Prof. Omowunmi Iledare
1.0 Preamble:
Members of the Policy Advisory Council (PAC), which was set up after President Bola Ahmed Tinubu emerged as the 2023 President-elect are credible professionals with distinctive credentials, majorly. The proposed recommendations and observations submitted to the president, amongst others, include consolidation and restructuring of the two regulatory institutions (the Commission and the Authority in the PIA 2021 and the local content institution (NCDMB), reorganization, human resourcing, and realignment of the Board and Management Team of the commercial institution, NNPCL, in conformity with intent of the PIA 2021; and the removal of petroleum subsidy complemented with transfer payment to the poor in the society. Further, the advisory council team recommends regular stakeholders’ engagement to minimize insecurity in the petroleum-producing states and suggests immediate reformation of the operations of the military task force with well-defined expectations.
Nigeria’s geometric decline in daily oil production is unsurprisingly of great concern to the Advisory council and perhaps, the stakeholders in the oil and gas sector. Thus, the PAC highlights issues and problems that the President must tackle squarely in the short run, precisely, within 100 days, to reverse the geometric petroleum production decline in the Niger Delta. Interestingly, the three anchor institutions, especially the commercial institution, apparently hold the key to reversing the geometric decline in petroleum production.
The assertion by PAC on petroleum production is, perhaps, because of what these institutions did or did not do well, since the enactment of Petroleum Industry Act in 2021, including the increasing agency roles of NNPCL, the indeterminateness at which the PIA 2021 provisions on governance and institutions are selectively interpreted by the institutions. This op-ed aims to review, attest, and, if necessary, invoke PIA 2021 provisions to further substantiate the observations and recommendations provided by PAC to PBAT on the state of the oil and gas sector in Nigeria and, perhaps, complement and/or expand on the recommendations.
2.0 The State of the Petroleum Sector in Nigeria: Driving Against the Traffic?
Permit the recanting of opinions we previously narrated in the media to set the stage for a good understanding of the issues at stake, which prompted in my opinion the recommendations provided by the PAC set up by PBAT when he emerged as the 2023 President elect. That the current state of the oil and gas industry in Nigeria is wobbly is not conjectural. Neither is there any doubt that the impact of the industry on the overall economy of Nigeria continues to leave much to be desired, more so since 2011. The industry currently contributes less than 10% to the Gross Domestic Product (GDP) and this is not necessarily because of any remarkable growth in the non-oil sectors. Perhaps, declining industry activities and geopolitical complexity of the global oil and gas business, in more recent times, have contributed to the tremor in the petroleum sector in Nigeria.
Additionally, the general issues and problems considered distressful to the oil and gas industry in Nigeria are complexly multidimensional. They include but are not limited to transparency and accountability, governance and regulatory ineffectiveness, institutional incompetence, or ineptness, which we discussed extensively in the February 2023 Edition of the Valuechain Magazine. The interrelatedness of these issues, perhaps, explains the low impact of the industry on the aggregate economic output; though the contribution of the industry to fund the annual budgets of the three tiers of governance in Nigeria is significant. However, what matters is not access to revenue just for political governance but translating huge revenue access to foster a business environment that is conducive for petroleum industry operations with linkages to the non-oil sector operations.
3.0 Synopsis and Review of the Recommendations of Petroleum Advisory Council
The more than twenty-year journey to reform the petroleum industry aimed to resolve the multidimensional petroleum policy issues and problems that have befuddled the economy of Nigeria is the focus. These problems and issues, coupled with rent-seeking, rent-sharing, and prebendal mindsets, and of course, transactional leadership attitudes seem to be delimiting the potential of the PIA 2021 to at least begin to turn things around.
Two years after the passing of the PIA 2021 Act, the industry key performance indicators seem to continue to go in the opposite direction or drive against the traffic. Cost efficiency and effectiveness is going up instead of coming down. Drilling intensity, reserves, and production is going down as upstream investment is not inching up as previously envisaged; gas to power, prices and reserves, jobs and wages are all still going down. Yet, the oil and gas in the scheme of things in Nigeria has become significantly more important in the emerging energy transition era. In the following paragraphs, we intend to attempt to decipher the recommendations within the context of the apparent rationale of each recommendation in a pedagogical manner under distinctive themes.
3.1 Effective and Efficient Petroleum Industry Governance
• The Advisory council recommends that PBAT should consolidate the regulatory institutions, the Petroleum Commission, and the Petroleum Authority into a single regulator.
