Unpacking the Petroleum Industry Act

A lot of controversies and misinformation have dogged the newly-signed Petroleum Industry Act, a piece of legislation meant to streamline the operations of the oil and gas industry. In this piece, Emmanuel Addeh attempts to break down the component parts of the law, which have attracted so much public attention.

On August 16, President Muhammadu Buhari signed into law the much talked-about Petroleum Industry Bill (PIB), which seeks to provide a legal, governance, regulatory and fiscal framework for the Nigerian oil and gas sector.

In all, the Act comprises five chapters, 319 sections as well as eight schedules, dealing with governance and institutions, administration, host communities’ development, fiscal framework and miscellaneous items.

However, questions have arisen, especially concerning various contentious parts of the bill involving frontier basins, administration of host communities funds, among others. This treatise will untangle some of the knotty areas.

Frontier Exploration Fund

While many of the frontier basins may be found in the northern part of Nigeria, other parts of the country in the south also boast of a number of such areas.

Unlike the host communities fund, which goes directly to the oil-producing communities, the frontier exploration fund is not going to be spent by people found in the frontier areas, whether in the north or south.

In fact, in sharp contrast with the host communities’ fund, which will be managed by a board to be jointly set up by the settlors (oil companies) and their hosts with oversight from the proposed commission, the frontier basins funds will have to be appropriated by the national assembly.

In any case, the Nigerian National Petroleum Corporation (NNPC) already operates a frontier exploration services, for which N50 billion was budgeted this year and out of which N14.514 billion had been released as of July this year.

While it is befuddling to some that Nigeria is continuing to spend scarce resources in search of a product like oil which in the next two decades or so is projected to lose its relevance in the energy mix, proponents of the fund have argued that the country has to quickly get the commodity from under the ground and make the best use of it before it becomes useless.

On this, the Minister of State, Petroleum Resources, Chief Timipre Sylva, says: “Thirty per cent of that crude profit is what is going into reinvestment fund we call frontier exploration and it’s a reinvestment fund because we have to commit to find more oil in the frontier territory.

“The ultra deep offshore is a frontier territory. You have the Anambra basin to explore and there’s already some gas finds in the Anambra basin. The Calabar basin is also a frontier basin. The Chad basin is also a frontier territory.

“ So there are a lot of other territories out there. So, these funds will be available to invest in these frontier areas so that we can find new oil especially at this time when we actually need to urgently produce the oil in Nigeria, because the oil era is almost getting to a close.

“So, we need to have this money so that we don’t look for money or don’t need to be going around looking for money when we want to invest.”

Wherever oil is found in the country, in some sense, Nigeria remains a federation and so monies from the basins will be pooled back into the joint account for the entire country to share.

3% and 30% Calculation

The question that most Nigerians wants an answer to is if 3 per cent and 30 per cent be calculated on same basis? No, Not exactly. In fact, there’s no basis to calculate both on the same equivalence. The host communities’ fund will be calculated on the basis of oil companies’ operating expenses from the previous year, while the frontier exploration fund will be computed on the profit oil and profit gas from the NNPC.

So, the 3 per cent and the 30 per cent will not be from the same pool, meaning that it’s not as straightforward as a case of giving Peter a paltry N3 and handing over to Paul a humongous share of N30.

So, for instance, going by last year’s figures, if the PIA were to start functioning from the beginning of this year, what would accrue to the communities and for oil exploration respectively?

The NNPC has estimated that if this were to be so, for the whole of 2021, the oil-producing communities will earn $500 million, based on the operating expenses of $16 billion by the entire oil and gas sector in 2020.

Conversely, given the NNPC’s profit oil and gas for 2020, if the law were to be operationalised this year, exploration funds will get $400 million. While profits are not guaranteed in the industry, oil companies must always spend on payment of salaries and other such expenses included in their operation basket.

To ensure that these monies are not frittered, the law makes it mandatory that 75 per cent must be spent on capital projects, 20 per cent as retained earnings or put in the reserve and 5 per cent is expected to be spent on administrative expenses.

When the sum, which is 30 per cent of the proposed NNPC Limited’s profit oil and profit gas is added to the estimated $500 million to be spent on host communities, being the 3 per cent approved by the Act, both cost centres will gulp a cumulative $900 million or roughly N450 billion every year.

Group Managing Director of the national oil company, Mallam Mele Kyari, while throwing more light on how it will be calculated said that although the exploration fund percentage may be appear outrageous, it is indeed lower than that accruing to the host communities.

“For instance, when you say 30 per cent of NNPC oil and gas, it’s a very small number, you know the percentages may appear very outrageous, but 30 per cent of what? Nobody has sat down to look at this. When you say profit percentage, it will probably come down to less than $400 million per annum.

“And then the other side of it is that 30 per cent is a big number, but when you come to the host community fund, you have 3 per cent of operating expense.

