(This Op-Ed was written before PIB was assented to by the President)
-Professor Omowunmi O. Iledare
1.0 – Preamble
The structure of the petroleum industry in Nigeria has been significantly altered in comparison to two decades ago, when the petroleum sector reform was initiated in 2000. Report of activities from the Department of Petroleum Resources (DPR) reveals there are about 85 operating companies in Nigeria, and 34 of these companies are producing operators in Nigeria. The international oil companies (IOCs) account for about 47 per cent of the producing operators, while the indigenous companies account for the other proportion. Ironically, the international oil companies, with 47 per cent operatorship, contribute about 94 per cent of the gross national oil production, with highest economic activities in the petroleum industry. However, lately there has been a significant shift of the IOCs’ interests, away from the onshore terrain into other terrains and outside the shores of Nigeria. The latter has been to other competing territories, especially within the Gulf of Guinea and other West African countries.
Nigeria is still Africa’s largest oil and gas producer, although 2nd in proved oil and gas reserves, ranking 12th and 10th, respectively, among the top 20 petroleum jurisdictions worldwide as at December 2020. However, the petroleum sector in Nigeria has long been suffering from ineffective governance, amorphous regulatory and overlapping policy institutions, with prebendalistic, individualistic, and Esau’s syndromic mindsets. Archaic policies, practices, laws and regulations from the 1960s continue to drive the modern oil and gas industry, making international perception of industry sustainability at its lowest ranking, according to familiar reports to all. As a result, the current state of Nigeria’s petroleum industry activities reveals declining trends in things that matter to sustain oil and gas business.
The joint venture (JV) assets, which are predominantly in the onshore and shallow water terrains, with a minimum 55 per cent government participating interest, have declined by about a quarter, in terms of percentage contribution to crude oil production, leading to a significant loss of huge revenue to the government, in terms of declining royalty, tax oil and equity oil. The production sharing contract assets, with about 3 per cent production growth, has been characterised with high investment cost, thereby eroding accruable revenue to the government as well. Surprisingly, the government, for whatever reasons, renewed de-risk PSC investments as industry reforms stalled.
The non-self-adjusting fiscal framework that incentivises efforts, using investment tax credits or tax allowance, with less consideration for outcome-based reward system, could be attributed to the rising cost profile in PSC arrangements. Fortunately, the independent and marginal operators, accounting for 6 per cent production assets, have production capacity trending upward, albeit marginally in growth and revenue contribution to the nation. Cumulatively, the mix of the huge production decline from JV assets and the marginal production growth from indigenous/independent operators reflect a colossal revenue decline. Of course, this is a case of concern for the assets and the productivity, even though home-grown participation is improving.
The sharp drop in drilling activity may easily be attributed to the political uncertainty enveloping the industry in Nigeria due, in part, to the non-passage of (the Petroleum Industry Bill) PIB since 2000, and perhaps, the persistence disturbance in the Niger Delta. Empirical evidence suggests that the level of drilling activity is below expectations, in comparison to countries with less endowed petroleum resources over the last five years. The upstream oil and gas industry trend shows that, if Nigeria continues crude oil production, at the current production rate, with zero reserves replacements, it will take less than 50 years to deplete its reserves, ceteris paribus. Globally, the average reserves life index (RLI) for the top 20 countries is about 90 years, and Nigeria ranks 13th in oil reserves life index. This implies that, if the nation desires economic growth at a higher rate than its population grows, Nigeria will diminish its reserves faster than the global average, and this will lead to a significant weakness in its energy security objective.
However, relative to Africa’s reserves life index of about 44 years, the nation’s resource replacement is competitive; but compared with the Organisation for Petroleum Exporting Countries (OPEC), with an RLI of about 85 years, there is much work to be done. Reserves replacement ratio (RRR), which measures the rate of replacing depleted reserves, shows that Africa has not been able to add new reserves to replace produced reserves. Less than 100 per cent of reserves produced are currently being replaced by reserves additions. But the Middle East nations, which constitute a large number of OPEC members, and the South and Central America, with close demographics to Nigeria, are doing better replacing all produced reserves with new reserves. This implies that the latter regions have been able to replace as much reserves depleted, and even more, which guarantees energy for the future generations in these regions. Of course, with the zero-carbon targets, optimal energy supply mix strategy in these regions would elongate the role of petroleum beyond 2050.
