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Towards A Functional Fiscal Bill For Nigeria Oil And Gas Industry

…Gas critical as an enabler to change the narrative in terms of economic development, diversification, industrialisation and employment

…Restructuring of fiscal policy to revamp the industry for external investors

…Approvals and bureaucratic process impacting the upstream

…Competitiveness is significant in the oil industry environment to make it investors’ friendly  

After five decades of oil and gas exploration in Nigeria, there is disquiet among stakeholders concerning issues of bottlenecks, contractor sanctity, procurement processes etc. These however have brought the country to where it is today. Rather than investment flowing, it is stagnation and investors are taking investments out of the country.

The Facility For Oil Sector Transformation (FOSTER), in partnership with Society of Petroleum Engineers (SPE), organized a forum where major oil and gas associations expressed their views concerning the current situation of the industry. FOSTER is an oil industry advocacy group with interest in the transformation process of the sector. It engaged stakeholders in the industry to deliberate and suggest how the industry can move forward especially on fiscal regime and sustainable policies that will drive the sector to attract external investors for Nigeria oil and gas industry.

On the side of SPE, it is one of the foremost oil and gas industry associations in Nigeria and its members are mainly involved in the engineering aspect as its name suggests. They practice in different companies either multinationals or indigenous oil firms across Nigeria.

In her views, the President of Nigeria Gas Association (NGA), Mrs Audrey Joe-Ezigbo asserted that it is oil and gas that Nigeria will use to get out of oil and gas issues which have been emphasised over the time by industry stakeholders. It is a reality that confronts the industry. “Professionals are in a journey where they have to take Nigeria into a value adding nation.” A nation that is able to produce goods and services locally for both domestic and export market, it has to accelerate to a country that generates substantial foreign exchange through import substitution to export proceeds.

Audrey said the industry should create multiple employment opportunities across board. This can only be attained if Nigeria effectively developed its resources. Significant investment requires fund for development, the money may not be available locally but the vast quantum of it comes from external investors.

The NGA President pointed out that in 2019, World Economic Forum global competitive index ranked Nigeria to be 116 out of 141 countries. Egypt was 93rd. Indicators of global competitive ranking include level of infrastructure, institutions, macro-economic stability among others. But Nigeria lacks virile infrastructure which continues to be a stand point for the country. In 2019, Nigeria’s Internal Generated Revenue (IGR) was about 3.3 billion which was almost 50% less than the previous year. While the International Monitory Fund (IMF), projected that Nigeria IGR crash from $9 billion to $2.4 billion.

These disquiet figures are the reasons petroleum sector will continue to be the cornerstone of conversation and concern to stakeholders in the industry, it is where over 70% of government revenues lies with 90% of foreign revenues.

Audrey disclosed that Nigeria’s oil and gas sector contribution to Gross Domestic Product (GDP) is less than 10% about 9.4% compared to other OPEC nations which is literary one of the lowest contributions of any OPEC country. Astoundingly, there are countries that contribute almost 50% of the oil and gas sector to their GDP. Kuwait contributes 40% while Libya is up to 50%. These figures show that Nigeria has to restructure its fiscal policy to develop its industry.

The Egypt Experience

Audrey further gave an example of Egypt with about 120 million population, second largest economy and major energy market in Africa. In the north Africa country, thermal power is the bulk of its gas offtake similar to Nigeria where 80% of gas supplies go to the power sector. Egypt has about 61 trillion cubic feet (tcf) of natural gas while Nigeria has about 203 and .16 from DPR data while Egypt has a quarter of Nigeria’s reserve. It has about 42 tcf yet to be discovered and another 600 tcf.

But domestic production was not able to meet up with domestic demand for gas. “If Nigeria is not careful, it is moving rapidly towards this part because building a vibrant domestic gas market that is sustainable means we are not only looking at leveraging prices as an incentive regulation to stimulate demand, but also putting in place the appropriate fiscals that can capitalize supplies growth.” After supply growth, infrastructural expansion must be in place to make it work.

According to Audrey, Egypt recognised that it has to fix its Exploration and Production (E&P) sector, the country began to put in place different fiscal policies incentives and unlock its economy. Within the last five to six years, the country has made significant gas discovery through one major field and brought out first gas. In the last five years Egypt signed over 80 to 83 E&P deals with International Oil Companies (IOCs). The country has injected over $15 to 16 billion worth of investment into its petroleum sector.

