PIGB: Nigeria’s Oil Industry Shaping Up To Global Standards, Ready For Investments
For more than two decades, the Nigerian petroleum industry was in limbo, with uncertainty, lack of clear rules, divestments and corruption among many others prevailing in the industry. This article focuses on the Petroleum Industry Governance Bill (PIGB), which would soon become law, and the numerous opportunities presented by the legislation to enforce the much-needed reforms in the industry and inspire investments needed to drive the growth and development of the Nigerian oil and gas industry.
The long expected reform of the Nigerian petroleum industry is gradually taking shape, with the passage of the Petroleum Industry Governance Bill (PIGB) by the National Assembly and the recent transmission to the Presidency for assent. The PIGB, one of the four variants of the initial Petroleum Industry Bill (PIB) was passed by the Senate and the House of Representatives, March 2018. This was 17 years after the PIB was initially presented before the National Assembly. With the passage, stakeholders are optimistic that the cloud of uncertainty that had hung over the Nigerian petroleum industry would be eliminated and investments that had been deferred would begin to pour in.
Nigeria Extractive Industries Transparency Initiative’s (NEITI) Policy Brief on the ‘The Urgency of a New Petroleum Sector Law,’ had stated that in the sixteen years the process of reforms commenced, and in eight years since the PIB was first drafted, there was no question that the petroleum industry was in desperate need of regulatory reforms. Issues bordering on imprecise rules, excessive regulatory discretion, and the fusion of regulatory, policy and operator roles were first-order problems which in turn created second order causes. While other issues like corruption, lack of transparency and accountability were consequences in a chain of ripple effects, leading ultimately to a severely underperforming economy, loss of benefits to the country, and a largely impoverished population.
The NEITI report had stated that there is however, a direct and hugely significant cost associated with promising a new petroleum industry law in the first place but having an indefinite delivery date.
According to the report, more than the size of the return, the rational investor prizes regulatory certainty above practically all else: clear, unambiguous rules, predictable policymaking and efficient regulation, adding that these clarity and predictability have been lacking, especially in the past sixteen years since the process commenced. In the eight years that the PIB was first presented for legislation, experts estimated that over $120 billion, at over $15 billion yearly, had been lost to investment withheld or diverted by investors to other, more predictable jurisdictions.
The hedging by investors stem from the expectation that the old rules would no longer apply, and not knowing when the new ones would materialize, they wait, or walk, if they are investors looking at the time value of money. Considering the limited pool of investment funds, the amounts of funds previously allocated by International Oil Companies for investment in Nigeria shrunk due to the emergence of several other viable oil and gas projects across Africa including Ghana, Senegal, Mozambique, Kenya, Uganda and Tanzania among others.
Furthermore it was estimated that projected lost earnings due to factors including loss of investment that should have happened stood at $100 billion, representing only five years period between 2007 and 2012. With the passage of the Bill, investors already are gearing up to return to the Nigerian petroleum industry en masse.
Specifically, few days after the passage of the Bill, the Chief Executive Officer (CEO) Royal Dutch Shell, Ben Van Beurden, alongside MD Shell Petroleum Development Company of Nigeria, Mr Osagie Okunbor and VP Nigeria and Gabon Shell Mr Peter Costello visited President Muhammadu Buhari in London. The meeting which was facilitated by Minister of State for Petroleum Resources, Mr. Ibe Kachikwu and the Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Mr. Maikanti Baru, presented an opportunity for the team from Shell to open talks with their Nigerian counterpart on a potential $15 billion investment in Nigeria. This may also include the $13.5 billion Zabazaba oilfield project jointly developed by Shell and Nigerian Agip Oil Company (NAOC). Both companies are on the verge of reaching Final Investment Decision (FID) on the project.
The Zabazaba and the Etan fields are located in oil prospecting lease (OPL) 245 offshore Nigeria in the Niger Delta of the Gulf of Guinea, in water depths ranging from 1,200m-2,400m. The oil and gas fields form part of an integrated project, which is being jointly developed by Nigerian Agip Exploration (NAE) and Shell Nigeria Exploration and Production Company (SNEPCO). Nigerian Agip Exploration (NAE) is also serving as the operator for the project. First production from the $13.5 billion integrated development project is expected in 2020. The deepwater project is expected to support small and medium sized businesses in Nigeria, with half of the Zabazaba FPSO topside currently slated to be fabricated and integrated in the country. Few days after the Bill was passed, precisely on April 25, 2018, the Nigerian Content Development Monitoring Board (NCDMB) stated that it has concluded the bid evaluations for the Zabazaba deepwater project within an unprecedented period of 14 months.
