Hurting Nigeria’s Oil And Gas Industry Development With Lopsided Bill 

Yemisi Izuora in this report draws comment and concerns from industry operators who consider the Petroleum Industry Bill, as a wedge to achieving Nigeria’s aspirations of sustainable oil and gas industry development 

A recent Punch report had estimated that Nigeria may lose up to 38 per cent of its deepwater oil production under the terms of the proposed new Petroleum Industry Bill.

This it predicted could happen by 2025. Further, the industry could lose almost a third of its deepwater production potential by 2030 because of the bill.

The long-awaited piece of legislation, which has been in the works since 2008, should replace a collection of more than a dozen separate laws and regulations. The country’s parliament plans to pass the new law in the first quarter of 2021.

However, according to the industry, the bill in its current form will hurt rather than help Nigeria’s oil production.

“The current PIB 2020 does not improve the investment environment for new project FIDs (final investment decisions) to be taken,” the country’s Oil Producers’ Trade Section said in a document.

“With the right fiscal framework, OPTS could invest an additional about $9bn in deepwater projects to grow oil and gas development in Nigeria with resultant benefits for the nation,” the group, which comprises local and foreign oil and gas companies, also said in the document.

The current PIB, however, did not contain this framework, leaving space open for problems including “Uncompetitive fiscal terms, increasing cost, unsettled deepwater disputes, and upcoming deepwater lease expiry.” These would increase risks for investors, the group said, and prevent new investments.

Nigeria is Africa’s largest oil producer, but its oil wealth has been a curse. Rife corruption and environmental damage have plagued Nigeria’s oil history for decades. The Petroleum Industry Bill was meant to solve most of the industry’s problems and bring in more oil money by amending the royalty regime and production sharing agreement templates.

Based on the industry’s complaints, it seems the bill is set to benefit the state but at the expense of the industry, which may not be the most sustainable and mutually beneficial decision.

Oriental News Nigeria, reports that since 2008, there has been an effort in Nigeria to introduce a new Petroleum Industry Bill (PIB) to replace the existing collection of 16 laws and regulations. The Joint PIB was submitted in March 2020 and updated in September 2020, and the Federal Government of Nigeria (FGN) and the National Assembly (NASS) aim to pass the bill in the first quarter of 2021.

The PIB covers 4 key areas: Governance, Administration, Host Communities, and Fiscals. While the Petroleum Industry Governance focuses on the Restructuring of industry governance framework (e.g. Commercialization of NNPC), the Administration focuses on Administration/ regulation of the industry (e.g. stipulates license/ lease requirements, terms, administration).

The Petroleum Host Communities Development aspect talks about the establishment and funding of Trusts for oil and gas Host Communities, while the Petroleum Fiscal framework focuses on introduction of new fiscal terms governing the industry (e.g. taxes, royalties, allowances)

The oil & gas industry (Industry) is the main pillar of Nigeria’s economy. The Industry contributed 65% of all revenues for the Government of Nigeria and 88% of Nigeria’s foreign exchange as of 2018. Several enabled projects created job opportunities for over 600,000 Nigerians in the last decade, improving the conditions of many people. The Industry has shaped Nigeria into the largest oil producer in Africa and the 5th largest LNG producer in the world

The desire is that the Nigerian oil and gas industry grows, however, growth requires capital and capital goes where it is competitive and investor confidence resides. Capital available globally to the oil and gas industry is also decreasing because of increased focus on carbon management and renewables over the long term and independence from oil & gas. Unlike historical cyclical trends where capital was temporarily redirected away from the sector during low commodity pricing but eventually returned when pricing recovers, the Industry is now seeing an increase in capital being redirected permanently away from the sector and unlikely to return.

2020 and the COVID-19 pandemic demonstrated this impact where commodity pricing for oil & gas will remain lower for longer due to global supply and demand competition.

Over the past several years, a shrinking oil & gas demand is now being further exacerbated by a larger pool of supply made possible through the technology boom.

The world (Africa in particular) is seeing new countries, previously unheard of in this sector, now emerge and be increasingly more effective to attract capital away from Nigeria. Many countries dependent on oil & gas resources are also not remaining still by aggressively pursuing competitive reforms to see their own resources are developed sooner and in support of their policies of energy independency from foreign supply.

Analysts believe that the right PIB will provide an opportunity to position Nigeria to attract capital by addressing two principles. The first is keeping total government take (i.e. tax, royalty, and NNPC’s share of deep-water profit oil) at globally-competitive rates; and the second is reducing the cost-of-doing-business in Nigeria.

The Nigerian oil and gas industry continues to suffer the highest project and operating costs relative to the rest of the world. Industry studies show that in 2016, Nigeria costs for new projects was 69% higher than the global average and operating costs were 42% higher than the global average.

This is attributable to high security costs, significant administrative costs associated to overlapping government department oversight and duplicity of demands, approval delays, and the inability to allow Industry to optimize. Additionally, the Industry has been increasingly burdened with a plethora of fees, taxes, and levies which amount to ~10% cost increases.

A PIB which drives down the cost-of-doing business alone would increase the pool of value available to both Industry and government such that even at lower government takes, government would realize higher incomes attributable to cutting waste and increasing growth by attracting capital.

However, industry watchers maintain that the current 2020 draft PIB does not improve the investment environment for new project FIDs to be taken. As it is currently, Government take on Nigeria’s pre-final investment decision Joint Venture (JV) oil projects is among the highest in the world. Also according to analysts, the PIB terms for Deepwater could lead to Nigeria foregoing over 30 per cent of its production potential in 2030.

Moreover, multiple issues along the gas value chain need to be addressed to maximize gas potential ( e.g. competitive gas terms, resolution of gas investment/revenue currency-mismatch, free market prices, infrastructure availability, adherence to contractual obligations, among others).

While analysts posit that the PIB does present several strengths which the Government should be commended for, they argue that as proposed, the bill does not improve Nigeria’s global competitiveness nor improve investor confidence.

Industry players recommend that the PIB should preserve base businesses, earned benefits, and contractual rights; %; ensure legislation which drives down Nigeria’s high cost premium, enable gas development by deregulating pricing, and simplify the tax system and administration to ensure clarity, and include a dispute resolution mechanism.

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