FSDH Oil and Gas Sector Report: PIA and the Nigeria Economy - A Case of Too Little Too Late?

Oil & Gas
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Monday, September 27, 2021 / 09:52 AM / by FSDH Research / Header Image Credit: FSDH


This is the summary of the Oil & Gas Sector report with a focus on the PIA and its implications for the Nigerian economy. For ease of reader reference we highlight focus areas and provide our analyst views.


Performance of Nigeria's Oil & Gas Industry

  • The share of crude oil in government revenue has been declining since 2011 due to a number of factors:
    • Declining oil revenue as a result of lower oil prices.
    • Improvement in non-oil revenue.
  • Despite this trend, oil still accounts for over 70% of Nigeria's export earnings.
  • Although the oil sector accounts for about 8% of Nigeria's real GDP, the sector is instrumental in shaping overall direction of the economy due to its linkage with government revenue, external reserves and foreign exchange.
  • To finance development, Nigeria will need a combination of oil and non-oil revenue, development finance, and more importantly, private capital. In addition, Nigeria will need to unlock significant revenue from the gas sector.


Analyst Views on the PIA and the Oil & Gas Industry

  • Crude oil has played a major role in Nigeria's development history. The oil and gas sector may account for about 8% of Nigeria's GDP but it contributes significantly to export earnings and reserves accretion. The fact that Nigeria's economic growth trajectory is closely linked with the performance of the sector suggests that the country is yet to break from its heavy dependence on crude oil.
  • The PIA has long been overdue. The absence of a holistic industry legislation has held the industry backward, resulting in loss of revenue and limited inflows of investment into the oil and gas sector. The passage of the PIA brings a lot of relief and has the potential to unlock new opportunities in the sector.
  • Unfortunately, the PIA comes at a time when the world is looking towards renewable energy. Renewable energy is the fastest-growing energy source globally and many of the oil majors are under pressure by their investors, governments and non-governmental organisations to reduce emissions. In addition, many of the international oil companies are divesting their investments in Nigeria. These twin challenges could serve as setbacks in the implementation of the Act.
  • Notwithstanding the challenges, we are quite optimistic of the opportunities that the PIA presents. The opportunities, however, can only be realised with proper implementation of the provisions of the Act. Already, the government has instituted a steering committee on implementation. The government will also need to develop a comprehensive oil and gas policy, ensure alignment of government ministries and agencies and pursue accountability and transparency in the implementation of the Act and other associated policies.

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The PIA emphasizes regulatory guidelines for the Industry

  • The Act makes provision for some regulatory guidelines which spell out the responsibility of the regulators.
    • The PIA provides that the Commission shall be responsible for granting of petroleum exploration, prospecting and mining licenses and leases on a fair, transparent and competitive bidding process based on guidelines issued by the Commission.
    • The Minister may on the recommendation of the Commission, grant a petroleum prospecting or petroleum mining lease to a winner bidder.  This is subject to his approval within 90 days after the application for license have been filed, after which the license is assumed approved.
    • A holder of petroleum prospecting license or petroleum mining lease shall pay to the government royalties, fees, rent and production or profit shares in the amount and time as prescribed in the license or lease made by the Commission.
    • The supply of crude oil and condensates for the domestic market shall be on a willing supplier and willing buyer basis.
    • An operator that flares or vents natural gas commits an offence under this Act and is liable to a fine prescribed by the Commission, and the Commission shall have the right to take, free of charge, natural gas that is destined for flaring at the flare-stack.
    • Alongside these specific guidelines, the PIA makes provision for policy changes that will impact the industry. The Commission or the Authority shall involve stakeholders' consultation in the process of making policy and regulatory changes.
    • If for any reason the Commission and the Authority have to make policy interventions without the stakeholders' consultation, such intervention shall be valid for not more than one year.


The PIA: Unbundling of the NNPC, a positive development for the Industry

  • First, the separation of the commercial and regulatory role of the NNPC could reduce government/political interference in the sector. The PIA stated that the role of the minister will be general oversight and policy formulation. Precisely, the minister may grant or revoke leases and licenses only upon the recommendation of the Nigerian Upstream Regulatory Commission, rather than the absolute power currently.
  • Secondly, the incorporation of the NNPC sets the stage for an Initial Public Offering (IPO) of the group and subsequent listing on the stock exchange. This development should increase the depth of the Nigerian equity capital market. The Group Managing Director of the NNPC noted that this could happen in 2024.
  • The listing of the NNPC will significantly add to the current market capitalization of the local equity bourse of N20.5tn.


