Avoiding a PIB of Controversy

As the administration of President Muhammadu Buhari begins work on a new Petroleum Industry Bill (PIB), Ejiofor Alike writes on the need to avoid the pitfalls that stalled the passage of previous versions of the reform bill for seven years

The Petroleum Industry Bill (PIB), a transformative piece of legislation that seeks to consolidate 16 different Nigerian Petroleum Laws into a single document was a product of a reform initiated by former President Olusegun Obasanjo on April 24, 2000.

On the said date, the former President set up the Oil and Gas Reform Implementation Committee (OGIC), headed by his Honorary Special Adviser on Energy and Strategic Matters, the late Dr. Rilwanu Lukman.

Obasanjo had mandated Lukman’s committee to carry out the first comprehensive reform of the oil and gas industry but the National Oil and Gas Policy (NOGP) produced by the Lukman’s committee was not implemented before Obasanjo’s tenure ended on May 29, 2007.

However, the imperatives for reform in the sector prompted the late President Umaru Musa Yar’Adua to reconstitute a new committee, also headed by Lukman, on September 7, 2007.

Lukman’s new committee, which submitted its report on August 3, 2008, was mandated to “transform the broad provisions in the NOGP into functional institutional structures that are legal and practical for the effective management of the oil and gas sector in Nigeria”.

The PIB, which establishes a new legal and regulatory framework as well as new institutions and regulatory authorities to replace about 16 obsolete legislations in the oil and gas sector, was a product of Lukman’s committees.

The passage of the PIB, which was first sent to the National Assembly during Yar’Adua’s administration, was unduly delayed until Yar’Adua demise.

Following the criticism of the initial draft of the bill sent by the late Yar’Adua by Nigeria’s business partners, former President Goodluck Jonathan, on assumption of office, withdrew the bill to enable the executive address contentious areas and ensure that all stakeholders were carried along.

Before he resubmitted the bill, the Jonathan’s administration had set up a Special Taskforce on the Review of the PIB and a PIB Technical Committee, which reviewed the reform legislation with new inputs from the government and the operators.

Speaking on the differences between the late Yar’Adua’s version of the PIB and the new bill submitted to President Jonathan in May 2012 by the task force and the technical committee, the immediate past Minister of Petroleum Resources, Mrs. Diezani Alison-Madueke said the two teams had reconfigured the various sections.

“The fiscal regimes used are so much different. The manner and templates for various calculations have been looked at differently, and other fiscal areas. The issue of domestic gas and fiscal regime for domestic gas has been looked at robustly. The issue of the reconfiguration of the NNPC is to ensure that going forward, it becomes the commercial entity that it is supposed to be and we can actually grow a first rate national oil company that over the years will grow to compete with other national oil companies such as Petronas and Petrobras. All these have been looked at. The administrative roles and some of the others have also been looked at,” the former minister had explained.

On July 19, 2012, former President Jonathan sent to both chambers of the National Assembly a revised version of the PIB for consideration and passage into Law.

Unfortunately, the seventh National Assembly could not pass the bill almost three years after.

After allowing the all-important piece of legislation aimed at reforming Nigeria’s oil and gas industry to attain global standard to waste for seven years under the legislative inefficiency that allegedly characterised Nigeria’s previous National Assembly, the seventh House of Representatives suddenly woke up from its apparent slumber and passed the reform bill, few hours to the end of its tenure in June 2015.

Before the former Lower House passed the PIB, the Seventh Senate had a day earlier performed a legislative magic by passing 46 bills within 10 minutes, just a day to the end of its four-year tenure.

But the failure of the upper chamber to pass the PIB made mockery of the exercise carried out by the Lower House, a development, which prompted former Senate President, Senator David Mark to apologise for the failure.

“I and I alone take full responsibility for all omissions and commissions in the last four years during my tenure as President of the Senate but we all share in the glory and successes,” Mark had said.

