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The Petroleum Industry Bill: Achieving Its Intended Reform Objectives? – Oluwayomi Ope-Agbe and Chinwe Ekene Ezeigbo
Alison Diezani is Nigeria's Minister of Petroleum

The Petroleum Industry Bill: Achieving Its Intended Reform Objectives? – Oluwayomi Ope-Agbe and Chinwe Ekene Ezeigbo

This policy brief examines the 2012 Executive Draft Petroleum Industry Bill (PIB) to determine whether the Bill achieves its intended reform objectives.  It analyses the PIB vis-à-vis Government’s reform objectives as contained in the National Oil and Gas Policy as well as best practice from other jurisdictions. It concludes that overall the PIB falls short of its objectives and makes recommendations on what can be included in the Bill towards achieving its goals.

Background

In a bid to liberalise and restructure the oil and gas sector, government inaugurated the Oil and Gas Implementation Committee (OGIC) under the National Council on Privatisation (NCP) to coordinate and monitor all activities relating to the reform and privatisation of the sector. The OGIC developed a policy document covering all aspects of the industry with emphasis on securing maximum sustainable value to the nation[1]. Key among the reform objectives are:

  • the need for separation and clarity of roles of the agencies operating in the industry
  •  reduced government participation and increased private sector involvement in the industry
  • the need for improvement in energy planning and implementation of such plans, policies and regulations
  • the need for effective and efficient sector regulation
  • the need for diversification into other sectors of the economy
  •  the need to create an appropriate economic climate to boost private sector involvement
  • the need for clear and transparent processes which will engender confidence and attract sector investment

The reform objectives proposed in the Policy were subsequently captured in a draft Act, the PIB which not only provided the legal basis for the policy initiatives but also sought to harmonise existing laws.

Analysis of the PIB vis-à-vis its Main Objectives

The PIB, which seeks to address the legal, institutional and funding challenges of the oil and gas industry, has the following objectives[2]:

1.     To create a conducive business environment for petroleum operations;

2.     To enhance exploration and exploitation of petroleum resources in Nigeria for the benefit of the Nigerian people;

3.     To optimise domestic gas supplies particularly for power generation and industrial development;

4.   To establish a progressive fiscal framework that encourages further investment in the petroleum industry while optimising revenues accruing to the Government;

5.     To establish commercially oriented and profit driven oil and gas entities;

6.     To deregulate and liberalise the downstream petroleum sector;

7.     To create efficient and effective regulatory agencies;

8.     To promote transparency and openness in the administration of the petroleum resources of Nigeria;

9.     To promote the development of Nigerian content in the petroleum industry; and

10.   To protect health, safety and the environment in the course of petroleum operations.

The PIB also seeks to promote good governance, transparency and sustainable development in the management and allocation of petroleum resources by providing for:

  •   an orderly, fair and competitive system;
  • clear and effective legal and institutional frameworks for organising petroleum operations; and
  • a fiscal regime that offers fair returns on investments while optimising benefits to the Nigerian people.

While the PIB is a laudable step towards achieving government’s objectives of a transparent, deregulated and efficiently managed oil and gas sector the Bill appears to raise more questions than proffer solutions.  Several analyses have been carried out on the provisions of the PIB vis-à-vis other jurisdictions, which concluded that there are issues that need to be addressed if the PIB is to achieve its intended goals.

Objective 1: To create a conducive business environment for petroleum operations

Findings from the various analyses revealed that this objective was not adequately addressed in the PIB.

The private sector is the primary engine for economic growth and Government, in its National Oil and Gas Policy, identified the need to foster an enabling business environment with minimal political interference[3].

Precept 10 of the Nigerian Natural Resource Charter (NNRC) recommends that Government should facilitate private sector investments at the national and local level for the purposes of diversification, as well as for exploiting opportunities for domestic value added.

Facilitating private sector investment requires the removal of constraints to private capital, guaranteeing an absence of political interference, improving access to financing, a clear legal and regulatory regime, and appropriate fiscal regime, among other things.

