The Petroleum Industry Bill: Energy Reforms in Legislative Limbo
- The Dream
- The Proposed Reforms
- The Concerns, the Realities
Nigeria Oil and Gas: Facts & Figures
Nigeria’s economy is heavily dependent on the production and exportation of oil, and the importation of petroleum products. Crude oil exports account for about 90% of the nation’s gross earnings. Producing 2.2 million barrels per day, Nigeria’s oil reserves are ranked 10th largest in the world and 2nd largest in Africa with proven reserves of 37.1 million bpd. In addition, the nation boasts of being the seventh largest natural gas reserve holder in the world and the largest in Africa. The oil industry is one that cuts across, and affects each member of the Nigerian Society, determining, to a large extent, the cost of goods and services, the availability of transportation, the cost of manufacturing, access to power, and the volume of available public revenue.
Oil and Gas Production and Regulation: Down the Memory Lane
Oil, or crude oil, was discovered in commercial quantities in Nigeriain 1956. Since 1969, the exploration, prospecting and exploitation of crude oil have been regulated largely by the Petroleum Act together with regulations and policies made under it. These regulations and policies, usually made by the reigning Minister of Petroleum Resources, are mostly constructed in a hurry, to cater for the latest mischief perfected by oil and gas companies and discovered by seating Minister. In other cases, the regulations seek to create an immediate solution to a particular objective of government, usually without the necessary think-thorough on their long-term implications, implementation and effectiveness.
With the more than 50 years of oil exploration and production in Nigeria, local infrastructure, human and material capacity of the nation’s economy in general, and the oil and gas industry in particular, have failed to measure up to expectations, especially with the volume of investment attracted by this black gold. Nigerian citizens have not grown any richer, employment opportunities have not commensurately improved, nor have Nigerians become better trained and equipped to preside over the various technical and management positions of the industry. Worse yet, the regulatory authorities are continually grappling with the onerous responsibility of managing the nation’s primary resource using a trial and error approach.
The Social and Regulatory Challenges
Among the current challenges in the industry are –
i. the over dependence of the economy on oil and the consequent stunted development of other sectors, coupled with a dearth of adequate institutional, regulatory and infrastructural framework for the effective development and utilization of gas, leading to the loss of revenue and environmental degradation from the continued flaring of gas;
ii. the difficulty in accessing the various legislations and regulations governing the industry and the complexity of such regulations;
iii. the loss of livelihood due to pollution in the indigenous communities which depend on agriculture and fishing for sustenance and the consequent militancy in the Niger Delta region leading to further disruption and sabotage of petroleum operations;
iv. poor revenue derivation by Government from proceeds of oil and gas exploration;
v. poor infrastructure for training and transfer of technology to Nigerians to take up strategic management and technical positions in the industry;
vi. the frequently unmet cash call obligations of the Government in Joint ventures in which the NNPC is a partner;
vii. The dual (and often confusing) role of the NNPC as both a player and a regulator;
viii. the lack of transparency in the award of licenses, leases and contracts in the industry, and the secrecy often surrounding various oil and gas transactions in which the Government is involved. Government officials and regulatory institutions have variously been accused of poor fiscal practices and outright corruption.
The Need for a Gear-Shift
The Petroleum Industry Bill (“PIB”) is the result of a series of efforts by the Federal Government of Nigeria (“Government”) to reform the legal, regulatory and institutional framework of the Nigeria oil and gas industry and ensure that the industry is able to meet the contemporary demands of a global energy sector, and the expectations of the people, the government and investors. The foregoing included the replacement of the obsolete laws, regulations and policies and the consolidation of the several legislations and legislative instruments regulating the industry and scattered in various documents into one comprehensive document.
The above need led to the inauguration of the Oil and Gas Sector Reform Implementation Committee (“OGIC”) by the administration of President Obasanjo on April 24, 2000. The OGIC was made up of a select team of industry veterans, players, members of regulatory institutions and other experienced industry practitioners. The mandate of the OGIC included fashioning a new and pragmatic oil and gas policy for Nigeria, as well as recommending a workable legal, regulatory and institutional framework for the industry. The OGIC was subsequently reconstituted in 2005 and 2007 respectively, and its report and reform proposals submitted on August 3, 2008 translated into, among other things, the draft PIB.
