The Next Big Hurdle for PIB

-By Benjamin Ike

Expectations are high that the Petroleum Industry Bill (PIB) which passed second reading at Senate plenary on October 20, 2020 and subsequently referred to its relevant joint committees, will be given accelerated passage and immediate assent by the president, writes our reporter.

A great deal of attention now shifts to the three joint committees of the Senate where the Petroleum Industry Bill (PIB) 2020 was referred to after it passed through the second reading at Senate plenary.

The PIB which was transmitted to the National Assembly by President Muhammadu Buhari on September 30 scaled through first reading two days later, perhaps due to the importance lawmakers attached to the Bill.

After debate on its general principles, the Bill was referred to the committees on Petroleum: Downstream, Upstream and Gas for further legislative work and for reports in eight weeks.

Valuechain reports that early work on the Bill is expected to avert any delay in passage and assent. The expectation from stakeholders is that the Bill will be given accelerated consideration and thereafter immediate assent and implementation.

An in-depth research by Valuechain showed that the PIB passage has become necessary because substantive law presently guiding the operations, administration, and overarching regulation of the petroleum industry in Nigeria (the Petroleum Act of 1969), was enacted about fifty years ago.

Some of the provisions of this act have since been overtaken by significant changes in the domestic and global realities of the industry. In spite of this obvious need to restructure the regulatory frameworks of the entire petroleum value chain in Nigeria, successive administrations have failed to achieve this.

The protracted attempt at enacting a more effective and socioeconomically beneficial law to regulate the petroleum industry in Nigeria has lasted for close to two decades (beginning from when it was first introduced during the administration of President Olusegun Obasanjo), as bickering and politicking by successive governments have delayed passage of the PIB.

Every PIB process has ended with each administration and then restarted almost from scratch by the succeeding government. Four Presidents, about five presidential terms and five legislative tenures have passed and second term in the administration of President Muhammadu Buhari is fast winding down likewise the 9th National Assembly (NASS).

The farthest the country came to having the PIB since 2000 was in 2018.

Efforts to accomplish the passage of the Bill in the first term of the Buhari administration, necessitated the disaggregation of the PIB by the eight NASS into four distinctive bills, the Petroleum Industry Governance Bill (PIGB), the Petroleum Industry Administrative Bill (PIAB), the Petroleum Industry Fiscal Bill (PIFB), and the Petroleum Host and Impacted Community Bill (PHAICB). Of the four bills, only the PIGB was successfully passed by the Senate and the House of Representatives in May 2017 and January 2018 respectively.

After its passage by the NASS, the PIGB was transmitted to the President for assent in July 2018, but he eventually declined to sign the bill into law.

According to the Presidency, the provision of the PIGB permitting the Petroleum Regulatory Commission to retain as much as 10 per cent of the revenue generated was one of the reasons Buhari declined to assent to the bill.

Deep dive into the new PIB
Highlights of the 2020 version of the PIB is the provisions to replace the Nigeria National Petroleum Corporation (NNPC) with NNPC Limited; create separate regulatory authorities for upstream, midstream and downstream operations; reduce the royalty rate from 10% to 7.5% for offshore fields producing not more than 15,000 barrels per day; make gas flaring penalties non-tax deductible in order to disincentivize gas flaring, among others.

A deeper study by Valuechain of provisions in the new bill show that the bill proposes the creation of a limited liability company to be called the Nigerian National Petroleum Company Limited (NNPC Limited), apparently in replacement of what currently exists as NNPC.

Ownership of all shares in NNPC Limited, according to the Bill, shall be vested in the government at incorporation, and held by the Ministry of Finance Incorporated on behalf of the government.

Section 54 (1, 2 and 3) reads in part, “The Minister (of Petroleum) and the Minister of Finance shall determine the assets, interests and liabilities of NNPC to be transferred to NNPC Limited or its subsidiaries and upon the identification, the minister shall cause such assets, interests and liabilities to be transferred to NNPC Limited.

“Assets, interests and liabilities of NNPC not transferred to NNPC Limited or its subsidiary under subsection 1 of this section shall remain the assets, interests and liabilities of NNPC until they become extinguished or transferred to the government.

According to the new Bill, “NNPC shall cease to exist after its remaining assets, interests and liabilities other than its interests, assets, and liabilities transferred to NNPC Limited or its subsidiaries under subsection 1 of this section shall have been extinguished or transferred to the government.”

The Bill also proposes the establishment of an agency known as the Nigerian Upstream Regulatory Commission (NURC) which will administer and enforce policies and regulations relating to all aspects of upstream petroleum operations and also to issue, administer and enforce compliance on the issuance of licenses and leases in the upstream sector. This role is currently being played by the Department of Petroleum Resources (DPR).

The proposed law in Section 29 also recommends the creation of the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) which shall be responsible for the technical and commercial regulation of midstream and downstream petroleum operations. The new bill technically scraps the PPPRA with the creation of the new agency that will now carry out the PPPRA’s functions.

Added to this is that the PIB provides that the pricing of petroleum products in the downstream product sector, shall be deregulated.

However, although pricing is to be left to market forces, the Bill proposes to safeguard the interests of consumers, by providing that the Nigerian Midstream and Downstream Petroleum Regulatory Authority shall oversee tariffs for transportation by pipelines, bulk storage for petroleum products, and regulated open access facilities.