Among the OPEC member countries, Nigeria’s RRR is extremely low, ranking 8th, only higher than Algeria, Angola, Ecuador and Qatar. Relative to the size of its reserves, and ranking among the member countries, Nigeria appears competitive among the member countries, however, the recoverable oil reserves are being extracted more quickly than they are replaced. This poses a significant concern for Nigeria to strive to ensure energy security, by adding new reserves, for its growing population to avoid becoming net importer of crude oil in the future, to meet its energy demands, despite the global desire to transit to renewable and sustainable energy.
Despite Nigeria’s impressive natural resources size, and growth with average production rate, over two million BOPD in the last four decades, the nation is still not a developed nation, and has not relished a commensurate economic growth like its par among the top 11 in the Middle East. Over the last four decades, the Nigerian economy has been highly dependent on the capital intensive petroleum industry. The oil and gas sector accounts for about 95 per cent of foreign exchange earnings, 98 per cent of total exports, and 75 per cent of federally collected revenue in Nigeria. However, with respect to the production capacity, there has been a huge paradox on domestic energy utilisation and consumption within the nation and the continent over the years, leading to abysmal contribution to the economic growth indices, especially the overall gross domestic product (GDP). Evidence abound, showing that the level of economic growth in developed economies is strongly linked to the rate of energy consumption per capita, and not necessarily energy production. The latter is evidenced in many of the developed nations, especially the oil importing nations, under the auspices of the Organisation for Economic Cooperation and Development (OECD).
Economic analysis suggests that, if current trends persist without a progressive reform, Nigeria’s JV production is likely to decline by 17 per cent in the short term, and might plunge further down by 52 per cent in the medium term outlook. Even though the PSC production capacity is projected to increase by 30 per cent in the medium term, the impact of rising cost, as a result of weak/poor cost curtailment in current incentive measure, the expected revenue for fiscal budgeting might not be realisable. The projected long term outlook puts the JV production capacity to have dropped by 97 per cent, while the PSC contribution increases by 53 per cent. In the aggregate sense, it means overall capacity would reduce by approximately 40 per cent, ceteris paribus. Consequently, measures have to be in place to avert the looming production capacity decline, hence, the PIB passage makes more sense now to avert the collapse of the oil and gas industry under the weight of COVID-19 and the energy transition dynamics.
A key challenge facing the petroleum industry in Nigeria has been identified, with the protracted delay in the industry reformation, thereby creating a lot of uncertainties, and not too clear a path for intending investors. The petroleum industry reform bill, as expected, did address the issues of effective and progressive fiscal system, enhance and strengthen regulatory and governance institutions, restructure and refocus the national oil company into a viable commercial entity, assuage the host and impacted communities, attract investments to engender new reserves addition, and ultimately make the industry internationally competitive, with a balanced stake to stakeholders. Interestingly, many contemporary nations – Brazil, Norway, Saudi Arabia, Angola, and Ghana – have reformed their oil and gas sectors, lately, in the wake of the low oil price dynamics, and the renewed call for alternative energy sources, and anticipated energy supply mix era.
That the continued delay in the passage of the PIB, as well as the lack of purposeful reforms over the last decades, have created a climate of uncertainty in the petroleum sector in Nigeria, which is not conjectural. Neither is it doubtful that the delayed reform has drastically affected the competitiveness and investment attractiveness of the sector. The reform of the oil and gas sector in Nigeria commenced in the year 2000, with noble expectations and objectives. The long and winding reform journey has resulted in significant industry investment opportunity losses, estimated at approximately $15 billion annually, according to available reports.
While past deficiencies are openly acknowledged, successive governments have failed to effectively complete the much-needed overhaul of the oil and gas sector in Nigeria. These efforts, championed by the 8th National Assembly, and concluded pragmatically by the 9th National Assembly, are laudable. The global oil and gas industry is anxiously waiting on the President of the Federal Republic, Muhammadu Buhari (GCFR), to add his insignia to the Bill, so as to make it an Act, at last. This Op-Ed aims to discuss some important provisions on the key components of the legislated PIB 2020, governance and institutions, host community development, and fiscal framework. The purpose of the Op-Ed is to guide the PIB 2020 implementation committee in the development of an effective implementation strategy for national prosperity, while keeping in view, posterity. It also aims to point out some areas of concerns that regulations must address in order to halt the deterioration or diminishing value addition of the oil and gas industry sector, to the national economy.