- The Dream
The goal of the PIB is to bring about long reaching reforms ofNigeria’s oil sector. The major objectives are as follows:
- to create new regulatory institutions which will be professional, independent and streamlined in their respective roles;
- to consolidate all the laws, regulations and policies regulating the industry and which have been trickle-fed by successive governments and scattered in various documents into one comprehensive, easy-reference document;
- to encourage Nigerians and Nigerian indigenous oil companies to take greater charge and a bigger share of the returns from oil and gas investments in the country;
- to turn the NNPC into a fully-capitalised and profitable National Oil company and refocus it from being a cost and accounting centre to a profit-making oil company;
- to convert existing joint ventures between the multinational oil companies and the Nigerian National Petroleum Corporation (NNPC) into Incorporated Joint Ventures (IJVs) which will be managed as independent companies;
- to institute a new regime for tax, rents and royalties in the industry that significantly increases the revenue accruing to the Government from oil and gas exploitation;
- to remove confidentiality in the award of petroleum licences and leases and discourage corruption by promoting transparency in all operations in the industry, thus giving citizens access to information relating to the nations primary revenue earner;
- to fully deregulate the downstream sector; and
- overall, to develop Nigerian human and service capacity in the oil and gas industry and encourage the growth of other sectors of the economy and shift emphasis from oil and gas.
3. The Proposed Reforms
New Regulatory Authorities
The new regulatory agencies to be created under the PIB are:
i. National Petroleum Directorate (the Directorate) to replace the Ministry of Petroleum Resources. The Directorate is to formulate strategies and policies and implement the same for the industry.
ii. Nigerian Petroleum Inspectorate (the Inspectorate) to replace the Department of Petroleum Resources (DPR) and be responsible for the technical regulation of the upstream sector.
iii. National Petroleum Assets Management Agency (the Agency) to monitor and approve costs in the upstream sector with the objective of maximizing the total revenue accruing to the Government.
iv. Nigerian Petroleum Research Centre (“the Centre”) to carry out research in all areas of the petroleum industry, especially exploration and production process technology, and to advise the Minister on the same.
v. National Frontier Exploration Service (“the Service”) is also established, with the objective of promoting efficient, sustainable exploration of hydrocarbons in the frontier basins ofNigeria.
vi. Petroleum Equalization Fund (“the Equalization Fund”) into which shall be paid any net surplus revenue recovered from petroleum products marketing companies and any such sums as may be provided for that purpose by the Federal Government.
vii. Petroleum Products Regulatory Authority (“PPRA”) to serve as commercial regulator for the downstream sector.
Conversion of the NNPC and Incorporation of Joint Ventures
The PIB provides for the incorporation of a legal entity to be known as the Nigerian National Petroleum Company Limited (“the National Oil Company”) registered under the Companies and Allied Matters Act, with the Federal Government as its sole shareholder. The Bill contemplates that the National Oil Company shall be a limited liability company and a successor to the assets and liabilities of the NNPC. This new structure will permit the National Oil Company to be run as a profitable, dividend-yielding private business, and no longer as a public parastatal, which is one of the major criticisms of the NNPC. The current “public corporation” status of the NNPC has been held as a key impediment to the competitiveness of the NNPC.
The PIB also contemplates that with effect from the commencement of the Petroleum Industry Act, the interests held by the NNPC in respect of the joint ventures for the exploration and production of petroleum in Nigeria shall be vested in the National Oil Company. It further provides that each such joint venture shall, within twelve months from the commencement of the Act, be incorporated as a limited liability company. The ownership of the equity in such IJVs shall be in proportion to the interests of the participating companies i.e the IOCs and the National Oil Company.
New Regime for Taxes, Rents and Royalties
- All companies, contractors and subcontractors involved in petroleum operations under the Petroleum Industry Act shall be subject to companies income tax (“CIT”) under the Companies Income Tax Act, Chapter C21, Laws of the Federation of Nigeria 2004.
- All companies involved in the production of crude oil or natural gas shall be liable to the payment of the Nigerian Hydrocarbon Tax (“NHT”). The NHT shall not be a deductible expenditure for determining the CIT payable under the PIB. The rate of the NHT varies depending on the foreign or indigenous ownership of the company, the terrain from which the production is derived, and, for indigenous companies, their volume of oil or gas production per day.
