National assembly & the passage of the PIB

National-Assembly-BuildingDr. Chijioke Nwaozuzu

29 November 2013, Sweetcrude, Lagos – It could be argued that the government’s transformation agenda would succeed only to the extent that the petroleum sector in transformed. The reason is that oil exports and proceeds from domestic sales account for nearly 80% of all federally- generated revenues and 95% of foreign exchange earnings. This statistics demonstrate that Nigeria operate largely a mono- product economy.

Therefore, one wonders why too much politics gets in the way of the passage of crucial bills such as the PIB, and the Gas Master Plan. Sometimes, one is tempted to doubt the patriotic credentials of those public officers who are responsible for ensuring the passage of such bills. On the other hand, it could be that the relevant public servants are merely interested in pursuing parochial regional interests, or are not conversant with the dynamics of the petroleum industry and the size and gamut of stakeholder interests involved. Judging by the caliber of some of the public officers involved in the PIB passage process one would prefer to ere on the side of caution, and so assume that they are patriots who are not out to pursue narrow and sectional agenda. Therefore, this contribution in based on the premise that there is a knowledge deficit (and not moral deficit) as regards the stakeholder interests involved and how to balance these interests and so achieve a speedy passage of the Bill.

Now let us turn our attention to sections of the PIB that spells out the objectives of the Bill. Section (1) (j) states “to protect health, safety, and the environment in the course of petroleum operations, while section 1 (k) states, “to attain such other objectives to promote a viable and sustainable petroleum industry in Nigeria”. Sections (2) and (3) under the objectives stipulates as follows: (2) Ownership of Petroleum Resources: “the entire property and control of all petroleum in, under or upon any lands within Nigeria, its territorial waters, or which forms part of its Continental Shelf and the Exclusive Economic Zone, is vested in the Government of the Federation”. (3) “The management and allocation of petroleum resources and their derivatives in Nigeria shall be conducted strictly in accordance with the principles of good governance, transparency and sustainable development of Nigeria by providing for – (a) an orderly, fair and competitive system; (b) clear and effective legal and institutional frameworks for organizing petroleum operations; and (c) a fiscal regime that offers fair returns on investments while optimizing benefits to the Nigerian people”.

Based on these objectives, we can identify four major stakeholders: the Host Country, the Host Communities, the Multinational Oil Companies (MNOCs), and the National Oil Company (NNPC) who protect the Federal Government interests in oil activities. Nevertheless, there are other minor stakeholders too numerous to mention. Some of these include: a wide variety of government agencies; private companies; trade unions; environmental groups; non-governmental organizations (NGOs); international organizations, agencies and institutions which are involved in natural resource development. For example, exploration & production (E&P) rights must be obtained from the Department of Petroleum Resources (DPR) a state agency granting such rights, which in turn produces periodic reports to be submitted to another supervising government agency. The financing that is needed for oil and gas projects may take the form of loans, direct investment or some other complex financial arrangements. These are obtained from diverse sources such as foreign direct investment (FDI) by the MNOCs, private institutions, individual private investors, corporate financing devices and international financial organizations. Other stakeholders would include agencies that oversee and administer the bilateral, regional and global trade agreements on monetary policies, trade and investment, and those established by treaties and conventions aimed at environmental protection. There are also other stakeholders that play less obvious roles. For instance, the international energy agency (IEA) and their stabilizing role in the international petroleum industry. When the OPEC countries imposed its 1973 oil embargo as a political weapon, IEA mobilized 16 industrialized nations who joined in the execution of an agreement for the international energy program (IEP). The aim of the agreement was to promote a secure supply of petroleum at reasonable prices; to take cooperative action in the event of future oil emergencies; to improve relations with oil producing countries; to gather reliable data on oil supply and demand; and to reduce reliance on imported oil through conservation, research and development. The program required that participating countries maintain a 90- day reserve of crude oil. Thus, IEP has forestalled oil embargos so far. The foregoing illustrates the complex nature and variety of participants in the petroleum resource development, and the international nature of the oil industry.

