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Impact of the New Petroleum Industry Bill on Nigeria's Oil

Oil & Gas	1420 VIEWS
Oil & Gas
1420 VIEWS

Sunday, January 17, 2021 /07:40 AM / by FDC Ltd/ Header Image Credit: petroleumindustrybill

Since the introduction of the PIB, there have been various amendments of it and deliberations about it. In 2017, four new pieces of legislation were created, namely: the Petroleum Industry Governance Bill (PIGB), the Petroleum Industry Administration Bill (PIAB), the Petroleum Industry Fiscal Bill (PIFB) and the Petroleum Host Society Bill (PHCB).

In Nigeria, the oil and gas industry is highly regulated by the government, with the National Petroleum Commission (NNPC) acting as the sole regulator. This is similar to what was practiced in the United States and Britain during the 1970s and 1980s. Regulators were seen to be working in the public interest under this legislative system.1 With a government agency as the sole regulator, private sector investment is discouraged - a negative impact on the development of the upstream and downstream sector. Despite being one of the largest crude oil producers in Africa, Nigeria has been unable to convert its abundant oil into financial wealth to drive growth. To address the limited private investment in the Nigerian oil industry, the Petroleum Industry Bill (PIB) was created and first introduced in the National Assembly in 2008.

The PIB has now been submitted to the legislature and seeks to:

Convert the NNPC to a private limited liability company (NNPC Limited) and scrap the Petroleum Product Pricing Regulatory Agency (PPPRA);

Establish separate regulatory authorities for the operations of the upstream, midstream and downstream sectors;

Decrease the royalty rate for offshore fields producing a maximum of 15,000 barrels per day to 7.5% from the current10%;

Raise the royalty threshold of crude oil price to $50 per barrel from $35 per barrel;

Reduce petroleum profit tax for onshore fields to 72.5% from 85% and decrease royalty payments to 18% from 20%; and

Disincentivize gas flaring by making its penalties non-tax deductible.

Implications for the oil sector and the Nigerian economy

Make oil sector more competitive

When passed, the revised PIB will make the oil sector more competitive and help attract more domestic and foreign investors. The bill proposes that the NNPC become a separate limited liability company to encourage the inflow of both foreign and domestic investors. With an increase in the number of investors, the oil industry will become more competitive and effective.

Supports the deregulation of the oil sector

PIB will also aid the deregulation of the oil sector to help attract more investors to the downstream sub-sector. This allows potential private investors the opportunity to participate in oil production in the downstream sector thereby raising aggregate oil output.

Development of oil infrastructure

PIB will help with the development of oil infrastructure, which will boost Nigeria's oil production and export revenue. Private investors will help in the rehabilitation and development of the new oil refineries increasing aggregate oil output. Their investment will also reduce Nigeria's reliance on imported refined oil.

Attract FDI inflows

The deregulation of the oil sector will help attract foreign direct investment into Nigeria thereby expanding the contribution of this sector to the country's economy. In addition, more FDI inflows will help in external reserves accretion thereby supporting the exchange rate.

Beneficial to the host communities

PIB proposes that the host communities receive a 2.5% fund based on the actual operating expenditure of the oil companies for the preceding year. The bill also seeks to end the flaring of gas, a major source of waste and environmental pollution, particularly at oil exploration areas. The fund will be used to support the development of healthcare facilities in the host communities, and enhance environmental protection and local initiatives, which are favorable for the overall socio-economic development of the host communities.

What's next for the PIB?

The National Assembly has postponed its deliberations on the PIB to Q1'21, in order to focus on the 2021 budget discussion, which it intends to pass before January 2021. About $20 billion is lost annually owing to the delay in the passage of the bill.3 The further delay in the implementation of the PIB and the oil sector reforms will continue to cost Nigeria capital flight and the lack of new investment. It is now very important to develop the domestic oil sector to reduce the country's fuel import bill, increase oil output and improve refining capacity.

The quick passage of PIB will also facilitate the government's objective to stop the exchange of crude for fuel by 2023. To achieve the desired outcome of the PIB, there is need for strong political will and commitment of the government. The question remains - does it have the resolve to move forward?