2.0 – Matters arising from PIB 2020 provisions on institutions and governance
Strikingly, with its top 12 ranking in crude oil production, Nigeria still imports petroleum products – a measure of the poor domestic utilisation of its crude oil – which has negatively impacted the multiplier effects of economic development and fiscal budgeting. The tendency to focus on foreign exchange earnings, instead of value creation, as the basis for its resource development, leaves much to be desired. This informs the exporting of the bulk of its oil production, which has led to the neglect and dilapidated state of the nation’s refineries and petrochemical industries. Consequently, the incessant shortage of petroleum products, especially gasoline, continues to linger, and the oligopolistic power of major petroleum products’ marketers persist.
Furthermore, uncertainty in crude oil prices – especially plummeting – has much negative impacts on the trade balance between exported crude oil and imported petroleum products, including fiscal budgeting in resource dependent nations, like Nigeria. Ironically, once the non-renewable hydrocarbon resources are depleted, and the potentials are not efficiently utilised, they are no longer available. If this trend continues, and new reserves are not found, it poses a great challenge to the economy at large, especially for countries, like Nigeria where petroleum accounts for a large proportion of the economic indices. The present economic challenges in Venezuela are an example.
Decades of delay in formulating a new petroleum policy framework in the management of Nigeria’s oil and energy resources is a factor that has caused dwindling revenue, diversion of major investments, very low rig activities for exploration and production, low reserves additions, poor economic development, very high unemployment rate, very low per capital income, and many economic woes for the nation. The expectations that the passage of a petroleum Bill would erode uncertainties in the petroleum industry, and boost investors’ confidence to spur new investments in Nigeria’s natural resources development are in order. It is also very plausible that passing the reform bills might lead to reserves additions, more drilling exploration/exploitation activities, expanding daily oil production output, ensuring revenue improvement for Nigeria, and at the same time keep Nigeria internationally competitive and attractive to investors in upstream, midstream and downstream sectors of the industry. It is also expected that the passage of the Bill will facilitate the needed reform, and restructuring of the energy sector, and full implementation of the Gas Master Plan (GMP).
The provisions in the legislated PIB 2020 on institutions and governance in July 2021 seek to reverse the near comatose and negative challenges bedeviling the Nigerian petroleum industry. The provisions strive to create and strengthen institutions to support transparency, accountability and value delivery. The principles of clear separation of roles, focus, transparent and good governance that covers the value chain are the main thrust of the provisions on governance and institution in PIB 2020. To achieve the separation of roles’ objectives, the governance and institutional framework to drive the process hinges basically on the Office of the Minister, two regulatory institutions – the Commission for the upstream and the Authority for the downstream, and one commercial institution. In the authority, there is an established fund to address midstream gas infrastructure deficit.
The minister
The Minister, as evident in the PIB 2020, is designated to act as the proprietor and driver of the industry policy and strategic planning. The office of the Minister has been legislated to set the general industry direction, supervise the industry, on behalf of the government, and take responsibility for the award of all upstream licenses. It is important to note that PIB 2020 disavows discretionary awards of upstream licenses, and promotes transparency and accountability in licensing rounds. It seems, however, that the ability of the Minister to function effectively is not addressed squarely in the legislated PIB 2020, with respect to technical capacity in the Ministry of Petroleum. There is no provision in the PIB 2020 to guarantee policy continuity and sustainability of strategic planning, which would depend on capable permanent professional and technical staff in the Ministry of Petroleum Resources. Perhaps, the Minister might rebrand, restructure, and redefine the Ministry, subsequent to the Bill becoming an Act by regulations to ensure continuity.
The commission
The establishment of the Upstream Petroleum Regulatory Commission, referred to as ‘the Commission’, is vested with petroleum administration and regulatory powers across the upstream segment of the petroleum industry, as against the single regulatory institutions across the industry value chain in PIGB 2018. Basically, the Commission is entrusted with the current functions of the DPR and additional responsibilities, but with the independence to carry out its commercial and technical regulatory functions, with a supervisory competent Board.
