The PIB: Panacea to the ills of Nigeria’s Oil industry?

The Petroleum Industry Bill 2020 (PIB or the Bill) is an omnibus Bill, which seeks to “provide legal, governance, regulatory and fiscal framework for the Nigerian petroleum industry, the development of host communities and for related matters.” However, there are a number of issues that need to be addressed.

1) Attraction of investment into the Oil and Gas Industry – According to the Nigerian Capital Importation Report just released by the National Bureau of Statistics, the total capital imported into the country in 2020 was $9.68billion. Out of this, $53.51million or 0.55% was in respect of oil and gas. Certainly, Nigeria requires a significant investment for the industry to grow. The country’s ambition has been, for a long time, to increase production to 4million barrels per day and grow reserves to 40billion barrels. To achieve these twin ambitions, we need a significant inflow of investments. However, the concern has been that Nigeria is not an attractive investment destination for the oil and gas sector given the challenges facing the industry globally and the need for scarce capital to go to places where the return on capital is more competitive.

Oil is not good for any country if it remains unproduced. There are reports that oil demand will grow in the next 10-20 years and remain flat thereafter as a result of climate change, cheaper energy storage costs, cheaper renewable sources and green hydrogen. It is, therefore, imperative that Nigeria do whatever is necessary to produce its reserves more profitably.

2. Dual Regulators – The PIB provides for the establishment of the Upstream Regulatory Commission and the Midstream/Downstream Regulatory Authority. The arguments for the dual regulators are hinged on the need to reduce the span of control of one regulator and focus on the midstream/downstream and not just on extraction. While these arguments cannot be faulted; however, it is important that the benefits outweigh the cost, given the associated cost of running two regulators.

3. Incorporation of NNPC – The Bill provides for the registration of NNPC limited within 6 months of the enactment of the enabling Act. At incorporation, the Ministry of Finance will hold the shares of NNPC Limited on behalf of the Nigerian government. The shares of the Company will only be transferable subject to government approval, and in an open, transparent and competitive bidding process. The PIB provides for the appointment of 2 non-executive directors though the President will appoint the entire members of the Board while the Company remains wholly owned by Government. Thereafter, the composition of the Board shall be in accordance with the provisions of the Companies and Allied Matters Act and its Articles of Association. NNPC Limited will take ownership of rights to gas and petroleum production (including joint ventures) under the arrangements undertaken by NNPC prior to the effective date.

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One question that has surfaced is whether the mere incorporation of NNPC Limited will make it profitable and comparable to leading national companies such as Equinor, Petronas and Saudi Aramco. The resounding answer to this question is NO, given what we know of NNPC. There needs to be a wholesale change of mindset, the establishment of strong performance culture and institutionalization of good corporate governance and best practices. The earlier the government reduces its holding in the company, the quicker it will be for it to become profitable.

4. Continued relevance of Niger Delta Development Commission (NDDC) – The major objective of the NDDC is to ensure that the ‘sums received from the allocation of the Federation Account for tackling ecological problems arising from the exploration of oil minerals in the Niger Delta area’ are effectively administered and managed. However, just like its predecessor, the Oil Mineral Producing Areas Commission (OMPADEC), the NDDC appears to have failed in discharging its statutory responsibility. Despite the existence of the NDDC and the Ministry of Niger Delta, the oil operators continue to sign and implement Global Memoranda of Understanding (GMoU) with their host communities to facilitate seamless operations and the sustained development of the Niger Delta.

Though the GMoU has achieved relative success, it has its drawbacks. Consequently, the PIB provides for the establishment of the Host Community Fund to which operators will contribute 2.5% of their operating costs incurred in the preceding year. So, the question is should the operators continue to contribute 3% of their annual budget to NDDC? Will the contribution to the host community be deducted from the NDDC contribution? Is the NDDC itself relevant given that the proposed arrangement in the PIB will better address the problems in the area?

5. Discretionary allocation and mandatory relinquishment – The Petroleum Act contains provisions discouraging discretionary allocation while encouraging mandatory relinquishment of oil blocks. Similar provisions are in the PIB. However, the issue is not what the law says but implementing the provisions of the law. This has been the major problem facing successive administrations in the country. The relevant question, therefore, is what guarantees are there in the PIB to ensure that these provisions are implemented to the letter? Consequently, all the stakeholders (including the media and civic society organizations) in the industry have a big role to play in monitoring transparency and compliance with the law.

6. Separate companies for midstream/downstream operations – The PIB requires upstream companies to incorporate separate entities for midstream/downstream activities – This will trigger significant issues for existing operators, especially with respect to viability of current projects, transfer of assets/liabilities, transfer of staff and related obligations, compliance costs, transfer pricing issues. This provision, therefore, needs to be revisited. The Bill may consider grandfathering existing projects or those projects in respect of which Final investment Decisions may be taken before the coming into force of the PIB. Alternatively, the government may consider ring fencing those operations without the requirement for incorporating separate entities.

Conclusion

While it important to pass the PIB speedily, it is equally important that the National Assembly do not just pass any bill. Whatever is worth doing is certainly worth doing well. Consequently, the proposal that the PIB be passed ‘as is’ and then amended subsequently through the annual Finance Acts should not be the way to go. Both the Government/National Assembly and industry operators should engage an independent consulting Firm to evaluate the issues and concerns raised by the operators and the need to boost oil revenue while enhancing competitiveness. This will greatly help to narrow the differences and enhance transparency and trust between both parties.

Adewale Ajayi, is partner & head, Tax Energy and Managed Services, KPMG in Nigeria.