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Passage of the PIGB …taking a step away from “how NOT to run an oil industry”

Proshare

Tuesday, May 30, 2017 3:38 PM/United Capital Research

How is the PIGB different from the PIB?
On 25th of May 2017, the Nigerian upper House of Assembly (the Senate) passed the Nigerian Petroleum Industry Governance Bill (“PIGB” or the “Bill”)- a part of the Petroleum Industry Bill (“PIB”) - into law.

To become a law, the Bill must be passed by the Lower House of Assembly and assented by the President. Nevertheless, the passage of the PIGB by the Senate has been well received.

The warm reception was also consistent with the performance of the local equity market which jumped 2.1% in the session following the announcement- the highest daily return in a fortnight- despite the fact that the PIGB is only a part of the actual Petroleum Industry Bill.


Drafted as an omnibus bill back in 2008, the PIB has now been in the works for close to a decade and seeks to do the following:
   

·         Increase domestic crude oil production   

·         Boost gas supply   

·         Deregulate the downstream sector  

·         Harmonize regulatory framework through the establishment of an efficient commission   

·         Restructure the NNPC into viable and profitable commercial entity(ies)   

·         Enhance transparency and accountability in the sector    

As such, the PIB was drafted to address critical challenges such as:   

·     Proliferation of inefficient and corrupt regulatory agencies carrying out over-lapping functions   

·         Rots in the NNPC and the need for a viable and profit oriented national oil company   

·         Industry structure that tilts the balance of oil assets in favour of IOCs at the expense of locals   

·         The need for a fiscal framework that will ensure oil revenue is optimized   

·         Address concerns in host communities  

·         Mounting fuel subsidy burden and the need to deregulate the downstream sub-sector  

·         Tackling the menace of lack of transparency and accountability in the Indus-try as a whole

Breaking down the PIB and the timeline for passage
Despite its laudable objectives, the PIB has endured an extended period of legislative delay since 2008 due a number of contentious issues.  

These include the host community clause (10.0% Petroleum Host Community Fund), unfavorable fiscal regime (as claimed by the IOCs) and the enormous amount of power vested in the Minister.  

To address these issues and ease passage, the Buhari administration broke down the provisions of the PIB into parts in 2016. Some of the known parts include;    

·         The Petroleum Industry Governance Bill   

·         The Petroleum Industry Fiscal Bill   

·         The Host Community Development Bill  
 

To the best of our knowledge, the number of bills yet to be announced and the timeline for their passage are yet to be ascertained.  

While we await the Senate and the Minister’s guidance as to how and when this will materialized, the level of contention in the fiscal and host community bills is likely to further prolong or delay the swift passage of the remaining bills in the interim.  

It must be noted that the PIGB is the low hanging fruit bit of the various parts of the comprehensive PIB.  

In the rest of this report, we briefly review and examine the implications of the PIGB which was passed by the Senate.  

The Petroleum Industry Governance Bill
The PIGB was drafted basically to create efficient and effective governing institutions with clear and separate roles for the industry.  

It seeks to establish a framework for the creation of commercial and profit oriented petroleum entities to ensure value addition and internationalization of the Nigerian oil & gas industry.  

The PIGB targets the promotion of transparency and accountability in the administration of petroleum resources in Nigeria, and thus, foster a conducive business environment within the sector. More specifically, the key provisions of the PIGB include: 
 

Independent Regulatory Commission
The PIGB will herald the creation an independent regulatory commission called the Nigerian Petroleum Regulatory Commission (“NPRC”). This commission will be headed by 5 executive commissioners who will be accountable to a Board.

They are to be appointed by the President subject to the ratification of the Senate. The NPRC will replace the PPPRA and DPR.


Restructure the NNPC
Implementation of the PIGB will bring about the reorganization of the NNPC and its subsidiaries into two entities i.e. the National Petroleum Company (“NPC”) and the Nigerian Petroleum Assets Management Company (“NPAMC”).  

These entities will be incorporated as limited liability companies under the Companies and Allied Matters Act.

The role of the Minister

The PIGB also clarifies the role of the Minister of Petroleum Resources, which will to be streamlined towards policy supervision.  

The Minister therefore exercises general coordination powers and provides full diplomatic cover on all petroleum-related matters on behalf of the country.

Existing Legislation

The PIGB will not repeal extant petroleum legislation, nonetheless, in event of any provision of an existing petroleum law contradicting that of the PIGB, the PIGB will take precedence to the degree of such inconsistencies.  


Better late than never… Is the passage of the PIGB timely?
A look back at where the Nigerian oil sector is and should have been suggests that the announcement of the passage of the PIGB is laudable and largely positive.  