The changing role of the proposed Commission, as against the amalgamated agencies, is enhanced by the independence and powers vested on the Commission. The legislated Bill proposes the appointment of board members into the Commission by the President, subject to the confirmation of the Senate. It also proposes a tenured term for the members. It is expected that, with this appointment mechanism, there would be a high degree of institutional and regulatory independence, with little or no political interference. Presently, some of the challenges encountered by the agencies, which culminated, most often, into the regulatory capture and low performances, have been hinged on political intrusion, poor funding mechanism, weak or restricted enforcement authority, and mismatched leadership competency. However, with the proposed reforms, it is expected that these challenges would be significantly ameliorated to achieve a strong and vibrant institution, with institutional authority, rather than personal authority.
The authority
Not unexpectedly, there is legislation by the 9th National Assembly of the downstream regulator called ‘the Authority’. Its key function is to regulate the downstream sector of the oil and gas industry in Nigeria. One recalls that one of the arguments for not signing the PIGB 2018 into law was the misrepresentation that a single regulator will be too powerful to manage. The executive got what it wanted, two regulators for the industry, despite, in my opinion, apparent technical capacity deficiency to effectively have two regulatory institutions. Resolving the technical capacity limitations are not addressed in the PIB 2020, and redundancy of staff more likely than not is envisaged, because of legislative absorption of ill-equipped staff for the new industry.
One good glaring thing in the PIB 2020 is that the era of petroleum products pricing is on its last lap. There seems to be in place to eliminate government interferences and would-be reimbursements or subsidy payments. A little surprising, though, are the fixing of a natural gas benchmark price, and the legislative pricing structure for the Authority. Finally, the process of appointing the Board of the Authority worries me, simply because of the prebendalistic mindset, though speculative. The best one can hope for, is that the Board of Authority will adopt professional ethics, rather than political expediency in its deliberations.
Nigerian National Petroleum Corporation Limited
Unlike the PIGB 2018, which proposes the unbundling of the present national oil company, the Nigerian National Petroleum Corporation (NNPC), into two viable commercial entities, with clear and focused deliverables, the PIB 2020 legislated a single commercial entity to be established and limited by shares under Companies and Allied Matters Act (CAMA). At the time of its incorporation, the initial shares shall be in the ratio of 50 per cent, to be held in trust by the Ministry of Finance Incorporated, and 50 per cent by the Ministry of Petroleum Incorporated, on behalf of the government.
The corporation, NNPC Limited, shall be subject to the Code of Corporate Governance, issued by the Securities and Exchange Commission (SEC), but shall not be subject to the provisions of the Fiscal Responsibility Act 2007 and the Public Procurement Act 2007. Hence, it is presumed that this commercial arm would operate like a private commercial company, with capitalisation and shares traded in any stock exchange market within recognised jurisdictions. This presupposes a big change in the management style of the present NNPC who dabbles into commercial, regulatory and policy activities. The old strategic goal to maximise social welfare must give way to a new business strategy to maximise profits for optimal returns on investment for its shareholders.
NNPC Limited has the mandate to own and operate assets responsibly and commercially, be responsible for the management of investments in all industry businesses by the government of the federation. Furthermore, NNPC Limited has the obligation to lift and sell royalty oil, tax oil, and profit oil, on behalf of the Commission, the Service and the Federation, respectively. Interestingly, the PIB 2020 seems to empower NNPC Limited to manage the 30 per cent of Profit Hydrocarbon escrowed for the frontier exploration fund. This particular provision is at odd with the commerciality objective, and has generated a lot of discussions, in terms of the constitutionality and the appropriateness of the provision. Legislating how a liability company must disburse its earnings seems quite worrisome. That notwithstanding, investing 30 per cent of the federation fund for exploration in frontier basins also seems at odds with the risk attitude and profile of a risk averse investors, the government of Nigeria, with competing use of a limited fund at its disposal.
3.0 – Matters arising from PIB 2020 provisions on host community development
The provisions on Host Community Development (HCD) are set to achieve laudable objectives, including, to foster sustainable prosperity in the host communities, minimise social welfare loss in the communities, enhance harmonious and peaceful coexistence among stakeholders, and establish funding framework to support economic, social and infrastructure development in communities.