Next, let us focus on the major stakeholders, what their interests are, and the need to factor these interests into a successfully negotiated PIB. Let us commence with the Host Country’s interests.
Nigeria is characterized by high population growth, excessive unemployment, low per capital income, a low level of economic development (reflected in a lack of social services and resources), a low quality of education, and short life expectancies). Given this setting, the critical concern of government should be economic growth. As a major oil exporter, oil E & P activities should secure a reasonable tax base for the government, revenue from the world oil market, capital for economic expansion, and employment and income for individual workers. There are other economic, social, and political factors of interest to the Host Country. These include acquisition of technology and expertise from foreign oil companies, increasing local content in supplies and other forms of contracting, access to foreign markets, infrastructure development in the course of E & P activities, such as roads, communications, port facilities, etc. Few developing countries have the capital, technology and trained personnel necessary to develop oil reserves, and so must rely to varying degrees on foreign investment by the MNOCs. The FDI offered by the MNOCs provide the Host Country with technology, managerial and technical expertise, and a reduced vulnerability to downturns in the world’s economy, and with capital. FDI also provides the opportunity to shift the responsibility of building and maintaining the requisite support services and infrastructure facilities to the MNOCs. Therefore, it is in the interest of Host Countries to maintain this historical interdependence with the MNOCs.
The MNOCs interests are principally driven by the characteristics of petroleum E & P operations. There is a considerable lag between an investment in a petroleum prospect and the realization of any profit from the enterprise. E & P operations is capital – intensive and frequently entails the creation of a robust infrastructure before actual extraction can take place. These operations are also high- risk in nature (the existence, extent and quality of oil reserves; production costs; and world crude oil prices are all difficult to determine well in advance). Therefore profitability is never assured. Generally, most MNOCs tend to improve their profitability by improving the crude oil which accounts for why they get involved in the entire value chain of the industry. Also hydrocarbon reserves are finite, so MNOCs must continually acquire new reserves which again are capital – intensive. The fiscal incentives available in different oil producing countries tend to determine where the MNOCs sink their oil rigs.

MNOCs are compelled to be far more concerned about government policies and regulations than most other businesses. These companies have to deal directly with the government (through their agencies) being the custodian of national oil reserves, but also must deal with the political and legal hazards associated with extracting the reserves that in most cases is the Host Country’s major source of revenue. The primary interest of the MNOCs as with any other business are maximization of profits and minimization of risks or at least ensuring that unavoidable risk are factored into the potential ‘upside’ of the enterprise. For the MNOCs the principal risks are geological, economic, and political. Political risks include a sudden increase in taxes, unfavorable alteration of the production- sharing ratio, government instability, agency – in-fighting, outright confiscation of production, and nationalization of foreign oil assets. These interests and risks have to be factored into the PIB debate and negotiations to ensure the MNOCs are not discouraged from making further investments in the Host Country. Else, they would be encouraged to move away and invest in other countries with more stable and better fiscal regimes.

The third major stakeholders are the NOCs (NNPC). NOCs are created to develop petroleum resources within the home (Host) country and in most cases are typically multi – layered in structure, and organized into subsidiaries in accordance with function, such as E & P, refining, marketing, petrochemicals, retail etc. The corporate forms of NOCs mimics that of the MNOCs, but the overall objectives of NOCs are less clear than the purely –for- profit MNOCs. NOCs are basically government agencies, and as such are responsive to government pressures and policies. Examples are: capping prices to domestic purchasers, purchasing from local suppliers (i.e. increasing local content) whose materials may be inferior and costlier, paying high wages that are not co-related to profitability, adopting in efficient labor- intensive production methods to increase employment, making uneconomic investments to promote political goals, etc.

Moreover, management forms may further inhibit setting and implementing of clear corporate objectives. For instance, sometimes the relationship between corporate management and the supervising government agencies, or ministries is unclear, and lines of authority tend to criss-cross. Similar issues may arise within the corporate structure itself, or the structure may resemble a government bureaucracy than a business enterprise. The NOCs can afford to carry-on in this manner, confident in the belief that when and where necessary, the government is likely to grant the company better tax treatment than private companies. Additional State Aid or bail – out measures may come in the forms of providing access to capital on favorable terms, including low-cost government loans, government loan guarantees, and direct capital infusions from the government coffers. In a situation where the NOC is economically threatened, the government will most likely step in as ‘savior of last resort’ and take remedial steps to prevent the NOC from collapse, or from defaulting on its obligations.

Conversely, if the NOC is responsible for a significant percentage of government’s revenue or accounts for bulk of the export proceeds, the company may be subject to tax, regulatory and budgetary terms that focus on generating immediate income .This makes it difficult for the NOC to effect sound long-term business decisions. In this case, NNPC and petroleum mexicanos (PEMEX) are typical examples. PEMEX, in many years has contributed almost a third of the total revenues of the Mexican Federal Government. Its decaying infrastructure, inefficient refinery and petro chemical operations, appalling record of pipeline explosions and environmental disasters are attributable to a near confiscatory rate of taxation on E & P operations and a government policy of promoting crude oil exports at the expense of downstream projects and infrastructure maintenance. Any accumulated funds (e.g. excess crude funds) have been invested exclusively in E & P projects rather than modernizing and boosting refinery capacity to meet a rapidly growing domestic consumer demand. In the case of Nigeria, the State Government insists that such accumulated funds be shared according to the national revenue sharing formula. Little thought, if any, is given to either re-investment in upstream and downstream projects. Similarly, PEMEX has made little investment in maintaining pipelines, refurbishing refineries and petrochemical plants or remediating environmental pollution. In the case of NNPC, this has led to wide scale importation of light petroleum products (i.e. petrol, diesel, dual purpose kerosene).