Rents and Royalties
The PIB provides for the payment to the Government of a rent by holders of petroleum prospecting licenses and petroleum mining leases. The rent payable will depend on the attainment of certain milestones. Royalties are also payable monthly, the applicable rate for each company depending on the terrain from which the production is derived, the volume of oil or gas production per day and the price of oil or gas at the relevant time.
- 4. The Concerns, the Realities
Perhaps, the greatest scepticism that has attached itself to the PIB is how much political will the successive Government administrations have to see the PIB through. Since its submission to the National Assembly, the PIB have enjoyed, or endured the patronage of two administrations, each claiming that it will see the bill through to passage. Over the months, the Government of the day had given, and missed several self-imposed deadlines for the passage of the PIB. On certain occasions, even elements within the Government itself had sought, directly or indirectly, to scuttle the Bill or certain aspects of the reform objectives.
A further scepticism has stemmed from the fact that may industry watchers see the position taken by the International Oil Companies (“IOCs”) ostensibly in support of the proposed reforms as mere puff and unconvincing lip service.
Virtually all oil companies, both the IOCs and indigenous companies have raised alarm over some of the provisions of the PIB. While generally affirming their support for the proposed reforms, they also argue that many provisions in the bill are unclear and open to multiple interpretations which would substantially increase investment risk, comparatively placing Nigeriaat a disadvantage for inflow of foreign investment. The IOCs are united in the belief that the new tax regime will reduce their profit and decrease by as much as half the capital investment in the sector in the next 10 years, and that new oil and gas production will be reduced by nearly 50 percent, with a high proportion of new projects becoming uneconomic. Government economic rents will thus decline in the long-term and overall economic growth will be negatively affected.
While some companies such as Total and Chevron are pressing on with scheduled projects in the country, others like Shell have adopted a hardball stance, including veiled threats to divest from the country or refuse to commit to further investments. To press home its discomfort with the tax and royalty rates proposed in the PIB, In 2010, Shell announced that it is offering 10 of its offshore oil blocs for sale as part of its efforts to divest fromNigeria. The sale of these blocs is being finalised by Shell at the moment.
The criticisms against the PIB are not restricted to the IOCs. Some Nigerian indigenous companies lament that the incentives for indigenous companies provided in the Bill is insufficient to encourage the growth of local companies and enhance their competitiveness in the sector. The view of the indigenous operators is that the bill seeks to impose more onerous terms on the success of their operations, thereby stunting their growth. Indigenous companies currently make up 3% of the production capacity of the industry, as compared to 7% in the recent past.
Quite apart from silent and overt attempts to delay, discourage or completely strangle the PIB, there have been reports of attempts by representatives of the various stakeholders to outrightly oppose the PIB. From maintaining liaison offices in Abuja dedicated to lobbying the legislators to yield grounds to the pressures of the relevant stakeholder, to scandals of bribery to pass or delay the passage of the PIB, the legislature and the executive has failed to muster sufficient goodwill and political clout to meet their own various deadlines on the passage of the Bill. Further, although the final version is yet to be made public, the journey of the PIB through the legislature has, with the robust assistance of several vested interests, significantly watered down various provisions reflecting the original dream of the OGIC and the Government.
The oil and gas industry is patently important to the day-to-day functioning of the Nigerian economy, and its future. The Government therefore cannot afford to let the regulation of the industry slide. Further, as a major oil producing nation,Nigeriais an investment hotspot for IOCs. It will be expected that the affected IOCs will put all resources at their disposal towards securing their investments, and with the heavy financial chest of these companies, acting singly or in consortium, and the endemic corruption in the country, the PIB may effectively be declared an endangered legislative species.
AlthoughNigeriais blessed with abundant oil and gas resources, including global records of gas reserves, the effective management of these resources, both for the present and the future of the economy and ofNigeria’s people, cannot be a game of trial and error, of faith without works, or of half-hearted attempts. With the lofty dreams of the Government in inaugurating the OGIC and the noble objectives of the PIB,Nigeriahad a chance to get its prime economy right, or let it slip right through its fingers. As the current federal administration concludes its term, with a new executive and legislature coming into play, the passage of the PIB, or failure thereto, before May 29, 2011, may mean a welcoming dawn, or the end of the dream, as the case may be, forNigeria’s energy reforms.
