Engr. Joseph Nwakwue & Professor Omowumi O. Iledare
Preamble:
On the 16th of August 2021, the Petroleum Industry Act 2021 (PIA) was signed into law by the then President Muhammadu Buhari. The PIA makes sweeping and fundamental changes to the administration, governance, legal, social, fiscal, and environmental management frameworks of the petroleum industry in Nigeria. The law is intended to re-position the industry for growth whilst stemming the obvious and apparent declining fortunes of the sector. It was enacted to foster transparency and accountability in the oil and gas sector with a primary objective to maximize the domestic oil and gas value chain for sustainable economic development. Two years after, it is important to appraise to what extent, the Act has been implemented and its impact on the industry. The oil and gas industry remains challenged by the usual headwinds of low investments levels, high unit production costs, insecurity and sabotage, regulatory uncertainty etc. Production levels for both oil and gas have continued to decline, reserves are not growing and according to the Nigerian Bureau of statistics, sectoral contribution to GDP plummeted to 5.3% in Q2, 2023. The industry has experienced a cumulative drop of about 55% in upstream expenditures from the 2010 levels in the past thirteen years, and a corresponding drop in crude oil output of about 36% in the same period. Is the petroleum industry really roaring to go?
Petroleum Sector Post PIA 2021
The emergence of PIA is an effort to correct the amorphous and opaqueness in the governance of the oil and gas industry in the evolving energy landscape. The primary object of the PIA is the necessity to separate the institutional roles that have been clustered around the Minister of Petroleum Resources. So you have three anchor institutions — the Policy, Regulations, Commercial. Another clear objective is to create competitive fiscal framework in addition to transparency and accountability. Though the PIA journey took too long, the high expectations of its benefits remain high. Moreso in respect of removing or reducing the perpetual uncertainty in the business. Thus, to assess the state of the petroleum industry post PIA, it is important to identify some critical performance dimensions – investor confidence measured by the level of investments, regulatory capacity and certainty, state of industry freedom to operate within the host communities, fiscal competitiveness and certainty, independence and efficiency of the governance framework and the ease and effectiveness of industry administrative mechanisms.
The PIA Institutions — In the period under review, a lot of excellent work has been done with regards to development of regulations by the Commission and Authority towards giving teeth to the provisions of the PIA, conclusion of the Marginal field bid round, enhanced transparency (NNPCL is up to date on the publication of its audited reports) and sector regulators have shown some independence. It is also noteworthy, the effort that has gone into integrating and building these institutions considering the varying cultures and value orientations of the precursor entities. No doubt, there are significant overlaps and gaps persisting in the oil and gas regulatory space, we expect that to sustain their independence, the regulators should engage within and without to align on these areas and document these using appropriate regulations. The PIA expects no less and has not empowered.
The evolution and development of the institutions (Policy, regulatory and commercial) that would manage and grow the industry is also critical. NNPCL and the regulatory institutions are well on the reform journey while the Ministry, the all-important policy arm is yet to start, and remains the weakest link and jeopardizing one of the key objectives of the Act, the separation of the institutional roles. The reform of the sector envisioned under the PIA rests on sound policy development and implementation. Where the policy arm is weak and ineffective, expected reforms may not be achieved. This needs to be addressed in short order otherwise we may well end up with a four-wheeler with one deflated tyre. There is an urgent need to rekindle, restructure and reform the Ministry of Petroleum within the context of the PIA 2021.
Petroleum Subsidy Removal — The immediate removal of subsidy, based on presidential body language, was traumatic to the economy. However, the removal is in some way symptomatic of the slow pace of implementation of sectoral reforms as enacted in the PIA. Section 205 of the PIA provides that the product pricing in the downstream would be based on competitive pricing; this would imply a transition from state-controlled price fixing to market-based pricing. That the government could not develop a plan, nor implement one in the intervening two-year period, speaks volumes.
Additionally, that the President had to, by out-of-context pronouncement, implement section 205 (obviously without a plan) further compounds the challenges in the downstream as the sub-sector is in a reactive mode. The removal of subsidy is a desired structural reform the sector needed but sadly, the government has been forced to do the right thing without a plan due to majorly to the increasing inability to fund the subsidy. A clear indictment of sector management. It is therefore necessary that efforts should be made to address the substantial challenges the abrupt removal has thrown up to ensure that the reform does not fail, a failed subsidy removal program would undoubtably wrought more pain on the consuming public and further undermine the credibility of government.
