News. Information. Analysis
A copy of the PIGB 2017 may be found here. The Bill is in a report format and shows the changes made to the Bill after the Joint Committee’s review.
This post has been updated with a link to the final version of the Bill.
The PIGB 2017 passed by the Senate on May 25, 2017, has the following objectives:
The Petroleum Industry Governance Bill was passed at its third reading at the Nigerian Senate today (May 25th, 2017). In the long history of pursuing Petroleum Industry legislative reform in Nigeria, this is the first time that a bill will be passed at the Nigerian Senate.
We shall update you on the changes made to the Bill and the next steps.
There are indications that the passage of the PIB may be nowhere is sight as information gathered from ThisDay suggests that the delay in the passage of the Bill is actually due to internal wrangling between the National Assembly and the Executive, a power play centered around which arm of government is responsible for the passage of the Bill. This is in addition to the unresolved issue of the inclusion or otherwise of the host community fund in the Bill. The report decried this debacle calling it a major embarrassment for Nigeria in view of the landmark passage of a similar Bill by Ghana’s parliament last week.
The paper went on to report that the Group Managing Director (GMD) of NNPC, Dr. Maikanti Baru has promised to continue with the reform initiatives started by the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, and further grow the fortunes of NNPC by focusing on a 12-point agenda, which includes security of oil installations, the new business models, joint venture cash calls, production and reserve growth, growth of the Nigerian Petroleum Development Company (NPDC), gas development, oil and gas infrastructure, and refinery upgrade and expansion.
A review of the Petroleum Industry Governance Bill 2016 (“the Bill”), which we reported last week passed first reading on the floor of the Senate shows that it largely retains the content of the first version, introduced late last year as the Petroleum Industry Governance and Institutional Framework Bill 2015, with a few amendments. The renewed attention given to the Petroleum Industry Bill (“PIB”) by the National Assembly by sponsoring this Bill is an indication of the lawmakers’ dissatisfaction with the seeming silence of the Executive on the matter.
Part One of this review focuses on the functions and powers of the Minister.
THE MINISTER
The Bill provides for the functions and powers of the Minister in two sections. Under Section 2(1) paragraphs a-i, the Minister is vested with eight functions similar to those provided in Section 6 of the PIB save for three distinct departures. The power to delegate is conferred under Section 2(2) whilst Section 3 addresses the Minister’s right of pre-emption.
Under extant legislation, the Petroleum Act grants the Minister exclusive and unfettered power to grant licenses and leases and amend, renew, extend or revoke same pursuant to the provisions of the Act. The Bill, much like the PIB (save for the replacement of the word “advice” with “recommendation”), fetters the discretion of the Minister to issue licenses and leases for petroleum exploration and production activities. The Minister may now only exercise such powers based on the recommendation of the Commission. Currently, the grant of licenses is governed by the Petroleum (Drilling and Production) Regulations and applications are made to the Minister. It appears this would no longer be the case and such applications would now be required to be made to the Commission. Section 25 of the Petroleum Act entrusts the Minister with discretionary powers to revoke a license or lease based on certain criteria. Under the Bill, this power may only be exercised based on recommendations made by the Commission in this regard. Accordingly, Part 6, Section 84(1) of the Bill provides that the provisions of all existing enactments or laws, including the Petroleum Act, Petroleum Profit Tax Act and the Companies and Allied Matters Act, shall be read with such modifications so as to bring them into conformity with the Bill. We expect that regulations would be made which clearly defines new procedures to be adopted.
In our next report, we will continue with an analysis of the proposed sector regulator, the Petroleum Regulatory Commission.
It was recently reported by Reuters Africa that the government is breaking up the Petroleum Industry Bill and replacing it first with a law to overhaul the state sector. This new Bill, entitled “Petroleum Industry Governance and Institutional Framework Bill 2015” aims to create “commercially oriented and profit driven petroleum entities” and close loopholes that bred corruption.
Some of the changes reportedly made to the new Bill include amongst others, curtailment of Ministerial powers, the splitting of NNPC into two separate entities: the Nigeria Petroleum Assets Management Co (NPAM) and a National Oil Company (NOC). The NOC will be an “integrated oil and gas company operating as a fully commercial entity” and will run like a private company. It will keep its revenues, deduct costs directly and pay dividends to the government thus putting an end to the era of waiting for Federal allocation for funding and always failing to meet cash call obligations.
You will recall that in the recent past we had reported that the former Minister of Petroleum Resources, Diezani Alison-Madueke, suggested that the PIB be split up to ensure speedy passage into law. This sentiment is one that is shared by many industry stakeholders although there are others who believe that splitting the Bill is not in Nigeria’s best interest.