• The council advised the president to consider integrating NUPRC, NMDPRA, and NCDMB into a single regulator or include all midstream activities into NUPRC’s scope.
Indeed, the PIA 2021 created efficient and effective governing institutions, with clear and separate roles for the oil and gas sector. The institutions in the PIA are fashioned to address the governance gaps and improve capacity delivery in a transparent, accountable, and appropriate manner, on time, and in a cost-efficient manner. Two regulatory institutions, the Petroleum Commission, and the Petroleum Authority, have a well-defined mandate to regulate, manage, and monitor upstream operations and the midstream and downstream operations, respectively. It is agreeable that the separation of roles and responsibilities of these institutions needs a re-evaluation by the PBAT’s administration.
The independence of the institutions is very much at stake, and this is the anchor for efficient, effective, and equitable delivery of the PIA mandates. It is one thing to be endowed with prolific geological and geophysical basins and it is also fabulous to have a progressive and value-creating fiscal framework. Optics really matter a lot and the perception of investors on the governance of the industry speaks volume in terms of sustainable investments to grow reserves and expand production capacity. The essentialness for a competent policy institution to facilitate proper execution of the powers of the Minister of Petroleum enacted in Part II, Section 3 of the PIA 2021 is not conjectural.
Unfortunately, as things stand now, the Ministry of Petroleum Resources is structurally deficient, technically inept, and managerially incompetent to support the Minister in the exercising of the powers mandated in the Part II of PIA 2021. Interestingly, the success of PIA 2021 anchors on three separate but equal institutions—policy, commercial, and regulatory, with a well-defined complementary role. Unfortunately, the institution mandated to formulate, monitor, and administer government policy in the petroleum sector is the weakest link in terms of technical capability, structural effectiveness, and organizational efficiency. Yet, the Commission and the Authority must comply with policy directives issued by the Minister on upstream petroleum operations and midstream/downstream operations, accordingly.
The powers of the Minister of Petroleum mandated in the PIA 2021 requires competent technical and managerial professionals to facilitate easy acceptance of, and compliance to ministerial directives to the Commission and the Authority. Such professionals and managerial staff must not be inferior in competency levels and compensation to professionals and managerial staff in the Commission and the Authority because of mutuality of interests. It is imperative to restructure the Ministry of Petroleum in alignment with the petroleum industry structure—upstream, midstream, and downstream and the departmental and/or divisional units in the commercial and regulatory institutions.
3.2 Reorganize and Restructure the PIA Regulatory Institutions
• The government should work towards achieving some milestones within the first 100 days in office ending August 2023.
• The council advised Tinubu’s administration to re-organize NUPRC and NMDPRA to deliver, set milestone goals, headhunt, and place capable resources in critical positions in the oil and gas sector.
The original intent of the industry reform was to promote industry governance efficacy. Political expediency and prebendalism rendered, in my opinion, the implementation of the twenty-year reform efforts ineffectual over the past two years. Of course, putting round pegs in round holes as advocated by the Advisory Council is laudable. The caveat remains the predictable preference for geopolitical expediency, godfatherism, and prebendalism over professional competency requirements. In most developed economies, political appointments are distinct from apolitical appointments with key performance indicators defined and established. The latter, apolitical appointments are professional and insulated from political cycles for continuity with institutional memories. It is unfortunate that often, appointments tend to be viewed as an invitation to earn favorable rewards in compensation for loyalty with relatively no definitive key performance indicators to evaluate service deliveries.
Nearly two years after the PIA, these institutions are still shuddering and are yet to hit the ground running. For those who care, PIGB 2018 recommended a single regulator derived from the Petroleum Policy Gazette in 2016, The PIA2021 provisions on a dual regulator, is perhaps, based on political expediency rather than policy effectiveness and institutional effectiveness. The implementation debacle so far with evidence of territorial power struggle is a testimonial. Regarding whether NCDMB is a regulatory institution remains conjectural. However, there is a merit in merging it with the Commission, and the Authority, if the PIA is amended for economy of scale and industry governance efficacy.
3.3 Commercialization of and Transformational Leadership in the NNPCL
• The council advised that the President should head-hunt competent, tested, reform-focused leaders in NNPCL and ensure the company discharges its function as a commercial entity as stipulated in the Petroleum Industry Act (PIA).
• It further urged the president to strip NNPCL of policy-making roles and keep NCDMB within its mandate as prescribed by the Local Content Act.