The Bill as currently drafted fails to put in place the necessary mechanisms for providing an environment aimed at boosting private sector investment. As such, in order to achieve this objective, the PIB has to adopt recommendations made in the other objectives below.

Objective 2: To enhance exploration and exploitation of petroleum resources in Nigeria for the benefit of the Nigerian people

Findings from the various analyses revealed that this objective was not adequately addressed in the PIB.

Precept 1 of the NNRC recommends that the development of a country’s natural resources should be designed to secure the greatest social and economic benefit for its people. Where the revenues from resource extraction are properly managed, they can help to alleviate poverty, generate economic growth and develop the economy, thus sustaining a more prosperous future. One of the intentions of the PIB is to ensure infrastructure optimization[4] in the future profitability and ultimate hydrocarbon recovery in existing and future fields.

In order for this to happen, a comprehensive approach in which every stage of the decision chain is understood and addressed is required.

While the PIB[5] made extensive provisions for minimum work commitment (obligation imposed on a licensee to carry out certain exploration and development activities) to achieve this objective, an analysis[6] of the provisions of the PIB based on international best practice revealed these provisions are inadequate. Further analysis revealed that the PIB provides limited information on infrastructure development initiatives as well as conditions under which existing infrastructure can be utilized to ensure marginal fields and fields lacking infrastructure are brought on stream. There are also no provisions in the PIB governing work program guarantees[7]. Given the dearth of infrastructure in Nigeria, which has hampered efforts to bring many fields on stream, it is important and strategic that this issue is adequately addressed.

The PIB does not provide for domestic supply obligations (DSO) or strategic supply obligations for crude oil. Considering the scarce nature of petroleum products in Nigeria and its socio-economic consequences the PIB would have been a useful avenue to encourage DSO for crude oil, to ensure availability of crude oil for local refining and distribution.

As such the PIB should:

  1. Include provisions for a bank guarantee to back the commitments being entered into by licensees because work commitment without a corresponding bank guarantee/performance bond may prove to be difficult to enforce.
  2. Reduce the level of detail in the PIB regarding work commitments and instead require in the Bill that a subsidiary legislation provides the necessary details. This would leave room for flexibility in the amendment of this provision especially since amendment of major legislations such as the PIB would require a lengthier process.
  3. Include provisions defining infrastructure optimisation and how the process for infrastructure development will be managed.
  4. Include provisions on DSO for crude oil as well as penalties for non-compliance.

Objective 3: To optimise domestic gas supplies particularly for power generation and industrial development

Findings from the various analyses revealed that while this objective was partly addressed in the PIB it could stand to be strengthened if the desire to create a competitive gas market is to be realised.

Precept 1 of the NNRC suggests that the development of a country’s natural resources should be designed to secure the greatest social and economic benefit for its people. Also Precept 10 prescribes that government should facilitate private sector investments at the national and local levels for the purposes of diversification, as well as for exploiting the opportunities for domestic value added.

To achieve this objective, optimal use of oil and gas infrastructure in order to facilitate efficient and effective activity across the entire value chain is important. This is to guard against negative outcomes of oil and gas exploration and production, such as monopolistic use of certain oil and gas infrastructure (for example, gas pipeline networks). The PIB includes specific provisions applicable to the gas sector addressing requirements for the licensing of a transportation pipeline owner, transport network operator, gas suppliers, and gas distributors. Other matters covered include development of a Network Code, third party access, gas pricing and pricing principles as well as transitional gas pricing arrangements.

An analysis[8] of the provisions of the PIB[9] revealed that this objective is not completely addressed in the PIB. Although there are numerous provisions concerning open access[10] to encourage the development of gas-to-power projects (also consistent with international good practice), this does not apply to future facilities. The PIB also does not provide clear references on how to determine the measurement point for the oil or gas produced neither does it provide guiding principles upon which such measurements or valuations are made.  The PIB also does not include tariffs for gas processing and while it provides for DSO for gas, it lacks sufficient supply obligations penalties for non-compliance.

