Long-awaited reforms to Nigeria’s oil industry may be gaining momentum again. Investors are seeking clarity about the new structures to be introduced by the passage of the Petroleum Industry Bill (PIB), now in its fifth year of deliberations. The legislation is expected to increase efficiency and transparency, although some aspects of the code are proving tricky to resolve.
On May 27 Senator Nkechi Nwaogu, the chair of the Senate Committee on Oil and Gas Resources, told the local press she expected the PIB to receive parliamentary assent by the end of the year. The bill is awaiting its second reading in the Senate, but Nwaogu said negotiations with key stakeholders on details in the legislation – particularly revenue apportionment and fiscal restructuring – were still ongoing.
The laborious process of finalising the PIB is no surprise to those familiar with Nigeria. The ambitious piece of legislation sets out to transform the structure and rules governing the oil industry. Firstly, the National Petroleum Corporation (NNPC), the state hydrocarbons firm, will be split into three entities, each expected to operate as commercially viable businesses.
These will be the National Asset Management Corporation, managing the state’s stake in joint ventures with major oil companies; a new commercial national oil company, taking over the 130,000 barrels per day (bpd) business of the Nigeria Petroleum Development Company; and a national gas company. Some 30% of the new national oil firm would be listed on Nigeria’s stock exchange.
Secondly, regulatory oversight will be spun off from the NNPC to two bodies, one in charge of upstream and one for downstream operations. This would go hand-in-hand with a broader relaxing of rules and restrictions in the subsidised downstream sector, including the introduction of market pricing as an incentive to production and to reduce distortions.
Thirdly, the PIB would introduce a new fiscal framework for exploration and production that would ostensibly improve overall attractiveness, while still delivering more cash to government coffers and ensuring that the communities in oil-producing areas see a greater benefit from extractive activities.
The first two areas of reform have been widely welcomed by the oil industry, both local and international. Hogan Lovells, a law firm headquartered in London and Washington DC, noted in a report on the bill, “It can hardly be disputed that Nigeria is ripe for a comprehensive review of the legal and regulatory framework applicable to its oil and gas industry.” Moreover, changes to NNPC should reduce conflicts of interest and create less opaque structures of the sector’s management.
But fiscal changes have proved much more controversial. Part of the concern stems from a debate over the apportionment of revenues throughout the country, particularly in terms of the restructuring of levies and the distribution of additional revenues, stemming from a proposed 10% tax, to benefit oil-producing areas in the south.
International oil companies (IOCs) have also raised concerns about possible increases in the tax burden on existing and future projects under the PIB. According to Anthony Long of US-based law firm King & Spalding, these “lead to an increased government take from 73% to a projected 82% of projects in an apparent move to increase the local distribution of oil profits”.
This is not unique to Nigeria, given the trend across Africa by governments to improve the capture of local value in extractive industries. Mining producers in Ghana and oil producers in Gabon are facing similar issues, as royalty schemes are revised and windfall taxes rolled out.
“Many people tend to view natural resources as national resources, which would explain the strongly held views that the proposed fiscal framework under the PIB is a legitimate claim to an increase in the domestic take of oil and gas revenues,” Seun Faluyi, the managing director of Global Oceon, told OBG.
However, the proposed changes have prompted worry from the private sector. On May 19, Mark Ward, chairman of the Oil Producers Trade Section of the Lagos Chamber of Commerce and chairman and managing director of ExxonMobil Nigeria, warned that $33bn in planned investments over the next five years could be jeopardised by the new fiscal terms.
“There is enormous investor uncertainty with apparent divergent interest,” he told a conference in Houston. “Nigeria’s joint venture oil fiscal terms are already among the highest in the world, not considering the high risks and cost due to security and bunkering.”
Despite concerns from IOCs, in May the IMF threw its weight behind the PIB, saying that it “would boost investment, government revenue and fiscal transparency”. Certainly, years of stalling have seen investment in production slow as companies put off capital expenditure due to the uncertain outlook regarding legislation. According to international press reports, oil output has leveled off at 2.4m bpd, well below the target of 4m bpd the government set for 2010.
Even if IOCs show limited enthusiasm for aspects of the PIB in its present form, changes to the regulatory environment are widely expected to be beneficial to the industry as a whole, including the increasing number of indigenous firms, as well as other medium-sized players in the region. This suggests that the settlement of the PIB could bring about a wider revival in the West African country’s primary economic activity.
Nigeria remains Africa’s biggest oil producer, and a major player in the global market. But failure to improve the investment environment for foreign and local companies means it is performing below its potential.