A Review of the Nigerian Energy Industry

Curbing executive abuses through the PIB

17 March 2015, Lagos – Apart from corruption, which former President Olusegun Obasanjo identified in his maiden speech in 1999 as Nigeria’s bane, he also vowed to stop discretionary award of oil blocks by the president and introduce an open, competitive and transparent bid rounds.

Mrs Diezani Alison-Madueke, Minister of Petroleum

Previous military heads of state had used discretionary award of oil blocks to reward associates and cronies, who neither had experience in oil and gas exploration and production (E &P) business, nor paid commensurate fees in the form of signature bonuses into federal government’s coffers.

The discretionary powers of the president fueled arbitrariness and abuse of power in the award and cancellation of oil licenses and its attendant corruption as evidenced in the celebrated Malabo case.

Discretionary powers also threatened investors’ confidence as many foreign investors were scared of staking their funds in oil block deals over concerns that the president might wake up one day and cancel the deals, especially when there is a change in administration.

Obasanjo’s effort to introduce open, competitive and transparent bid round did not completely remove the discretionary powers of the president as two or three deals ended up in disputes when the president attempted to exercise his discretionary powers during his tenure.

The alleged attempt by Obasanjo to exercise his discretionary powers also led to the controversial award of Oil Prospecting License (OPL) 291, which led to the suspension of the then Director of the Department of Petroleum Resources (DPR), Mr. Tony Chukwueke.

Chukwueke was suspended after he awarded OPL 291 to Starcrest Nigeria Energy Limited during the May 2006 oil licensing auction on the alleged orders of the president.

But it was on records that Obasanjo’s administration made the first deliberate effort to whittle down the discretionary powers of the president and reform the entire oil and gas industry.

He had on April 24, 2000, set up the Oil and Gas Reform Implementation Committee (OGIC), headed by his Honorary Special Adviser on Energy and Strategic Matters, the late Dr. Rilwanu Lukman, to carry out the first comprehensive reform of the oil and gas industry.

Obasanjo had left office before he could implement the National Oil and Gas Policy (NOGP) report of the Lukman’s committee.

The imperatives for reform in the oil and gas sector prompted the late President Umaru Musa Yar’Adua to reconstitute a new committee, also headed by Lukman, on September 7, 2007.

Lukman’s new committee, which submitted its report on August 3, 2008, was mandated to “transform the broad provisions in the NOGP into functional institutional structures that are legal and practical for the effective management of the oil and gas sector in Nigeria”.

The PIB, which has a chequered history, according to the Deputy Speaker of the House of Representatives, Hon. Emeka Ihedioha, was based on the report of these two committees.

The PIB seeks to replace the current myriad of about 16 obsolete legislative and administrative instruments and transform them into a single transparent and coherent document.

The reform bill is the first deliberate attempt to reform the country’s oil and gas sector since Nigeria joined the league of oil producing and exporting countries in 1957.

When the country became a major player in the global oil and gas business several legislations were enacted to govern the sector.

However, as some of these laws are over 50 years old, there is no doubt that these legislations are no longer relevant in the modern oil and gas business.
Many of these laws are obsolete military decrees that are not in line with global best practices and standards.

Key provisions of PIB

A key provision of the new bill is the creation of a commercially viable National Oil Company (NOC) to compete with other national oil companies and the multinational oil companies in the exploration and exploitation of hydrocarbons in Nigeria.

The PIB recommends the unbundling of NNPC as presently constituted to National Oil Company that promotes indigenous operational capacity development.

The bill also requires the federal government to divest 30 per cent of its shareholding in the proposed NOC and sell the shares on the Nigerian Stock Exchange (NSE).

The NOC, which is slated to be the successor company of the NNPC, is meant to be created not later than three months upon enactment of the Act.

The PIB actually seeks to create a viable oil company to operate under commercial terms and will transform into a world class national oil firm in the mould of Saudi Aramco, Malaysia’s Petronas and Brazil’s Petrobras.

The reform bill also provides that government should incorporate the National Gas Company (NGC) Plc and sell up to 49 per cent of the equity to the public on the NSE.

It also seeks the creation of an Asset Management Company and the strengthening of regulatory and inspectorate institutions that promote transparency, safety, consumer rights and safe environments.

Another landmark provision of the PIB is the creation of the Petroleum Host Community Fund to address restiveness in the oil producing communities.
This will bring succor to the oil-producing communities as the fund will be utilised for the development of the economic and social infrastructure of the communities.

The latest draft PIB mandates each upstream petroleum company to remit on a monthly basis 10 per cent of the net profit derived from petroleum operations in onshore areas and in the offshore shallow water areas directly into the Fund.

The bill however provides that where an act of vandalism, sabotage or other civil unrest occurs that causes damage to the upstream facilities allocated to a community, such community shall forfeit its entitlement to the portion of the PHCF for repair and remediation of the damage.

