In the first part of this article, we highlighted two reforms which the government and NNPC may undertake prior to the passage of the Petroleum Industry Bill – internal reforms of NNPC & resolution of JV cash call issues. This paper examines two more reform initiatives available to the government pending the passage of the PIB. These are Downstream Sector Deregulation and the institution of Domestic Gas Market Reforms.
1. Downstream Sector Deregulation
Nigeria provides subsidies for the consumption of petroleum products like premium motor spirit (“PMS”)and kerosene. The current PMS pricing template (September 2015) of the Petroleum Products Pricing Regulatory Authority (“PPPRA”) indicates that the government is currently subsidising PMS consumption by N 20.56 per litre. The subsidy regime has come under scrutiny in recent years, with allegations of fraud and mismanagement. Beyond those allegations, however, there lies the questions whether, given the economic climate, the government should be in the business of subsidising consumption of petroleum products and whether such subsidies efficiently target the less privileged in society who need them the most. Various studies, including this one by the International Monetary Fund, suggest that petroleum products subsidies are costly and inequitable, with the subsidies more likely to benefit the rich and the middle class in real terms than the less advantaged. For a more detailed analysis of the subsidy regime in Nigeria and why it should be removed, see our infographic which may be found here and these two reports by Nextier Advisory which may be found here and here.
The recent fall in crude oil prices actually provides Nigeria with an opportunity to remove its fuel subsidies. Oil producing countries such as the United Arab Emirates (“UAE”) and Indonesia have already taken advantage of the crude oil price climate and removed their fuel subsidies recently. Indeed, the NNPC GMD, Dr. Kachikwu has argued that Nigeria’s fuel subsidy regime is unsustainable.
The Petroleum Act empowers the Minister to fix petroleum product prices, which power is expressed in discretionary terms. The Minister may, therefore, choose not to fix petroleum products prices. The Price Control Act (“PCA”), which has fallen into disuse, provides for the establishment of a Price Control Board to fix the prices of certain commodities including petroleum products. The price control mechanism under the PCA requires the recognition of cost and profit in fixing prices. As far as we are aware, a Price Control Board has not been inaugurated in several years and has certainly not been involved in petroleum products pricing. More recently, the Petroleum Products Pricing Regulatory Authority Act established the PPPRA to “determine the pricing policy of petroleum products” and “…periodically approve benchmark prices for all petroleum products…”.
Whilst the legislations discussed above seek to grant powers to different authorities to regulate petroleum product prices, none of them imposes an obligation on the government to subsidise petroleum products pricing. It is therefore within the remit of this government to act to remove petroleum subsidies without requiring legislative amendments.
Responsibility: President Buhari, Minister of Petroleum, PPPRA
2. Domestic Gas Market Reforms
The development of Nigeria’s natural gas resources is critical to the nation’s economic growth. A functional domestic gas market would provide fuel for gas-powered plants and feedstock for job-creating industries. The domestic gas market has historically suffered from neglect. Existing legislations have treated gas utilisation as an afterthought, leading to a haphazard development of the industry. There is no clearly defined commercial and regulatory framework, no recognition of the constituent elements of the gas sector value chain and gas price controls. All of which have not incentivised the development of natural gas projects.
It is only fairly recently that a number of initiatives have been introduced to develop the sector including the National Gas Policy – which provides the policy framework for the development of the industry; the Natural Gas Supply Pricing Regulations – which provides the framework for determining gas pricing across various sectors; the establishment of the Gas Aggregator – the entity responsible for matching domestic gas suppliers with buyers; and the formulation of the Nigerian Gas Masterplan – which sets out the plan for developing the domestic gas market.
These well-meaning initiatives are yet to achieve the aims of fostering the domestic gas market, extending gas penetration in the domestic market and encouraging private sector investment. This is in part due to the failure to pass legislation which creates the appropriate market structures. A central piece of the reform initiatives had been the passage of the Downstream Gas Bill. The Downstream Gas Bill provided for the establishment of a regulatory agency responsible for regulating the domestic gas sector. The Gas Regulatory Commission (“GRC”) had the power to license the various participants in the gas sector value chain, which the Bill recognises as Supply; Transportation Network Operation; Transportation Pipeline Ownership; and Distribution.
The bill also provided for the principles of commercial regulation of the gas network including for gas transportation tariff, third-party access rules, competition and market power and the gas network code. It further sought to unbundle NNPC’s Nigerian Gas Company by separating it into two companies – a transportation (transmission) focused entity and a marketing company focused on distribution and sales of natural gas. The Bill, however, became a victim of the Petroleum Industry Bill when it was consolidated into that document. Uncontroversial by itself, it suffered from the disputes surrounding other elements of the PIB, which delayed its passage as well as from an inelegant consolidation which led to a loss of coherence.
A critical examination of the Bill, however, suggests that most of its elements may be implemented without the passage of the PIB or any other legislation. The Minister may, by virtue of the powers given to him under the Petroleum Act, immediately issue regulations “providing for such other matters as in his opinion may be necessary or desirable in order to give proper effect to this Act”. The wide ambit given to the Minister would entitle him to create regulations, which:
- Recognises and requires licenses for different elements of the gas sector value chain;
- Provides competition rules;
- Mandates the Network Code;
- Defines the elements of gas transportation tariffs; and
- Assigns the responsibility for carrying out these activities to a department (such as the DPR) under his Ministry.
The NNPC Board and management may also restructure NGC through its internal governance regimes in the way it is proposing for the Petroleum Pipelines and Marketing Company Limited.
The Minister may however not have the power to create the GRC as an independent regulatory agency as intended under the Bill. Given the ten year delay to the passage of the Bill, on its own and as consolidated into the PIB, this is a small price to pay to commence the establishment of the domestic gas sector framework.
Responsibility: President Buhari; Minister of Petroleum, NNPC Board & Management
The final part of the paper will examine Institutional Reforms and Reforms to the Ministerial Consent process.