This is an interesting development and one we intend to watch closely to see how the pendulum swings. Should this Petroleum Industry Governance and Institutional Framework Bill 2015 be passed as reported, we do hope it addresses not just a few, but all the lacunae and institutional issues which the previous PIB was not able to effectively tackle. We are at least certain of one fact, it will be a welcomed development for NNPC JV partners.
In a recent article, it was announced that President Buhari had given the Nigerian Petroleum Development Company (“NPDC”) the approval to corporatise its joint venture assets and convert them into Incorporated Joint Ventures (“IJV”). The IJV structure has been floated at least since 2008 when the first draft of the Petroleum Industry Bill (“PIB”) was issued. That draft of the Bill mandated the formation of IJVs with respect to joint ventures between the Nigerian National Petroleum Corporation (“NNPC”) and its partners (mostly international oil companies). The IJV was seen as a solution to the perennial difficulties faced by NNPC in financing its share of the joint venture cash calls. This was based on the theory that an IJV was likely to be in a better position to raise money from loan and equity markets. This concept, loosely based on the NLNG model, was resisted by the joint venture partners for a variety of reasons and was removed from subsequent drafts of the PIB.
The recent proposal is a bit different. Firstly, it is targeted at companies in joint ventures with NPDC, a subsidiary of NNPC. These companies are typically Nigerian owned and/or Nigerian-led companies. The assets recommended for conversion into IJV status are detailed in the table below:
| Asset | Joint Venture Partner | Key shareholders* |
| OML 30 | Shoreline Natural Resources Nigeria Ltd | Shoreline (indigenous) & Heritage (foreign) |
| OML 26 | First Hydrocarbon Nigeria Ltd | Afren (foreign) |
| OML 34 | ND Western Ltd | NDPR (indigenous), Petrolin (foreign), First E & P (indigenous), WalterSmith (indigenous) |
| OML 40 | Elcrest E & P Nigeria Ltd | Eland(foreign) & Starcrest (indigenous) |
| OML 42 | Neconde Energy Ltd | Nestoil (indigenous) & Kulcyzk (foreign) |
| OMLs 71 & 72 | West African Exploration & Production Company Ltd | Dangote & First E & P (both indigenous) |
*from publicly available data and news reports
It is not clear whether NNPC/NPDC believes that the local companies are soft targets for implementing the IJV strategy or whether this is a first step which may be extended to all companies in a joint venture with NNPC. Whatever the case, it is worth noting that unlike the IOCs, most of these companies are single asset companies, which means two things. One, the success of the asset means everything to the company, its owners and its employees. Therefore, these stakeholders will be averse to any change which they consider may affect the economic potentials of the company. Two, most of the companies and/or its owners are substantially leveraged from the acquisition of the assets and the lending banks will have a say in any proposed reforms.
There is no indication (at least not yet), that these companies would be compelled by law, as previously proposed under the 2008 PIB draft, to enter into these IJVs. This allows for detailed negotiations on the form and substance of the IJV structure which may emerge.
This brief paper will not be examining the merits or demerits of the IJV structure. It only seeks to enunciate two options, which may be taken by the NPDC and the joint venture partners in achieving the IJV structure. In doing this, we show that the process of conversion itself is not that simple and requires all parties to put a lot of thought to the issues likely to be faced.
Before looking at the options available, it would be useful to comment on the characteristics of the current unincorporated joint venture structure, which may impact on its conversion.
Rights to explore for, develop and produce petroleum are granted in Nigeria through the award of Oil Prospecting Licences (“OPL”) and Oil Mining Leases (“OML”). Typically, two or more parties would become the licensee and enter into a joint venture governed by a joint operating agreement (“JOA”). The JOA, amongst others, spells out the participating interest (or the share of costs and oil) to which each party is entitled. Each joint venture party holds its participating interest as an asset on its own books and is entitled to assign the asset (subject to certain controls) and to pledge the asset. It is worth mentioning that the pledge of OML/OPL assets is not typical in Nigeria due to the requirement for ministerial consent and the time it takes to achieve such consent.
This is not an RTO in the technical sense where a private company takes over a (dormant) public company. Under this structure, NPDC transfers its rights in the underlying OML in exchange for shares in the indigenous company. The indigenous company would be required to substantially increase its share capital in order to allot the requisite shares to NPDC. This option, therefore, requires a thorough valuation of the assets and the liabilities of the indigenous company as well as that of NPDC’s interest in order to determine the appropriate level of shareholding to be allocated.
This process is likely to lead to NPDC holding majority shares in the indigenous companies (hence the RTO) and where the shareholdings of the companies are already relatively fragmented, NPDC would be the largest shareholder by a significant margin. This may raise concerns from the existing shareholders in terms of their ability to influence the operations of the new entity. A number of these concerns may be dealt with by putting in place a robust shareholders’ agreement which addresses voting rights, pass mark issues and other minority protection mechanisms.
NPDC may also be concerned that at the end of this process, it would have only transferred assets and not achieved the capacity building objectives of this exercise. This concern may be ameliorated by allowing the process to accommodate the transfer of staff.
