Stakeholders in the oil and gas industry were full of optimism when President Goodluck Jonathan presented the repackaged Petroleum Industry Bill, PIB, to the National Assembly in July 2012 at least for some reasons. First, the presentation made it for the nation to have only one authentic copy of the PIB in circulation. Before then, there were many variations of the bill in circulation.
Second, Jonathan asked for expeditious consideration and passage of the bill. Furthermore, since the legislators were familiar with the various issues, it was expected that it would not take a very long time to pass it into law.
But this was not to be. Barely after one year after the presentation, is the PIB still before the National Assembly. It has been there since 2008 when the administration of the late President Musa Yar”Adua first presented it to the legislators. From all indications, the PIB may not be passed into law this year as the National Assembly has just completed its public hearing on the bill.
More than that, major areas of conflict among interest groups, especially the Federal Government, International Oil Companies and indigenous operators have not yet been resolved. A few days ago, the IOCs expressed fears that the passage of the PIB in its present state would reduce oil production by 25 per cent. The Chairman of Oil Producers Trade Section, OPTS, Mr. Mark Ward stated that: “With the proposed PIB, reduced investments would not offset natural decline and Nigeria’s production would fall 25 per cent through 2022 which is more than 500 kbd.
He stated that Fiscal regimes which are the inter-play of royalties, taxes, incentives and recovery of costs and no single element can be taken in isolation when evaluating the impact on investments. Mark who made this observation at the National Association of Energy Correspondents Association conference on PIB in Lagos remarked that: “The PIB does not balance these fiscal elements. Generally speaking, the terms proposed increase royalties, increase taxes and lower allowances or incentives all at the same time. Additionally a 10per cent profit tax is introduced to fund the PHCF and limitations are placed on deductibility of foreign costs.
He said that all this comes on top of many other existing levies and taxes we pay, such as the NDDC levy, NCD levy and Education tax, adding that: “The cumulative effect of this is that a combination of higher royalties and taxes with reduced incentives to an extent that investors would be discouraged from investing in the deep waters.
Mark stated that no new deepwater investments are economically viable and they will not go forward, 90per cent of new JV gas production will not happen and 30 per cent of new JV oil production will not materialise. The chairman remarked that: “As part of our analysis of the PIB, we also compared the proposed fiscal terms with 20 other countries. What we see across the board is that when a country has relatively high royalties, they balance it with relatively lower taxes or higher taxes with lower royalties with incentives in both cases providing some balance.
He stated that the PIB does not have this balance, meaning that it would be difficult for Nigeria to attract the required foreign capital to offset decline let alone grow production. Mark regretted that the development was taking place when the global energy landscape was witnessing radical changes. He said that: “As you know, new technologies are unlocking shale oil and gas in the US with Russia and China expected to follow. Closer to Nigeria, there have recently been significant gas discoveries in East Africa and West Africa is opening new areas with attractive terms up and down the region.
He stated that on the market side, recent refinery upgrades are reducing the need for light crudes like Nigeria’s Bonny crude putting pressure on crude sales. All these advances are creating direct competition for investments dollars with Nigeria. He noted that the treatment of gas in the PIB is an even more difficult story as gas was extremely important for the nation.
Specifically, he said that: “It has the world’s 9th largest gas reserves and we believe that these vast reserves can underpin economic growth and diversification to Nigeria through more power generation, more gas based industrial activities such as fertilizer plants to boost agriculture, petrochemical industries and also high value exports.
He stated that although the average domestic gas prices have recently risen to $1 per mmbtu, this is grossly inadequate when compared with development costs which include not only the development of the resource, but also the infrastructure needed to move the gas to market. Mark remarked that: “The $1 in perspective, this is equivalent to $6 per barrel of oil. Additionally, infrastructure is still very much in its infancy and therefore costs are mostly higher than oil developments depending on many factors.
He added that if oil were priced at $6 per barrel there would be no new oil developments. PIB makes matters worse by increasing the tax rate from 30 per cent to 80per cent and by significantly reducing incentives for investments. Mark stated that: “PIB focuses on a punitive approach to enforce domestic obligations. Given the capped price and the undeveloped infrastructure leading to high overall development costs, we believe that an incentive based approach to domestic obligations is the best way to achieve the development which Nigeria so clearly needs.
He maintained the OPTS has non-fiscal concerns which further creates uncertainty for the industry and impedes investments, including licenses and leases and contract sanctity. Mark stated that: “Dispute resolution – Access to independent arbitration is a key part of a secure investment environment, and a globallyaccepted practice. PIB should seek to do the same as also is provided in the current law. PIB as proposed has government regulators providing the final decision on business disputes.