Today, Egypt is a net exporter of gas, it has attained production to make it energy self-sufficiency. This is exactly what Nigeria needs to do by having enhanced fiscals. Stakeholders  should express  concern by “asking what has brought Nigeria to a place where it stands rather than investment flowing, it is stagnation and investors are taking their investments out of the country.”

However, fiscal is a significant tool that signals to investors, “where their money goes, how competitive it is, how attractive the sector is, how sustainable is their revenues, how profitable it will be and how secured it will be.”

Audrey disclosed that NGA as a stakeholder in the industry is concerned about depletion and accretion of investment in the gas space because natural gas is an enabler which can change the Nigerian narrative in terms of economic development, diversification, industrialization and employment. NGA has been engaging for years on the issue of Petroleum Industry Fiscal Bill (PIFB) and the National Fiscal Policy, its advocacy effort in this regard is unrelenting. The gas association has also made several reviews as the way forward for the industry.

Effectively, gas should be taken as an enabler not as a source for immediate tax revenue. Gas should not be over taxed, it has to be incentivized for investments and to enable domestic production and infrastructure to grow. For NGA, the association wants fiscal outcome to enable stand-alone gas project to be profitable in its own right.

In considering fiscals, it is supercilious to take a look at other models that have worked like that of NLNG. “What are the things they did that made them successful, they are a poster child for gas development in Nigeria.”

The NGA President said, recommendations have been projected on cost efficiency factor that should be applied to gas operations given the prevailing environment in Nigeria, royalties, statutory payment and tax regime. Indigenous and small marginal players that have different cost profiles play major roles.

For fiscal instrument to thrive, challenges such as bottlenecks, contractor sanctity, procurement processes must be put in place to change the land scape.

NGA believes there is an imperative for government to pass fiscal legislation for specific formation on upstream, midstream and downstream aspect of the gas industry.

Audrey added that NGA advocates for fiscal provision that will address different issues in the sector such that gas will be a place of comfort for investors. “Fiscal  will address issues around debt capitals and funding. We want to see more public private partnership investment in gas and power infrastructure.” There should be a well-founded transformation for the future generation.

Nigeria has to use an enhanced regulation to drive investment of its 200 tcf and 40 billion barrels of reserve to be developed in such that the country’s economy will be sustained.

Giving her views on the country’s regulation for the oil industry, Professor Yinka Omorogbe, President of Nigeria Association of Energy Economics (NAEE) said, lack of fiscal laws has hampered the progress of the country’s oil industry.

For investors to invest in any country, the system and process are of utmost importance because stability and predictability will be considered. Hence fiscals are not in vacuum.  Fiscals are not taken outside general legal framework; they are different legal instruments for the government. It is an entire framework. A country cannot have proper regulation if it does not have good laws.

Professor Omorogbe was of the view that Nigeria gas sector has no enabling law to drive it. This has proved detrimental to the sector. Obviously, Nigeria should take drastic action to enact laws for its petroleum industry. “Petroleum fiscal laws investment has to be founded on a fiscal framework that is investment friendly for the environment. Our general policies are not clear.”

The NAEE President bemoaned legal system regime in Nigeria with regards to the oil and gas industry, that is obsolete and outdated, it is not in alignment with international best practices, but rather opaque. “Frankly, it is not in the interest of Nigeria because it does add values to the country.” The provision of the law ensures that the industry moves in the right direction and it is an instrument of change.

Professor Omorogbe stated further that Nigeria taxes are high and disincentive with cumbersome processes which discourage activities in the industry.

On the aspect of reforms which industry practitioners have clamoured for years, being one the progenitor of Petroleum Industry Bill (PIB), Omorogbe decried that the bill had been for twelve years without been passed into law. “We have not been able to get it right, policy wise. This is a disaster and we cannot have a good environment.”

According to Omorogbe, every four years, Nigeria starts a new legislative journey for the PIB and heads nowhere with the bill, from 2015 to 2019 it is still the same process. There is a pretense that the country moves forward with the legislative bill whereas the journey has not taken a different route. When will the petroleum industry journey end?

Unfortunately, industry players are no longer stressing on reforms, the focus is on transformation due to lull of activities in the sector.

The NAEE President advocated for clear policies in the oil and gas industry that will harmonise the sector. Law is the foundation that allows transparent functional upstream, midstream and downstream operating in line with international best practices.

Hopefully, as Nigeria gets its acts together there will be a functional industry for the country devoid of fuel subsidy, importation of fuel, an enhanced upstream with accordance to principles for good governance.

