One departure from the past in the Petroleum Industry Bill (PIB) is the proposal to commercialise the state-run Nigerian National Petroleum Corporation.
While commercialising the NNPC might seem like a bold move by the government, it still should not come as a surprise.
With the Nigerian government seeking efficient ways of positioning the country on its path to recovery, the petroleum industry which contributes about 90 percent of its foreign exchange earnings would undoubtedly be critical on this journey.
The long-awaited PIB, which seeks to regulate the entire Nigerian petroleum industry and repeal a host of existing legislation, is paramount in transforming the industry and introducing more efficiency, particularly in its government-owned parastatals.
On September 28, 2020, President Muhammadu Buhari presented a reworked PIB to the National Assembly for consideration and passage, after over two decades of delay in the legislative review process.
Intended as a complete overhaul of the Nigerian oil and gas sector, the Bill seeks to introduce pertinent changes to the governance, administrative, regulatory, and fiscal framework of the Nigerian oil and gas industry.
This is to ensure an increased level of transparency and accountability. It will strengthen the governing institutions, and attract investment capital, among other objectives.
It also seeks to safeguard the long-term macroeconomic stability of the country, reform the extractive industry’s institutional framework, and provide better clarity for Nigeria and its partners, thereby entrenching a domestic gas to power market, as well as increasing oil and gas production, whilst protecting the environment.
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The PIB has gained more traction in the current administration and is now awaiting deliberations by legislators.
The Nigerian oil and gas industry, which is the mainstay of the country’s economy, was still largely governed by the Petroleum Act, and the Petroleum Profit Tax (PPT) Act, enacted in 1969 and 1959 respectively.
Since these laws were ratified, the global oil and gas industry has undergone significant changes, from investment, governance, and fiscal perspectives. Although certain obsolete aspects of the Acts were amended, their inadequacies have led to community unrests, increased uncertainty which affects the flow of desired investments into the sector, inefficiencies plaguing the sector, the state-owned oil giant’s (NNPC) budget shortfalls, and so on.
The emergence of the Bill was a result of the fallout of the activities of the Oil and Gas Reform Implementation Committee which was inaugurated on April 24, 2000, under the chairmanship of the then-presidential adviser on Petroleum and Energy, Rilwan Lukman.
The body was charged with the responsibility of making recommendations for the extensive and holistic restructuring of Nigeria’s oil and gas industry.
The eventual report that came from the committee formed the basis of the first PIB that was submitted in 2008 as an Executive Bill under the administration of Late President Umaru Musa Yar’Adua.
Since then, the Bill has faced numerous crises and hit several roadblocks as different vested interests try to push their different agendas.
Having gone through several revisions, a new version of the bill was presented to the seventh session of the National Assembly under President Goodluck Jonathan’s administration and subsequently, the legislature under the current administration of President Muhammadu Buhari.
In order to make it more manageable to legislate on, the Bill was structured into four major components namely: the Petroleum Industry Governance Bill (PIOB), Petroleum Industry Administration Bill (PIAB), Petroleum Industry Fiscal Bill (PIFB), and Petroleum Host Community Bill (PHCB).
Today, the key highlight of the PIB essentially focuses on the taxation of oil companies, the creation of community funds for oil-producing communities, and the commercialisation of the State-run behemoth, Nigerian National Petroleum Corporation (NNPC).
This move would see the NNPC incorporated as a Limited Liability Company and be known as NNPC Limited. This company would conduct its affairs on a commercial basis without resorting to using government funds.
The Petroleum Industry Governance Bill (PIGB), which was passed by the eighth session of the National Assembly, could not get presidential assent and was thereafter returned to the legislature for further revision.
The latest version of the Bill, which is now before the ninth session of the National Assembly for consideration and passage, seeks to replace the Nigeria National Petroleum Commission (NNPC) with NNPC Limited, create separate regulatory agencies for upstream, midstream, and downstream operations, as well as reduce the royalty from 10 percent to 7.50 percent for offshore fields producing not more than 15,000 barrels per day.