He remarked that the IOCs firmly believe in the future of the Nigerian Oil & Gas sector. Most of the international companies have been present in Nigeria for 50 years and have made major investments critical to Nigeria’s current production. Mark stated that they have intention of being in Nigeria for decades more to come but noted that the investment dollar as directed by the shareholders of the major investors will flow to where companies can get a competitive return commensurate with the risk.
He remarked that with the current proposed fiscal terms and changes to many fundamental business practices, Nigeria will not attract investments at the level and pace needed to offset the natural decline. Mark stated that: “What the PIB must do is to provide fiscal terms which allow investors to add value to both shareholders and Nigeria. An appropriate balance must be achieved in the context of an attractive, competitive fiscal structure.
He also stated that: “The investment returns in isolation and in a global competitive context must be taken in to account. In addition it should provide an environment where non-fiscal obstacles and issues are addressed. If you do this, investments will flourish and both oil and gas production in Nigeria can grow significantly…a win-win situation for all.
The Country Chair/Managing Director of Shell Petroleum Development Company, Mr. Mutiu Sunmonu noted that the government needed to ensure that the PIB provided increased air of freedom for operators to concentrate on core operations with minimum interference. He said: “All we need is for the government to replicate what it has done in the telecoms industry, which allows investors, including MTN, to run operations as seamlessly as possible in order to fast track the development of the industry.
Sunmonu had earlier surmised that the nation has great potential, which should be properly harnessed to maximise value for all stakeholders, including operators, communities and the entire nation. He said the slag in exploration and production as a result of the PIB had impacted in many negative ways on the industry and government which needed more funds to catch up in the coming years.
He noted that the tax provisions in the PIB is ‘uncompetitive’, stressing that they are capable of stifling investment and making offshore oil and gas projects unviable. Sunmonu who believed that a good bill should, “take local business challenges into consideration as well as the impact on existing investments, ”remarked that: “What we have seen of the draft PIB to date does not indicate a bill that fits these criteria. And this is the opinion not only of the major players in Nigeria’s oil and gas industry, but, as I mentioned earlier, industry analysts as well. What we have seen and what we know of the current draft PIB requires significant improvement to secure Nigeria ’s competitiveness, and attract the required level of investment to enable exploration to increase Nigeria’s reserves and then foster development of the projects to monetise them.”
Sunmonu, who argued that an unbalanced bill could hinder investment stated: “The PIB will likely render all deepwater projects and all dry gas projects whether for domestic or export markets non-viable, added that many opportunities will be lost. The Country Chair who noted that the opportunity to monetise some of the world’s best gas reserves will be lost also stated that the opportunity to kick start the power sector “the key to economic growth using easily accessible gas will also be lost.”
The Shell boss remarked that the PIB needs to address long term industry issues, including funding, particularly as funding requirements have constrained production growth in the industry. He stressed that the nation needs a strong national oil company, capable of partnering with others to enhance its competitiveness.
He remarked that: “While the economy in general is on the path of diversification it should not be denied that the oil and gas sector remains the driver of this process providing not only the funds to enable the diversification but also the gas that could and should be used to regenerate the power sector to provide reliable electricity which is the backbone of industrial growth.
Spaces for Change noted that the environmental laws as documented in the PIB are weak and not capable of making much impact in the industry. For instance, they maintained that: “Asking operators in consultation with the Ministry of Environment to come up with an environmental plan does not deal with questions of the gap between the policies and practices which has been the problem.
The body maintained that: “The provisions relating to gas flares gives by one hand and takes from the other. After banning gas flaring from end of this year, it creates room for exceptions to be granted by the minister. That is not effectively different from what is happening under the current regime. It turns gas flaring into discretionary permit granting. Environmental justice advocates believe that the gas ban should be absolute. They also insist that operating companies should not only be made to get insurance covers to cover cases of environmental disasters arising from their operations and this should be a condition precedent to the operation of any license.
The report noted that the new PIB vests enormous powers on the Minister of Petroleum Resources, especially by placing all the newly created agencies and regulatory institutions under the control and supervision of the minister. It documented that: “Section 5 of the bill provides that the Minister of Petroleum Resources shall be responsible for the coordination of the activities of the petroleum industry and shall exercise general supervision over all operations and all institutions in the industry.
However, the Group Managing Director of the Nigerian National Petroleum Corporation, Mr. Andrew Yakubu maintained that the various issues in the PIB constitute the major challenges in the industry. As he puts it: One of the major challenges in the industry today is how we shall arrive at a consensus on the Petroleum Industry Bill which has been at the National Assembly for several years. It is by being able to have a harmonised position on the bill that we can expect an industry legal framework that would support the growth of the oil and gas industry for many years to come.”
Information from National Mirror was used in this report.