Fiscal regulation to attract investment in order to develop Nigeria vast resources for sustainable development is a concern for the industry.

Emphasising on the issue of regulation, the President of Nigerian Association of Petroleum Explorationist (NAPE), Mr. Alex Tarka was of the view that fiscal issue has been with oil and gas industry and it will continue until it is addressed.

The vision of NAPE is, “our ideas find oil and gas” that agenda will vigorously be pursued for oil exploration.

Tarka said the Petroleum Act of 1969 is clear, apt and enduring which is still relevant under the current market dynamics. The recent DeepWater Offshore Act (DOA) as amended addresses royalty issues in the deep-water which has fueled a lot of debate in the industry.

Aggressive exploration is ongoing within the Nigerian National Petroleum Corporation (NNPC) and the DOA that addresses opportunities in the frontier is 7.5% in the inland basins. The issue of regulation has changed pace with emerging trend in technology, commercial and financial evolution in the upstream.

However, part of the current challenges is that government is the biggest participant in every aspect of upstream through complex business arrangement. This worries players in the industry.

The NAPE President commended the recent deregulation of the downstream by the government. He believed that more steps will be taken to encourage and stimulate the industry. “We have shortage of funds and cost are being impacted partly because of dollar exchange which will continue to fluctuate and create issue around us for some time.”

Tarka expressed concern on approvals in the industry that is bugged with bureaucracy. Approval and contracting processes are cumbersome. This has impacted the industry especially on the upstream. Signature bonuses involving Production Service Contracts (PSCs) companies could not be implemented or operated due to unrealities of commercials.

The NAPE President alluded to divestment by government to allow other investors and encourage investments in the oil sector. Government should stimulate private participation in sensitive areas of the oil and gas industry for more investors to be involved and jobs created.

Tarka was optimistic that the Ajaokuta-Kano-Kaduna (A-K-K) gas project will boost industrialization and government will make revenue from the arrangement.

NAPE advice is for reduction of government participation and aims at equity participation. Trust will be built among stakeholders in the industry, investors will be comfortable to operate in such an environment.

On the protracted PIB that has become an august visitor to every legislative session, Tarka said players in the industry are bothered and there is a mistrust on the passage of the bill. Due to the inability of the passage of PIB, exploration has been impacted. He added that palliatives are needed in the upstream, this could be through taxation and waivers, it doesn’t take anything for government to give waivers.

The NAPE President noted that the upstream business has to be operated like other industry. Companies should be properly incorporated by shares and go public for the interest of the citizens to own shares. Indigenous oil firm such as Seplat and Saudi Aramco are listed in the Stock Exchanges. This will make companies visible to local and international investors in terms of raising capital to fund new and grow existing project. Security exchanges around the world have proved to be platform for corporate accountability, transparency and democratization of wealth for citizens.

Tarka opined that the position of NAPE being an oil industry association is to spur investment to attract revenue for government.

Fiscal regulations can attract investment to develop Nigeria resources, the Chairman, Nigerian Council of Society of Petroleum Engineers (SPE), Mr. Joe Nwakwue pointed out that failure to re-invigorate an industry that has served Nigeria for more than five decades, leaves a sour taste for operators of the industry.

According to Nwakwue, SPE had presented its position through several papers on PIB to the government. “But the kernel of our position is very simple and the bulk of our members working in the industry makes us desire growth of the industry .” Thus, “SPE aspiration is that the Nigeria oil and industry will continue to grow from leap to leap and that it will be sustainable growth in long term.”

For SPE, competitive fiscal arrangement coupled with best friendly business environment is what the country needs to grow the oil sector and this must be a priority to the government. Competitiveness is significant and the business environment has to be investor friendly, going forward the expectation of SPE is for thorough fiscal arrangement that will encourage the development of the midstream and downstream for a complete valued chain development.

SPE wants statutory arrangement and a framework that will allow the country to save for the rainy day,and invest in critical infrastructure for the future.

Nwakwue said Norway has Sovereign Wealth Fund in excess of $1trillion from oil and gas revenue which will be passed on from generation to generation. Any new fiscal regime that does not address issues in the industry will be inadequate.

Notwithstanding, SPE advocates for a competitive industry that will attract investors in spite of the country’s tough operating environment. It needs to enable diversification of oil and gas economy through its midstream and downstream, with a workable refinery, Nigeria’s 2 million barrels can be refined, export its products rather than exporting crude. This amounts to self-sufficiency.