Fuel to the fire: A far-reaching piece of legislation has sparked intense debate

The Petroleum Industry Bill (PIB), which is currently before the federal legislature, establishes the legal and regulatory framework, institutions and regulatory authorities for Nigeria’s petroleum industry and stipulates guidelines for operations in the upstream, midstream and downstream sectors.

When the PIB is passed into law, it will have the effect of repealing or reviewing all existing laws governing the administration of the industry, and in essence combine 16 different Nigerian petroleum laws into one comprehensive law. The PIB is divided into eight parts and 483 sections, which deal with all activities in the industry.

The PIB has objectives that include the creation of a conducive business environment for exploration and exploitation of petroleum resources for the benefit of the Nigerian people and to optimise domestic gas supplies, particularly for power generation and industrial development.

While the concept of the PIB is laudable, key issues for a number of stakeholders must be resolved before the bill is passed into law. The antagonists are made up primarily of international oil companies (IOCs), including Shell, ExxonMobil, Chevron, Total, Agip and Addax Petroleum, all of which have subsidiaries in Nigeria and contribute hugely to the country’s oil and gas sector. Following the release of the PIB, IOCs, most notably ExxonMobil, have expressed reservations about some of its provisions. They argue that the legislation would put too much power in the hands of the federal government. However, Nigerian officials maintain that the PIB is fair for the Nigerian people, the IOCs and the government.

In response to the various concerns, the House of Representatives has set up an ad hoc committee to organise public hearings across the country to get a broader range of opinions and help shape the bill prior to its passage. The contested provisions include:

TAX & INCENTIVES: On comparing Nigeria’s deepwater regime with those of other countries, the IOCs concluded that the government’s take for production-sharing contracts under the PIB regime would be among the highest in the world. Armed with data from foreign independent analysts and oil industry experts, the IOCs insist that the proposed terms would put investments in deepwater at risk and are “extremely uncompetitive”. According to the IOCs, prior to the PIB’s emergence Nigeria’s royalty rate was between 0% to 8%, the tax rate was 50% and the government’s share of profit oil was 20-60%, with incentives of $1.38 per barrel to the oil companies.

However, the PIB proposes royalties of 18-26%, a 55% tax rate and a government share of profit oil of 20-75%, with only $0.34 per barrel of oil equivalent (boe) as incentive to the producers.

There is also the general insecurity in the Niger Delta region’s oil-producing communities, pipeline vandalism, the high risks and costs incurred due to bunkering to be taken into account.

Yet the group executive director in charge of exploration and production at the Nigerian National Petroleum Corporation (NNPC), Abiye Membere, insists that the government’s overall share would still be very competitive, and lower than it is in peer countries such as Angola.

IMPACT ON DEEPWATER PROJECTS: Deepwater oilfields are projected to potentially contribute an additional 900,000 boe per day to national output in 2020 to offset the natural decline in production, in addition to the current 900,000 boe per day that it has already added to national output. It is also the contention of the oil majors that deepwater fields have had a broader impact on the Nigerian economy through the growth of GDP and job creation.

FISCAL TERMS: Deepwater production has contributed significantly to the country’s oil growth strategy, accounting for up to 40% of liquids production. However, the IOCs argue that the fiscal terms proposed by the PIB are stiffer than the current regime, which is already deemed unfavourable, and would put proposed deepwater investments at risk. According to a report by hydrocarbons research and consultancy firm Rystad Energy, the fiscal terms proposed by the PIB will make all planned deepwater projects non-viable, resulting in the rapid decline of deepwater production. In their view, with these proposed new terms, $66bn of potential investments in deepwater projects may lose funding. With projects worth over $40bn in place, deepwater was already delivering 900,000 barrels of crude oil into the country’s daily output as of 2012, compensating for the steady decline in onshore production.

IMPACT ON GAS DEVELOPMENT: With a lack of infrastructure across the value chain and the low cost of domestic gas, which can never cover the huge costs of gas development, the IOCs argue that the PIB does not provide incentives to support investment in this area. According to them, the fiscal terms of the PIB are harsher than the existing terms. For instance, at present, the royalties on gas amount to between 5% and 7% of all gas revenues. However, the PIB seeks to impose a production-based rate of 5-12.5%, as well as price-based rate of 0-21%.

HOST COMMUNITIES FUND: The PIB also proposes that 10% of net profits of the oil companies be remitted to a Host Communities Fund (HCF). Yet, some governors from the north of the country have emphatically voiced their objection to the HCF in local press. They have been quoted as saying that they want all sections dealing with the HCF, its purpose and entitlements to be removed from the bill completely as they find them discriminatory against non-oil-producing areas of the country. It is safe to say that such sentiments have turned this otherwise forward-looking proposal into another contentious issue. POWER VESTED IN THE MINISTER OF PETROLEUM RESOURCES: Arguments for reducing the powers vested in the minister of petroleum resources under the PIB featured prominently in a workshop recently organised by the Senate Joint Committees on Petroleum Upstream, Downstream, Gas and the Judiciary. The PIB seemingly makes it mandatory for the president to seek the minister’s advice before taking major decisions involving the hydrocarbons industry, and to rely on the minister’s advice to grant and revoke licences. The bill also gives the minister the power to formulate and coordinate government policy on petroleum, and to represent the govern-ment at international forums.

Institutions to be overseen by the minister under the PIB are the National Asset Management Company, the National Gas Company and the National Oil Company, among others. The minister is also authorised to nominate members to the boards of various agencies within the oil industry, and it appears that the minister would no longer rely on the NNPC to provide technical capacity in any form. The minister will also serve as chairman of the board of the National Asset Management Company.

The general opinion among industry experts is that Section (1) (a) of the PIB, which accords the power to formulate and monitor petroleum industry activities to the minister, should be amended to the extent that the exercise of such powers shall be subject to the approval of the Federal Executive Council. This is because a minister performing all of these functions without being accountable through the Council defeats the objectives set out in the bill itself. Power to coordinate and regulate the critical areas of the oil and gas sector, advise the president on the appointment of CEOs – including the upstream petroleum inspectorate and even in the downstream sector – go way beyond the current laws.

The widely held view is that legislators now have the crucial responsibility to either retain the president’s unilateral power to award oil blocks at his sole discretion, or alternatively to opt to throw the process open through a transparent bidding process.

OBG would like to thank Ajumogobia & Okeke for their contribution to THE REPORT Nigeria 2013.