LAST week, Thursday July 1, the Senate finally passed the long-awaited Petroleum Industry Bill, PIB. A milestone in the history of our legislative affairs. Too many interests had repeatedly scuttled it over the years.
According to the auditing and advisory firm, KPMG, previous attempts in 2009, 2012 and 2018 failed “because of factors such as lack of ownership, misalignment of interests between the National Assembly and the Executive, perceived erosion of ministerial powers, stiff opposition by the petroleum host communities and push back by investors on the perceived uncompetitive provisions in those versions of the bill”.
Prolonged uncertainty had humongous costs in lost income and foregone investments. According to an industry source, of the $70 billion of FDI that went into the oil and gas sector in Africa between 2015 and 2019, a mere four per cent came to Nigeria — despite the fact that Nigeria remains the largest producer on the continent.
According to the NBS, of the total FDI of $9.680 billion that flowed into Nigeria in 2020, a paltry $53.5 million (0.55%) went into oil and gas. Potential investors have stayed action as would be expected of rational economic actors under conditions of extreme uncertainty. And we have been the worse for it.
The industry has undergone profound transformations since oil was first discovered in Oloibiri, Delta State, in 1956. Novel exploration techniques and the new technologies such as fracking have brought in new players. There has been a tendency for supply to outstrip demand, with OPEC’s cartel power being eroded.
Competition for market share has further driven down prices. At the peak of the COVID-19 lockdown, oil prices fell to an unprecedented $12 per barrel. North America even registered $37 per barrel.Under the laws of probability, the novel coronavirus is a Black Swan. If it has happened once, it can happen again.
When I was a Boy Scout, our motto was: “Be Prepared”. This has always shaped my attitudes and mindset with regards to public finance and economic policy management. We must prepare for a world in which oil is no longer the harbinger of the gilded age that we once dreamt of.
For much of the seventies, up to the nineties, oil accounted for as much as 50% of our national GDP. Following the 2014 GDP re-basing, it now accounts for a mere 10 percent. But oil still accounts for 60% of government revenue and a staggering 92% of foreign-exchange earnings.
The hydrocarbon industrial civilisation that we have known for more than a century is in retreat, thanks to recent global protocols on climate change. Advanced industrial nations have given deadlines to their auto manufacturers to transition from petrol to electric vehicles.
This is true of Daimler-Benz as it is of Volkswagen, Nissan, Toyota, Renault, Peugeot and Tata. Automobiles account for 70% of the market for oil. The writing on the wall is clear. Globally, oil will continue to be important for another decade or two. But its sun has well gone past its zenith.
The ambitions of FGN are to attain 40 billion barrels of reserves and production levels of four million barrels per day. The PIB aims to drive that agenda.The PIB re-affirms the oversight and supervisory role of the Minister of Petroleum in driving government policy in the sector. The new provisions curtail the powers of the Minister in approving or revoking an oil license. The Minister now has to act based on recommendations from the new Downstream Commission.
The new bill prescribes 30% of NNPC profits to fund exploration activities in “frontier basins”. Clause 4 of the new bill calls for setting up of aNigerianUpstream Regulatory Commission, NURC, to enforce, administer and implement laws, regulations and policies covering upstream petroleum operations while Clause 29 prescribes creation of aNigerian Midstream and Downstream Petroleum Regulatory Authority, NMDPRA, for regulation of midstream and downstream operations.
Clause 53 requires that the Minister of Petroleum incorporates the NNPC into a Limited Company with 100% FGN share ownership not later than 6 months after the coming into effect of the new Act.The new entity shall operate inaccordance with the Companies and Allied Matters Act, CAMA.
One of the particularly contentious issues has been the question of the Community Development Fundpayment. Representatives from the oil-producing areas inevitably demanded 5% of the total profits of the oil firms to be paid to host communities. Theywere, however, out-voted by the majority. Under Clause 240 (2), the matter was settled at 3 percent.
Other important aspects of the new bill finance, taxation, environment and centre gas supply and regulation andgas-flaring. Tax and finance provisions have been streamlined to ensure greater transparency. The Upstream Regulatory Commission is empowered to monitor and ensure compliance with environmental regulations.
Operators must submit environmental plans for both prevention and remediation on environmental pollution. The new bill prohibits gas-flaring, except under specified conditions: (i) emergency; (ii) exemption expressly granted by the Commission; and (iii) acceptable safety requirements under established regulations.
While the industry will operate on a free market basis in terms of demand and supply, operators will have to give some consideration to ensuring adequacy of supply to the domestic market and local refineries. The new bill frowns at monopolistic behaviour while invoking the rules of the to ensure sound market Federal Competition and Consumer Protection Act 2019 as the standard for fair market competition.
When Uganda discovered oil a few years ago, President Yoweri Museveni led a large delegation to Nigeria. He wanted to under-study. When he returned to Kampala, he issued a presidential order for the Ugandan oil sector: (1) No gas-flaring whatsoever; (2) export of only refine petroleum; and (3) transparent governance.
In my humble view, the PIB runs short in many key areas. There is no evidence of adequate commitment to climate change and energy transition in line with the Paris Agreement.I would have loved to see the outlawing of gas-flaring altogether. We need a three-yeartransition period when gas-flaring must be phased out altogether.
Those that continue to do it will be doing so under stiff penalty. I also wished that we took the bull by the horn by putting a date by which Nigeria will export only refined petroleum. This will put our country at the higher end of the value chain while boosting jobs and revenue.
The amount of 30% of NNPC profits for exploratory activities is way too high. A figure of 20% would be adequate. We also look askance at the secrecy and lack of transparency surrounding exploratory activities in the North East and other areas. There are in fact rumours that oil is already being lifted in the north east and that the insurgency has largely been a smokescreen to cover up the pillage. It is reminiscent of Zamfara gold and the dust and blood surrounding it.
There are things that ought to have been emphasised. We need to reaffirm Nigeria’s full and permanent sovereignty over all its hydrocarbon and other natural resources. The meter system must be enforced not only as a matter of law but also as a matter of prudence and transparency.
Equally important is the principle of fairness and transparency for foreign investors. Nigeria should reaffirm her commitment to respect for all contracts and for protection of foreign investments in line with best global practices and the norms of international economic law.
The success of the PIB will very much depend on political leadership and commitment to effective implementation. The competencies of the new regulatory agencies will be crucial. Nigeria’s oil industry has historically been full of sharks, jackals, hyenas and vultures, both domestic and foreign. For succeeding governments, the sector only served to fuel the kind of pork-barrel political economy that has become a curse rather than a blessing.
Much will depend on construction of the Articles of Association for NNPC Ltd. There are successful models that we can draw on: Saudi Aramco, Petronas of Malaysia and, to a lesser extent, Petrobras of Brazil.
Far from the Byzantine behemoth of grand larceny and sloth that it has been for years; we must reinvent the NNPC to be a commercial enterprise that is anchored on merit, excellence and professionalism. Repositioning the oil sector is the first step in the quest for a New Nigeria.