While provisions to address this issue can be incorporated in a subsidiary petroleum regulation (as is the case in other jurisdictions[11]), the PIB should:

  1.  Provide a reference to a subsidiary regulation which would make provisions for a transparent mechanism through which the provisions on measurement and valuation of hydrocarbons are articulated.
  2.  It will also prove useful to reconsider the detailed provisions from the PIB ’08 pertaining to measurement and valuation of oil, gas and condensates. These provisions are consistent with good international practice and clearly set out the means of valuing the hydrocarbons, and define the measurement points for such valuation.
  3. Tariff provisions should be extended to gas processing.
  4. Strengthen DSO provisions by reviewing S.272 (1)(b)(ii)[12] which opens the door to abuse by providing exemption from penalties for non-compliance.

Objective 4: To establish a progressive fiscal framework that encourages further investment in the petroleum industry while optimising revenues accruing to the Government

Findings from the various analyses revealed that while this objective was not addressed in the PIB.

Precept 3 of the NNRC states that fiscal policies and contractual terms should ensure that the country gets full benefit from the resource, subject to attracting the investment necessary to realise that benefit. Policies and contracts need to be sufficiently robust to meet changing and uncertain circumstances. Policies need to provide for strong fiscal structures capable of providing a reasonable rate of return and incentives while providing economically efficient signals to government and consumers regarding costs that consumption places on licensees.

An analysis of the provisions of the PIB revealed an absence of provisions for progressive fiscal elements[13]. Rentals and royalties are to be determined by Ministerial Regulations[14]. Important provisions on Bonuses; Relinquishment requirements; Cost recovery limits; Profit oil or gas splits; DSO (except for gas) are either not mentioned or have been neglected. As currently drafted, the fiscal framework described in the PIB will ultimately be regressive if a flat or fixed royalty percentage is required as one of the bid items per Section 190 (2) (a) (ii). In addition, the PIB does not define sliding scales which means that the fiscal systems will have no real ability to respond to situations where oil prices rise or fall significantly, or if a discovery is made that’s significantly larger than anticipated[15]. Further, the absence of fiscal royalty provisions in the PIB coupled with inadequate taxation provisions adds significantly to investor uncertainty.

The PIB should provide greater clarity on the fiscal terms as well as clear distinctions with respect to fiscal terms between oil gas and condensate.

Objective 5: Establish Commercially Oriented and Profit Driven Oil and Gas Entities

Findings from the various analyses revealed that this objective was not adequately addressed in the PIB.

Precept 6 of the NNRC recommends that nationally owned resource companies should operate transparently with the objective of being commercially viable in a competitive environment.  While the Bill makes provision for the commercialisation of NNPC it does not include details necessary to make the newly created National Oil Company (NOC) more profitable and efficient.

Analysis of twelve national oil companies (NOCs) and NNPC revealed

[16] that the Bill is unlikely to significantly advance Government’s objective of establishing a commercially oriented and profit driven oil and gas entities due to a number of gaps. The Bill does not provide clear provisions on shareholding rights of government neither does it address the composition of the NOC or NGC boards and exposes the companies to no direct legislative oversight. There are no clear provisions on how NOC and NGC would fund their operations neither does it discuss NOC crude oil sales which account for up to 70 percent of public revenue.

The Bill provides for partial privatisation of NOC and the National Gas Company (NGC without requiring a minimum level of privatisation) but does not mandate the partial privatisation of the Asset Management Corporation (NPAMC).  NPAMC and NGC are not subject to the upstream contract-disclosure requirement which means joint venture and gas contracts could remain opaque. The Bill does not mandate auditing requirements for NOC and NGC while NPAMC is required to publish only a summary of its audited accounts.  Further, there is no clarity on core fiscal terms that could determine the commercial viability of the new NOC’s upstream operations.