The widespread dissatisfaction with the efficiency levels of NOCs has led many oil- producing countries to move towards privatization. This trend is more evident in South America than in the middle East, Asia and Africa. For example Argentina began to privatize its NOC, YPF (Yacimientos Petroliferos Fiscales) as early as 1989, and most other South American countries have at least partially privatized their NOCs. Some of these NOCs have broadened their role into international downstream activities, which includes building transnational pipelines to transport petroleum and natural gas to the marketplace, acquisition of refineries in the US & Western Europe, and also retailing directly to consumers in these foreign countries. For example, Petroleos de Venezuela S.A (PDVSA) owns CITGO Petroleum Corporation through which the NOC carries out extensive refining, marketing and transportation operations in the US.

Conversely, countries like Kuwait, Saudi Arabia, Libya, Nigeria, Angola, etc. have made no significant efforts toward privatizing their NOCs which still enjoy monopoly control. However, countries like México, Kuwait, Saudi Arabia have reorganized and restructured their NOCs and introduced diverse cost –cutting measures and audit controls to make them operate more efficiently and competitively in the global marketplace. To arrive at this minimal point in part of what the PIB seeks to achieve. The suggested restructuring of NNPC in the PIB would ensure that the Nigerian petroleum industry at the least operates efficiently and eventual privatization of NNPC assets would ensure competitiveness in the global marketplace.

The fourth major stakeholders are the Host Communities, often disregarded but powerful. It is a recognized fact that economic gains from petroleum reserves development outweigh the attendant social costs brought about by both upstream and downstream operations. The social costs include population displacement, cultural changes, and environmental effects.
The environment effects are not limited to the immediate impact on land, water, and air around the host communities but include effects on traditional economic activities that are dependent on water, natural wildlife, and vegetation. Claims by, and on behalf of, indigenous host communities to participate in decisions on whether to incur such social and environmental costs, and if so, how to allocate them are advancing with increasing frequency. Where such claims are suppressed, it has often led to emergence of militant groups with full intent on impeding or crippling oil operations and engaging in hostage takings as a way of raising funds for arms. In a mono-product economy such as Nigeria, successful militancy activities in oil- producing locations spells disaster in terms of government revenues. Crude oil/Fuel theft and pipeline vandalization are becoming regular features of the Nigerian petroleum sector. This is partly attributable to militancy activities, and nefarious criminals who ride on the back of such confusion to achieve personal economic gains. The FGN have made some concessions to the host communities who bear the social costs associated with oil production and refining, e.g. by setting up the Niger Delta Ministry, Niger Delta Development Commission (NDDC), the Amnesty Deal, extra- budgetary allocations to oil producing State Governments. There have been some contributions from the MNOC’s under corporate social responsibilities. Regardless of these palliatives, a visit to the Niger Delta Region still reveals insignificant human and infrastructural developments at the moment.
Besides, who can tell how much of these benefits end up in individual possessions, and the proportion that in actually channeled towards real infrastructural development e.g. quality schools, markets, clean water plants, road and bridges, port facilities, etc. Nevertheless, more still needs to be done to ameliorate the social and environmental costs in host communities in Nigeria. The PIB should make additional concessions to host communities in the interest of environment equity and justice. Furthermore, the PIB should more importantly incorporate strategies into the Bill that ensure that the benefits incorporated in the Bill accrue in real terms to all peoples of the host communities.

It may be appropriate, at this juncture, to mention a few international developments in the petroleum sector than may guide the PIB process. The US and Western Europe account for bulk of Nigeria’s oil exports. Due to the famed ‘Global warming’ and resulting environmental directives based on the Kyoto Protocol, these countries have since commenced measures to reduce their dependence on fossil fuels. Future fuels would be mainly gas; shale oil, and biofuels. Vehicles that run on CNG, biofuels, fuel cells are currently being tested and perfected in Western countries. Hybrid vehicles are already in use in some parts of the US. Pilot tests are being carried out on vehicle that runs on hydrogen; and wind and solar forms of energy are being harnessed in increasing frequency. The fuel mix dynamics is set to change and a new paradigm will soon emerge. It is relevant to note that the world did not switch from biomass energy to coal because there was no more firewood to burn. Similarly, the world switched from coal to fossil fuels not because coal resources were depleted. In the same breath, the ‘global warming phenomenon’ has dictated a switch from fossil fuel to something else. As a nation, these developments will impact us and we need to adapt in time.

Therefore, I wish to call on the National Assembly to speedily pass the Petroleum Industry Bill as well as Gas Master Plan in their current forms. Amendments could be made as and when necessary along the implementation route. Alternatively, you may wish to call in the services of petroleum experts and who can quickly resolve and balance the interests of the contending stakeholders. The time is NOW!
*Dr Chijioke Nwaozuzu, a petroleum expert wrote from Abuja. Tel: 070 6874 3617 (SMS only)

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