Surprisingly, perhaps for political expediency, the designation of who is a petroleum host community is left for the Settlor (Licensee) in its area of operations, around the pipeline right of ways, and any other facilities is left for the Settlor to determine. The Settlor is tasked with establishing the needs assessment of its hosts. It is noteworthy, to observe that a community may be a host or cease to be host; a community may also be a host to more than one Settlor and the benefits accruing to each community may differ, based on the matrix that is utilised. It is important to note that the Advisory Committee is the initiator of all the community development projects. The role of the Management Committee is to review the projects, and seek approval from the Trustee established by the Settlor. This is so glaringly different from the Niger Delta Development Commission (NDDC), where the contributors to the fund have no say on how the money is spent, and the ineffectiveness of the Commission over the years is evident. In other words, the efficacy of NDDC leaves much to be desired, hence the legislative specificity on Host Community Development Fund (HCDF) distribution is inevitable – 75 per cent for capital, 20 per cent for reserve fund, and 5 per cent for administration.
The source and level of funding host community development seem to have created some discomfort and agitations, understandably so, in the petroleum host communities and allies. However, it is an innovative homegrown solution to a local problem. It is also laudable, because it has a legal basis to back it up with well defined structure and guidelines on how to send the fund. This approach represents a great departure from nearly all the previous intervention funds, including NDDC, Derivation Fund, and the Ministry of Niger Delta. The provisions in the PIB 2020 on the host community development, though imperfect, are commendable. The only caveat emerges from the school of thought, that tying the source of funding host community development to 3 per cent of preceding year’s OPEX. Of course, I understand that there are provisions for grants, aids, etc., 3 per cent of OPEX is inadequate for the type of development needed in the petroleum host communities.
Moreover, even though 3 per cent of OPEX is revenue neutral, in terms of the burden on operators, because it is tax deductible, OPEX spending is too stochastic and heterogeneous, and this makes annual disbursement volatile and unevenly realistic. A fraction of OPEX also cannot address the ownership agitation in the host community stakeholders. My preference has always been the surrendering of a portion of royalty to host community development would have lessened the ownership agitation. The closest to royalty would have been surrendering a portion of the derivation fund to the host community fund by state legislation. I must commend the 9th NASS for renouncing the tying the HCDF to equity participation. Dividend payments, based on equity participation, is not guaranteed, and comes with carried-interest costs.
4.0 – Matters arising from PIB 2020 provisions on fiscal framework
The basis for the design of the fiscal system in any jurisdiction would, mostly, depend on the overall objectives of the host government, with due consideration to the perspectives and goals of investors. As a result, the desire to manage petroleum resources in a jurisdiction and geopolitical influence may differ from a desire to be competitive and attractive to global investments. Finding a balance between the two goals majorly shifts government attention to the latter. Thus, petroleum prolific nations of the world are continually reforming fiscal systems in their jurisdictions that are stable, dynamic, flexible, and, of course, competitive. It is becoming a convention to design fiscal regimes, with mutuality of interests between the government’s portion of economic rent and financial returns to investors. Nigeria, as a nation, has, over the last few decades, made several attempts to reform its petroleum fiscal system to attract investors, and create some stability in the oil and gas sector.
To a large extent, in my opinion, the fiscal objectives, structure, and schemes in the legislated PIB 2020 follow global best practice in fiscal system design. However, the legislated fiscal instruments and terms in the legislated PIB 2020 in July 2021 are glaringly investor friendly to a fault, making the optimisation of mutuality of interests, suboptimal, in an aggregate sense. Perhaps, the impact of COVID-19 pandemic shocks on the oil and gas sector, coupled with the emerging energy transition debates, informed the designers to make the fiscal instruments and terms in the PIB 2020 liberally skewed in favour of investors. Perceptively speaking, it seems the designers accepted nearly everything, in my opinion, that the industry wanted. One can only hope the investors would react favourably to these highly generous terms, in a relatively de-risked deep-water environment.
