Wednesday 3 February 2010
New Petroleum Industry Bill for Nigeria - Debbie Legall
A new legal framework aims to streamline numerous regulatory agencies but reducing the industry’s environmental impact poses the toughest challenge.
Nigeria is home to Africa’s largest gas reserves. According to the Energy Information Service, the country is a primary oil producer on the continent and, in 2008, had an average crude oil production level of 1.94 million barrels per day. In the same year, Nigeria exported 1.9 million of the total 2.17 million barrels of oil it produced per day.
The global importance of oil supplies on the world markets, coupled with Nigeria’s high export levels, mean that major foreign oil producers abound there and issues relating to the management and control of petroleum resources in local communities where the oil is extracted have been the source of heated debate and well-documented unrest. But there are now clear signs that the challenges that have plagued the petroleum industry in Nigeria are being addressed – through a new legal framework.
The new legislation, the Petroleum Industry Bill (PIB), is currently under legislative consideration and represents the most comprehensive review of the legal framework for the oil and gas sector in Nigeria since the industry began commercial operations in the 1960s. It could signal the dawn of a new era; an era during which restructuring and transformation could address many of the issues that have dominated the oil and gas industry in sub-Saharan Africa’s second-biggest economy.
Separation, professionalisation, and commercialisation
The draft PIB in its current form has a number of aims. The Bill, which, it is believed, is likely to be enacted by the National Assembly during 2010, represents the outcome of a report produced by the Oil and Gas Reform Implementation Committee (OGIC), a committee formed in September 2007 under the current administration. Adeoye Adefulu, a partner at Odujinrin & Adefulu, Lagos, sums up the new PIB under three headings: separation; ‘professionalisation’; and commercialisation. There will be a ‘clear separation of government roles and apportioning these responsibilities to newly created organisations’ so that the government no longer continues to have a part to play across the three areas of the oil and gas industry: policy, regulatory and commercial. Under the PIB, responsibility for these functions would be split between different agencies. The newly created agencies would sit outside the civil service structure, and would act as professional institutions.
Adefulu adds that the Bill also proposes the commercialisation of the national oil company – the Nigerian National Petroleum Corporation (NNPC). This would mean that the NNPC would be incorporated as a limited company, operating in accordance with company law and subject to the same governance as other companies of a similar type. Essentially, Dr Ikechi Mgbeoji, a partner at Blackfriars LLP, Lagos, argues, ‘the Bill aims to inject new vigour into the NNPC by reforming its opaque, octopus-like structure to create independent units to handle tasks such as exploration and production, regulation and research’. But, Dr Mgbeoji emphasises, central to the reform strategy is the restructuring of joint ventures between the NNPC and Western corporations, which will allow them to raise private capital and not have to wait for ‘a notoriously unreliable annual injection of cash from Nigeria’s Government’.
One of the key challenges facing Nigeria’s petroleum industry is transparency and access to information, and the introduction of legislation that would clarify matters for all players in the industry can only be hailed as a positive step forward. In addition to establishing a ‘more robust, accountable and transparent oil and gas industry’, Tolu Aderemi, a solicitor at Perchstone & Graeys, Lagos, believes that the PIB would also serve to ‘consolidate a plethora of laws, statutes and regulations which regulate the Nigerian oil and gas industry’ and would, if passed, reform, review and streamline existing legislation, in order to deliver a fair, economic return for Nigeria as well as for investors. Existing legislation that would be affected by the new Bill includes:
- the Petroleum Profit Tax Act 1959;
- the Petroleum Act 1969;
- the Petroleum Technology Development Act 1973;
- the Associated Gas Re-injection Act 1979;
- the Petroleum Equalisation Fund Act 1989;
- the Oil Pipelines Act 1990;
- the Nigerian National Petroleum Corporation Act 1997; and
- the Petroleum Products Pricing Regulatory Agency Act 2003.
‘Nigeria's PIB will establish a "more robust, accountable and transparent oil and gas industry."’