The New Fiscal Structure aims to attract investment into the Industry

  • The purpose of the Petroleum Industry Fiscal Framework is to provide a progressive fiscal framework that encourages a profitable business environment for investment in the Nigerian Petroleum Industry. It is also to expand the revenue base of the federal government based on the principles of clarity, dynamism, equity, transparency and fiscal rules.
  • The Petroleum Industry Act provides the following:
    • The Act notes that all monies in the form of taxes, royalties, production shares, profit shares, signature bonuses, production bonuses, rent, fees, fines, and other levies shall be transferred to the Federation Account in timely manner.
    • The administration and collection of government revenue in the industry shall be the function of government institutions as follows:
      • The petroleum profit tax has been split into the Hydrocarbon Tax (HT) and Companies Income Tax (CIT) to be collected by the Federal Inland Revenue Service (the Service).  The Service is also empowered to collect  the Tertiary Education Tax in the industry.
      • The Commission is empowered to collect royalties, signature bonus, rent, production shares and related payments.
      • The Authority is empowered to collect gas flaring penalty arising from the midstream operations and its enforcements under this Act.
    • The hydrocarbon tax applies to crude oil as well as field condensate and liquid natural gas derived from associated gas and produced in the field upstream.
  • The Act provides that the chargeable tax shall be 30% of profit from crude oil for petroleum mining lease and 15% of profit from crude oil onshore and shallow water for petroleum prospecting licenses. It also provides for 30% in Companies Income Tax and 2% Education Tax which has become non tax deductible.

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Fiscal Structure: Price-Based Royalty Could Offset Tax Reduction

  • We like that the Petroleum Industry Act (PIA) focuses on a framework that consolidates an enhanced revenue-generating capacity for the government and improved sector competitiveness when compared to peer African countries such as Angola, Ghana, and Mozambique.
  • Upon implementation, the Act will reduce royalty and taxes, a move that dovetails neatly with the age-long aspiration of the International Oil Companies (IOCs).
  • However, what appears as counterintuitive is the provision for price-based royalties, which should raise the government's income when oil prices are robust; but at the expense of upstream producers.
  • Unlike in the past when taxes and royalties were ambiguous, upstream oil & gas companies now look to pay a fixed rate for hydrocarbon tax and companies income tax. Although we noted that offshore deepwater assets have been excluded from hydrocarbon tax, the current rate of 30% will apply to converted leases, while 15% will be exercised on new leases. 


  • This will be in addition to a 30% CIT, translating to a cumulative tax of 60% and 45% for converted and new leases, respectively.
  • The reduction in fixed-rate royalties would have been admirable, especially when viewed from the perspective of upstream operators.
  • However, the PIA provides significant room for the government to rake in some benefit in an elevated oil price environment, due to the introduction of price-based royalties to all acreages.
  • For instance, additional royalties of 5% will apply when the oil price is at US$100/bbl. It increases to 10% at US$150/bbl. oil prices.


This appears counterintuitive to taxes and royalties reduction and can somewhat complicate the fiscal structure as seen in the past.


Fiscal Structure: Frontier Exploration Fund (FEF)

  • One topical aspect of the fiscal structure remains the creation of the Frontier Exploration Fund (FEF), which is targeted at funding the exploration of hydrocarbons in the inland basins.
  • We understand that the fund will be financed by 10% of rents on petroleum prospecting licenses and petroleum mining leases, together with 30% of NNPC Limited's profit oil and profit gas.
  • While the negative pass-through from the preceding is a possible reduction in the government revenue without any meaningful guarantee for future cash flows, we believe that redirecting such fund towards the monetization of 2P reserves would be a better use of scarce resources, rather than the new exploration.
  • This is particularly important given the global shift away from carbon-intensive energy sources to renewable energy sources.


The PIA and the Gas Industry

  • With a proven gas deposit of over 206.53 trillion cubic feet (TCF), Nigeria appears to have a greater potential for gas than crude oil. Hence, the PIA made several provisions to develop the gas industry.
  • Given the increasing campaign for cleaner energy, gas and related liquids have a strong positive outlook and the PIA makes several provisions to encourage investment, development and growth of the gas industry.
  • Specifically, the Authority shall establish the Midstream and Downstream Gas Infrastructure Fund which is to be funded by 0.5% of wholesales price of petroleum products and natural gas sold in Nigeria.
  • The Authority will make government equity investment in infrastructure development in the gas industry. It will also develop strategies to increase domestic consumption of gas and reduce or eliminate gas flaring in Nigeria.
  • The PIA provides regulatory forbearance in terms of tax, rent, royalties and other remittance to the government. Also, the PIA provides for an additional 5-years tax holiday to be granted to investors in gas pipelines. This is to incentivize gas utilization in midstream petroleum operation and large scale gas utilization in the country.
  • Furthermore, the provision of Frontier Basin Fund could be instrumental in the infrastructural development for the natural gas exploration and production.