Mark also identified the non-passage of the PIB as a major failure of the seventh National Assembly
“For instance, we were not able to pass the PIB and our constitutional amendment is stalled,” he said.
The implication of the non-passage of the PIB by the former Senate was that the new administration of President Muhammadu Buhari had to withdraw the bill and re-submit it to the eighth National Assembly for fresh deliberation and passage.

However, the greatest single factor that hindered investments in Nigeria’s oil and gas industry since the past 10 years is what the operators described as the general uncertainty in the operating environment.

Clearly uncertain of the possible impact of the PIB on the profitability of new investments, the international oil companies (IOCs) operating in Nigeria continued to hold on to world-class investments, citing uncertainty of the operating environment.

As Nigeria is witnessing dwindling investments, other countries especially in the West and East Africa have made large discoveries of oil and gas, providing alternative destination for investors.

But what are the factors that hindered the passage of the previous versions of the reform bill?

Petroleum Host Communities Fund

As part of the measures to curb restiveness and militancy in the oil-producing communities, the promoters of the previous PIB had set out to create a fund in the PIB to be known as the Petroleum Host Communities Fund (PHC Fund) to be utilised for the development of the economic and social infrastructure of these communities.

Section 125 of the previous draft reform bill provides for the creation of the fund to provide social and economic infrastructure for the oil-producing areas.

Under Section 127 of the bill, each company that is involved in oil and gas exploration and production is required to remit into the fund on a monthly basis, 10 per cent of its net profit, which the reform bill defined as the adjusted profit minus the Nigerian Hydrocarbon Tax and minus the corporate income tax:

“(a) For profit derived from petroleum operations in onshore areas and in the offshore shallow water areas, all of such remittance directly into the PHC Fund;

(b) For profit derived from petroleum operations in deepwater areas, all of the remittance directly in equal shares to each State Government of the eight littoral states of the Federal Republic of Nigeria.”

“(2) At the end of the fiscal year, each upstream petroleum company shall reconcile its remittance pursuant to subsection (1) of this section with its actual filed tax return to the Service and settle any such difference. (3) The contributions made by each upstream petroleum company pursuant subsection (1) of this section, will constitute an immediate credit to its total fiscal rent obligations as defined in this Act.

(4) Where an act of vandalism, sabotage or other civil unrest occurs that causes damage to the upstream facilities allocated to a community, such community shall forfeit its entitlement to the portion of the PHC Fund determined by the Inspectorate to be sufficient for repair and remediation of the damage.

(5) The Minister shall, subject to the provisions of this Act, issue regulations on the governance and management structure with respect to this Chapter”.

But a section of the people from the northern part of Nigeria rejected the sections of the previous PIB, which stipulated that oil companies must remit 10 per cent of their net profits to host communities.

To appease the north, the PIB had provided for the establishment of National Frontiers’ Agency to embark of oil exploration in the Chad and other basins.

But the north also faulted Section 9 of the reform bill that provides for the establishment of National Frontiers’ Agency, otherwise known as Petroleum Technical Bureau, as a unit under the office of the Minister of Petroleum Resources.

The northern law makers had argued that the agency should exist as an independent body and not be under the Minister of Petroleum.

On the issue of 10 per cent fund, the north also argued that the Niger Delta did not deserve additional funds, having allegedly received N11 trillion from derivation and other funds since 1999.

They insisted that the people of the Niger Delta have had a fair share of the oil resources, with the setting up of the Niger Delta Development Commission; Ministry of Niger Delta and 13 per cent derivation paid to their states.

According to the north, the revenue that one state in the Niger Delta collects monthly from the Federation Account is more than that of four states in the north.

They alleged that different state governments in the oil-producing states that had been receiving 13 per cent derivation had nothing to show for it.

Fiscal/tax issues

With data collated by Wood Mackenzie, and other independent analysts, both the federal government, through the NNPC and the international oil companies (IOCs) also embarked on campaigns to attract support for their differing positions on the bill.