In order to ensure the commercial viability and autonomy of the entities, the PIB should provide for the following:

  1. Shareholding rights of government and clarity on NOC’s fiscal obligations to Government
  2. Transition framework guiding how NOC will be commercialised
  3.  Clear provisions on how the operations of the NOC and the Nigerian Gas Company would fund their operations along with a workable revenue retention model
  4. Appropriate level of legislative oversight and professional, independent boards for the companies
  5. Limit or clearly define NOC’s non-commercial roles
  6. Public listing of NOC shares
  7. Improve corporate governance through the discipline of external debt financing

Objective 6: To deregulate and liberalise the downstream petroleum sector

Findings from the various analyses revealed that this objective was partly addressed in the PIB although some additional provisions are required to achieve this objective.

Precepts 7 of the NNRC prescribes that resource revenues should be used primarily to promote sustained, inclusive economic development through enabling and maintaining high levels of investment in the country. Also, Precept 9 suggests that government should use resource wealth as an opportunity to increase the efficiency and equity of public spending and enable the private sector to respond to structural changes in the economy.

To achieve this objective, PIB makes provisions for the creation of a deregulated and liberalised downstream petroleum market[17]. The PIB also proscribes anti-competitive market practices and provides for third party access to downstream facilities[18].

While the Bill contains numerous provisions guiding deregulation, further analysis revealed that there are no transition provisions nor are there clear provisions on the process for deregulation or an implementation regime post-PIB. The Bill lacks clarity over which institution will have operational responsibility for carrying out reforms both pre and post PIB and is silent on transitional arrangements for the new regime.

Accordingly, the PIB should make provisions for the following:

  1. Amend the Bill and mandate the process of reform pre – and – post – PIB should be carried out by the Bureau of Public Enterprises in line with the current Public Enterprises (Privatisation and Commercialisation) Act
  2. Include clear provisions on the process for deregulation as well as transition provisions on outstanding issues such as where liabilities will be domiciled following the transfer of assets and employees from NNPC to the National Oil Company, and how NOC will be commercialised.

Objective 7: To create efficient and effective regulatory agencies

Findings from the various analyses revealed that this objective was not adequately addressed in the PIB.

The Oil and Gas Policy recommended an industry structure under which the Minister would be responsible for broad policy initiation, formulation and development in the sector while the regulators would be responsible for technical and commercial regulation in the sector.  However, the PIB 2012 permits the Minister of Petroleum Resources to exercise excessive discretionary powers over the licensing process for upstream activities, even though majority of licences and leases are expected to be issued through competitive bidding process[19].  The President of the Federal Republic of Nigeria is also granted unrestricted discretionary power under the Bill to award upstream licences and leases[20]. The Downstream Petroleum Regulatory Agency is vested with power to independently license all downstream petroleum operations, excluding specific downstream activities that are expressly reserved for licensing by the Minister[21].

Several analyses revealed that the Bill is lacking in specific provisions that would ensure transparency and non-discrimination in the award process for every licence, lease, permit or authorisation. Recommendations for improving the provisions of the Bill include:

  1. Limit the role of the Minister to Policy Issues/Directives and Confer general powers to award licenses and leases on an independent regulatory body as is the practice adopted in United States of America and the Russian Federation.
  2.  Remove provisions conferring discretionary power on the Minister over competitive bidding process and avoid the use of wording conferring omnibus power to the Minister to grant licenses and leases.
  3. Remove provisions granting the President discretionary powers to grant licenses and leases in special circumstances.
  4.  Include clear rules guiding the exercise of the Regulators’ power to issue licenses aimed at achieving non-discrimination and transparency. This provision should also include publication and widespread dissemination of (minimum) qualification requirements for each category of licenses, periodic mandatory audit of all issued licenses by NEITI or other like organizations, mandatory use of a competitive bidding process for appropriate categories of licenses etc.
  5. In order to preclude any debate on who the appropriate licensing authority is for typical midstream activities undertaken by upstream licensees or lessees for their own account, clear provisions should be inserted in the legislation confirming where that such licensing powers should reside.

Objective 8: To promote transparency and openness in the administration of the petroleum resources of Nigeria

Findings from the various analyses revealed that while this objective was partly addressed in the PIB it could stand to be improved.

