The PIB Nigeria needs
An independent review of PIB 2012
Nigeria badly needs to reform its oil and gas industry, attract investments and create jobs. We commend the work that has been done to bring the bill to its current form and we must especially appreciate the minister and her team for the work done so far.
Nevertheless, the bill still requires some significant rework to truly reform and deregulate the Nigerian oil and gas industry. As it is now, the bill falls short of being a reform bill. The major constraints of excessive bureaucracy and an unduly large role for government in the operations of the industry have not been addressed. The sorts of questions that need to be addressed are:
How do we cut bureaucracy and approval times in the industry so we can be competitive and cut waste? For example, how do we cut the contracting time in the Joint Venture (JVs) and Production Sharing Contacts (PSCs) from 36 months to 3-6 months like we see in other countries?
How can we attract the right type of investments in the sector to increase job creation for host communities and Nigerians at large?
What role, if any, should the National Oil Company (NOC) play in running operations vis-a-vis the private sector? This is an important question to answer given Nigeria National Petroleum Corporation’s (NNPC’s) track record in managing business and comparing it with operations run by private sector players? For example, Indorama Eleme Petrochemicals compared with NNPC-run Eleme Petrochemicals, NLNG compared with NNPC refineries, SEPLAT compared with NPDC-run assets.
How do we eliminate toll gates and avenues for graft and insulate the industry from excessive and negative political influence? For example, should government have any role in approving commercial transactions between two private parties in the industry? Should politicians have discretionary powers to allocate licences or disapprove commercial transactions if they are not shown to breach national security or against previously stated national policy thrusts?
A recent article in The Economist Magazine of March 2 concluded as follows: “Africa needs a reborn liberation movement – except this time the aim is to free Africans from civil servants rather than colonial masters.”
Whatever we do, we must have the boldness to free the Nigerian oil and gas companies from the sorts of civil servants The Economist refers to and from unnecessary bureaucracy that stifles the sector. The National Assembly can help facilitate an elite national consensus to structurally eliminate corruption, cronyism and incompetence from the oil and gas sector so that it creates a platform for our collective national aspirations of job creation, energy security and economic empowerment. We must all join hands to seize the golden opportunity to reform Nigeria’s most critical sector at this point in our national history. The consequences of not doing so are dire and perhaps not well understood by a lot of our people including the elite.
Below, please find major changes suggested to the draft bill:
1. Adopt the Sulaiman Committee recommendations on institutions and corporate governance and capture this in the bill to clarify roles of entities and institutionalise clear corporate governance. This should include: (a) Merging National Gas Company into the NOC; (b) Merging the proposed upstream and downstream regulators into one; and (c) Replacing the Petroleum Technical Bureau with the National Petroleum Directorate.
2. Adopt the Kalu Idika Kalu (KIK) Committee recommendations for managing the refineries and capture salient points in the bill to deal with refining policy and refinery asset ownership, which is absent in the draft bill
3. Modify the fiscal provisions based on the outcome of the reconciliation committee on fiscals set up by the honourable minister of petroleum resources (HMPR) ensuring that Nigeria is competitive while bearing in mind the peculiar challenges of operating in Nigeria.
4. Clearly define royalties and rents in the bill and outline the process for making amendments. This is too important to be left to the HMPR – remove section 197.
5. Remove discretionary powers of HMPR and Mr. President – remove sections 191, 194.
6. Make Bureau of Public Enterprises (BPE) responsible for the privatisation and get their inputs into relevant privatisation clauses to be included in the bill (BPE has done the work already).
7. Define clearly which institutions have responsibility for crude sales, clearly outlining the rules using best practices from other countries.
8. Ensure open access for gas and upstream oil pipelines.
The objective of reform and deregulation in Nigeria must be to grow a broader-based economy and focus on sustainable job creation.
