New regulatory body to overhaul Nigeria's energy sector

It was just one step in the right direction, but the Nigerian Senate’s passage of an energy industry bill, the Petroleum Industry Governance Bill (PIGB), in May 2017 felt like a huge leap to many in the country. Nigeria has been waiting for a decade for comprehensive energy sector reform, with the existing regulatory framework showing its age, causing investment inflows to slow as a result.

The PIGB is one of several reforms designed to update the legal environment and stimulate fresh investment in the sector. The bill is intended as the first in a series of energy sector laws that, together, comprise elements of the Petroleum Industry Bill.

Under President Muhammadu Buhari the government decided to break up the umbrella Petroleum Industry Bill into specific smaller pieces of legislation to aid passage. After the PIGB, the government plans to address financial terms for future energy activity – the profit split between the state and producers – in the Petroleum Industry Fiscal Bill. Residual issues will be addressed in a third bill.

Fiscal Terms

There are billions of dollars in investment at stake. Eight major deepwater projects are ready to move from exploration to production, but due to regulatory uncertainty and questions over their commercial viability, producers are holding back. Final investment decisions on seven of them could add as much as 900,000 barrels per day (bpd) to production, which is more than half of the existing level. Given that oil and gas account for roughly one-third of overall government revenue, the implications of whether these move ahead are significant for the country.

Currently, the government’s effective share of sector profits ranges from 65% to 75% of the total, through taxes, royalties, rents and fees. Various versions of previous proposals for the Petroleum Industry Bill all featured an increase in the state’s take, ranging from 72% of the total to 96%. The base rate for government royalties could rise from 55% to 63%, according to past drafts.

Governance Bill

The PIGB, should it be passed into law, will provide a significant overhaul of the sector’s structure. According to a brief from the Lagos investment firm United Capital, “The passage of the PIGB will eliminate the confusion of who is responsible for what and thus bring sanity, clarity and order into the regulation of the sector.”

This would be done by breaking up the state’s two main energy bureaucracies now in existence, namely the Nigerian National Petroleum Corporation (NNPC, an operator and regulator) and the Department of Petroleum Resources (DPR, a regulator). Their powers would then be transferred over to new agencies, which would end certain conflicts of interest and eliminate some confusion about which bodies are responsible for carrying out different functions.

The bill also reduces the power of Nigeria’s minister of petroleum resources. Under the bill, the minister would be responsible for overall policy and strategy, but would no longer have the power to approve transfers of exploration or production blocks between companies, or to influence the licensing process. Those powers will be shifted to a new regulator called the National Petroleum Regulatory Commission (NPRC).

In addition, the NPRC will absorb all the functions of the DPR, such as licensing, bidding rounds and other regulatory matters. The proposed NPRC would also absorb the NNPC’s Petroleum Products Pricing Regulatory Agency, which sets downstream prices for fuels, issues licences and regulates midstream activities, including refining.

Overall, the new regulator would be the sole body in charge of all energy regulatory matters from upstream to downstream. The bill gives Nigeria’s president power over the composition of the regulatory agency’s board, which would include the ability to remove people from it, and to waive rules for board eligibility, if so desired.

Commercial Successors

The bill also establishes several new commercial entities to replace divisions of the NNPC that were created to own and manage energy blocks. Those assets are now primarily held in joint-venture structures with commercial companies, or owned by companies and governed by production-sharing contracts.

The NNPC currently approves development plans for joint ventures through its National Petroleum Investment Management Services arm. However, the system has faced complications, particularly in terms of the ability of the NNPC to respond to cash calls. Its arrears to its joint-venture partners had surpassed $6bn until a 2017 negotiation that managed to reduce the amount to $5.1bn. The NNPC in late 2016 had reformed the cash-call system to lower the accumulation of debt, by allowing its joint-venture partners to deduct what is owed from the body in the form of recovered oil or gas.

Additional Bodies

The PIGB would change the way the system operated by creating new agencies outside the NNPC to manage each of these types of commercial contracts. Stakes in the joint ventures would be transferred to a new body called the Nigerian Petroleum Company (NPC).

The bill mandates that 40% of shares in NPC be held by the Ministry of Petroleum Resources, through a new entity called the Ministry of Petroleum Incorporated, which would be controlled by the ministry, with another 40% held by the Ministry of Finance. The Bureau of Public Enterprises, which coordinates the privatisation of state assets in Nigeria, would hold the remaining 20%. The PIGB mandates that within five years of its creation 10% of the company should be floated on the Nigerian Stock Exchange. That proportion would then be increased gradually to 40% over a 10-year period.

Production-sharing contracts would be managed by the Nigeria Petroleum Assets Management Company, and owned by the same three public agencies in the same proportions. However, the bill would not require a public share sale as it does for NPC.

For both of these new entities, initial capitalisation would be provided by government, but they would then be expected to fund themselves from revenue. The current liabilities of the NNPC associated with these assets will not be assumed by the new owners, however. These will be transferred to the Nigerian Petroleum Liability Management Company, including the pension obligations of the DPR.

Draft Versions

The bill settles issues of regulatory confusion and addresses some crucial conflicts of interest, such as the NNPC’s status as both an operator and a regulator. However, there are still a handful of clauses in the bill that have prompted concern. The new regulator, for example, has been assigned a broad set of powers and can charge fees for services, which could create conflicts of interest, according to an analysis from KPMG.

According to the Nigeria Extractive Industries Transparency Initiative, the bill in some areas fails to heed the standards of the global Extractive Industries Transparency Initiative, to which Nigeria is a signatory. Additionally, some have criticised the PIGB for giving the president significant latitude in shaping the regulatory agency’s board.

Moving Forward

As the process continues, politicians could improve the current draft bill by clearing up remaining uncertainties, such as the type of liabilities that are transferable off the balance sheets of the new commercial entities. The House of Representatives, which as of September 2017 had yet to pass its version of the bill, may also seek to insert additional rules for the compensation of communities that host the energy industry, instead of addressing such regulations in later legislation.