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Six Reforms the Nigerian Government can Undertake Immediately without Passing the PIB (Part II)

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.

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Six Reforms the Nigerian Government can Undertake Prior to the Passage of the PIB (Part I)

Introduction

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.

Continue reading “Six Reforms the Nigerian Government can Undertake Prior to the Passage of the PIB (Part I)”

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Oil and Gas Industry Reforms to Commence Prior to the Passage of the PIB

The newly appointed Group Managing Director of NNPC, Dr. Ibe Kachikwu recently indicated that the reform of Nigeria’s oil and gas industry will start prior to the passage of the Petroleum Industry Bill.

We reported earlier this year that the House of Representatives passed the Bill in the 7th National Assembly, however, the Senate failed to pass the PIB and has not taken up the House version in its 8th Assembly. Indeed, the Senate Majority Leader, Ali Ndume, has been quoted as saying that the PIB was not a priority of this Senate.

The Buhari government is expected to make a number of changes to the Bill, particularly in relation to institutional reforms and the fiscal regime. The absence of a clear policy statement and indicative timelines from the government is, however, a cause for concern for investors.

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House of Reps Passes Petroleum Industry Bill

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.

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The Petroleum Industry Bill: 5 Things the Incoming Government Must Do

The Petroleum Industry Bill (PIB), which has been with us in one form or the other since 2008, proposes to completely overhaul Nigeria’s petroleum industry. The current draft of the Bill, sent to the National Assembly in 2012, seeks to, amongst others, restruc ture the regulatory and commercial institutions in the petroleum industry, change the fiscal dynamics and reform the operational mechanisms of the upstream, downstream and natural gas industries.

The below article by Dr. Adeoye Adefulu and Dr. Ekpen Omonbude highlights 5 actions the incoming government may take to get oil industry reform back on track.

 

1.   Delay the passage of the PIB

Given the potential impact of the Bill, its passage, at this late stage, will significantly hamstring the incoming government which has not had a chance to give its input. Indeed the current oil price crisis has changed the dynamics of the fiscal bargain and calls for a reconsideration and the introduction of flexible mechanisms to deal with any future crisis (see our point 4 below). Further, the current draft of the Bill remains controversial and it is necessary that the new government is able to take a position on its contents and implementation.

 

2.   Set a timetable and stick to it!

One of the hallmarks of this process has been the failure of the government to keep its promises regarding the passage of the Bill. This failure has kept the industry in limbo, with several companies delaying investment decisions due to the uncertainties surrounding the post PIB fiscal and regulatory regimes. Whilst we have indicated above that it is necessary for the new government to review the Bill, it must do so with a clear and achievable timetable. In our view, it should take no longer than twelve months to undertake the necessary research and pass the Bill or Bills (see next point). Whatever time is agreed, it is important that the government achieves its objective within that framework. This will help to bolster its credibility and reduce investment uncertainties. Our suggested timetable is as follows:

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3.   Break up the Bill

With 363 sections in over 223 pages the current draft of the Petroleum Industry Bill is unwieldy. The Bill seeks to deal with a wide variety of issues, the majority of which are only peripherally related. This has made it difficult from a political and operational perspective to manage the diverse interests impacted by the Bill. Further, a thorough analysis of the Bill will show that a number of areas, such as the proposed reforms in the downstream petroleum and natural gas sectors, have been inadequately addressed. The new government should break the Bill up into its natural segments. We suggest the industry reforms be taken under the following bills:

  • A fiscal reform bill – which deals with the tax and royalty issues surrounding the industry.
  • Institutional reform bill – this bill will be focused on creating new or reforming existing institutions. This will include the regulatory bodies as well as provisions for the commercial entities to be established and the process for transferring assets, liabilities and staff to these institutions;
  • An Upstream Petroleum Bill – focused on the upstream  oil and gas industry
  • A Petroleum Products Bill – focused on midstream and downstream matters; and
  • A Natural Gas Bill – dealing with the operations of a domestic gas market. This bill should not address gas productions matters.

We believe that this approach is more consistent with the various parts of the oil and gas value chain which require varying degrees of regulatory oversight and fiscal arrangements.  It would also encourage a more thorough coverage of the relevant issues, a robust debate from the impacted stakeholders and quicker timelines in passing the reforms.