Precepts 2, 4 and 6 of the NNRC suggest guidelines for achieving transparency and accountability in a resource rich country.

Precept 2 of the NNRC suggests that a successful natural resource management requires government accountability to an informed public. This involves government adopting transparent processes for taxing, collecting and managing revenues from the industry, among other things.  Also, Precept 4 of the NNRC prescribes that competition in the award of contracts and development rights can be an effective mechanism to secure value and integrityPrecept 6 of the NNRC also prescribes that in order to yield best returns for the country, nationally owned resource companies should operate transparently with the objective of being commercially viable in a competitive environment.

The PIB contains strong provisions to ensure transparency and non-confidentiality in the sector. However, based on findings from various analyses[22] on this subject, this objective while partly addressed in the PIB[23] could be improved. The Bill also allows the new regulatory agencies to receive gifts of money or other property upon such terms and conditions as may be specified by the person or organization making the gift provided such gifts are not inconsistent with the objectives and functions of the agencies. This could compromise the integrity and objectivity of the agencies and weakens the transparency objectives of the Bill.

Furthermore, as discussed under Objective 7, excessive and wide ministerial discretion contained elsewhere in the Bill regarding its role and oversight of the regulatory agencies[24] in addition to the President’s discretionary power will not only work against the transparency aspirations of the Bill but could eventually result in political manipulation.

To achieve this objective, the PIB should:

  1. To avoid revenue leakages- have a clear definition of what “petroleum income” entails for the purposes of the Act and state precisely which account such income should be directed into.
  2. Remove the provisions allowing the agencies to receive gifts
  3. Include provisions with strict stipulations of the time within which payment should be made into the federation account, which agency should be responsible for collecting which revenues and the process through which payments should be made.
  4. Provisions regarding all areas relinquished under s. 193 of the Bill should be amended to include that such areas should be re-awarded based on a competitive bidding process with clear guidelines governing the entire process.
  5. Introduce a regular fixed cycle for the licensing rounds.
  6.  Introduce clear rules that would effectively bar the reissuance of a revoked Petroleum Mining Lease (PML) other than by an open, transparent and competitive bidding process.

Objective 9: To promote the development of Nigerian content in the petroleum industry

Findings from the various analyses revealed that while this objective was somewhat addressed in the PIB there is still room for improvement of the provisions.

The PIB highlights the importance of Nigerian content by requiring prospecting licensees to provide approved Nigerian Content Plan in line with relevant legislation[25] as part of their Development Plans further to a commercial discovery or significant gas discovery.[26] The import of this is that no drilling or appraisal work can commence without an approved content plan.  Part VI of the Bill on Indigenous Petroleum Companies requires the Minister to issue regulations or guidelines for increased indigenous participation in the petroleum industry.

While the Bill does address Nigerian content, additional steps will need to be taken towards reviewing and amending the subsisting enabling legislation on Nigerian content ,i.e., the Nigerian Oil and Gas Industry Content Development Act 2010, in order to ensure it adequately addresses all issues relating to Nigerian content.

Objective 10: To protect health, safety and the environment in the course of petroleum operations

Findings from the various analyses revealed that this objective was not adequately addressed in the PIB.

Precept 5 of the NNRC observes that resource projects can have significant positive or negative local economic, environmental and social effects which should be identified, explored, accounted for, mitigated or compensated for at all stages of the project cycle.

The PIB includes provisions on health, safety and environment in the petroleum industry. The sector regulators have responsibility in their respective sectors while the Ministry of Environment has overall responsibility over environmental issues.

