from much of what was sent by the IOCs and energy/financial advisories, is that whilst the PIB is necessary for oil and gas industry reforms, the proposed fiscals in the legislations would make Nigeria an unattractive investment destination. KPMG, a global audit, tax and professional services advisory, in a recent presentation at the American Business Roundtable breakfast session, warned that Nigeria is performing woefully on increasing sustainable revenue generation from its hydrocarbon resources.

The firm pointed out that Nigeria finds itself in a vicious cycle from which it must extricate itself through a new legal, fiscal and regulatory regime via the PIB. Using 2012 to illustrate its case, KPMG said the uncertainty caused by the non-passage of the PIB led to the underfunding of joint venture operations (JVs), which account for up to 60 per cent of Nigeria’s crude oil output, This in turn resulted in a drop in crude oil production to 2.1 million barrels per day (mb/d), on average, 400,000b/d lower than the federal government’s budget of 2.5mb/d. The knock-on effect was a reduction in government revenue in 2012, increased borrowing and a subsequent rise in debt payments. With increased crude oil theft in 2013, I don’t expect the verdict to be any different.
KPMG went further to caution that in sub-Saharan Africa alone, crude oil discoveries are being made in several countries. It predicted that by 2015, discoveries would have been made in Mauritania, Mali, Senegal, Guinea Bissau, Togo and Liberia (predominantly in the Gulf of Guinea), alongside oil production from Angola, Ghana, Mozambique, Kenya, Tanzania, Cote d’Ivoire, South Sudan and Chad. With increased competition on the continent, will the PIB position Nigeria as the preferred investment destination, the firm queried.
To be frank, KPMG’s presentation did not deviate significantly from what the oil majors have been saying since the first PIB and its modified version were presented to the National Assembly in 2008 and 2012 respectively. But what I found glaringly missing in KPMG’s presentation, as well as those from the IOCs, was a counter-proposal on what they think the new fiscals should be in the proposed legislation.

When I made enquiries from the oil majors why a counter-offer or a willingness to negotiate the fiscals contained in the PIB had not been initiated with the federal government, what I was sent was a document titled OPTS Memorandum on the Petroleum Industry Bill. Curiously, this 58-page document produced in July 2013, failed to be specific on a counter-proposal for the fiscal terms. At best, all it did was to highlight what obtains in other oil producing countries, even went as far as proposing amendments to the non-fiscal considerations in the PIB, but refused to make a counter-offer/amendments on the fiscals, which is the main determinant on whether they shall remain in Nigeria or not.
On Membere’s part, he said his team, at various workshops, had invited the oil majors to submit alternative proposals for the government’s consideration, so that they could find a middle of the road solution on the bill. But the oil companies have remained unyielding, insisting that the fiscal terms must remain unchanged. This, in my opinion, is an untenable position on the part of the oil companies.

A review of the 1993 Production Sharing Contracts (PSCs), which cover the frontier deep offshore acreages, shows that oil produced under the 1993 PSCs attracted no royalties. The royalty rate was left at zero in order to attract investments in the frontier deep offshore basin at a time the price of oil was below $20 per barrel. In fact, the Deep Offshore and Inland Basin Production Sharing Contracts Act, which was enacted around the time and amended in 1999, only made a provision for the Minister of Petroleum Resources to review the royalty rate charged on deep water acreages from time to time. However, no minister since 1993, not even Odein Ajumogobia, a lawyer, who was Minister of State for Petroleum Resources between 2007 and 2010, has deemed it necessary to review the royalties applicable to the 1993 PSCs. Yet with the price of oil currently at well over $100 per barrel, the IOCs preference is for Nigeria not to apply royalties on oil produced from deep water acreages. This is simply unacceptable.

As indicated in the second part of this article, royalties as proposed in the PIB, will be determined by output and the price of oil and gas, based on a self-adjusting rate when the price of oil is higher than $50 per barrel and the price of natural gas exceeds $2 per mmBtu. This, in the government’s estimation, is a fair deal and takes into consideration smaller oil firms with a maximum output of 25,000b/d. Accordingly, what would be expected of the oil companies with concerns over the government’s proposition on royalties and other fiscals is to negotiate them, but certainly not reject them.