4. Reflect further on the fiscal provisions

The provisions concerning the obligation and features of the royalty regime require clearer expression within the Bill. There are 21 references to the word “royalty” or “royalties” in the Bill but nothing is stated in terms of tangible values for any meaningful interpretation or analysis. This implies that the existing royalty regime will continue to hold, subject to amendments or pronouncements in subsequent regulations.

The level of fiscal burden on new investments based on the terms proposed in the Bill amounts to about 82% in effective tax. This compares favourably with other proven jurisdictions such as Norway, Iran, Kuwait and Egypt (at an average of about 85%). However, the fiscal regime offered by the Bill is regressive and should be addressed. The combined fiscal instruments of royalty, Nigerian Hydrocarbon Tax, Companies Income Tax and other fiscal impositions do not flexibly respond to changes in project profitability. The implication is that in the event of an oil or gas price increase or a significant reduction in costs, the State will not get an incremental share of the increased revenues resulting from such positive changes to profitability. Also, there are potentially significant negative implications on investors in the event of an oil or gas price decrease as is currently the case. Therefore the fiscal system requires the inclusion of more progressive mechanisms such as rate of return trackers in order to enable automatic adjustment to changes in economic circumstances of specific projects.

 

5. Fix the cash call challenge

One of the major drivers for energy reform in the first place was the need to address under investment in the joint ventures due to cash call deficiencies. Since one of the proposals to resolve that problem, the incorporated joint venture, was shot down after the first versions of the PIB, no concrete proposals have been put forward. Resolving this challenge should be one of the immediate priorities of the new government. Whilst this is an issue on which the authors do not agree, one of us believes that there is merit in reconsidering the motive behind the IJV structure and the specific risks it seeks to mitigate. Such an exercise will also provide an opportunity to objectively address the concerns within the originally proposed IJV structure in previous versions of the Bill such as the Board and Management compositions. We do however agree that if the IJV is to be reintoduced, it cannot be by compulsion and counterparts must negotiate the terms under which such a structure would be acceptable. In addition to this, consideration should also be given to the rationalisation of the Government stake in the joint venture arrangements through divestment of interests preferably to indigenous players.

Dr. Adeoye Adefulu is an Energy Partner in the law firm of Odujinrin & Adefulu and the Managing Editor of petroleumindustrybill.com; Dr Ekpen Omonbude is an Economic Adviser (Natural Resources) at the Commonwealth Secretariat and a regular contributor to petroleumindustrybill.com

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House of Representatives Move to Minimise Executive Discretion under the PIB

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.

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PIB to pass before current N. Assembly’s tenure ends – Mark, Ogor

ThisDay reports that Senate President, David Mark, and Deputy Leader of the House of Representatives, Leo Oguweh Ogor, have reassured the public of the National Assembly’s commitment to pass the Petroleum Industry Bill (“PIB”) before the tenure of the current assembly ends in June 2015.

The relevant committees of both houses are yet to present their reports on the Bill subsequent to the public hearings conducted in 2013.

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Splitting up PIB not in Nigeria’s Interest says PENGASSAN

Reacting to the Minister of Petroleum’s suggestion that the Petroleum Industry Bill be split up to ensure prompt passage, the Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN) has retorted that such suggestion would not be in the interest of the country. The association maintained that the provisions, as contained in the current Bill, are capable of transforming the industry and in particular, grow the upstream sector.

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DIEZANI SUGGESTS THAT PIB BE SPLIT UP TO ENSURE SPEEDY PASSAGE INTO LAW

While addressing panellists at the just concluded World Economic Forum in Abuja, it was reported that the Honourable Minister of Petroleum Resources, Diezani Alison-Madueke, suggested that the draft Petroleum Industry Bill (“PIB”), currently before the National Assembly, be split up to ensure speedy passage into law. By June, the current draft PIB would have spent two years at the National Assembly.

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David Mark orders Senate Joint Committee on PIB to conclude deliberations

Following a Point of Order raised by the Senator representing the Ekiti-North senatorial zone, Senator Olubunmi A. Adetunbi, the Senate President, David Mark, gave orders that the Senate’s Joint Committee on the Petroleum Industry Bill (“PIB”) conclude work on the Bill and return same to the Senate for prompt passage.

It was reported that Senator Adetunbi’s plea was prompted after he was put on the spot at a function he attended. At the occasion, the Senate was accused of toying with critical issues affecting the economy especially the PIB.

It will be recalled that the PIB was committed to the Senate’s Joint Committee for deliberations on Thursday, March 7, 2013.