The federal government in 2010 said the condition for oil communities to enjoy the proposed 10 per cent equity in the former draft PIB was for them to ensure safety of oil installations in their areas.

Also, in the new PIB, the fiscal regime – royalty and tax is predicated on production as opposed to terrain and investment respectively.

The current royalty by production captures the output of a company as opposed to its location; creates a fair balance between small and big producers operating in the same terrain and enables operators to continue to make fair returns during field decline.

It also proposes lower rates for condensate from Non-Associated Gas (NAG) fields and also lower rates for frontier and ultra deepwater basins.

Also the new royalty by price triggers a mechanism that is fair to all irrespective of the terrain.

The royalty has self -adjusting rate based on the price of crude oil above $50 per barrel and natural gas price of above $2.0 per thousand standard cubic feet.
Under the new tax regimes, the Company Income Tax Act (CITA) puts all operating companies on the same pedestal and also provides for the payment of minimum tax where incentives would otherwise not have made the company liable to Nigeria Hydrocarbon Tax

The draft bill encourages the adoption of flexible fiscal measures that attracts investment and provides for tax holidays and minimum threshold price biased taxation.
The new tax regime removes all the rigours and intricacies involved in the calculation of NHT, fixing Company Income Tax (CIT) rate is 30per cent regardless of geographical location.
President, Ministers’ powers in PIB

Though the spirit of the Obasanjo-led reform was the removal of the discretionary powers of the president to grant petroleum licences because of its abuse and potential to fuel corruption, the authors of the current version of the PIB retained this provision in the reform bill.

The retention of this provision was obviously done at the instance of the executive arm of the government, which thinks that anything to the contrary means reducing its powers.

A major flaw in Nigeria’s law-making process is that when an incumbent executive or National Assembly makes laws or create policies, they insert clauses that will help them achieve their selfish purposes, without recognising the fact that laws are not made for only the incumbent but for future generations.

When the popular demand for the common good of the people is to reduce the influence or powers of the president, governor or local government chairman on an issue, the incumbent will erroneously assume that the law is against him or her and will frustrate such law.

It was therefore not a surprise that the authors of the PIB inserted a clause that gives the President discretionary powers to award oil block, powers, which are prone to flagrant abuse, going by the past experience.

Section 191 of the reform bill gives the president the discretionary powers to grant petroleum licences.

The Minister of Petroleum Resources also enjoys enormous powers in the PIB as the minister is saddled with the responsibility of serving as the chairman or recommending to the president the appointment of chairmen of boards of some agencies under PIB..

The PIB provides that the petroleum minister shall be responsible for co-ordination of the activities of the petroleum industry and shall exercise general supervision over all operations and all institutions in the industry

The bill also provides that the minister shall upon advice of the inspectorate, grant, amend, renew, extend or revoke upstream petroleum licences and leases pursuant to the provisions of this Act…

In other words, the PIB also gives the minister the discretionary power to give his/her consent to an assignment.

Even though the PIB provides that the minister can only exercise this power upon the advice of the inspectorates, it is the same minister that appoints or recommends the appointment of heads of these agencies and therefore, will not have any difficulty in getting their recommendation to achieve any selfish ambition.

The implication is that the PIB gives absolute right to the minister to revoke a license or lease.

Comparison with other countries

The concentration of powers on the petroleum minister by the PIB is not in line with the standards in advanced economies.

For instance, in the United Kingdom, the Petroleum Law of 1990 provides that the minister shall exercise general supervision over all operations carried on under licences and leases granted under this law.

But according to the Act, the minister exercises the powers on behalf of Her Majesty, the Queen.

In the Norway, the Petroleum Act of 1996 provides that the Norwegian State has the proprietary right to subsea petroleum deposits and the exclusive right to resource management.

The Norwegian petroleum law did not concentrate powers on the president or the minister.

According to their law, resource management is actually executed by the King but strictly in accordance with the provisions of the Act and decisions made by the Parliament.

In other words, functional powers reside with the King, rather than the minister and strictly in accordance with the decisions of the parliament.

But in Nigeria, the powers are delegated by the President to the minister without regard to the National Assembly, thus giving room for impunity, corruption and abuse of powers.

Also in Malaysia, the 1974 Petroleum Act exclusively vested the functional powers to the state-owned corporation, PETRONAS, which is under the direct supervision of the Prime Minister.

Functional powers reside with PETRONAS, equivalent of the NNPC, which is under the supervision of the Prime Minister, also equivalent of Nigeria’s President.

While the petroleum laws of Norway and Malaysia confer such powers on the President, the Brazilian petroleum law, confers powers on the National Petroleum Agency (ANP).

The Regulation of Brazilian Petroleum Industry Law of 1997 confers the National Council of Energy Policy, presided over by the Minister of Mines and Energy with the responsibilities of proposing national policies and specific measures to the President.

