Opinion: Thawing the ice of the petroleum industry

by Felix Ayanruoh

The draft Petroleum Industry Bill (PIB) recently approved by the Jonathan administration has been viewed by many as a catalyst for hydrocarbon industry reform. This development is certain to impact not just an aging legal regime, which excludes crucial aspects of the sector (such as natural gas production) but also the country’s partnerships in the global energy market.

Although Nigeria is Africa’s largest oil-producing state – with 187 trillion cubic feet of proven natural gas reserves, 37.2 billion barrels of proven oil reserves; and significant growth in deep-water production from new fields such as Total’s Akpo field – it remains one of the world’s most problematic hydrocarbon sectors. The alarming scope of the recent Otedola/ Lawan oil subsidy bribe scandal is sufficient testament for reform in this sector.

Heuristic analyses of the petroleum sector show that its poor performance has been a significant barrier to private investment in the country and to overall development and economic growth. The sector’s regulatory and market structure is dominated by Nigerian National Petroleum Corporation (NNPC), the state-owned oil and natural gas company. The dissatisfaction with the performance of NNPC – symptomized by corruption, decaying infrastructure, and inadequate refining capacity – has fuelled the debate on the theoretical and holistic overhaul of the oil and gas sector.

The PIB is intended to serve as the grundnorm of a legal framework for the Nigerian oil and natural gas industry. The bill, first proposed in 2008 and introduced in the Nigerian Senate on January 2009 (where it was later withdrawn) attempts to reform governance across the entire hydrocarbons sector. Its principal objectives are to:

• Enhance exploration of petroleum resources in Nigeria – including the development of natural gas production in conjunction with the Gas Master Plan 2008.

• Establish a progressive fiscal framework that encourages further investment in the petroleum industry while optimizing accruable revenues to the government.

• Establish a commercially oriented and profit-driven National Oil Company.

• Deregulate and liberalise the downstream petroleum sector.

The PIB would repeal existing motley assortment of disparate and almost labyrinthine body of oil- and gas-related legislation, dating back to the Hydrocarbon Oil Refineries Act No. 17 of 1965, the Petroleum Act of 1969; the various Nigerian National Petroleum Acts and related statues and decrees from 1977 through 2004; up to and including natural gas exploration laws such as the Gas Reinjection Act (CAP A25 Laws of the Federation 2004).

PIB mandates the unbundling of NNPC into several regulatory institutions which (in addition to the office of the Minister of Petroleum) will include The National Petroleum Directorate; The Nigerian Petroleum Inspectorate (Inspectorate); The National Frontier Exploration Service; The Petroleum Technology Development Fund; The Petroleum Host Community Fund; establishment of a new National Oil Company; a Nigeria Petroleum Assets Management Company.

Under the new law, the Inspectorate will be responsible for all regulatory functions, hitherto performed by various agencies. The National Oil Company would assume NNPC’s shares in existing joint ventures with international oil companies (IOCs) operating in the country. Six major joint ventures between the NNPC and the IOCs account for about 98 per cent of the production from Nigeria’s proven reserves. The NNPC holds a majority share of 60 per cent of each joint venture and serves no operational role. The new joint ventures with the National Oil Company will be financially autonomous entities able to secure their own funding directly from capital markets, thus relieving existing cash call pressures on the government.

The PIB will also allow government to renegotiate existing oil contracts, some of which were signed 10 or 20 years ago and which the government considers (rightly, in this author’s opinion) to be more favourable to the international oil companies. IOC’s with existing joint-venture and production-sharing contract licenses and leases would be required to reapply for their respective contracts within a year of the PIB’s passage. Under the new bill IOC’s will get better tax deal than before.

Notwithstanding its position as Africa’s largest oil producer with four domestic refineries, secure and consistent supply of refined petroleum products to meet demand requirement remains a problem. It is axiomatic that under the present dispensation, NNPC – the gate keeper for securing stable supply – actually colludes with independent marketers to create scarcity, which in turn has resulted in the development of a thriving black market for petroleum products. The reforms would deregulate the entire downstream petroleum sector and scrap the Petroleum Products Pricing Regulatory Agency (PPPRA) and its sister company, Petroleum Equalization Fund (PEF) through which oil marketing and trading companies committed the biggest subsidy and reimbursement scam in the history of the country. This should relieve the government of the burden of having to pay billions of dollars in subsidies to oil importers to ensure stable domestic supplies. Under the current regime, investors are reluctant to commit to refinery projects because they are simply not cost-effective. Reforms may be expected to create a climate of investor confidence and more measurable (and reasonable) rates of return on investment.

The reforms will also encourage growing local participation in the petroleum sector. The much-touted promotion of increased local content as a condition for the award of some oil licenses will be further strengthened by the bill. The proposed bill requires the federal government to promote “at all times” the use of indigenous companies, employees and locally produced goods and services in the industry.

The communities in which exploration and production are centred will also benefit. Under the new bill, oil producing communities will receive “10 per cent Profit Fund” for the development of the economic and social infrastructure of the petroleum producing communities. The profit fund will be derived from 10 per cent contributions from companies’ net profit. However, such communities risk losing their share to the Fund if they indulge, encourage or condone acts of vandalism, sabotage or civil unrest that cause damage to the upstream facilities situated in those communities.

Since the first oil well was drilled in Oloibiri in 1956, natural gas has been derived largely from associated fields or has been “flared” (burned off) rather than captured. This is as a result of the absence of a reliable legal regime, which has hindered the exploration and development of unassociated fields.    Recent economic expansion and power sector reforms have driven the demand for natural gas as a source of fuel for power generation. Presently, the pricing structure of natural gas in Nigeria has deterred investment in the capital-intensive supply infrastructure required to service the local electricity market, and as long as those structures remain in place, commercial opportunities in the Nigerian market will remain problematic. The PIB reforms will include wholesale and retail pricing provisions for electricity and other hydrocarbon products. The law will reopen natural gas licensing fields by separating oil and natural gas licensing as against the present structure that allows for joint rights for exploration and development. In addition, the PIB has provisions for a crude oil fiscal regime and the upliftment of the utilization of domestic gas through the establishment of a new National Gas Company, whose purpose will be to drive the Gas Master plan.

Even without the salutary lessons of the recent oil subsidy scandal, it is self-evident that no amount of legislation – however detailed, well intentioned or structured – can cure the ills of the petroleum sectors unless implemented fairly, transparently, and in the national interest. An aggressive elimination of graft is sine qua non. Corruption discourages private investment, retards growth and inhibits poverty reduction efforts. To advance the reform process towards its laudable objectives, it is the author’s opinion that it should be devoid of government’s capture. Additionally, a permanent, special unit of the EFCC should be established – dedicated to the petroleum and electricity power sectors, with independent powers of investigation, arrest, and prosecution in all instances of corruption in the sector, without recourse to the Ministry of Justice. Such a draconian approach is more than justified: after all, this sector is the lifeblood of the nation.

This piece was originally published in Guardian.

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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