The oil and gas industry continues to be critical for revenue generation, for building capacity that can be deployed to other sectors, for generating fuels (particularly gas) to power a modern state and for creating jobs across the country starting with the Niger Delta. Nigeria needs to deregulate and reform the oil and gas industry to be successful. The major challenges are: (a) Balancing revenue drive and government take against incentivising badly needed investments to drive development; (b) Developing an industry structure that promotes efficiency and sustainable returns for the country across the value chain; (c) Developing an industry that thrives with higher levels of security, better environmental protection, community alignment and national harmony.
The PIB is meant to reform and position the oil and gas industry for the benefit of Nigerians. How does it fare against these challenges? We will look at each of these challenges.
Balancing revenue drive and government take against incentivising badly needed investments to drive development
Nigeria is in need of stable and steadily rising revenues to meet the developmental needs of a large country. While Nigeria has potential to do so from better management of key areas of competitive advantage, oil remains the easiest to ramp up and one that can provide capacity that can be deployed in other areas. But those revenues are at risk today. Historic underfunding of the industry has put us in a dangerous position. Base decline in production is steep and the industry is looking to new projects to replace the production. But new production appears to be threatened as major investors are warning of no new investments.
While it may be tempting to try and push government take up as a way of raising revenues, this can only work if investments will continue to be made. The emerging consensus amongst industry players – international, local, International Oil Company (IOC) or independent – is that the fiscal terms in the draft PIB (assuming rents and royalties are unchanged) will make investments less likely to happen.
Some make the case that players in the industry including the IOCs that have the deep pockets particularly in deepwater are bluffing when they state that current terms will not make investments fly. Is it true they are bluffing? Only time can tell. Let’s take a look at how the world of oil and gas prospectivity is changing to decide how we respond. Let’s start with sub-Saharan Africa. In 1975 only four countries had hydrocarbons in commercial quantities – Nigeria, Angola, Congo Brazzaville and Gabon. Today, you will need to add Chad, Ghana, Cameroun, South Sudan, North Sudan, Uganda, Tanzania, Mozambique, Senegal among hydrocarbon producing countries. In a few years we are likely to add Kenya, Liberia, Namibia and Ethiopia to that list. Beyond Africa, we are all aware of what has happened with gas and the advent of shale gas. The US which was building re-gas plants a few years ago is now getting ready to export gas. What is the implication of this? Oil and gas investors now have more options than they had a few years ago and this should be borne in mind as we craft a national response. There are a number of challenges that give concern to investors – insecurity, corruption, low approval cycles, contingent liabilities from environmental pollution, etc.
Can Nigeria afford to experiment and see if investments will happen or not? If the investors turn off the tap this will have serious consequences for Nigeria knowing that oil and gas investments require 7-10 years to mature. Today, we are already being told by DPR that reserves are declining. It is today’s reserves that are tomorrow’s production. Can we afford to take the risk and let reserves and production drop?
Developing an industry structure that promotes efficiency and sustainable returns for the country across the value chain
The PIB draft advocates the creation of a National Oil Company (NOC) and creation of a national petroleum asset management company (NAMCON). Schools of thought abound on the issue of ownership of oil companies by the state. The question to ask is: why does the state need to be involved in operations at all through an NOC? What has been our experience as a nation with state-owned companies and why would this be different? Assuming a case can be made for the asset management company because Nigerian are not ready to sell our oil and gas assets and live on taxes and royalties alone for political and emotional reasons, why do we need an NOC?
If we decide that an NOC is desirable, splitting JV assets from NOC assets as prescribed in the PIB’s proposal is commendable as it will help focus management on two clear mandates which should be good for the industry and enhance transparency and efficiency: clearer focus and attention on JV assets by NAMCON and its JV partners; and clearer focus and attention on assets owned and managed by the NOC.
This proposal, commendable as it is, however, is not sufficient for gaining the transparency, competitiveness and results that are required to propel the industry forward.
One of the big gaps in the bill is the lack of clarity on the roles of the various companies set up – NOC, NAMCON, etc. Similarly, the corporate governance requirements are not properly defined.
