A Review of the Nigerian Energy Industry

PIB may be dead on arrival

Oscarline Onwuemenyi

11 March 2013, Sweetcrude, ABUJA – Hopes of a quick passage for the Petroleum Industry Bill (PIB) which has been for upwards of five years at the National Assembly, may have been dashed by the inglorious politicking in the legislature, and matters may yet get worse. The impasse in the federal legislature has not been helped by the obtuse racketeering by various stakeholders including the Nigeria National Petroleum Corporation, the international oil companies and even the organized labour organizations.

So, despite what may look like a ‘movement’ in the bill when it scaled the Second Reading in the Senate last week, there is still a lot of fear that the PIB may yet meet its waterloo in the chambers of the lower House, as was the case during the last legislative chapter. It is reasonable to contend that no bill in the history of the Nigeria’s experiment with democracy has undergone as much political and economic machinations as the Petroleum Industry Bill. Thus, from the goings-on since the very idea of an all-encompassing reform law for the nation’s oil and gas industry was muted, it seems that the PIB was always doomed for death even before it was birthed.

The PIB, which is designed to bring Nigerian petroleum laws up to date with global trends and present realities, if passed, is expected to overhaul the country’s corrupt oil industry, open the sector for more investment, and give more oil earnings to government. The bill has nevertheless suffered interminable delays since it was first presented to the Sixth National Assembly in 2008, which later abandoned it after some time-wasting legislative manoeuvres.  It has suffered further tortuous journey since its reintroduction. After subsequently holding a public hearing in July 2009, the National Assembly once more succumbed to pressure from vested interests and abandoned the bill.

Opposition has come from oil multinationals, who have behaved pretty much as they pleased for decades; from entrenched interests within the bureaucracy; and from the corrupt Nigerian National Petroleum Corporation (NNPC), whose executives gorge themselves at public expense by exploiting the rampant opacity that defines its operations; from marketers, politicians and briefcase traders, who colluded with top bureaucrats to cream off over N2 trillion in fraudulent petroleum subsidy claims last year; and from sectional power brokers.

It is worthy to note that some of the bill’s mandates will replace all existing oil and gas legislation, which include about 16 previous bills, besides various acts and decrees that administered the sector for about 50 years. It will also redesign the oil and gas governance structure (including the establishment of seven new institutions), commercialize and restructure the state-run Nigerian National Petroleum Corporation, revise fiscal regime for onshore, shallow water and deepwater oil and gas production, and change the provisions for awarding, renewing and revoking licenses and leases.

One of the objectives of the PIB is to enhance government revenues through better tax codes and restructure joint ventures between the NNPC and oil majors. But oil majors, who are said to have benefitted immensely from the profit sharing contracts of 1993, have raised concerns that the fiscal terms in the new bill could deter investment in the oil and gas industry. The PIB also will finally outlaw gas flaring with fines equal to the cost of the flared gas.

IOCs, NNPC at loggerheads

International oil companies operating in Nigeria, notably Shell Petroleum Development Company and Chevron Nigeria Limited have had a long running battle with the Nigeria National Petroleum Corporation (NNPC) over aspects of the Petroleum Industry Bill which is currently undergoing tremendous tweaking at the National Assembly.

They had expressed worries over the increase in the gas tax from 30 percent to 80 percent, increase in royalty payment from seven percent to 12.5 percent for big producers and the minimal tax allowances for investment incentives on gas.

Mark Ward, who is chairman and managing director of ExxonMobil Nigeria and the president of the Oil Producers Trade Section (OPTS) of the Lagos Chamber of Commerce, which includes Royal Dutch Shell, Total, Chevron, ExxonMobil, and Agip, said at a recent workshop organized in Lagos by Ernst & Young that tax terms in the bill are “so uncompetitive these risk rendering offshore oil and gas projects unviable, and could halt investments.”

The OPTS said the effect of the PIB will be that: most gas projects will not go ahead; Nigerian government’s objective to triple power generation (using gas) will not be achieved; the new fiscal regime renders all new deepwater and several onshore projects uneconomic; Nigerian oil and gas sector will not be globally attractive; joint venture funding issues are not resolved; contract approval challenges are not resolved; there is lack of clarity around key terms; and investment will be lower as viability declines.

Things came to a head only recently at the strategic session of the Nigeria Oil and Gas Conference, in Abuja, where representatives of the IOCs gave a frank overview of the proposed petroleum industry reform bill championed by NNPC and the Ministry of Petroleum Resources.

The former Regional Executive Vice President of Shell Exploration and Production, Africa, Ms. Ann Pickard, dealt the most devastating blow on the ongoing negotiations between the NNPC and other stakeholders in the industry over the PIB, when she noted that the PIB lacks insight into the very basics of the oil and gas industry.

According to her, the PIB threatens to make the present situation in the nation’s oil and gas industry worse. “If passed in the form currently proposed its mistakes will take years to correct. Nigerians will have to wait longer for the electricity they need to light their homes at night. They will have to wait longer for the jobs they need to put food on the family table. The government will have to face difficult choices to balance the budget with less money available for the social services that the people need,” she stated.