Analyst view on the PIA and its key components

  • The PIA provides a much-needed fiscal and legal framework for the oil and gas sector and allows the Nigerian National Petroleum Corporation (NNPC) to become a self-governing entity that could, at some stage, be privatised. Demonstrating a sense of urgency, the President has also approved a steering committee, chaired by the Minister of State for Petroleum, that has been tasked with implementing the PIA over a two-year period.
  • The PIA reflects a desire to bring more transparency to the industry. Investors will be reassured by the PIA's creation of two new regulatory agencies - the Nigerian Upstream Regulatory Commission and the Nigerian Midstream and Downstream Petroleum Regulatory Authority. The Commission will be a beefed-up version of the Department of Petroleum Resources and will have the right to award and revoke upstream licences subject to the approval of the ministry of petroleum. The Authority will oversee pipelines and refineries and ensure there is sufficient supply of oil and gas for an expanding domestic market. As Nigeria's three major refineries, all owned by NNPC, are operating at a fraction of their capacity, the NMPDRA faces a herculean challenge.
  • The unbundling of the NNPC holds great value for the country. However, the key unanswered question surrounding NNPC's future is what will happen to the liabilities of around US$11 billion owed to its joint venture partners, including funding shortfalls. According to the PIA, the old NNPC will transfer its assets and liabilities to NNPC Limited within 18 months, and it will be the job of the petroleum and finance ministries to decide what to do with them. This lack of clarity will concern NNPC's main creditors who are looking for some roadmap to get their money repaid. There is every possibility that NNPC's liabilities will become a political hot potato that will be passed around the various decision-making bodies, and left unresolved.
  • Nigeria's gas assets remain largely untapped. The PIA incentivises the development of these assets with forbearance on rent, royalties and 5 year tax holiday. We believe that a combination of these incentives and the opportunities that exist in the sector will steer the sector towards a new direction, albeit, at a slow pace given the political environment and the need to set up the relevant policy and institutional frameworks.

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PIA and Business Opportunities

  • Nigeria is unique in Africa for having a proliferation of indigenous oil companies that are keen to expand and build on their upstream expertise.
  • These companies may end up being the main beneficiaries of the PIA, as foreign operators pull back and look to deploy their capital elsewhere.
  • The main problem for the Nigerian independents is getting access to capital, so there will be a greater opportunity for Nigerian banks to support them with loans and other kinds of financing.
  • There is also scope for Nigerian companies to buy into infrastructure, such as pipelines and refineries, and play an active role in the country's regeneration.
  • There is no lack of entrepreneurial talent in Nigeria, but there remains a deep lack of confidence in how the system functions and can be manipulated by the politicians. On the surface, at least, the PIA helps to address this.


The PIA - Business Opportunities: The Gas Industry Leads the Way

  • The PIA incentivizes gas monetization in Nigeria, with gas royalties now reduced by 2 percentage points to 5.0%. Royalties on gas can be as low as 2.5% for natural gas production targeted at domestic market.
  • This creates huge incentives for massive investment in gas business, since a significant share of power generation in Nigeria comes from gas.
  • A combination of insufficient gas supply and inadequate infrastructure has contributed significantly to inadequate power supply in Nigeria. We believe that this structural demand prospect for gas will justify investment in the business.
  • It is worth noting that Nigeria is a gas-rich country given the huge gas reserves it boasts of. In addition, gas prices in Nigeria are decoupled from the volatility in the global oil market, because prices are pegged at US$2.5 per million standard cubic feet.
  • Thus, we think there are ample opportunities for the upstream players to reallocate portfolios towards gas to extract more value.
  • We recognise that the FGN is also aware of this opportunity, following its declaration of 2021-2030 as a decade for gas.
  • We recall that NNPC partly owns ANOH gas project through the Nigerian Gas Company (NGC). ANOH recently completed its debt and equity final investment decision of US$650mn, with the project now looking set to produce its first gas by 2022.
  • In addition, NGC has also recently completed an FID on a US$3.6bn Integrated Gas Processing and Methanol Plant in Bayelsa, a project operated by the Brass Fertilizer Limited. All of these point to the opportunities in the Gas Industry.
  • For the downstream industry, players in this space will likely adjust portfolios towards the lubricant business, where margin is attractive, relative to white products.
  • That said, we think the fate of the downstream sector will continue to hang by the slimmest thread. Until the sector is completely deregulated, we believe the current industry structure will continue to squeeze profitability, and thus, deter new investment.  