Citing the data from these foreign independent analysts, as well as the oil industry analysts the IOCs and 16 Nigerian companies led by Shell; Chevron, Total, Agip, ExxonMobil, and Addax Petroleum had opposed the fiscal terms in the reform bill, insisting that it would put investments in deepwater at risk and “extremely uncompetitive.”

They expressed concern that even the existing fiscal terms are among the harshest in the world, in addition to the high risks and costs due to security and bunkering in the oil-producing communities.

Comparing Nigeria’s deepwater regime with global deepwater regimes, the companies said the federal government take or share for Production Sharing Contracts (PSCs) would also be among the highest in the world in the event of the passage of the bill.

Nigeria under pre-PIB, according to the IOCs, has a royalty rate of zero to eight per cent, tax rate of 50 per cent and 20 – 60 per cent federal government’s share of profit oil, with incentives of $1.38 per barrel of oil equivalent as incentives to the oil companies.

Supporting their argument with a data by Wood Mackenzie, the companies said the PIB proposed between 18 and 26 per cent royalties; 55 per cent tax rate and 20 – 75per cent government’s share of profit oil; with only $0.34 per barrel of oil equivalent as incentives to the oil producers.

They pointed out that Angola collects only zero per cent royalty; 50 per cent tax and between 25 and 80 per cent government share of profit oil, with $1.84 as incentives to the oil firms.

Brunei, according to the IOCs, collects eight per cent royalty; 55per cent tax rate, between 14 and 50 per cent profit oil but gives no incentives to oil companies.

Equatorial Guinea, the companies reveal, collects between 12 to 16per cent royalty; 35 per cent tax, between 10 and 60 per cent profit oil and also gives no incentives.

The fiscal regime in Indonesia is also more competitive than Nigeria as the firms stated that Indonesia collects 10 per cent royalty; 30 per cent tax; between 46 and 73per cent profit oil and gives $0.38 incentives.

Malaysia collects 10 per cent royalty; 38 per cent tax; between 14 and 50 per cent profit oil and gives incentives of $1.05per barrel of oil equivalent.

Also citing Wood Mackenzie, the IOCs insisted that federal government take for Production Sharing Contracts (PSCs) in Nigeria post-PIB would not be globally competitive.

Comparing Nigeria’s take as a percentage of the net revenue with the world-wide government take, the companies argue that Trinidad takes 58 per cent; Angola, 62 per cent; Nigeria, 70 per cent; Equatorial Guinea, 75 per cent; Egypt, 79 per cent; Malaysia, 85 per cent; Indonesia, 87 per cent and Nigeria, under the PIB, 96 per cent.

Onshore, the firms said the PIB would also make the fiscal terms globally uncompetitive, thus putting investments at risk.

They supported their positions with a data from WoodMac, saying that government’s take in Equatorial Guinea’s onshore/shallow water is 44per cent; Ghana, 52per cent; United States Concession, 55per cent; Kazakhstan, 61per cent and Russia, 65per cent.

United Kingdom, the data reveals, collects 68per cent; Trinidad, 73per cent; United Arab Emirate, 77per cent; Norway, 80 per cent; Venezuela, 82per cent; Angola, 83per cent; and Oman, 85per cent.

The federal government under the current fiscal terms collects 90 per cent but the PIB proposes 92per cent, while Libya currently collects 97per cent of net revenue from onshore/shallow water operations.

With this argument, both the IOCs and the Nigerian independent companies mounted campaigns to frustrate the passage of the previous bill, despite the NNPC’s position that the data presented by these operators to support their opposition to the reform bill was not correct.

Multiplicity of taxes

Oil and gas companies also alleged that the tax regime in the previous PIB was unfriendly to investors and insisted that the multiplicity of taxes in the bill could make investment in Nigeria’s oil and gas globally less- competitive.

The operators had pointed out, among other things, that the bill contained 11 different forms of taxes.