Perchstone & Graeys
Mgbeoji adds that the PIB will include provision for ‘increasing the tax take from gas by creating a new fiscal regime separate from the rules governing oil’, a review of the royalties applicable to gas production, the introduction of changes to the way tax breaks are allocated to new developments and incentives for the oil companies to entice them to ‘refine at least 50 per cent of their production in Nigeria by the end of the decade’ and to encourage the development of marginal fields and ‘improved community programmes in the Niger Delta’, an area which since 1975 has accounted for more than 75 per cent of Nigeria’s export earnings.
Nigeria’s oil and gas industry is dominated by a number of regulatory institutions, which, under the PIB, would undergo some form of restructure. For example, explains Sola Adepetun, a partner at Adepetun Caxton-Martins Agbor & Segun, Lagos, a new national petroleum directorate is the proposed successor to the Ministry of Petroleum Resources. Currently, the Ministry of Petroleum Resources is charged with regulating Nigeria’s oil and gas industry under the Petroleum Act 1969. The technical and regulatory division of the Ministry, which acts as regulator of the upstream sector of the oil and gas industry, will, it is proposed, be replaced by the Nigerian Petroleum Inspectorate. In a similar vein, the Petroleum Products Pricing and Regulatory Authority, which currently acts as the pricing regulator for downstream products, would be replaced with the Products Regulatory Authority. Likewise, the National Petroleum Investment Management Services, which monitor and approve costs in the upstream sector, would be replaced by the National Petroleum Assets Management Agency.
Under the proposals, two agencies would be retained in their current form: the Petroleum Equalisation Fund, into which is placed any surplus revenue recovered from petroleum products, marketing companies and funds from the federal government provided for this purpose; and the Petroleum Technology Development Fund, which was established by the Petroleum Technology Development Fund Act 1973 to manage funds accruing to the government from exploration works and production activities and channel such funds into training courses for Nigerians to qualify as professionals within the oil and gas industry.
Aderemi contends that the existence of so many regulatory bodies is one of the reasons why the reforms could create organisational problems and, if not properly handled, could undermine the very reforms that the PIB is attempting to usher in. He states that the ‘new Bill, if passed, will create too many regulatory agencies with overlapping functions’. The creation of so many agencies could, in his view, ‘foster an unwieldy bureaucracy, create confusion and impede approval process’.
But if the reforms serve to throw into stark relief noteworthy challenges relating to the proposed institutional structures, these pale into insignificance in the face of the environmental challenge the proposed legislation seeks to address. In a report entitled Gas Flaring in Nigeria, Friends of the Earth states that approximately 2.5 billion cubic feet of gas associated with crude oil is lost to gas flaring in Nigeria every day – a practice that involves waste gases being released and burned as they exit flare stacks in oil and gas wells. In Nigeria such practices account for the highest amount of gas flared in the world. As well as releasing into the air a dangerous cocktail of toxins associated with a number of serious health conditions, gas flaring contributes significantly to greenhouse gases.
The passage of the new legislation would, Aderemi affirms, ‘introduce and enforce integrated health, safety and environmental quality management systems with specific quality, effluent and emission targets for oil and gas operations in order to ensure compliance with international standards’.
But what does this mean in practical terms? Aderemi claims that through these proposed reforms the PIB aims to end gas flaring in Nigeria, a topic of long-standing controversy, given that the international oil companies (IOCs) have ‘refused to adhere to the direction by the Nigerian Government to stop flaring gas as they appear to prefer to pay the penalties attached to their being remiss of this directive’. That said, the new Bill also seeks to place an obligation on the IOCs to put in place a domestic gas supply to meet their commitments with regard to gas exports. This, Aderemi believes, would invariably curb gas flaring by the oil companies and rebalance upstream gas pricing, which in turn would encourage more gas supply projects, as such projects would be seen as more economically viable and could put an end to the upstream funding crisis that has, so far, served to curtail gas development work in Nigeria.