Investors in the oil and gas industry are likely to be cautious for the following reasons:


1. Environmental/Climate Change concerns

  • The rapid pace of global energy transition towards low carbon-emitting and renewable sources could place a ceiling on the potential benefit that could accrue from the PIA, especially from the perspective of sector modernisation, transparency, and competitiveness when compared to oil-producing African countries.
  • While we understand that a host of final investment decisions (FIDs) are still pending on several offshore projects that are expected to create an additional capacity of about 900kb/d, it is reasonable to assume that international oil-producing companies are not likely to rush to Nigeria, especially as ESG (Economic, Social, and Governance)-driven pressure from investors continues to drive their energy transition strategy.
  • Although the reduction in taxes and an even clearer fiscal regime are welcome developments, these reductions may not induce huge fresh foreign investments into the oil and gas sector in Nigeria, mostly due to the undue ESG-driven paradigm imposed on IOCs.
  • Since the oil & gas industry remains one of the top contributors to global emissions, environmental concerns, together with the resulting drive for energy transition, have taken center stage in recent times.


2. High exposure risk of commercial banks to the oil and gas sector

  • The oil and gas sector has been a major destination of banks' credit in Nigeria. The challenges associated with the sector in 2020 saw a declining trend in the share of oil and gas credit in total credit to the economy. Despite this, nominal credit to the sector increased. (See chart above).
  • The sector remains instrumental in determining non-performing loans (NPL) in Nigeria. The total NPL of the sector in nominal terms as at the end of 2020 stood at N315.38 billion from N219.47 billion at the end of 2019. Therefore, NPL ratio was 8% in 2020.
  • Despite the growth in credit to the sector over the past three years, the sector's NPL ratio remains relatively stable.
  • With this in mind and following the signing of the PIA, there is room for the banking sector to expand position for expanding credit to the oil and gas sector.
  • Nevertheless, there is need for caution on the part of the banks, particularly, due to the uncertainty regarding the implementation of the Act as well as a high exposure risk.

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3. Slow pace of implementation of the PIA

  • As with many legislations in Nigeria, the PIA could experience slow pace of implementation of some of the provisions.
  • Although the current administration has expressed commitment to develop the oil & gas industry with the inauguration of the Steering Committee on Implementation of the Act, continuity of implementation could become a challenge, especially in view of the forthcoming elections in 2023.
  • In addition, we will carefully observe whether the government will summon the political will to implement crucial reforms such as the complete deregulation of the downstream industry.
  • Challenges associated with the host communities could persist following disagreements over the Host Community Development Trust (HDCT). This could revive agitations in the oil-producing regions.


Analyst Views on Bankability of Projects and bank credit to oil & gas sector

  • There is no doubt that the relatively clear fiscal structure in the Petroleum Industry Act (PIA) could strengthen the investment case for Nigeria's oil and gas sector. As pointed out earlier, Nigerian banks are exposed to the oil and gas sector, with lending to the sector at around 20% of Nigerian banks' total credit and 30% when the power and energy sectors are included.
  • Beyond the attractive fiscal provisions of the PIA, we think that the bankability of oil and gas deals is also significantly dependent on oil price volatility. The slight decline in the share of banks' credit to the oil and gas sector in 2020 was oil price collapse-induced, a development triggered by the outbreak of COVID-19.
  • Post PIA, we believe that the blend of oil price recovery, together with the taxes and royalties reduction in the PIA, which is positive for oil economics and cash flows, can trigger Nigeria's banks interest in the oil and gas industry.
  • Also, given the opportunities in the gas segment as well as government's commitment to provide incentives for investors, Nigerian banks will need to reposition their portfolios in favour of the gas segment, which has greater demand and investment prospects than crude oil. This would be a useful strategy for banks to limit growth of non-performing loans in the medium term.


The world is transiting to cleaner energy...

