Regulatory reform to facilitate growth in Nigeria’s energy sector

In late September 2020 President Muhammadu Buhari submitted the Petroleum Industry Act (PIA) to the National Assembly, breathing new life into the stalled legislation. Both chambers of Parliament passed the then-bill on July 1, 2021, and it was signed into law the following month. The PIA aims to overhaul the oil industry, focusing on its organisational structure and fiscal terms, with an eye to increasing transparency and stimulating growth. It also created the Upstream Regulatory Commission, and the Midstream and Downstream Petroleum Regulatory Authority. Even so, investment was muted in the year leading up to the law’s passage, as investors held off on plans in anticipation of the reforms.

New Draft

The PIA has undergone a number of changes since it was first introduced in December 2008, including being split into sections to help speed up the legislative process. The first part of the omnibus PIA, known as the Petroleum Industry Governance Bill, was passed by the Senate in May 2017 and the House of Representatives in January 2018. The latest iteration, however, combined the four components of the bill – governance, administration, host communities and finance – into one cohesive law.

One of the law’s core tenants is to privatise the Nigerian National Petroleum Corporation (NNPC), transforming the entity that generates over 50% of government revenue into a fully integrated commercial entity under the name National Petroleum Company. An initial public offering would help the entity raise capital as well as alleviate financial strain on the government. The NNPC has registered net losses for years, yet a N803bn ($2.1bn) loss in 2018 improved significantly to a N1.7bn ($4.5m) loss in 2019.

Another pillar is the reduction of taxes and royalties for new and existing operations to ensure that investors can continue with projects, make favourable returns and launch new undertakings to boost growth. The PIA amends the controversial changes to deepwater royalties made by the authorities in 2019 by lowering the royalty rate for offshore fields producing up to 15,000 barrels per day from 10% to 7.5%.

The legislation also lays out plans to create separate regulatory authorities for upstream, midstream and downstream operations; increases the threshold for charging crude oil royalties from $35 per barrel to $50; and makes gas flaring penalties non-tax deductible to eliminate routine gas flaring, an intention that Nigeria has been unable to see through despite ongoing efforts by the government (see overview).

Host Communities

However, some observers have argued that the PIA will do little to address some of the major issues undermining the competitiveness of the industry, namely the unease in the oil-rich Niger Delta. The PIA plans to meet the demands of host communities living near oil fields and wells through trusts, yet Marc-Antoine Pérouse de Montclos, research director at France’s Institut de Recherche pour le Développement, has stated that communities have largely been left out of the equation. “They do not need to be consulted prior to setting up the trusts, whose institutional and tax-exempt framework is the only aspect likely to really distinguish them from the agreements already signed with operators in the industry. In the end, the aim is not so much to develop the Niger Delta, but instead to involve the host communities in production to encourage them to protect the oil facilities,” he wrote in an online article published in November 2020. Host communities originally lobbied for 10% of earnings from oil production but the House of Representatives – the first chamber of Parliament to pass the bill – wrote the amount as 5%, up from 2.5%. The Senate ultimately approved a 3% share. Nevertheless, Nigeria’s goals of reducing the petroleum import bill, increasing oil output and boosting refining capacity are now within reach due to the new legislation shaping a more competitive industry.