Adepetun echoes these views but flags up an international dimension to the argument: ‘under the PIB, the government is mandated to the extent practicable, to honour international environmental obligations and promote energy efficiency, provide reliable energy and a taxation policy that encourages fuel efficiency by producers and consumers’. Following the publication of a report by the journal Nature Geoscience, which highlights that greenhouse gas emissions have swelled in recent years, with developing countries now accounting for 54 per cent of total global emissions, the appetite for observing international obligations is unlikely to wane. Adepetun makes the point that the new laws specifically target the activities of upstream companies. Such companies are required to submit an environmental quality management plan alongside their application for a licence or lease, and the plan should spell out precisely how they intend to demonstrate their commitment to comply with the relevant laws, guidelines, regulations and standards. In addition, he adds, a ‘prescribed financial commitment’ must be paid to the government inspectorate, before any environmental quality management plan can be approved.
Reducing fiscal burdens
Fiscal concerns are, arguably, the beating heart that sustains any oil and gas industry. And, unsurprisingly, these are central to the new petroleum industry legislation in Nigeria. There are provisions for new and revised tax regimes in addition to provision for a reduction in the fiscal burdens of companies that have a substantial Nigerian interest.
But, Aderemi believes, the main attraction for gas production lies in the introduction of low royalties, and a special gas allowance known as the hydrocarbon tax. Under these arrangements, oil producers would not be liable to pay this tax provided they supply gas to the domestic market at low prices. Further provisions in the PIB would seek to simplify tax assessments and payments by reducing the tax burden of the petroleum profit tax (PPT). A modified version of the PPT known as the Nigerian hydrocarbon tax (NHT) would be introduced, which would oblige all companies engaged in petroleum operations to pay company income tax. Aderemi explains that the sums payable under the NHT would be pegged on a sliding scale – with rates ranging from 30 per cent to 50 per cent, based on the location of the oil production sites, and would be ‘achieved by reducing tax deductible items, particularly interest on loans, deleting tax allowance credits as well as reducing tax rates’.
A closer look at the PIB also reveals that the fiscal arrangements of the Bill are such that they would increase the amount of revenue the government would take in the form of royalties and taxes. Adepetun reveals why this is important. Regardless of the fluctuation in the price and production of crude oil, he explains, the industry will remain a constant source of revenue for the government. But it is possible that the proposed regime could dent rather than boost or maintain fiscal income to the government. Both Aderemi and Adepetun agree that the increased aggregate taxes proposed under the PIB could be unpalatable to some IOCs, which may not commit to new investments, or may even decide to wind up their existing operations in Nigeria and turn to other countries where the fiscal environment is more financially favourable. The knock-on effect would be felt throughout the economy, including among Nigeria’s law firms, which could see a reduction in the number of oil and gas clients.
‘2.5 billion cubic feet of gas is lost to gas flaring in Nigeria every day’
Friends of the Earth
A promising future?
For Africa’s most populous country, the proposed petroleum legislation signals a new chapter in a highly troubled industry. While many would agree that further revisions to the Bill are required in order to address concerns such as clearly defined areas of responsibility for the new regulatory agencies, the deregulation of petroleum product prices and issues relating to unintended consequences, for example reduced exploration and production activities from IOCs as a result of fiscal disadvantages, few could argue convincingly against the many opportunities the Bill would bring.
The local content aspects of the reforms, for example, would enhance indigenous involvement in the industry. In addition to the compulsory participation of Nigerians in both the exploration and the production side of the petroleum industry, training will be made available to Nigerians, which will encompass all areas of petroleum industries, thus guaranteeing that the country as a whole and local communities benefit from such operations by having access to gainful employment and education opportunities
Companies that hold petroleum mining leases will be obliged to ensure no less than 95 per cent of the managerial grades carrying out these functions are occupied by Nigerians. In addition to a more robust system of environmental regulation, which would introduce reporting obligations on operations throughout the oil and gas cycle, the abolition of discretionary awards should improve transparency and make the procedure for the award of licences clearer.
Many are hopeful that the PIB will achieve all of its aims and live up to the view that it proposes a better regime than the one currently in place. While Dr Mgbeoji fully agrees that the Bill includes copious ideas for improving Nigeria’s gas and oil sector, he contends that ‘the bottom line is whether these ideas will be implemented with courage and honesty’.
Debbie Legall is a freelance journalist. She can be contacted by e-mail at firstname.lastname@example.org.
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