In the legislated PIB 2020, the design of the tax fiscal element follows significantly global best practice, with local flavor, shifting from a single tax system – the petroleum profit tax, to a dual tax system, hydrocarbon resource tax and corporate income tax, which is an acceptable practice in other regions. It allows targeting incentives to output, rather than efforts by jurisdiction. The royalty scheme in the legislated Bill shows some degrees of fiscal progressivity. The scheme is similar to what is being practiced in other jurisdictions, as well. The incentives in the PIB 2020 show a clear departure from the traditional effort-based incentives (ITA/ITC) to the more modern output-based incentives in the form of production allowances, with generous capital allowance and cost management scheme to promote cost deficiency. There is no doubt that, to the extent possible, the core principles of fiscal rules of general applications were in play in the PIB 2020 fiscal design.
Unfortunately, as far as I am concerned, the necessary interplay of the instruments and terms would have been better coordinated to optimise mutuality of interests. For example, dropping resource tax for deep-water operations and natural gas was ill advised. Could it be because royalty is introduced for deep-water? I would have recommended suspending the resource tax with a sunset date. Again, a tax holiday would have been preferred, learning from the zero royalty saga in the PSC 1993 assets, which was never revisited. A sunset specification for gas royalty would have kept the reform process holistic. Let me be clear, I am not opposed to suspending royalty or resource tax to support the decade of gas mantra by the Federal Government, but public policy perception index matters, as well. It is certainly commendable that, when it comes to natural gas development, the fiscal framework designers disavowed optimisation of revenue extraction in favour of economic expansion. Using natural gas as the engine to propel the national economy, this decade, is a wise decision.
Finally, with respect to matters arising on fiscal provisions, the fear of the unknown seems to have driven the production allowance schemes in the legislated PIB 2020, especially granting a cap of $2.50 per barrel for old assets, perpetually. I certainly understand the apprehension of the limited funding opportunity to develop discovered reserves, under rapid transition to renewables. But, I hasten to say that the world is not running out of oil, and oil cannot be run out of the optimal global energy supply mix, without unintended consequences that may border on global energy security. Furthermore, I think the legislated PIB should have stayed out of dictating a fixed gas price, based on the legislated PIB. Neither should there have been a legislative pricing structure for gas, as well, in the PIB 2020. The inclusion of a model contract in the Bill with legislative commercial terms, looks like old wine in a new wine bottle. Commercial terms should not have been legislated.
5.0 – Matters arising from PIB 2020 – concluding remarks, observations
Passing the Executive Petroleum Industry Bill 2020 successfully, certainly ended the petroleum industry reform journey in and out of the National Assembly, since 2008. The Presidency, having claimed ownership of the reform efforts, will conclude the journey assiduously with a strategic and inclusive approach to the implementation of the Bill. This Op-Ed is a cerebral perspective on matters arising from the final version of the PIB 2020, legislated by the 9th National Assembly in July 2021. It is, hopefully, a closing argument for me, having offered a lot of perspectives, over the years, through lectures, professional and academic training, and research papers. The changing global energy landscapes, where traditional petroleum exporter has become importer, and the emerging economies looking frantically for where to get oil and gas in the face of climate change phenomenon, make the passage of this Bill inevitable at this time. I am glad it happened.
Certainly, the consequences of the COVID-19 pandemic and pronouncements coming out of developed economies seem to signal an apparent premature prediction of the end of the crude oil era, making the PIB 2020 fiscal terms overtly generous to investors. The legislated PIB 2020 is certainly not perfect, in terms of optimising stakeholders’ mutuality of interests. However, in an overall sense, the PIB 2020 has established vital strong institutions to support the fiscal competitiveness and attractiveness goal of the reform process in Nigeria. To some extent, the legislated Bill did attempt to address the host community demands for sustainable development, with an innovative funding framework.
Finally, I would certainly not sacrifice a good legislated bill for a perfect unlegislated bill, after 20 years, wobbling along this reform journey. Yes, it is true that the Bill is not perfect, and I have no crystal ball within my reach. Yet, let me venture to say that the design of the PIB 2020 fiscals would enhance indigenous utilisation of oil and gas resources in Nigeria for its sustainable development, ceteris paribus. Of course, this conclusion is certainly subject to proper implementations of the provisions in the legislated PIB 2020, using heterogeneous, competent and cerebral professionals with posterity in view.