It also increases the benchmark threshold of crude oil price for charging royalty from $35 per barrel to $50 per barrel and makes gas flaring penalties non-tax deductible in order to discourage the practice.
Owing to the fall in crude oil prices from over $100/barrel to below $50/barrel levels in 2020 due to the pandemic, Nigeria’s exciting story with crude oil slowed down but has picked up in recent months.
The country’s heavy dependence on the volatile crude oil market and its ineptitude in diversifying during its “oil-rich” days has now thrown the economic growth story into jeopardy. The once 3rd-fastest growing economy with foreign reserves in excess of $40bn now wallows in rising inflation complemented and a weakened currency.
Olusegun Elemo, a public finance and policy analyst in a policy dialogue centred on the 2019 Audited Financial Statement of NNPC which held on Tuesday 23rd March 2021 stated that “the idea of pumping $1.50 billion into the rehabilitation of the Port-Harcourt refinery seems far-fetched as the operating cost of N25.20 billion in 2019 generated nothing, thus pumping in more funds into such a project would continue taking more from us than it generates even in another 24 months.”
Why commercialising the NNPC makes economic sense
A core theme with a number of government-owned parastatals is the plague of inefficiency and obscurity in the way they are run.
To give an idea of NNPC’s lack of transparency, the corporation only published the group’s audited financial statements for the first time in its 43 years of operation in 2020.
The corporation reported a recurring loss, albeit 70 percent lower in 2019. The significant reduction in losses may prove the government’s will in improving the operations of the NNPC.
However, comments on the report noted that “material uncertainty exists that may cast significant doubt on the Group and Corporation’s ability to continue as a going concern.”
NNPC experienced a drastic reduction in loss of revenue as the statement shows that NNPC reduced its loss by 99.70 percent – from N803 billion in 2018 to N1.70 billion in 2019 – indicating a significant increase in profits from its subsidiaries between 2018 and 2019.
During the examination of the transcript prepared by the Office of the Accountant General of the Federation, it was observed that a monthly refund of N6.33bn was made by NNPC from January to December 2015 to the Federal Government totalling N75.96bn from an outstanding balance of N170.92bn as of 31st December 2014 leaving a balance of N94.96bn as at 31st December 2015. NNPC was expected to refund a total of N450bn to the Federation Account. So far, approximately, the sum of N356bn had been refunded.
Moving down to the state-owned refineries with a combined capacity of 445,000 barrels per day (bpd), capacity utilisation well below 20 percent, and recurring annual losses in excess of N150bn, we can agree that the condition of these refineries is utterly worrisome.
Despite the government’s annual budget for Turn Around Maintenance (TAM) of these refineries, they have now been shut down with plans to undergo a Build, Operate, and Transfer (BOT) model.
“Chief among NNPC’s problems is corruption,” Olusegun said. A number of investigative reports have explained how subsidy payments, domestic crude allocation, revenue retention practices, and oil-for-product swap agreements are smeared with corruption. The Senate has initiated countless probes and new management seeking transparency has been introduced by the President, however, it just seems like the rot has eaten too deep into the system. In the light of this fact, the pertinent question thus becomes.
Why commercialising NNPC is important
The government-managed NNPC has proved to be inefficient and riddled with corruption.
A commercialised NNPC with more committed employees would mean better accountability and transparency in its operations.
The possible introduction of more shareholders would strengthen the amount of funding available to the NNPC and further shift the burden of being the sole-financier away from the government.
In conclusion, the recurring performance of the corporation with several corruption allegations, inefficiency, and lack of clarity is indeed worrisome.
It is time to have the NNPC turn over a new leaf and operate on a commercial basis. This would afford the government the ability to deploy funds into other segments of the economy and have the NNPC focus on being a commercially viable entity.
Olusegun in his concluding remarks stated that the office of the Auditor General of the Federation should be strengthened by enacting a law which will “empower the AUGF to have full access to NNPC’s financial statements for audit purposes.”