The transfer of assets from NPDC under this option would require the consent of the Minister, which is unlikely to be a problem, given that this initiative is being driven by the government side. The process may also require the approval of the Securities and Exchange Commission as it is likely to fall under the mergers and acquisitions rules of the Investments and Securities Act. Further, the required increase in share capital by the indigenous companies would incur fees at the Corporate Affairs Commission as well as stamp duty fees. Banks and other lenders to the indigenous companies as well as those of its existing shareholders may also need to approve the transaction under the terms of their existing loan arrangements.
A second option which may be utilised to achieve the IJV structure is for both parties – NPDC and the indigenous companies, to transfer their assets and liabilities with respect to that OML to a newly created entity. In this scenario, the shareholders in the new company would be NPDC and the existing indigenous company. The post-transaction shareholding structure should broadly reflect the current participating interest ratio between NPDC and the indigenous company on the asset. This may provide some level of comfort for the indigenous shareholders as they may act as one block, reducing NPDC’s influence as the majority shareholder. It will still be necessary to put in place a shareholders’ agreement which addresses minority protection rights.
In adopting this structure, however, there may be concerns about the tax exposure of the shareholders of the indigenous company. Under the current arrangements, the indigenous company pays petroleum profits tax (“PPT”) after which its shareholders may take dividends from the remainder profit. The dividends are not subject to the payment of tax under Nigerian law although the company which receives the dividends may be further subject to companies income tax (“CIT”) on any profits it makes. The addition of another layer through the establishment of this new company may subject the current shareholders in the indigenous company to additional tax, potentially whittling down profits.
The transfer of assets from NPDC under this option would also require the consent of the Minister. As the option would require the incorporation of a new company with sufficient share capital to accommodate the assets being transferred, there are likely to be substantial CAC fees as well as stamp duty fees. Banks and other lenders to the indigenous companies and/or its existing shareholders may also need to approve the transaction under the terms of their existing loan arrangements. The process is unlikely to require SEC approval.
There are a number of questions which need to be asked around the desirability of the proposed conversion to IJV status. As private sector entities, concerns may be raised around governance of such an institution, incorporation of politics into the affairs of the organisation and public procurement obligations amongst other issues. Even where these hurdles are scaled, the fulfillment of the process requires both NNPC/NPDC and the private companies to think through how to implement the change. That process will not be straightforward and may take a number of years to reach an agreement.
During that period, however, the NNPC/NPDC and its joint venture partners must come to an agreement on appropriate structures to enhance the efficiency of these joint venture operations. This means agreeing on alternative finance structures and how operations are managed and this would involve at the very least executing new joint operating agreements.
Nigeria’s proposed wide ranging oil and gas industry reform bill, the Petroleum Industry Bill (“PIB”), has failed to secure the approval of the National Assembly since 2008. The bill which seeks to reform government institutions, change the fiscal framework,and institute domestic gas reforms amongst other objectives has stalled at the National Assembly due to a wide range of disputes over its terms and mechanisms. According to Austin Avuru, the Managing Director of Seplat, one of Nigeria’s leading indigenous oil and gas companies, the delay in passing the PIB has contributed considerably to reduced investments into the sector.
The fall in investments will have a long term negative impact on Nigeria’s oil and gas industry with a reduction in government revenues, loss of jobs and the damaging effects associated with a failure to replace reserves. In spite of these apparent consequences, the new government is yet to enunciate its proposals with respect to the PIB, its passage and proposed timelines. Indeed, the Senate Majority Leader, Ali Ndume has stated that the passage of the PIB is not currently a priority of this Senate. In any case, we believe that the new government will seek to make changes to certain aspects of the bill including fiscal & institutional reforms.
Channels Television reports that the House of Reps’ Ad-Hoc Committee report on the PIB has been considered and that the Bill has been passed by the lower house.
This comes after a flurry of Bills (46 in total) were passed by the Senate yesterday, June 3, after same were transmitted by the House of Reps.
The House of Reps’ passage of the PIB comes to little or no avail as the 7th Assembly wrapped up today. The Bill would have also required passage by the Senate.
Indeed, Senate president, David Mark, in his End-of-Assembly speech, admitted the lawmakers failure to pass the Bill.
The PIB has been before the House of Assembly since July 2012.
ThisDay and Leadership report that the House of Representatives’ Ad-hoc Committee on the PIB has recommended that the President’s discretionary powers to award licenses or leases, as well as the Minister of Petroleum Resources’ control over relevant regulatory agencies, be removed.
The recommendations, which are contained in the executive summary of the Committee’s report on the Bill, also seek to extend the coverage of the Petroleum Host Community Fund to communities where oil and gas installations are located.
The Committee will present its report on the PIB when the House reconvenes on March 31, 2015.