The Bill adopts a precautionary approach to environmental challenges and requires every operator to adopt environmentally friendly technologies and comply with relevant requirements of environmental guidelines and standards approved for the petroleum industry. The Bill also requires prospecting licensees to submit Development Plans including Environmental Management Plans, acceptable Decommissioning and Abandonment Plans and providing for elimination of routing gas flaring[27]

Regarding gas flaring, the Bill specifically proscribes gas flaring and requires operators to provide gas flaring plans highlighting all flared gas resources along with gas utilization plans for gas to be utilized before gas flare out date. While the Bill provides for flare-out date as well as gas flaring offences and associated penalties, it requires the Minister to prescribe the flare-out day, gas flaring penalties and also allows the Minister to grant permits to operators to flare or vent gas[28]. This discretionary permit of gas flaring has the potential to be abused and substantially weakens this objective.

The PIB should:

  1.  Proscribe gas flaring completely.
  2. Require insurance covers for environmental disasters as one of the requirements for the Development Plan.

Conclusion

While the Bill does not completely conform to its reform objectives, it provides a good opportunity to reform the oil and gas sector.  Steps will need to be taken to address those outstanding issues if the PIB is to achieve its intended goals.

[1] See National Oil and Gas Policy (2004)

[2] See Part 1, S. 1 of the PIB

[3] See National Policy on Oil and Gas (2004)

[4] S. 15(1) (p) of the PIB 2012

[5] Ss. 178, 179 and 277 of the PIB 2012

[6] See  Creative Energy Consulting and Training Limited “Work Commitments and Bank Guarantees under the Petroleum Industry Bill 2012: A comparative analysis” ( October 2012)

[7] See Daniel Johnston, David Johnston, Bede Nwete, “Nigeria Petroleum Industry Bill: Evaluation of Fiscal Provisions” (November 2012)

[8] See Creative Energy Consulting and Training Limited, “Measurement, Value Determination and Open Access Provisions in the Petroleum Industry Bill 2012” (October 2012)

[9] Ss. 230 – 283 of the PIB 2012

[10] See Ss. 222, 224, 249- 250 and 269-272 of the PIB

[11] Angola and Brazil

[12] Any supplier who does not comply with the DGSO as specified by the Agency shall not supply gas to any expoer project for the period that the supplier is not complying with the DGSO unless it can demonstrate to the satisfaction of the Agency that it has made reasonable commercial endeavours to make gas available.

[13] See Daniel Johnston, David Johnston, Bede Nwete, “Nigeria Petroleum Industry Bill: Evaluation of Fiscal Provisions” (November 2012)

[14] S.197 of the PIB 2012

[15] See Daniel Johnston, David Johnston, Bede Nwete, “Nigeria Petroleum Industry Bill: Evaluation of Fiscal Provisions” (November 2012)

[16] See Aaron Sayne, Paasha Mahdavi, Patrick R.P. Heller and Johannes Screuder, “The Petroleum Industry Bill and the Future of NNPC” Revenue Watch Institute (October 2012)

[17] See S. 221.

[18] Ss. 222, 257,262-264

[19] S.6 (1) (g) (h); S. 172

[20] S.191

[21] S.6(1) (h)

[22] See Ikeyi and Arifayan, “Technical Analysis of the Petroleum Industry Bill in respect to Terms and Conditions of Licenses and Leases”, (September 2012) and Iledare, W., and Iwayemi, A., et al, “An Analytical and Comparative Analysis Review of the PIB and Engagement  with Civil Society on Dissemination”, (October 2012)

[23] Ss. 32 (4), 299 (3)

[24] S. 6 (1) (g), 172(2), 13, 14, 43, 44,

[25] NOGICD Act 2012 or as may be amended from time to time

[26] S.178, 179

[27] S.179(3)(e)(f)

[28] S.276, 277, 281, 282, 200

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3 comments

  1. Having gone through this write up I can say that in as much as credible work has been done to produce the PIB more work needs to be done. The oil sector is the main stay of our economy and should be as transperant as possible. I have noticed that the Minister and the presidency have certain discretionary powers to give licenses; I would like to suggest that such actions should be taken with the utmost caution. Let those who are furnishing this bill not forget that they won’t always be in power;they can vouch for their own character but not of their predecessors. In the light of this let’s us consider our peculair challenges as a country and make laws that will not be doomed from its implementation. Thanks.

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