Three Petroleum Ministers — The industry welcomed the ministerial announcements and assignments with bated breath and perhaps, there are some who are in disbelieve within the context of the functional responsibilities assigned to the Minister of Petroleum in the PIA. While most are skeptical about the bifurcation of the Ministry into oil and gas, there is indeed the acknowledgment of the thinking behind the renewed focus on gas as a critical enabler for national re-industrialization. Others are also hopeful that Nigeria may yet be able to achieve key sectoral objectives with renewed focus driven by these two gentlemen working with Mr. President. Sceptics, however, point to the earlier experiment with this model and its clear failure to deliver on its promise under President Olusegun Obasanjo.
There is also the apprehension that a continued retention of ministerial powers by the President may not only delay prompt attention to sector challenges but may indeed be inappropriate and regressive. It is argued that the Presidency is beset with much more responsibilities and may not be able to pay sufficient attention to the sector; a situation that could be worsened by the appointment of two Ministers of State in the Ministry of Petroleum Resources. This situation will no doubt be challenging for policy coordination, but there is the plausibility that the Ministers would work closely together to not only ensure policy alignment but coherence. The president, keeping the petroleum minister portfolio and having two ministers of state, though has precedents, but it has no backing in the PIA, the petroleum policy documents, nor perhaps the Constitution. Regarding the framer’s intention, the presidency as the anchor of petroleum policy negates the separation of roles entrenched in the PIA for administrative efficiency and governance effectiveness. This is doable if institutional capture and economic rent seeking and sharing mindsets are disavowed by the Ministers and their aides.
Furthermore, given the critical contribution the sector is expected to play in the revival of the petroleum economy, it is important that a clear policy road map is charted by the Ministry and singularly pursued with vigor. The completion of ongoing gas utilization projects – the AKK pipeline, NLNG Train 7, OB3 interconnect pipeline, Nigerian Gas Flare Commercialization program etc. need be prioritized. A revamp of the national gas masterplan and development of policies (Public Private Partnerships, Concessioning schemes etc) that would attract and retain private sector capital and know-how into the gas infrastructure space will be key. The current focus on virtual transportation of gas, though desirable given the urgency, does not provide a long term sustainable and cost-effective means of supplying gas for industry and homes across the length and breadth of the country.
Concluding Remarks
Nigeria must now begin to look at the development of nationwide, private sector driven gas infrastructure (The national gas grid) build-out. This would have long term impact on industrial competitiveness and national development. A renewed focus on the implementation of the PIA with specific focus on aspects that help build investor confidence will be central to the delivery on sector and PIA objectives. The impact of such issues like transparency, good corporate governance, regulatory even-handedness, effective communication and providing a level playing ground cannot be over-emphasized.
Addressing the pervasive funding challenges across the value-chain would task the new leadership. Most operators, in Nigeria, agree that the PIA 2021 in the main, restored fiscal competitiveness and certainty to the sector. However, investors’ confidence has not quite returned due mainly to regulatory uncertainty and lack of level playing ground. Most also would agree that while commendable work has been done by the regulatory agencies, a lot still needs to be done and faster. The resolution of the issues associated with JV funding mechanism would give a flip to efforts at restoring production to pre-2010 levels.
It is our considered view that along with addressing security, community unrest, sabotage and vandalism, funding and revamping our aged production infrastructure is the key to restoration of our output levels to at least 2 MBOPD and 8.5BCFPD of oil and gas, respectively. Indeed, an output growth to at least 2.5 MBOPD and 12 BCFPD is not an unreasonable expectation for the incoming leadership of the sector in 4 years. We should also see domestic utilization of oil and gas rise to at least 1.5 MBO (through domestic refining) and 3 BCFPD of oil and gas, respectively. However, decoupling oil and gas exploration and production is worrisome and may perhaps be unsettling to the upstream business.
The restoration of domestic refining capacity is ongoing and should be expedited to ensure earliest exit from fuel importation and its debilitating impact on forex availability. A much broader and more far-reaching policy thrust that enables domestic refining of our total crude production, thereby exiting the crude exportation business is long overdue and concrete steps needs to be taken by the new ministers in this regard. The PIA envisages this and has made ample provisions for its realization. It is certainly not going to be a walk in the pack for our new ministers as they grapple with these issues; without losing sight of the bigger and global issues of energy transition and de-carbonization, global crisis and geo-politics, ongoing divestments by the international oil companies – and its implication for technology deployment and financing of key industry projects. We wish the administration well as it helps to navigate the water-taking ship to safe harbor!