While the National Petroleum Agency – ANP headed by the Energy Minister is vested with the responsibility for administration of the petroleum laws.
But to avoid political interference, abuse of powers and concentration of powers on an individual, all decisions are vested in the ANP, rather than the minister
The PIB provides that the minister shall upon advice of the inspectorates, grant upstream petroleum licences and leases pursuant to the provisions of the PIB.
In other words, the PIB gives the minister the discretionary power to give his/her consent to an assignment but upon the advice of the inspectorates.

In the UK however, there is no provision for consent by the minister and no
provision for consent to an assignment as all the powers are vested in Her Majesty.

Also in both the Norway and Malaysia, there is no corresponding provision for consent

In Norway, all ownership rights are vested in PETRONAS.
However, in Brazil, the transfer of the concession contract is permitted, as long as the object and the contractual conditions are preserved and the new concessionaire conforms to the technical, economical and legal requirements established by the ANP.

The law also provides that the transfer shall be subject to the previous and explicit authorisation given by the ANP

According to the law, the transfer of concessions is subject to authorisation given by the ANP as long as the object and the contractual conditions are preserved

Nigeria’s PIB provides that the Minister shall extend or revoke upstream petroleum licences and leases pursuant to the provisions of this Act, thus giving absolute right to the minister to revoke a license or lease.

In the United Kingdom, revocations are specifically mentioned in authorisation for pipelines, construction, installations and construction: (Part III; Section 18) (2) If it appears to the Secretary of State that the execution of works authorised by a work’s authorisation has not begun at the expiry of the period specified in subsection (3)…

This implies that the powers of the Secretary of State to revoke licenses apply only to pipelines, construction and installations and not exploration licenses.
In the Norway, Section 10.3 of the Act states that “In the event of serious or repeated violations of this Act, regulations issued pursuant hereto, stipulated conditions or orders issued, the King may revoke a license granted pursuant to this Act”.

The right to ‘take over’ is vested on the State, acting on behalf of the King but this can only be exercised when there is “serious or repeated violations” of the petroleum law, unlike in Nigeria where the president can exercise his discretionary powers at will to take actions that can fuel corruption, arbitrations and protracted litigations.

In Malaysia, there is however no provision for revocation, while in Brazil revocation of concessions are executed by ANP

Termination of concessions is administered by the ANP subject to provisions of the Act or by agreement between ANP and the concessionaire.

By concentrating powers on an individual, rather than on strong institutions, the PIB deviates from other standard petroleum laws such as the United Kingdom, Malaysia, and Brazil.

Removal of powers of President, Minister

The recent complete removal of the discretionary power of the president to grant petroleum licences and the introduction of a competitive bidding process by the committee of the House of Representatives will no doubt boost the confidence of investors in the Nigeria’s oil and gas sector.

Under the latest amendment, the petroleum minister is also denied the power to either serve as chairman or recommend to the president the appointment of chairmen of boards of some agencies.

These recommendations are contained in the executive summary of the report on the new PIB presented to the House of Representatives on Thursday at plenary by the Ad-hoc Committee on PIB ahead of its consideration and approval by the committee of the whole when the House reconvenes on March 31, 2015.

Briefing journalists on the works of his committee, the chairman of the 23-member Ad-Hoc Committee, Hon. Ishaka Bawa, said the removal of the president’s power to grant oil blocks was to avoid the practice whereby the power for the award of oil blocks becomes discretionary.

“Discretionary power of the president to grant petroleum licences and lease as contained in section 191 of the original Bill is completely removed. Instead, the committee recommended competitive biddings for the award of such licences and leases. Whereas the committee has retained the conventional powers of the minister under Section 6 of the Bill, the powers conferred on the minister over the control of newly- established agencies in the petroleum industry appear to be enormous and capable of undermining the independence of the regulatory agencies.”

“The rationale behind the removal of ministerial powers is to ensure the smooth running of the agencies without undue influence, and guarantee independence of the same, which is in line with current global practice,” he added.
Discretionary powers of the President and excessive powers by the Minister of Petroleum Resources lead to arbitrary use of powers to approve or revoke licenses.

This has fueled corruption and protracted litigations that erode the confidence of investors in doing business in the sector.

For instance, Obasanjo’s administration in 2005 awarded a South Korean consortium led by Korean National Oil Company (KNOC) rights to the two oil blocks – OPL 321 and OPL 323 in return for a pledge of major infrastructure investment.

The consortium included Daewoo Shipbuildin and Korea Electric Power Corportion.

But the late President Yar’Adua in January 2009 withdrew KNOC’s rights to the
two major offshore oil fields, saying the Korean firm failed to fully pay the investment pledged.

With the powers of the president to renew or revoke oil block licenses, foreign investors are alarmed on the unlimited powers of the president and the security of contracts when there is a change in administrations.

– Ejiofor Alike, This Day

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