Pickard explained that Shell and other companies – both international and Nigerian – have extensively shared their thoughts and knowledge with government over the proposed industry reform bill.

She insisted that in the bill as currently proposed would impact negatively on the deep water frontier of the industry, noting that, “In the form currently proposed, the bill will make the Nigeria PSC regime among the harshest in the world, despite the high risk environment. The OPTS believes the bill will effectively end investment into Nigeria’s deepwater. Their analysis suggests that – no matter which version of the bill you look at – all or almost all proposed deepwater projects between now and 2020 will become uneconomic, and approximately $50 billion won’t be invested as planned.”

Pickard further noted that both the government and the international investors had failed to take responsibility for the proper repositioning of the oil and gas industry over the decades, resulting in the decline in the sector. She lamented that the nation’s oil and gas production over the last decade has declined seriously and has been eclipsed by countries like Angola, even as investment in the industry has stalled.

She stated that, “Nigeria’s oil and gas production has not only failed to grow, it has fallen every year since 2005. Its share of global oil production is shrinking with it, falling just over 30 percent since 2005.”

She added, “Our collective failing is that there has been a distinct inability to translate all of these positives into coherent policies and actions; to focus on speed and simplicity. It is a failure to seek win-win solutions as opposed to win-lose. There has been a failure to recognize that we all benefit from taking a fair share of a growing industry rather than an excessive share of a declining one; an unwillingness by some to stand up and take decisions. A failure to work with partners rather than see them as adversaries to be held at arm’s length.”

Defending the PIB, the Minister of Petroleum, Mrs. Diezani Alison-Madueke, insisted in a statement that the new draft bill “is fair to all.” She explained that the proposed increase in government take from 61% to 72% in the deep and ultra-deep offshore is “competitive when we look at the scale of other entities around the world like Norway, Indonesia and even Angola.”

Alison-Madueke contended that the PIB ‘will re-position the industry in Nigeria for global competitiveness. I also believe the National Assembly will address the concerns of all stakeholders to come up with workable law.”

But the oil majors point out that there are implications in respect to the bill’s mandates. A key point, they note, is the extreme complexity of the bill. They point out that with the bill’s objective of transforming the entire oil and gas industry, there is lack of clarity in implementation, including lack of a transition plan, which will cause delays and impact day-to-day operations, the companies said.

Without the new investments, Nigeria’s oil production is expected to drop by 42% within the same period, Ward said, adding that oil and gas production from existing fields is declining and new investments are required. But, the new PIB would make many projects non-viable. It was not clear how the new management company will fund joint venture operations.

The oil majors stated that revising fiscal regime for onshore, shallow water and deepwater oil and gas production brings “enormous investor uncertainty with apparent disregard for previous investments and existing contracts.”

The IOCs acknowledge that the government of Nigeria has the right to change law; however, the companies explain that there is need to “recognize sanctity of existing contracts and prior investments to maintain investor confidence.”

In the draft bill, oil companies will pay the following tax rates on profits: 50% for onshore and shallow water areas and 25% for bitumen, frontier acreages and deepwater areas.

A new fund, the Petroleum Host Community Fund (PHCF), will be created for the development of the economic and social infrastructure of the communities within a petroleum producing area. Oil companies will contribute 10% of the net profits to the PHCF after royalties and other taxes have been deducted, if the bill is passed without amendments to the clauses on PHCF.

Industry experts said this will bring peace in the volatile but oil-rich Niger Delta. It is significant legislation as host communities have over the years pressed for more money from oil companies to develop their areas, which they insist are constantly being degraded by oil production and pollution, making it difficult to pursue their major economic mainstays – farming and fishing. Giving more money to the communities could stop restiveness and other militant activities that disrupt and hinder oil and gas production.

“But the PIB does not specify how the money will be distributed. So political interference may be significant while the amount will fluctuate with the oil prices,” said Pedro van Meurs, of Nassau Bahamas, a consultant to the Inter Agency Team which prepared the Nigerian government`s memorandum on the 2008 PIB though has no contract with the NNPC now.

The oil majors said the new 2012 draft PIB submitted by the Nigerian government to Parliament in July, if passed as it is, will make it unprofitable for new investments worth $108 billion to go ahead.

The $108 billion is the sum of the planned capital expenditure of all the oil majors from 2012 to 2025, Ward said. This will raise Nigeria`s oil production per day, by 64% to about four million barrels from its current average of slightly over two million barrels.

The bill provides for scrapping 1990-era incentives for the deepwater, when new production sharing contracts (PSCs) were introduced. Nigeria is looking to its deepwater frontier to drastically increase production – and deepwater fields are expected to account for up to 70% of production by the end of 2013. The country has been seeking to collect more revenue from deepwater offshore projects.