The implementation of the legislation is anticipated to bring about a considerable amount of certainty to an industry bedeviled by legislative uncertainty for years.  

Yet, a question that comes to mind when subjected to further critique is the timeliness of the passage of the bill when considered in the context of the time frame between when the broader PIB was drafted, the circum-stances surrounding its drafting, the underlying assumption at the time vis-a-vis current realities. 

For instance, the situation in the Niger-Delta has worsen between 2000 and 2017, oil prices have peaked and tumbled to record levels, dynamics in the global energy market have shifted significantly and gradually in favour of cleaner sources of energy and most importantly, a huge sum has been lost to delayed passage of the Bill.  

The Minister of state for petroleum resources, Dr. Ibe Kachukwu, estimated this at about N3.0tn worth of investments annually.  

Although the circumstances surrounding the drafting of the PIB have drifted from “bad” to “very bad”, they remain broadly the same.

As such, though “late”, we maintain that the passage of the PIGB is “better late than never” and critical for moving the Nigerian oil & gas sector away from “how NOT to run an oil industry”.  

So, how do these provisions change dynamics going forward?    

Single regulator: PIGB will eliminate regulatory overlap
One of the most important provisions of the PIGB is the creation of the NPRC which will harmonize regulatory roles in the sector and operate as a single regulator thereby phasing out the proliferation of multiple agencies rendering duplicated or overlapping functions.  

The NPRC will be responsible for licensing, monitoring, supervising petroleum operations, as well as enforcing industry laws, regulations and standards.  

Thus, the role of DPR and PPPRA will be handled by NPRC. Specifically, the NPRC will;   

·         Regulate, issue and grant leases, licenses, authorizations and permits   

·         Administer unallocated acreages and upstream data   

·         Conduct bid rounds for the award of any license or lease for oil exploration or production   

·         Issue crude oil export certificates   

·         Generate cost benchmarks for midstream and downstream operations   

·         Outline market rules for trading in wholesale gas   

·         Regulate and ensure the supply, distribution, marketing and retail of petroleum products   

·         Take over the regulatory functions of the Minister of Petroleum Resources   
 

Until the passage of the PIGB, these functions were carried out by DPR, PPPRA and NNPC.  

The passage of the PIGB will eliminate the confusion of who is responsible for what and thus bring sanity, clarity and order into the regulation of the sector.  

Checks and Balances: PIGB will moderate the excesses of the executive arm
The absolute power of the executive arm of government will be tempered with the implementation of the PIGB.  

For instance, PIGB provides that the NPRC is to be headed by five executive commissioners (ECs) who are accountable to a Board, appointed by the President but subject to the ratification of the Senate.  

A functional NPRC is expected to streamline the current power of the Minister whose responsibility, going forward, will be policy coordination. Although will retain certain powers of discretion.  

The NPRC is to establish a fund into which it shall remit a proportion of revenue it generates to the government. This percentage will be determined by the National Assembly.  

Other portions of the revenue can be invested and used for day to day administration of its activities including paymenlt of salaries.  

Ultimately, the PIGB will bring about checks and balances which will moderate the excesses of executive arm of government and reduce the incidence of cases such as the Malabu oil scandal on OPL 245 nonetheless this may extend decision making.  

A viable and profit oriented national oil company
PIGB also seeks to restructure the NNPC into two profit oriented entities (the NPC and NPAMC).  

It requires the FGN to privatize close to 40.0% of the NPC’s shareholding within 10 years of its incorporation.  

This will be done via the divestment of at least 10.0% of the FGN’s share in the NPC within the first 5 years and then an additional 30% in the following 5 years. Thus, the FGN’s share in the NPC will come to 60.0%.  

The overall objective is to position the NPC to become viable and profit oriented corporate entities for the ultimate advantage of its shareholders and the Nigerian economy at large. 

Expectedly, this portends that the private sector or the public may be able to own as much as 40.0% stake in the NPC within a foreseeable future.  

The NPAMC will basically hold all NNPC’s assets other than JVs (PSCs, Risk Service Contract and Service Contracts) as asset managers not owners and remit in-come generated from such to the federation account upon receipt.  

In the main, the positives from the above will include improved corporate governance, accountability and transparency in the operation of the entities.
 

The possibility that the would be National Petroleum Company may be subsequently listed just like Saudi Aramco, also gives the entity access to capital marke
t funding.

Implication for the industry 

Indigenous operators’ view …the immediate winners?
Our interaction with domestic operators in the space indicated that they seem quite excited about the passage of the PIGB.  