Upstream, no structural funding solution has been defined for the National Asset Management Company. The draft bill does not address the funding of the JVs. For several years now, JV funding has only been sufficient to cover operating expenses (OPEX). However, it is capital expenditure (CAPEX) spending that will help to develop new reserves and production. Without a structural solution to funding the JVs we are not going to see any material volumes from the JV assets. Yet JV assets have historically been the most lucrative from a government take and national revenue generation perspective.
Additionally, the proposal to have PSCs managed by the NOC and not NAMCON is inconsistent with the philosophy of leaving the NOC with assets it owns and for which it is accountable. What value will it add to the PSCs that it has no competency managing? How can we transfer such strategic national assets to an NOC that will be partially privatised when a national asset management company exists? The NOC needs to compete so that Nigerians can get value for money.
Downstream, while deregulation as prescribed is highly commendable, the industry structure and the domiciliation of critical midstream and logistics assets in the NOC will not make for a level-playing field and will perpetuate the ongoing ambiguity of roles. Would the logistics assets being unbundled not help with promoting greater badly needed investments in the sector? It is the lack of investments in the logistics assets that is causing the country to lose hundreds if not thousands of citizens and billions of naira every year to petrol tanker-related accidents. Will it not enhance transparency and make Nigerians better understand the oil and gas downstream value chain? Will it not enhance competition as other suppliers and mid-stream investors will have a lower barrier to entering the industry for the benefit of Nigerians if the assets are open to all and not held by the NOC with its history and reputation for corruption and mismanagement?
Examples abound on how effective regulators with a light regulatory touch and private sector competition have been the key to reform success. In Nigeria, the telecommunications industry and the banking industry are cases in point where regulators are doing a fairly decent job. The ongoing power reform is one that all keen observers are watching, and already the NERC is gaining the confidence of citizens and investors. The PIB appears to fall far short of the regulatory approach of the industries mentioned above. Direct intervention and approvals abound and even in transactions between two companies in an asset acquisition and divestment process, we need the approval of the minister! In our socio-political context, this is a recipe for abuse. A lot of discretion and interference appears to still be allowed in the draft bill. Should we not be following the robust approach of empowered regulators with the ministry left to policymaking and long-range planning for the industry?
Developing an industry that thrives with higher levels of security, better environmental protection, community alignment and national harmony
Will a high government take solve the problems here? Has a high government take solved the problem in the past? Should we not lower government take and allow communities and companies to negotiate and come up with arrangements that keep communities aligned and that help companies and communities work to operate in cleaner, safer and more synergistic manner? Should we not reform the current arrangements with derivation and let it target more the communities?
Conclusion
The PIB offers a great opportunity to make changes to how the oil and gas industry works and, by extension, how the Nigerian economy works. A competitive, independent oil and gas industry could bring about a revolution in our economic fortunes and truly lay the platform for success for future generations. A well functioning and competitive oil and gas industry will help stabilise the Niger Delta by creating work and ensuring meaningful integration of host communities, provide gas for power to the benefit of the whole nation, gas for fertiliser to support agriculture, gas for petrochemicals for building a light manufacturing industry as well as a good engineering infrastructure that can be leveraged across other industries. Whatever we do, we must remember that the world is dynamic and the oil and gas landscape is changing rapidly. New technology and new markets mean that we have to compete and move fast to diversify our economy away from over-reliance on oil and gas. On a final note, we need to pass a bill that is concise enough to leave little room for ambiguity while also minimising the avenues for abuse. We have a unique opportunity to lay the foundations of an industry that can help launch Nigeria forward, if properly managed, for the benefit of our people. Can the National Assembly help facilitate an elite national consensus to structurally eliminate corruption, cronyism and incompetence from the oil and gas sector so that it creates a platform for our collective national aspirations of job creation, energy security and economic empowerment? If they do, they will go down in history as the set of leaders who helped secure the future of current and future generations of Nigerians.
EYITAYO AKPOFURE & KEITH CALEB
Akpofure and Caleb are former oil industry executives now in consulting.