It said this was in line with the directive of Mr. Ibe Kachikwu, for the reduction of the protracted contracting cycle in the petroleum industry. This represented a positive sign for the petroleum industry, as analysts are optimistic that many more investors would begin to take position so as to benefit from the expected attractiveness of the industry. Speaking on the PIGB, Minister of State for Petroleum Resources, Mr. Ibe Kachikwu, declared that the PIGB and the other bills that are presently at the National Assembly,
had been articulated and designed to establish clear and enduring good governance principles; provide for fiscal regimes that are flexible and that would guarantee optimal take for the government. He also stated that Bills would support domestic gas utilization through the National Gas Master Plan; enhance local content; properly align the roles and functions of institutions; strengthen and reposition the Nigerian National Petroleum Corporation (NNPC) for enhanced productivity; and ensure that NNPC runs like all world class commercial entities.
He further declared that investors, considering Nigeria’s attractive gas market, would be encouraged to invest due to the development of a friendly environment, while surplus gas would be available for power generation, forcing the emergence of distribution companies looking to make profits from trading gas. He said, “The challenges of any beautiful plan lie in its implementation and you can be assured that this administration would ensure the implementation in order to ensure that the oil and gas industry yields profit for the Nigerian people.” Also speaking, President of the Nigerian Association for Energy Economics, Professor Wumi Iledare stated that the passage of the PIGB offers significant optimism to the petroleum sector. According to him, the passage of the Bill is a worthy milestone in the industry and the country in general, noting that reforms and restructuring espoused in the Bills are expected to completely revolutionise the institutional, governance, fiscal and communal structures of the oil and gas business in Nigeria.
The PIGB seeks to establish a framework for the creation of commercially-oriented and profit-driven petroleum entities, to ensure value addition and internationalisation of the Nigerian petroleum industry, through the creation of efficient and effective governing institutions with clear and separate roles for the petroleum industry. The Bill is the first in a series of long awaited petroleum industry laws designed to reform the Nigerian oil and gas industry. The PIB, an omnibus law meant to regulate the entire sphere of the industry and repeal all current existing oil and gas legislation, had struggled to see the light of day despite its introduction to the National Assembly over 16 years ago. Subsequently, the National Assembly decided to break the PIB into a number of different pieces of legislation guiding specific aspects of the industry. The PIGB is the first of several Bills, such as the Petroleum Industry Fiscal Bill, Petroleum Industry Administration Bill and the Host Community Bill, still currently before the Senate, which the National Assembly will debate and pass in due course.
Highlights of the PIGB includes the fact that it seeks to establish a number of new or existing institutions, which can be broadly classified into the following categories: Policy and general strategy formulator– tasked with setting overall policy and direction for the industry; Regulator – charged with regulating the entire industry and Commercial Institutions – tasked with holding and managing the assets and interests of the Government, while Ancillary Institutions are tasked with the provision of specific support services assigned to them. The PIGB defines the power of the Minister of Petroleum Resources to be responsible for setting the overall policy and strategy in the petroleum sector. The Bill also grants the Minister preemptive rights to all petroleum products in the country in the event of a National emergency.
However, the Minister would no longer have the power to grant, renew, amend, extend or revoke any lease or licence issued pursuant to the provisions of the Act. Under the Bill, the Minister cannot create any new entity. Also, the PIGB seeks the establishment of the National Petroleum Regulatory Commission (NPRC), which replaces the current Department of Petroleum Resources (DPR), the Petroleum Inspectorate and the Petroleum Products Pricing Regulatory Agency (PPPRA). It shall be responsible for regulating the entire industry, with its regulatory functions cutting across the downstream, midstream and upstream sectors. It is saddled with the responsibilities of administering and enforcing policies, laws and regulations relating to all aspects of the petroleum operations assigned to it under the provisions of this Act or any regulations made in pursuance of this Act or any other enactment.
It is also expected to monitor and enforce compliance with the terms and conditions of all leases, licences, permits and authorisations issued in respect of any petroleum operation; advise the Minister on fiscal and other issues pertaining to the petroleum industry and conduct bid rounds or other processes for the award of any license or lease required for petroleum exploration or production. It is expected to establish the methodology for determining appropriate tariffs for gas processing, gas transportation, transmission and transportation of crude oil and bulk storage of oil and gas; establish the framework for calculating the fair market value of petroleum products; regulate the supply, distribution, marketing and retail of petroleum products.
The NPRC would be vested with all assets, funds, resources and other movable and immovable properties currently held by the Petroleum Inspectorate, Department of Petroleum Resources and the Petroleum Products and Pricing Regulatory Agency. The Commission, which shall be wholly independent from the Minister of Petroleum, shall be run by a Governing Board whose members, other than those representing the Ministries of Petroleum, Finance and Environment, shall be appointed by the President subject to the approval of the Senate. The Governing Board shall comprise eleven Directors, five of whom shall be Executive Directors.
The bill also seeks the establishment of three commercial entities, the Nigerian Petroleum Liability Management Company, the Nigerian Petroleum Assets Management Company Limited and the National Petroleum Company. These entities are to replace the NNPC. The PIGB was drafted basically to create efficient and effective governing institutions with clear and separate roles for the industry. It also seeks to establish a framework for the creation of commercial and profit oriented petroleum entities to ensure value addition and internationalization of the Nigerian oil and gas industry.