Apart from the overarching positives of an efficient regulatory commission and a viable national oil company to the domestic economy in form of improved business confidence and foreign direct investment which should ultimately spur output growth, some of the specific gains highlighted by local operators include:

Ease of doing business
The clarity and harmonization of regulation that comes with the implementation of the PIGB will make doing business in the sector easy.  

Stakeholders in the local space noted that the fact that this announcement is coincidentally coming in the wakes of the recently signed Presidential order on ease of doing business which mandated all agencies of the government to publish a complete list of all requirements or conditions for obtaining products and services within the agency’s scope of responsibility, including permits, licenses, waivers, tax related pro-cesses, filings and approvals, makes the PIGB even more interesting.  

Expectedly, indigenous operators noted that the PIGB should streamline the process of obtaining permits, licenses, waivers, tax related processes, crude oil export certificates, filings and approvals, as this can now be undergone within a reasonable time at a lower cost.   

Should strengthen the drive towards ending fuel importation, development of private refineries and strengthen national gas policy
In a recent interview with the BBC, the Nigerian minister of state for petroleum, Dr. Ibe Kachukwu, maintained that the FGN is committed to ending fuel importation by 2019.  

From our interaction with local operators, the minister’s position may be supported by the number of licenses issued to interested stake-holders for private refineries recently.  

In March 2016, 25 private refinery licenses were said to have been issued by DPR, 21 of which were licensed to establish (LTE) while 4 got approval to construct (ATC).  

A more structured regulatory environment is thus seen as a catalyst for growth of private refineries which is gradually catching the attention of an increasing number of domestic operators.  

In addition, our sources noted that the PIGB may favour the national gas policy which intends to boost domestic consumption of a cleaner cooking gas (LPG) in place of more popular kerosene (DPK) in the domestic space.  

The thinking is that regulation may fast track the shift from the domestic consumption of DPK to LPG across the country, a development that is sure to boost turnover for domestic operators.  


IOCs/Foreign operators’ view… This is not the bill to unlock investment in the sector

Although the passage of the PIGB is quite momentous for the Nigerian oil & gas sector, the Bill may not mean much for IOCs or foreign operators.  

This is not surprising given that the provision of the PIGB does not necessarily address the concerns of IOCs which borders on fiscal administration and the fiscal provisions contained in the broader PIB.  

As noted earlier, the PIGB only seeks to strengthen the governance and institutional structure of the Nigerian petroleum industry.  

IOCs are more interested in the yet to be passed Petroleum Indus-try Fiscal Bill which defines the revenue and tax structure of the sector.  

Our interaction with operators in the sector indicated that the Fiscal bill is the most important part of the PIB with the capacity to unlock investment into the sector. 

IOCs are particularly looking out for a flexible fiscal term to scale up the level of investment in the sector. 

One of the contentious items in the broader PIB is gas production for the benefit of the domestic economy. Although the PIB seeks to give tax breaks for gas production for local consumption, IOCs have insisted on gas export.  


This is partly due to lack of gas infrastructure to support domestic consumption. The other reason being a more attractive gas export market which tilts investment in favour of export-oriented gas projects despite pressing domestic need in the power sector.  

Other points listed by IOCs outside the purview of the PIGB include the issue of fixed tax rate (the Nigerian Hydrocarbon Tax and the Companies Income Tax), a new royalty and the requirement that IOCs should do more for the underdeveloped communities in the Niger-Delta region from their huge profit margins.  


Our take on the PIGB
The Nigerian oil & gas industry has been described as an example of “how NOT to run” an oil sector.  

Although it contributes more than 70.0% of government revenue, 90.0% of FX earnings as well as external reserves, drives foreign capital inflows and domestic output growth, the sector has suffered from erratic regulation, mismanagement, scandals and gross inefficiency.  

This partly accounts for the wide spread civil unrest, pipeline vandalism and militancy in the host communities, as government officials, both military and civilians, are accused of capitalizing on oil assets as rewards for getting into power at the expense of investment in the sector.  

The profound cases of corruption scandals that made headlines such as the Halliburton scandal, allegations of missing oil remittances levied against the NNPC ($5.2bn in 2007 and $20.0bn in 2014) and the more recent Malabu oil scandal gives credence to the abovementioned and buttresses the need for something urgent to be done.
 

While the recently passed PIGB may not be able to swiftly restructure the Nigerian oil & gas sector from where it is as highlighted above to the desired state.  

We think the genuine implementation of the provisions of the Bill should go a long way in effectively repositioning the sector towards global competitiveness, efficiency and optimality. 

Thus, we opine the passage and eventual implementation of the PIGB will be a significant step away from “how NOT to run” the sector. 
 

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