  • The harsh reality facing Nigeria and other African oil producers, such as Angola and Ghana, is that the big multinational oil companies are moving away from oil and gas and investing more money in renewables.
  • This trend is certain to accelerate as pressure intensifies on the oil majors, both from shareholders and external activists, to "go greener".
  • Commercial banks, globally, are having to embrace the energy transition. Nigeria, which has seen oil and condensate production fall steadily over the past decade due to under-investment, may pay a heavy price for its lack of decisiveness in getting the bill over the finish line.
  • Even with the PIA in place, there is a possibility that proven oil and gas reserves will become stranded. A litmus test will be Shell's on-going process to sell the remaining 19 onshore and shallow-water licences that it operates in the SPDC consortium with Eni and Total, in the coming years.
  • Other majors such as ExxonMobil and Chevron are also looking to reduce their upstream portfolios in Nigeria. But finding buyers won't be so easy in this market. Nigerian independents that have paid billions of dollars for SPDC acreage over the past decade lack the majors' deep pockets and will be more cautious.


Analyst Views on Energy Transition

  • Many countries are transiting to renewable energy. Even the world's largest exporter of crude oil, Saudi Arabia, plans to generate 50% of its energy from renewables by 2030. The Kingdom has in recent years launched several renewable projects, which are part of a broader diversification plan to reduce its dependence on crude oil by 2030. Many other oil-producing countries are also developing alternative energy sources. This divestment, coupled with technological advancements will place a cap on oil price in the medium term.
  • Without downplaying the rapid pace of global energy transition to renewables, we believe Africa will continue to rely heavily on energy from fossil fuels. In several African countries like Nigeria, transition to renewables is slow especially because it requires massive private investments, enabling policies and legislations and large scale renewable solutions. Reaching a near zero-carbon level across the continent means a significant decline in the use of coal, oil, and gas, a move we consider a longer-term strategic goal, especially given the huge usage of internal combustion engine passenger cars and coal/gas-powered plants. However, there is a need for urgency in planning for diversification and setting out a clear path to the energy transition.
  • However, as the least carbon-intensive fossil fuel, gas can play a prominent role in reducing emissions in energy consumption. We understand that some African countries are already instituting policies that encourage natural gas usage in power generation, instead of oil. We also note that gas demand is looking set to rise in transport and the world's shipping fleets are increasingly using LNG as fuel. The positive impact of this will likely keep oil and gas investment afloat in Africa.
  • That said, based on its huge resource endowment, Nigeria is better positioned to focus on exploring the opportunities in the gas segment of the industry. While the PIA is a good starting point, it must be backed with swift implementation, enabling policies and political will to make decisions that will be beneficial to investors, host communities and the country at large.
  • The world will need oil and especially gas for decades to come but alternative will be found, and there will be some big technological changes especially re: batteries for EVs that will accelerate the shift away from FFs. Nigeria would be much better off focusing on gas and using it primarily as a domestic fuel. I think oil is becoming more and more toxic, and I would not be surprised if these onshore/shallow water assets become stranded.


Conclusion: Signing the PIA is a positive step towards improving the state of oil and gas in Nigeria

  • The oil and gas industry plays a pivotal role in Nigeria's macroeconomic performance in terms of investment inflows, export, foreign exchange earnings and government revenue. The lingering debate on the passage and signing of the Petroleum Industry Bill into law has put the industry on a standstill for several decades, leading to lower investment inflows into the sector.
  • We congratulate President Muhammadu Buhari and the 9th National Assembly for birthing the Petroleum Industry Act (PIA). The PIA presents some level of clarity and certainty about the regulatory and institutional framework of Nigeria's oil and gas industry. The Act presents guidelines for operations in the industry. It also provides clarity on the level of government participation in the industry.
  • The PIA provides a first leap to the demutualization of the NNPC by incorporating it as NNPC Limited owned by shares. Though the shares of the NNPC Limited are still 100% owned by the government of the Federation of Nigeria, this sets a viable platform for future efficient transfer of shares to the private sector. The Act also makes an attempt to develop the gas sector, address environmental pollution and incentivize investments in the upstream segment of the oil and gas industry.
  • While the PIA may not address all the challenges facing the oil and gas sector, we believe there is no better time than now to balance the different stakeholders' demand, especially given that the global landscape is swiftly shifting in favour of countries with the most competitive provisions to investors.
  • Thus, the PIA is a major positive step towards improving the state of oil and gas in Nigeria and it comes with the potential to create new investment opportunities provided the government ensures proper implementation of the Act.


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