The PIGB targets the promotion of transparency and accountability in the administration of petroleum resources in Nigeria, and thus, foster a conducive business environment within the sector. In his own contribution, Executive Secretary of NEITI, Mr. Waziri Adio, stated that the PIGB would stem the massive loss of revenue recorded in the petroleum industry, arising from corrupt practices and process lapses. Adio declared that NEITI’s previous reports in the petroleum industry had also revealed that over $10.4 billion and N378.7 billion were lost through under-remittances, inefficiencies, theft or absence of a clear governance framework for the oil and gas industry.
According to him, the total cost to the nation in 2013 alone was N1.74 trillion largely as a result of the absence of a new law. He said, “NEITI is optimistic that with the new governance law for the industry, these huge revenue losses to the nation as a result of process lapses and outright stealing will be strictly checked if not eliminated.” Adio explained that NEITI’s interest in the issue, was in view of the urgency and strategic importance of a new law to replace the existing archaic legislations that have aided huge revenue losses, impeded transparency, accountability and investment opportunities in the nation’s oil and gas industry. He added that “NEITI recalls that as an anti-
corruption agency in the sector, it boldly alerted the nation last year through a special Policy Brief ‘The urgency of a new petroleum sector law,’ that the current stagnation of investment opportunities in the petroleum industry was as a result of the absence of a new law for the sector. This has led to huge revenue losses to the tune of over $200 billion.
“In that publication which was widely circulated, NEITI argued that the ‘revenue losses were as a result of investments withheld or diverted by investors to other (more predictable) jurisdictions.’ The publication added that ‘The hedging by investors stems from the expectation that the old rules would no longer apply, but not knowing when the new ones would materialise.’”
NEITI further noted that the implementation of the global Extractive Industries Transparency Initiative, which Nigeria is a key signatory, had over the years been frustrated by the absence of a dynamic law that suits modern business modules and trends in the ever evolving oil and gas industry. He averred that it remained convinced that the PIGB when assented to by the President would provide a dynamic governance framework required to re-position the petroleum industry to fully embrace competition, openness, accountability, professionalism and better profit returns on investments to both companies and government.
Analysts at United Capital Research Plc, in their report titled, “Passage of the PIGB …taking a step away from ‘how not to run an oil industry’”, disclosed that the implementation of the legislation is anticipated to bring about a considerable amount of certainty to the petroleum industry bedeviled by legislative uncertainty for years. The report noted that a question that comes to mind when subjected to further critique is the timeliness of the passage of the bill when considered in the context of the time frame between when the broader PIB was drafted, the circumstances surrounding its drafting, the underlying assumption at the time vis-a-vis current realities.
The analysts explained that one of the most important provisions of the PIGB is the creation of the NPRC which will harmonize regulatory roles in the sector and operate as a single regulator thereby phasing out the proliferation of multiple agencies rendering duplicated or overlapping functions. Ultimately, the analysts argued that the PIGB will bring about checks and balances which will moderate the excesses of executive arm of government and reduce the incidence of cases such as the Malabu oil scandal on OPL 245 nonetheless this may extend decision making.
They added that ensuring viable and profit-oriented entities would bring about improved corporate governance, accountability and transparency in the operation of the entities.
“The possibility that the National Petroleum Company may be subsequently listed just like Saudi Aramco, also gives the entity access to capital market funding,” they noted.
The analysts in the report, also declared that the clarity and harmonization of regulation that comes with the implementation of the PIGB would make doing business in the sector easy. In addition, they noted that it would strengthen the drive towards ending fuel importation, development of private refineries and strengthen national gas policy. Continuing, the analysts said, “The Nigerian oil and gas industry has been described as an example of “how not to run” an oil sector. Although it contributes more than 70 per cent of government revenue, 90 per cent of FX earnings as well as external reserves, drives foreign capital inflows and domestic output growth, the sector has suffered from erratic regulation, mismanagement, scandals and gross inefficiency.
“This partly accounts for the wide spread civil unrest, pipeline vandalism and militancy in the host communities, as government officials, both military and civilians, are accused of capitalizing on oil assets as rewards for getting into power at the expense of investment in the sector.
The profound cases of corruption scandals that made headlines such as the Halliburton scandal, allegations of missing oil remittances levied against the NNPC ($5.2bn in 2007 and $20.0bn in 2014) and the more recent Malabu oil scandal gives credence to the abovementioned and buttresses the need for something urgent to be done.
“While the recently passed PIGB may not be able to swiftly restructure the Nigerian oil & gas sector from where it is as highlighted above to the desired state. We think the genuine implementation of the provisions of the Bill should go a long way in effectively repositioning the sector towards global competitiveness, efficiency and optimality. Thus, we opine the passage and eventual implementation of the PIGB will be a significant step away from “how not to run” the sector.” As the nation awaits the signing of the Bill into law by President Muhammadu Buhari, there is hope that the Nigerian petroleum industry would regain its lost glory and investments, both new and deferred would begin to pour in, as confidence once again returns to the nation’s industry.