But even if we were to cast the fiscals in the proposed legislation aside, one critical issue that has been ignored by both sides – the oil companies and government – has been the industry’s cost structure as well as its contracting processes. Investigations have shown that the cost of doing business in the Nigerian oil and gas sector is 40 per cent, at the minimum, higher than in other oil producing countries. The primary reason being, oil companies have been escalating costs and the National Petroleum Investment Management Services (NAPIMS) Department of NNPC has been inefficient at reining them in. NAPIMS is under the Exploration and Production Directorate of NNPC headed by Membere, and has oversight responsibility for the government’s investments in the JVs, PSCs and Service Contracts (SCs).

To be fair, it could be argued that the time it takes to approve a major contract in Nigeria’s oil and gas sector is four to six times higher than that of its peers (an average of 36 months), leading to unending contract and cost variations. But what has not been acknowledged is that there is constant collusion on the part of the oil companies, which leads to single-contract sourcing from companies either affiliated to the oil majors or with ties to them.

This is made worse by the fact that the oil majors have refused to use common facilities (or what the ICT industry terms infrastructure collocation) for contiguous oil acreages. The result is that for deep water projects, that are technically and financially more challenging, what we have are floating production, storage and offloading vessels (FPSOs) and other facilities costing several millions of dollars to fabricate, for every deep offshore oil block. However, if these facilities were clustered in acreages that are contiguous, this would go a long way in cutting costs.

The irony is that an electronic medium for tenders in the oil and gas sector does exist. The Nigerian Petroleum Exchange (NIPEX), which is jointly funded by the IOCs and NNPC, was set up to provide for the standardisation of contracts and tenders. Through NIPEX, industry collusion and the time within which a contract is tendered is supposed to be significantly reduced. But NNPC and the oil majors have largely ignored the platform, because it has paid them handsomely to keep costs high.

Fortunately, these are some of issues the PIB seeks to address. By cutting costs, most of the IOCs’ concerns with the fiscals would be addressed. After all, there is no denying the fact that profits and a company’s rate of return are also a function of its overheads and operating costs. Where costs are kept high, profits are reduced. The reverse is the case when costs are kept low.
The PIB can no longer be delayed. The oil companies must stop pussyfooting and tell the government what exactly they want. It is not enough to say the PIB, as presently constituted, will deter investment. Nigeria’s objective is very clear: It intends to maximise the nation’s economic rent from the oil and gas sector while not jeopardising investment and growth in the industry. It intends to achieve this through revised fiscals and non-fiscals. Where they have issues with what has been proposed, the oil companies should offer alternatives and not remain adamant on keeping the fiscals unchanged.

In the same breadth, the Minister of Petroleum Resources, Mrs. Diezani Alison-Madueke, NNPC and other industry stakeholders need to push harder for the bill’s passage. A lot more advocacy and lobbying must be done to force the legislation through, as the continuing uncertainty over the bill is costing the country billions.
A step has been taken in the right direction by agreeing to amend the section that deals with the Petroleum Host Community Fund (PHCF) to include all sections of the country that host oil and gas infrastructure as beneficiaries of the fund. What this means is that the northern and southern sections of the country would stand to benefit from the PHCF.

But a lot more tweaking of the legislation needs to be done to allay concerns over the discretionary power given to the president in the bill to award oil licences as the president deems fit. This must also include empowering the government agency responsible for the privatisation of public enterprises to oversee the privatisation of NNPC’s subsidiaries that have been slated for transfer to the private sector, as this would eliminate the conflict of interest that could arise if NNPC and the petroleum ministry handle such a venture themselves.

Another concern arises from the lack of transition arrangements for the industry reforms envisaged by the PIB. These must be spelt clearly, like they were in the Electric Power Sector Reform Act, so that there is no room for ambiguity and would provide a roadmap for those responsible for implementing the reforms.

The above flaws in the PIB (and they are several) suggest that the bill is anything but perfect. Indeed, there are even those who have argued that one of the PIB’s primary set backs is that it is unwieldy and should be broken into three or four bills, for ease of legislation. On this, I beg to disagree.

The PIB is an omnibus legislation that seeks to consolidate and update16 obsolete legislations. If passed as one consolidated Act, it will achieve a critical government policy that this writer has been advocating for a very long time – reducing the cost of governance. As it stands, there are 16 legislations that provide the legal and regulatory framework for oil and gas operations in the country. Most of the legislations not only contain conflicting clauses, they also provide for the establishment of too many agencies in the sector that are either working at cross-purposes, engaged in turf wars or falling over each other. The PIB will put a stop to all these and a lot more.

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