• The council also advised that NNPCL should also be strengthened and placed in a position where it would be paying taxes, royalties and profits to the Federation Account and properly regulated by NUPRC, NMDPRA and NCDMB.
This advice calls for a change in leadership attitude in the NNPCL Board and Management. It is agreeable that the only way to achieve the commercialization goals is through a thorough appointment process of Board members and the management team of NNPCL. A transactional leadership mindset in the company is less likely than not to accomplish the framer’s intent for this PIA commercial institution. Unarguably, a “Leopard” cannot change its skin without surgical operations, which may take time to heal. However, the NNPCL passion for its agency role must be disavowed with immediacy. However, the effectiveness of the Ministry of Petroleum or Ministry of Energy as the policy institution is the primary key to freeing NNPCL from its agency role in the oil and gas sector.
An evaluation of the immediate past eight years makes it plausible to argue that the support base for the PIA functional responsibilities of the Minister of Petroleum has been the Presidency, to a large extent. This constitutes the big quandary that bedeviled the policy process in the petroleum sector, lately, as well as the general policy supervision over the affairs of the petroleum industry. I hasten to insinuate that the lackluster impact of PIA 2021 on the sector is consequential to the dilemma in defining the institutional base of the Minister of Petroleum Resources with respect to discharging its PIA mandates. To a large extent, NNPCL seems to have gladly filled the void, including acting as the driver of the industry reform process to get the PIA 2021 enacted.
There must be a redirection in the implementation philosophy of the PIA 2021 to be in alignment with the commercialization intentions for NNPCL. There must be a good understanding of the process leading to the commercialization of NNPC, and the framework anticipated for its sustainability. It is imperative to note that commercialization is not synonymous with privatization. Paraphrasing, one of the objectives stated in Chapter One of PIA 2021 within the context of industry governance and institution is to establish a framework to create a commercial institution christened as NNPC Limited in the PIA, as a national petroleum company. The commercial institution so created shall be commercially oriented and profit driven. However, a reappraisal of the created framework, which established NNPCL is highly recommended to bring it back to focus and to avoid crowding out the petroleum industry operational space with diseconomies of scale.
3.4 Petroleum Pricing Deregulation and Cash Transfer Payments
• The council equally proposed the deregulation of petrol pricing.
• Implementing the Federal Direct Cash Transfer Programme, with the disbursement of $8 billion in Direct Cash Transfer to the poorest 30 million Nigerians.
In an op-ed in the 2021 June edition of Valuechain Magazine, I mentioned that price control or regulation is a legitimate intervention when the market system fails to promote efficiency, equity, and social responsibility. In that process, however, government intervention may become an albatross. Thus, when the cost of regulation overshoots the benefit to the extent that a great proportion of government budget is significantly high over the last decade, then something must be done, and what ought to be done is price decontrol. Price regulation for the purpose of economic efficiency and equity, regulation to protect against anti-competitive behavior of marketers or regulation to protect against socially undesirable behavior using coercive power of government and fear of social unrest is like riding on the back of the tiger. Thus, the advocacy by the PAC has been heeded by the President. Unfortunately, the speed at which the commercial institution, NNPCL, set the auto fuel price as a dominant firm in the downstream petroleum market structure dampens the anticipated market performance improvement in the short run.
Regrettably, a direct cash payment approach to relieving the society of poverty is not sustainable like petroleum subsidy. There is a good lesson to learn from the constituent tiers of governments having to wait for disbursements from Federation Account to survive. Perhaps, rather than a direct cash transfer, cost of living adjustment for workers and VAT suspension on consumable goods may be more pragmatic. Price deregulation using price modulation approach is also plausible until a significant domestic petroleum products production comes on stream and FOREX market is stabilized and exchange rates are decoupled from the price of petroleum products.
3.5 Geometric Declining Trend in Reserves, Production and Government Revenue
• The Council proposed that the government should work to raise Nigeria’s oil and gas production to 1.8 million barrels per day (mbpd) and 3.5 billion cubic feet (bcf) in the next 18 months ending December 2024.
• The advisory council urged President Tinubu to mandate NNPCL, NUPRC and NMDPRA to close out outstanding divestments and contract issues for project delivery clarity.