We spent about $16 billion in fiscal year 2020 across the industry and that number comes above $500 million, far above the budget of the Niger Delta Development Company (NDDC),” he argued.

While stressing that there’s no wrong in looking for more oil because of the direction the industry is now moving, Kyari mentioned that whether there’s profit oil and gas, the oil companies must have operating expenses which the host communities fund is built into.

“But you must spend money, so we are very sure that the provisions that are meant for the host communities will be implemented and will be delivered. But then when we even come to the frontier exploration, what is the issue?

“There is this common understanding that when you say frontier, you mean northern Nigeria, it’s absolutely wrong.

“Frontier is a very technical word and it means where you haven’t found oil, but there’s potential for finding oil and this spreads across the country, from the Chad Basin, to Sokoto basin, the Bida basin to the Anambra platform, the Calabar embankment, including the ultra deep water in the Niger Delta which has not been explored,” he added.

Yar’adua 10% Approval

Another contending issues is the fact that former President Umar Yar’adua approved 10 per cent for host communities. Yes. But according to those in the know, the late former Nigerian leader envisaged that the monies will be taken from NNPC’s profit oil and gas, while this new legislation says it must be pulled out of the outgone year’s operating expenses.

On this, the President of the Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN), Mr Festus Osifo, while stressing that although the figure for the Niger Delta could have been better, explained however, that it is a good way to start.

He argued that the Umar Yar’Adua government in 2008, proposed 10 per cent of oil and gas profit, whereas the new one proposes 3 per cent of operating expenses in the previous year.

“So, the 10 per cent would have meant that any year that the companies don’t make profits, like last year most of the companies operating in this sector actually reported losses, you will get 10 per cent of nothing.

“So, we think that this 3 per cent as it is today now is already in law. The fact that we have 3 per cent of the operating expenditure of the preceding fiscal year, if it was 3 per cent of profit, we would have said it’s bad, if it was 3 per cent of capital expenditure, it would have been bad.

“But operating expenditure is there because the company must operate, pay salaries, the company must expend some sizeable amounts of their fund on operating expenditure,” he maintained.

However, he said that the challenge is to make sure that funds are used judiciously, so as not to have issues like what is currently happening with the Niger Delta Development Commission (NDDC).

“So, our advocacy is that this amount of money that is to be set aside should be used judiciously for us not to have issues like the ones with the NDDC, ”he said.

But the PENGASSAN chief advocated that there should have been a deliberate attempt to start developing renewables because a lot of companies today are transiting from being just oil and gas companies to energy concerns.

“ So, that was our advocacy, that some percentages should be set aside to start developing our renewables, so that the energy transition will not catch up with us, because from the research currently ongoing, it is really difficult for us to predict the future of oil in the next 30 years. So, the time to act is now,” he added.

Monitoring Community Fund

You may also want to know if state governments and Niger Delta Affairs Ministry have any role in monitoring community fund. No. Indeed, part of the reasons the 3 per cent is going directly to the oil-producing communities is the perception that the governors have not dealt fairly with local host communities when it comes to the disbursement and deployment of the 13 per cent derivation, which they get from the joint account every month.

In addition, neither the Niger Delta ministry nor the NDDC has any role to play in the management of the fund. Responding to a question on comments allegedly credited to the Minister of Niger Delta Affairs, Chief Godswill Akpabio that the ministry will be part of the management of the fund, Sylva jocularly said it’s possible that maybe people were already proposing amendments to the new legislation.

“I am not aware of that and there’s no role specifically for the Niger Delta ministry that I am aware of. Maybe that’s an arrangement they are already proposing, I don’t know.

“But if it’s the PIB that has been passed to PIA , I don’t see any role. It’s between the communities and the companies. This is a targeted fund and it’s because other funds have failed to target the host communities.

“The NDDC is not specifically targeted at the host communities, same with 13 per cent going to the states. The PIA has sorted that out. So, there’s no space for anybody else, not even for the Niger Delta ministry,” the minister said.

Petrol Import Licences

Many have also asked if petrol import licences still for only owners of refineries as suggested by Dangote No. This portion has been reworked to involve other qualified corporate entities and businessmen even if they don’t hold a refinery licence.

This is perhaps in deference to the Major Oil Marketers Association of Nigeria (MOMAN) which had advised the federal government against preventing marketers from importing refined petroleum products when the refinery and others come on stream in order to create an open market for the sector.

Executive Secretary, MOMAN, Clement Isong, had argued that while there was merit on insisting on a minimum in-country investment in order to encourage investment in the oil and gas industry, as a core principle, MOMAN believed that free market competition remained the best protection for the final consumer.

“MOMAN’s position would therefore be, not to limit importation of refined products to refiners only, but allow importers with a set minimum level of investment in the oil and gas supply chain in Nigeria,” he had argued.

