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Oil and Gas Industry and the Ongoing Reforms

-By Omowunmi Iledare, PhD

The quest to reform the Nigerian petroleum industry has been on the front burner of policymakers since the turn of the new millennium. Several attempts have been made with the setting up of the Oil and Gas Implementation Committee (OGIC), which culminated into the versions of the Petroleum Industry Bills (PIB) of 2008 and 2012. In 2008, there was a single Bill as was the case in 2012. The 2018 approach segmented the PIB and proposed four separate but interrelated bills—governance, administration, fiscals and host community. The governance bill was very much in alignment with the petroleum and natural gas policy documents gazette by the Federal Executive Committee (FEC) in 2017. Unfortunately, like PIB 2008 and PIB 2012 it failed to see the light of day, PIB 2018 efforts failed.

Major concerns that have stalled previous reform efforts include the issue of oil and gas exploration security, perceived regressive fiscal terms, contract sanctity, long approval processes, and political instability, lack of ownership of efforts, to mention a few. These challenges have mitigated the inflow of investment and stalled development in the oil and gas sector in particular and the National economy in general. Broadly, the PIB 2020 seeks to address the aforementioned challenges, and perhaps we are close to bringing the reform process to a mutually desirable conclusion among the stakeholders. The 2020 Bill reversed to the single bill design approach with four chapters, deal majorly with great optical similarity to the PIB 2012 Bill. The first chapter describes the governance institutions with clearly defined roles in terms of policy, regulations and commercial responsibilities. Chapter two deals with administration and licensing and chapter three covers host community development strategic framework and implementation. Lastly, Chapter four is devoted to fiscal framework, which to a large extent, reflects the fiscal philosophies embraced in the 2017 national petroleum fiscal policy document. It will be recalled that FEC did not gazette the fiscal document in 2017.

For the purpose of this first in five series article on PIB 2020, permit me to share a quick review of my immediate apolitical reactions on the PIB 2020 as follows:

First, with respect to industry governance, the idea of NNPC Limited and IJV in the PIB 2020 seem the most evolutionary but a lot of fine-tuning is necessary in my opinion in order to optimize value addition. I hasten to say that a governing Board appointed solely by the President and not shareholders may be riddled with political maneuvers, sentiments and patronage can deter private investments. I also have some concerns with the office of the Minster. It has limited human capital competency level to perform tasks assigned to it in the bill. I cannot imagine NNPC letting go its agency role without the presence of competent and a well-rewarded workforce in the Ministry of Petroleum. Thus, there must be a way to restructure the ministry’s professional staff to function effectively in order to accomplish the desire to separate the institutional role within the context of policy, regulatory and commercial for transparency and accountability. Going the way of a dual regulatory institutions beats my imaginations but it is tolerable. My next article in January shall expand on the governance framework and institutions.

Secondly, regarding administration and licensing, it is a welcome relief to think of reducing the petroleum block size, which PIB 2020 did well, making relinquishment of blocks and the idea of drill or drop a lot easier to implement than was the case in Petroleum Act 1969. I am not sure it is wise to induce a conversion process with unnecessarily lucrative fiscal terms whereby the benefits of lease conversion is far less than the costs to the society. The future is equally as important as the present with integrational equity consideration. It might be better to just let the leases in play expire.

I also have a gripe with the idea of discretional award by the President or Minister for strategic reason(s) without recourse to the Commission. Discretionary award of blocks can be aptly described as a beauty contest and mostly cannot guarantee a fair market value for such scarce resources with developmental uncertainty and price volatility. The more efficient way to give out a block of petroleum for a fair market value and efficient resource management is through a transparently competitive bidding process!

The third component of the bill is with respect to the petroleum host community. The definition of a host community beyond the upstream activities impact from drilling, production and crude movement portrays rent-seeking and rent sharing syndrome. My aversion any form of transfer payments and makes it easy for me to embrace the idea of the Petroleum Host Community Fund in PIB 2020. There is a very clear specification of how to use the fund in the bill. The fund utilization provision in PIB 2020 represents a great departure from what is in the NDDC Act and the Derivation Fund for the Niger Delta. I must say that some clarity in the fund governance institutions proposed in the bill is necessary to allay the community’s exclusion perceptions with respect to membership of the Settlor Board of Trustee. Lastly, chapter four of the bill presents the petroleum fiscal framework, which is anchored on a dual tax system — corporate income tax and hydrocarbon resource tax.

There is also a sliding royalty system that is anchor on production, terrain and price to lessen the regressive effect of royalty on investment performance. The tax and royalty systems design portrays in my opinion government aversion to a delay rent extraction. I would rather want the government to recalibrate its royalty and tax structure to deemphasize early rent extraction and embrace a mutuality of interest approach to fiscal system design. The idea of generating revenue from gas for the next ten years must be shelved. Yes, there is a possibility of abuse with respect to tax and royalty holidays, but an easy instrument to encourage and accelerate gas development is inevitable. Tax and royalty holidays that are based on output seems better than incentives based on efforts. Finally, superficial imposition of fiscal arrangements in the Bill needs clarity. For me, it should be concessionary, concessionary, and concessionary. If at all possible, government must avoid any direct contractual agreement with any lessee.

In conclusion, passing and signing PIB 2020 to become PIA 2020 by the end of the first quarter in 2021 will significantly reduce the heightened level of uncertainty that has limited investments flow to oil and gas industry for a while back. Of course, there are other things that Nigeria must also do to complement PIB 2020 to accelerate sustainable economic development post-Covid-19. Nigeria must move away from an ad hoc approach to solving its oil and gas industry policy issues and problems. It must also think much more about using everything it has to solve the economic problems of all and not just a select few.

Sentiments and patronage must be detested in the sector going forward Post PIB 2020 and Covid-19. It is so sad that prebendalism, elite capture, and poverty are in a collision course, and a national agenda is required to resolve the collision in the oil sector as addressed in PIB 2020. It begins with devolution of power to the component units, and the decentralization of the economic structure is inevitable.

Unitary system of government falsely described as federal system that supports winners take all mentality and accentuate Esau’s Syndrome is not sustainable. Post Covid-19, dependency on oil used mostly to fund goods and services produced abroad must stop with no cross-subsidization of forex.

Monetary policy effectiveness depends on fiscal responsibility by members of the society, including the political elites of course.

Professor OMOWUMI O. ILEDARE, is a Petroleum Economics and he is currently the Chair of University of Gold Coast (UCC) Institute for Oil and Gas Studies, Cape Coast, Ghana