The new Bill demands strict adherence to a gas flaring plan, along with gas utilization plans, to be submitted by all oil and gas operators within six months of the coming into effect of the law, indicating data on their daily flare quantity, reserve, location, composition.

The new law, is also proposing the establishment of a specialized intervention mechanism, called the Midstream Gas Infrastructure Fund, to deepen gas usage in the country. This, the Bill said, is aimed at increasing the domestic consumption of natural gas in Nigeria in projects which are financed in part by private investment; and also encouraging private investment in the midstream gas sector. The Bill is proposing that, on its passage, the Midstream Gas Infrastructure Fund would have the power to acquire, hold and dispose of property, sue and be sued in its corporate name, while it shall have a Governing Council which shall supervise and make investment decisions for it.

On the fiscal side, the Bill proposes to replace the existing petroleum profits tax with a Nigerian Hydrocarbon Tax (NHT), at the rate of 50 per cent for petroleum operations onshore, and in shallow water fields; and 25 per cent for petroleum operations in deep-water, bituminous and frontier acreages. In addition to NHT, the Bill also proposes companies’ income tax at the rate of 30 per cent on upstream petroleum operations (which under the existing regime are not subject to companies income tax). Where petroleum operations fall in geographical areas that are subject to different tax rates, NHT shall be levied on the proportionate parts of the profits arising from such operations.

How PIB 2020 provisions differ from PIGB
It may be recalled that PIB was split into four distinctive bills by the Eight NASS: The Petroleum Industry Governance Bill (PIGB), the Petroleum Industry Administrative Bill (PIAB), the Petroleum Industry Fiscal Bill (PIFB), and the Petroleum Host and Impacted Community Bill (PHAICB).

Of the four bills, the PIGB which was a subset of the omnibus PIB whose assent was denied by President Buhari, sought the creation of efficient and effective governing institutions with clear and separate roles for the petroleum industry unlike what currently exists.

Some unique and distinctive features identified in the PIGB and the 2020 PIB are thus: The PIGB which eventually did not see the light of the day provided that all existing regulatory agencies like the DPR, PPPRA would be merged into a new agency called the Nigerian Petroleum Regulatory Commission (NPRC), as an independent, one-stop-shop regulatory agency.

This is contrary to what is proposed in the PIB 2020 which recommends the creation of different regulatory agencies: One for upstream called the Nigerian Upstream Regulatory Commission and for downstream, the Nigerian Midstream and Downstream Petroleum Regulatory Authority The PIGB proposed to unbundle the Nigeria National Petroleum Corporation (NNPC) into two companies: the Nigeria Petroleum Assets Management Company (NPAMC) and the National Petroleum Company (NPC) while the 2020 version of the PIB seeks to replace NNPC with NNPC Limited.

Opportunity cost of PIB
The oil sector remains the backbone of Nigeria’s economy and also national life. The sector, according to NBS data, accounts for almost 70 per cent of government revenues and more than 80 per cent of export earnings.

The federal government has proposed about N13 trillion in the 2021 budget with N3.12tn (23.85 per cent) earmarked for debt servicing.

The delay in passing the bill has continued to deny the Nigerian federation badly needed revenues to fund critical projects in the budget.

Valuechain analysis showed that over $15bn is estimated to be lost yearly to investment withheld or diverted by investors due to the delay in enacting the PIB.

About $3bn of the $15bn lost revenue is enough to fix the country’s ailing refineries which have consigned the country as the only OPEC member that not only imports petrol but is currently the largest importer of the product in the world.

$15bn is urgently needed in a country with the highest number of poor people in the world, according to the Brookings Institution data from the World Poverty Clock. Severe poverty caused by massive unemployment among the youths, coupled with widespread insecurity and police brutality recently triggered mass protests which, currently is threatening the stability of the country.

The negative consequences of the absence of the PIB have been dire for the Nigerian economy.

In almost 20 years since the struggle to have the PIB started, business clarity and predictability have been lacking in the oil industry. In the eight years that the PIB was first presented for legislation, experts estimate that over $120 billion (at over $15 billion yearly) has been lost to investment withheld or diverted by investors to other (more predictable) jurisdictions, which informed the surge in investment in other fellow African countries that oil is discovered.

NEITI in its 2016 occasional paper series noted that the amounts of funds previously allocated by IOCs for investment in Nigeria is almost certainly shrinking due to the emergence of several other viable oil and gas projects across Africa including Ghana, Senegal, Mozambique, Kenya, Uganda, Tanzania etc.

According to former Minister of State for Petroleum Resources Dr. Ibe Kachikwu, the cost of uncertainty is far greater than the cost of simply not having the law itself. Further estimates put estimate lost investment earnings between 2007 and 2012 at $100 billion.

It is now anticipated that with the prospects of the new law coming into place, this huge revenue losses to the nation as a result of governance lapses will be eliminated.

COVID-19 has brought to the fore, the vulnerability of Nigeria to the high levels of uncertainty confronting the oil and gas industry. With the crash of crude oil prices, Nigeria has embarked on a fresh round of borrowing, rejigged her budget, reversed her long-held subsidy policy and is currently looking for areas, which would fill the financial void created by the economic challenges of COVID-19.

Immediate passage of the Bill according to experts may soften the impact of the looming economic recession in the country occasioned by COVID-19.