Unquestionably, the declining trend in upstream petroleum revenue is in the conscious awareness of every Nigerian. The key determinants of revenue declining trend are contemporaneously linked to upstream production, crude oil price volatility, system leakages, and insecurity. Producing the OPEC allocated quota remains quite challenging because of oil theft and institutional inefficiency. Unfortunately, Nigeria started rather late to leverage on its natural gas reserves accordingly and appropriately, despite the laudable natural gas policy framework adopted in 2017. The established good natural gas program initiated by the immediate past president is worth adopting. Don’t destroy good foundations in the oil and gas sector, instead build on them. However, do not hesitate to let adding value to the sector be the key motivation in your decision-making process to reverse the declining petroleum revenue trend.
However, let us state the obvious, reversing the declining revenue trend and diminishing industry value in the short run will be a tall order because the PIA 2021 fiscal framework emphasizes more on delayed revenue extraction mechanism than early revenue extraction in the upstream sector. This makes a lot of sense as competition for upstream investments has become keener under the emerging energy transition era with many more oil and gas producing countries emerging by the numbers in pursuit of investments to develop the black gold. Additionally, the PIA 2021 fiscal framework is more favorably disposed to deep offshore contractual upstream arrangements than the prevailing concessionary upstream arrangements in the shallow water and onshore terrains, which traditionally offers more revenue to the government because of JV operations. Further, though a progressive royalty scheme existed in the PIA 2021 for the deepwater terrains, exempting the terrains from resource taxes dampens the revenue outlook for the federation. This is worrisome and renders the original intention of a dual tax system suboptimal in performance.
3.6 Resolution of the Challenges in the Host Communities
• The Advisory Council advised the president to end insecurity in oil-producing states, particularly in Imo, Delta, Ondo, Rivers, Bayelsa and Akwa-Ibom by engaging key political and community stakeholders.
• The council called for the reforming of the operations of the military task force with clearly defined key performance indicators (KPIs) and consequent management to tackle deficiencies.
The optimal pathway to sustain prosperity in the petroleum host communities and enhance direct social and economic benefits from petroleum operations in the communities remains tenuous. Nearly every instrument, NDDC, Ministry of Niger Delta, Amnesty programme, 13% derivation fund, devised by the federal government to enhance peaceful and harmonious relationship between operators and host communities has fully worked. Perhaps, because of agency theory, whereby those engaged to deliver cater to themselves first before the host communities. It is not surprising that these instruments are perceived as indirect benefit from petroleum operations in the communities. No Laws or Act should be perpetual. Some of these Act need proper reevaluation to add value to the communities.
Thus, the philosophy behind getting the community to articulate and prioritize projects is innovative in the PIA 2021 and reflects a reward mechanism to the communities as legitimate stakeholders in petroleum resources development. Because the relationship among the stakeholders—communities and operators is predetermined, the framers of Chapter III of the PIA made mutuality of interests the cornerstone of the host communities fund. Posterity is critical if prosperity is to be sustained; thus, the allocative structure of the fund is well defined to keep the future in view.
Additionally, such relationships demand effective communication, cooperation, and responsibility of stakeholders to improve security of infrastructure and enhance peace in the community. The relationship is not opportunistic and the benefits accruing to stakeholders cannot be justified based on the motives of the individual stakeholder. Optimizing mutuality of interests is key to enhancing security of assets and workers.
4.0 Summary and Concluding Remarks
That the current state of the oil and gas industry in Nigeria is bothersome is not conjectural. Neither is there any doubt that the impact of the industry on the overall economy of Nigeria leaves much to be desired. The general issues and problems distressing the oil and gas industry in Nigeria are multi-dimensional. The good news, however, is the Petroleum Industry Act 2021, which provided three governing institutions to effectively, efficiently, equitably, and ethically manage the industry for sustainable economic growth and development. The PIA framers understood the essentiality of good governance, transparency and accountability, progressive royalty framework, efficient tax system, and relational peace and security in the host communities. The recommendation of the PBAT PAC understood these framers’ intentions too.
The implementation of the Act is going on steadily, though not without some hitches and apparent deviations from the intentional framing of some of the provisions in the Act, to resolve some of the issues and challenges limiting the deliverability of the petroleum sector potential to create and add value to the national economy. Unfortunately, the needle seems not to be “threading the cotton” fast enough to ameliorate the governance issues in the oil and gas sector. To a large extent, the recommendations of PAC to PBAT, though privately driven, are on track. PBAT must act with immediacy as recommended by his PAC using Tripple Helix Plus approach, which ensures having subject-matter experts from academia, industry, and government on the table, in policy formulations, development, evaluations and implementations.
Omowunmi Iledare, PhD, Emeritus Professor in Petroleum Economics and Executive Director, Emmanuel Egbogah Foundation, Abuja, Nigeria