Some of the taxes include the payment of three per cent of each oil company’s budget to Niger Delta Development Commission (NDDC); payment of two per cent to the Nigerian Maritime Administration and Safety Agency (NIMASA); and payment of the Petroleum Profit Tax (PPT), which the PIB splits into Nigerian Hydrocarbon Tax (NHT) and three per cent Company Income Tax (CITA).

Other payment include increase of Royalties to 50 per cent; increase of Gas Flare penalty to $3 per 1000 standard cubic feet per day of gas flared; two per cent Education Tax; payment of two per cent gross profit on infrastructure and payment to NiPeX (Nigerian Petroleum Exchange), which is under the NNPC.

Many Regulators

Another issue raised by the oil companies was that the bill contained many regulators, which they said could hinder international arbitrations.

The immediate previous version of the PIB had two regulators – one for the upstream and one for the downstream but the oil companies were saying that there should be only one regulator for the oil and gas industry instead of two.

Excessive powers to the minister/president

A section of northern senators had criticised the powers given to the Minister of Petroleum Resources by the previous bill, saying such excessive powers would be detrimental to reforms in the oil sector.

Parts of the powers of the minister as provided in the previous bill include the powers to re-assign oil blocks to operators in the industry, grant waivers, grant and revoke oil blocks unconditionally.

The minister was also empowered to order the Auditor General access to some documents, and was also empowered to appoint the management of Host Community Fund.

Some members of the previous National Assembly had also criticised Section 119 of the bill, which gave the president the unilateral power to grant oil licences, saying it is against best practices.

Need for a robust PIB

As the National Assembly is preparing the legislative groundwork for a new reform bill, there is need for the country to enact a robust bill that would encourage investment. With more and more countries discovering oil and gas, gone were the days Nigeria was sub-Saharan Africa’s final destination for investors.

As more countries have discovered oil and gas, investors will ultimately take their money to the countries with the highest returns on investment.

To be globally-competitive in the ever changing energy dynamics, the federal government should concentrate on making the cake bigger in Nigeria’s oil and gas industry, instead of insisting on taking all the cake, which may turn out to be small if investment is discouraged by a harsh PIB.

The Deputy Managing Director of Total E & P in charge of Deepwater District, Mr. Ahmadu-Kida Musa told THISDAY in an interview that the company wanted a robust PIB that would encourage investment.

“Total wants a PIB that would encourage investment; that would encourage the growth of our oil and gas industry here in Nigeria and also make good revenues for the government and people of Nigeria. So, however or whatever PIB or in whatever form it is going to come out; if it does not address all these there will always be one party that will feel left out. So, we are for a PIB that is very robust; that is very sustainable and that gives due to everybody,” Musa explained.

To achieve these, relevant interest in all the contentious areas in the previous PIB should be harmonised to avoid ‘winner-takes-all’ situation.

Minister of State for Petroleum, Dr. Ibe Kachikwu had called for the splitting of the PIB for passage into law, which the federal government has accepted.

Kachikwu had told the Senate during his ministerial screening for his position as the Group Managing Director of NNPC that the reform bill should be split into parts to avoid further delays to the oil and gas reforms.

“As long as we continue to want to pass a holistic PIB, it’s going to be a major challenge,” he said.

“Once you begin to break it up into critical aspects, you begin to make a faster run to passing the PIB,” Kachikwu added.

Kachikwu said the delays had caused “a level of uncertainty that no international investor wants to grapple with” adding that the development cost the country $15 billion a year in lost investments.

Kachikwu said the reorganisation of oil taxes should provide scope for giving producers incentives to invest when prices are low and for increasing the rates they pay as prices recover.

According to him, the tax changes for the oil industry can be incorporated into the national tax code.

“The times when oil prices are so low that nobody is willing to invest in your country, you may give some incentives. At the time when they’re so high and people are making outrageous profits, you may increase your taxes,” he added.