JAMA ONWUBUARIRI is an Associate in the Energy & Project Finance Group of the Commercial Law Firm of Adepetun Caxton-Martins Agbor & Segun, Lagos, Nigeria
 A barrel is made up of 42U.S. gallons, or approximately 159 litres.
 Obasa, R. (2010 August). Getting Nigeria’s Reserves Addition Back on Track. Nigerian Oil and Gas Journal.
 The Petroleum Act was enacted in 1969, and is currently compiled as Chapter P10 in the Laws of the Federation of Nigeria, 2004.
 For instance, the Regulation 4(b) of the Petroleum (Drilling and Production) Regulations was inserted by Chief Dan Etete, the Minister of Petroleum Resources on 12th February, 1996, by the Petroleum (Drilling and Production) (Amendment) Regulations (Statutory Instrument No. 3 of 1996) with a commencement date of January 1st, 1995. The introduction was apparently in an effort to prevent oil producing companies from by-passing the consent of the Minister by transferring their oil licenses or leases through share transfers, instead of through direct assignment, which is restricted under the Petroleum Act.
 See for instance, Obasa, R. (2010 February). Government Puts Deregulation on Hold. Nigerian Oil and Gas Journal.
 The official version of the PIB so far made available by the National Assembly is accessible from http://www.nass.gov.ng/nass/legislation.php?pageNum_bill=29&totalRows_bill=806&radio=radio2&search=Select+Year&button2=GO.,. It is to be noted that several efforts are being made by various groups to protect their interest by lobbying for amendments to the PIB before passage, and that varied memoranda by such interest groups and the Government itself have consequently been submitted to and are being considered by the National Assembly. This foregoing has given rise to several and sometimes conflicting “versions” of the PIB. Please be advised that the comments in this article are restricted to the provisions contained in the copy of the draft PIB posted on the website of the National Assembly (referenced above) and which has so far formed the basis for the deliberations by the National Assembly. To this effect, this article has ‘ignored’ the provisions of the various memoranda submitted to the National Assembly which are not reflected in the original draft.
 The downstream sector includes transportation, refining, and finished products marketing.
 The upstream sector of the Industry consists of exploration and production of crude oil and natural gas.
 This law regulates the incorporation, management and winding up of companies inNigeria. It is presently compiled as Chapter C20 in the Laws of the Federation of Nigeria, 2004. Currently, the NNPC exists and operates by virtue of the NNPC Act, compiled as Chapter N123 in the Laws of the Federation of Nigeria, 2004.
 When it is passed into law, the PIB will be known s the Petroleum Industry Act
 The thickest of the criticisms appear to be coming from the pipelines of Royal Dutch Shell. In January, 2010, the company had declared through its Group Chief Executive that it no longer counted on Nigeria for its “growth aspirations.” That position was reiterated on June 17 as the company’s management in Nigeria warned that multi-billion dollar investments proposed for the country would be held back unless the PIB was reformulated to accommodate Shell’s objections. (see the Punch Newspaper’s online article of 12th July, 2010 available at http://www.punchng.com/Articl.aspx?theartic=Art20100712015650, and Shell Shifts Oil Output Growth to Other Regions in Nigeria’s Oil and Gas Monthly (2010 February) page 8.
 For instance, in June 2010 a Shell spokesperson stated that the company is withholding some $40 billion (N6.0 trillion) worth of investments from the Nigerian oil and gas industry until the PIB is passed. (see the Daily Champion of 23rd June, 2010, available at http://allafrica.com/stories/201006230443.html)
 The PIB provides, for instance that “the fiscal terms applicable generally to companies engaged in upstream petroleum operations shall apply to an indigenous oil company with an aggregate production of more than fifty thousand barrels of oil or its gas equivalent per day.” Thus, the favourable rate of tax available to small-producing indigenous companies will not be available to “successful” indigenous companies which produce more than 50,000 barrels of oil or natural gas equivalent per day.