MOMAN’s position followed a proposal by the Dangote group for the government to allow only firms that refine petroleum products in the country to import refined fuel. The company had suggested that this should be made part of the law.

Many Nigerians criticised the proposal, arguing that it will foster monopoly in the market and allow the Dangote Group to be a major beneficiary to the detriment of others.

“Pursuant to subsection (8), licence to import any product shortfalls may be assigned to companies with active local refining licences or proven track records of international crude oil and petroleum products trading.

“Import volume to be allocated between participants shall be based on criteria to be set by the Authority taking into account their refining output in the preceding quarter, the share of active wholesale customers competitive pricing and prudent supply, storage and distribution track records,” the law now reads.

“Licences are renewed for a tenure of 20 years. So, if a licence has been renewed because we wanted to raise money, nothing will happen to it because it has been renewed until it expires,” Sylva says.

According to him, there’s a provision for “grandfathering in the Act which means that everything that has happened before, will be taken on board.

He adds: “So that we don’t because there’s a new law, we’re changing the environment. So if something has been done, it will be taken on board as far as the PIA is concerned.

“So, there is no problem at all. Any renewal that has been done under the petroleum act of 1969 will still fall within the ambit of this law and there’s no problem. The PIA recognises everything that has already been done under the 1969 petroleum Act”

Petrol Subsidy

Although, the federal government admits that there’s need to free the market to allow the forces of demand and supply take charge, removing subsidy will not be sudden because of the impact on the poor and vulnerable.

Sylva noted that because deregulation will come with a lot of changes, it would not be advisable to suddenly remove it, adding that it is something that will become a reality when the law becomes fully operational.

“It (deregulation) is something that is desirable, which I have always said. I’ve never deviated from that. Deregulation is desirable because that is the sustainable way out of where we are. But also, the reality is that deregulation is going to come with some changes.

“And of course, when people have been used to certain behaviours, behavioural patterns which means you’ve been used to subsidy for this long, and you want to change that, you have to have some kind of change management process in place.

“You cannot just change the policy on everybody without looking at some of the problems that this might create. One of which is that we know that this is going to entail increase in price. How do we alleviate the problems that will come with this increase?

“This is not a mindless government. It is a government that really, really cares about the Nigerians. So, we have to really look at all these possibilities of how to at least alleviate the pains and the problems that this increase might occasion. And that’s why we are taking our time. And that’s why it will not happen overnight.

“But I’m just telling you that there is a provision in PIA that will make this happen, that we have to jointly ensure that we’re able to come up with a workable way of making this happen. And that process is already ongoing,” he stated.

He said that although the new law has actually deregulated the sector, it wouldn’t mean that there will be an immediate implementation of that price.
“We know what the law provides is that products will be sold at market dictated prices. But, of course, we are also mindful of the fact that this will bring some hardship, some difficulties, and that is why we’re not just going to jump to implementing.

“Implementation framework will take care of that. So, it’s not going to be automatic, but we’ll work together as we’ve been working to ensure that there is a framework that will implement this provision of the PIA,” he declared.

Why Governors Are kicking?

Well, two quick points: ownership of the NNPC and the 30 per cent devoted to frontier basins exploration.

The truth is that the more money devoted to any cost centre, the less money will be available to the 36 states. That’s the whole point. So, the governors are basically saying that devoting 30 per cent to looking for oil is too much.
On the issue of ownership, the governors are insisting that the law has no specific mention of the joint ownership of the NNPC and its assets by the federal, state and local governments.

NNPC GMD in response to this, said that with more activities in the sector, the sub-nationals will have opportunities for taxes as the industry expands as most federation revenues will be sustained.

But Sylva attempted to deepen the response of the federal government, maintaining that like other entities, the federal government would hold the equity in trust for all the other levels of government.

However, he noted that negotiations are ongoing with the state governors that have raised objections to the constitution of the proposed NNPC Limited, pointing out that all the parties were almost having an agreement on the matter.

“Now, the other issue is the ownership of the NNPC which has been raised variously by governors and we have also responded and I think that we are having an understanding, that’s all I can say. I do not want to pre-empt that discussion.

“ But, we are having an understanding. You must agree that in this country there is the federal government of Nigeria and then there’s the federation.

“The federal government of Nigeria can always hold something in trust for the federation. Depending on which side you stand on, you want to introduce complications on this matter. But I can assure you that we are already discussing, and we are clarifying some of these issues. In this case, what the federal government is doing is to hold this equity in trust for the federation,” he emphasised.

He noted that this is not the first time this had happened, explaining that the government of Nigeria is currently holding the equity in trust of the federation in Nigeria LNG in Bonny.

“So, if the federal government holds the equity in trust for the federation, it means it is holding it in trust for the states, for the local governments and by extension, also the communities,” he posited.