Under rules governing the upstream sector of the Nigeria oil industry in the PIB, “a very negative provision is that the Nigerian president has the power to grant licenses without competitive process or any other process. This leaves the door wide open to political favoritism in a manner that has been the practice in Nigeria in the past,” Van Meurs said.

The Northern Senators as albatross

The latest assault to the PIB by some legislators purporting to represent the “North” could very well knock down the intended legislation and continue to hold up progress in our oil and gas sector.

The apparent grouse of the lawmakers from the North is the proposal to reserve 10 per cent of all oil and gas earnings for the oil producing areas through the Petroleum Host Community Fund. Echoing other lawmakers from the North who had earlier vowed to frustrate its passage, Senator Bukar Abba Ibrahim of Yobe State complained that the PIB is lopsided, noting that the inclusion of an additional 10 per cent for oil producing states was one revenue stream too many as such states already enjoyed seven other special sources.

According to Abba-Ibrahim, “Derivation is only one out of seven sources of revenue for the oil producing states. They have the Federal Government’s take home, the NDDC with over N500 billion being projects only in oil producing communities. They also have the Niger Delta Ministry with over N400 billion Federal Government grants in the name of amnesty and oil companies doing social corporate responsibility.”

He noted that adding another 10 per cent to the already existing revenue generators for the zone was unfair. “Adding another 10 per cent to all these seven sources, I don’t know how you are going to have peace where resources allocations are so skewed to one side and unfair. ”

He said this addition in the PIB was unacceptable and suggested that the money should go into the treasury so that every Nigerian could benefits from it. “Nobody planted or farmed oil, it is God, who put it there and it will not last forever. “It will get to a point where the oil will finish and another natural resource will come up and every Nigerian will benefit from it.”

The lawmaker added that the North was also opposed to the PIB because of its failure to make provision for the exploitation of other minerals all over the country. “We have over 800 million tonnes of limestone in Gulane, Fune and Guljimba local governments of Yobe, but as a state government, you cannot go and exploit, it has to be Federal Government.”

He is, however, optimistic that the bill when passed, would sanitise the Petroleum Industry and address the issue of corruption in the sector.

Meanwhile, stakeholders have urged the Northern lawmakers should drop their opposition and indeed, lawmakers from all six geopolitical zones should move quickly and pass the bill. Thereafter, they should press for the immediate exploitation of solid minerals that are available in all the 36 states in line with the PIB principles to foster federalism, stimulate industrialisation, boost exports, create jobs and reduce poverty.

Declining investments

The administration lamented last month that investment in the country’s oil industry was falling because of delays in passing the Petroleum Industry Bill (PIB), adding that the conclusion of the bill was critical.

Presently, some of the oil majors operating offshore in Nigeria have sold off some of their oil blocks and suspended new investments, especially in deep offshore areas where they complain that the PIB imposes stiffer conditions on the operators.

Peter Voser, the Chief Executive Officer of Royal Dutch Shell Plc, said in an interview posted on the company’s website that the current draft of the PIB, which is still the subject of discussions and consultations would make it highly unlikely that Shell – and the whole industry – could invest in offshore and domestic gas projects.

According to him, “This would be counterproductive to what Nigeria needs, which is gas for power generation and revenues to develop the nation.” He added that the uncertainties surrounding the new PIB might change the company’s views on investing in Nigeria, depending on how the PIB is implemented.

Shell, Chevron, ExxonMobil, Total SA and Eni, who pump about 90 percent of Nigeria’s oil through ventures with the NNPC, had said in a joint presentation to the legislature that the proposed higher taxes in the PIB would make exploration of oil and gas uneconomical.

In 2012, Shell, Total, ConocoPhillips and Agip divested part of their stakes in the oil and gas industry. The multinationals were said to have sold a 45 percent stake in the seven oil concessions in five transactions.

Total, France’s largest oil company, has sold its 20 percent stake and operating mandate of its Nigerian offshore project to a local unit of China’s Sinopec for $2.5 billion.

Shell, a subsidiary of Royal Dutch Shell Plc (Shell), sold its 30 percent interest in Oil Mining Lease 30 (OML30) in the Niger Delta to Shoreline Natural Resources Limited.

ConocoPhillips, a United States (U.S.) oil company, disposed of its Nigerian onshore assets.

Last week, the Federal Government reportedly commenced negotiations with the IOCs operating offshore in order to review some contents in the bill. Since the delay in the bill is partly caused by the opposition from the multinational oil companies, it is believed that if a common ground is reached, it would go a long way in expediting the legislative process.

Nigeria maintains one of the most developed upstream oil and gas sectors in Africa, but has not truly reached its potential partly owing to poor legislation. The passage of the bill apparently would usher in the long-awaited reform of the oil and gas industry, which remains a major contributor to the Nigerian economy.

For a nation that is dependent on oil revenues for 90 per cent of its revenues, the PIB is too important to remain mired in the divisive politics of resource-sharing that has made a mockery of our federal status and held back investments in the sector. This insufferable arrogance must be discarded.

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