After almost twenty years of vacillation, the National Assembly finally brought the Petroleum Industry Bill (PIB) to a close with the passing of the Bill by the two chambers of the legislative arm and subsequent harmonization. This is perhaps the biggest contemporary issue in Nigerian energy space this year and a key one for even the global oil and gas industry. The progress deserves some commendation.
However, there are certain provisions in the Bill that are not in synchronisation with government’s general policy direction for the energy industry. One of such areas of policy mismatch is gas development. Successive governments in Nigeria have been coming up with different policies that seek to enhance gas development and utilization in Nigeria. From the Nigerian Gas Masterplan of 2008 to the National Gas Policy of 2017, Nigerian government has experimented with different initiatives to aid gas development in Nigeria.
Declaring the years 2021 to 2030 the Decade of Gas by President Muhammadu Buhari earlier this year shows the current government is showing some commitment to gas sector in Nigeria. This was also in addition to the launch, in December 2020, of the National Gas Expansion Programme and the National Autogas Roll-out Initiative. I hope the efforts go beyond slogan as the importance of gas to the development of Nigerian economy cannot be emphasised. From being a key source of electricity generation to being a cheaper source of energy for large industries, gas plays an important role in the domestic economy.
From being a key source of electricity generation to being a cheaper source of energy for large industries, gas plays an important role in the domestic economy
The PIB has done well to propose a lower royalty rate for gas production in Nigeria compared to the existing legislation. However, it fails to address a major issue that suppliers of upstream gas to Nigeria’s domestic markets face – foreign exchange issue.
I attended a webinar of key operators and investors in the gas sector sometime in 2020 and all the presenters listed foreign exchange crisis as a major challenge in the sector. Suppliers of gas to the domestic market receive payments in Naira. It is therefore expected that statutory payments to government arising from gas production or gas sales to the domestic market should be payable to government in Naira. Nigeria upstream gas producers who sell gas to the domestic market are grappling with inability to source Dollars and the PIB would be a good tool to ameliorate the challenge by permitting payment of their royalties and taxes in Naira, rather than in Dollar.
This provision was made for supply of crude oil to the domestic market for local refining in the PIB as contained in paragraph 9(3) of the 7th schedule to the PIB (page 428 of the House of Representatives’ version), which reads thus:
Royalties shall be paid in United States dollars, however, for production delivered for local refining, royalties may be wholly or partly paid in Naira at Central Bank of Nigeria applicable exchange rate for the valuation of crude oil delivered.
It is a good provision, but gas delivered to domestic market is missing here. Gas probably needs this more than oil. Royalty (and indeed other statutory payments) on supply of gas to the domestic market should be made in Naira. This will go a long way in solving a major issue gas producers face in Nigeria.
The provision could be extended to all statutory payments in the entire gas sector, beyond upstream, such that operators in the midstream and downstream sub-sectors of the Nigerian gas industry are allowed to pay their company income tax and education tax in Naira irrespective of the currency of their accounting. After all, they earn their revenues in Naira.
With over 206 trillion cubic feet in proven gas reserves in Nigeria, the country is generally regarded as a gas province with little oil. It is therefore very important that government policies and legislation are coordinated to support the economic exploitation of this resource and make Nigeria realize the potential in its gas sector. Removing bottlenecks like this foreign exchange challenge will go a long way in enhancing the performance of operators in this critical sector that the government has identified as key to its plan for this decade.
It is never too late to correct this oversight in the PIB. Perhaps before the harmonization is completed. Perhaps before the president signs.
Oyewale, a petroleum industry and fiscal policy analyst, lives in Lagos. [email protected]