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Shadow Governance Intel

Shadow Governance Intel

Shadow Governance Intel (www.shadowgovintel.com), the analytical arm of West Sands Advisory Limited, conducts in-depth research on power players and power plays that challenge the transparency…

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Nigeria’s Oil Industry Overhaul

flaring flame

Although Nigeria is Africa’s largest oil and gas producer, its petroleum sector has long suffered from frequent scandals, severe mismanagement and a lack of coherent guidelines and regulations.

Furthermore, Nigeria’s state oil company, the Nigerian National Petroleum Corporation (NNPC), has become synonymous with corruption in Nigeria. Widely accepted as being one of the world’s most opaque national oil companies, the NNPC has gained a reputation for its hazy finances and its penchant for engaging in non-transparent business dealings with both domestic and international corporations.

While these failings are openly acknowledged, successive governments have failed to effectively initiate a much-needed overhaul of Nigeria’s oil and gas industry. Until now.

On 25th May 2017, Nigeria’s Senate passed the Petroleum Industry Governance Bill (PIGB), a new legal framework that seeks to reform how Nigeria’s oil and gas industry is structured, regulated and funded.

More specifically the PIGB aims to ensure value addition and internationalisation of Nigeria’s petroleum industry through the creation of both efficient and effective governing institutions, with clear and separate roles and commercially oriented and profit driven entities. It also seeks to promote transparency and accountability in the administration of petroleum resources and foster a conducive business environment for petroleum industry operations.

Petroleum Industry Governance Bill

The PIGB is the first of at least three bills that originally composed the old Petroleum Industry Bill (PIB) – which for years remained on the floor of the National Assembly undergoing a long and drawn out process of continued negotiations and re-drafting as various stakeholders and International Oil Companies (IOCs) continued to object and disagree over different sections.

To address these issues, and ease the reforms’ passage, in 2016 the current Buhari administration broke the original idea of the PIB into at least three parts, effectively isolating the contentious issues into separate bills. Notably, both the Petroleum Industry Fiscal Bill and the Host Community Development Bill are currently before the Senate.

Further bills may be introduced in the coming months and years as the government continues its attempts to overhaul Nigeria’s petroleum sector.

The PIGB itself aims to reform how Nigeria’s oil and gas industry is structured, regulated and funded – largely through the restructuring and reorganising of the NNPC – in order to boost investment and production.

Therefore, a key objective of the PIGB is to turn Nigeria’s national petroleum company into a successful, profitably commercial entity. In February 2016, the NNPC published its first annual financial data since 2005. Not only did the figures show a loss US $1.34 billion in 2015, but there was a clear lack of transparency around oil and fuel sales.

Furthermore, independent non-profit organisation, the Natural Resources Governance Institute (NRGI), has also drawn attention to some of the NNPC’s questionable activities – most notably, the “earnings by its subsidiaries, the costs of its operations and its significant spending on non-commercial activities”.

While much of the power is currently concentrated in the NNPC and the Petroleum Resources Ministry, the PIGB attempts to spread out the authority and power in Nigeria’s petroleum sector, and increase accountability and transparency. Conversely, there are fears that breaking up the NNPC into smaller units will actually create new levels of bureaucracy and increase opportunities for corruption. Related: This Critical Oil Price Divergence Could Boost US Exports

The NNPC itself will be split into two limited liability companies – the National Petroleum Assets Management Commission (NPAMC) and the National Petroleum Company (NPC) – both of which will be responsible for the managements of assets currently held by the NNPC. Furthermore, a third entity – the Nigeria Petroleum Liability Management Company (NPLMC) – will be established to assume and manage the liabilities of the NNPC in order not to financially encumber the newly created NPAMC and NPC.

While both the NPAMC and the NPC will be initially wholly owned by the government, in the long-term at least 40 percent of the shares of the NPC will be divested to the public. Notably, it is unclear whether these shares will be listed on any stock exchange. Not only will the sale of stakes in the NPC generate much-needed funds for the central government, it is anticipated that a diversified shareholder structure – hopefully comprised of both domestic and international private investors – will significantly reduce the risk of future corruption within the petroleum company.

Furthermore, under the currently proposed PIGB, both entities will be able to retain their revenues accrued from their operations – and only disburse to the central government its dividends accruable in respect of its shares – enhancing the ability of both entities to operate commercially.

Additionally, the PIGB will also establish a new regulatory agency – the NPRC – which will serve as a regulatory entity for the entire petroleum industry (upstream, midstream and downstream) and will absorb all existing regulatory bodies – including the of Petroleum Inspectorate (PI), the Department of Petroleum Resources (DPR) and the Petroleum Products Pricing Regulatory Agency (PPPRA).

Notably, the Minister of Petroleum will not have a seat on the Governing Board of the NPRC, whose members – other than those representing the Ministries of Petroleum, Finance and Environment – shall be appointed by the President subject to the approval of the Senate.

Interestingly, while the Minister will still possess significant powers – retaining the responsibility for the general supervision over the affairs and operations of the petroleum industry – the bill will limit the Minister’s role to essentially that of policy maker, and they will no longer have the power to grant, amend, renew, extend or revoke any licence or lease required for petroleum exploration or production (the powers of which will be transferred to the newly-created NPRC).

By establishing the NPRC as the sole industry regulator, the government hopes to eliminate the overlapping regulatory functions of the previous bodies, promote transparency, simplicity and accountability, and reduce bureaucracy in a sector that is already notorious for its unnecessary, expensive and cumbersome regulatory processes.

Outlook

Continued delays in the passage of the PIB – as well as a lack of much needed reforms over the last decade and the ongoing regulatory uncertainties – have created a climate of uncertainty in Nigeria’s petroleum sector, which has not been conducive to attracting further investment and the interest of IOCs. Emmanuel Ibe Kachiwku, the Petroleum Minister, estimates that the delays have actually cost the country as much as US $15 billion a year in lost investment.

Therefore, there are high hopes that the passing of the PIGB will demonstrate the government’s desire to open up the sector to more and better business opportunities through increased transparency, better accountability and clearer regulations.

Overall, the PIGB has the capacity to create a conducive business environment for petroleum operations and establish commercially-oriented and profit driven oil and gas entities to encourage the growth of investment in the sector.

In particular, establishing an efficient regulatory commission, couple with improved corporate governance, accountability and transparency in the sector, will serve to improve investor confidence and attract foreign investment, which in turn should – in theory - spur wider economic growth. Related: The Next Oil Price Spike May Cripple The Industry

However, while the passing of the PIGB has been widely viewed by industry stakeholders as a step in the right direction, there are still serious concerns over the clarity and some of the details of the bill.

For example, the bill includes the establishment of the Ministry of Petroleum Incorporated (MOPI); but it remains unclear what the relationship will be between MOPI and the current Ministry of Petroleum Resources.

Notably, two key unions in Nigeria’s petroleum sector, PENGASSAN and NUPENG, have also voiced their concerns about labour issues that might arise from the merging of the DPR, PPPRA and PI into the NPRC, and the lack of clarity on how the transfer of employees will happen.

Furthermore, it will be interesting to see who will fill the new roles within these newly created entities. It is more than likely that some of these positions will be filled with familiar faces from the NNPC, increasing concerns that the deeply-entrenched issues of corruption, cronyism and rent-seeking will infiltrate the newly restructured petroleum sector.

Finally, without the passing of other aspects of the original PIB, the PIGB – even if passed into law – will be unable to deliver the full benefits of the intended reforms and restructurings of Nigeria’s petroleum sector. Therefore, it is vital that the Senate make passing both the Petroleum Industry Fiscal Bill and the Host Community Development Bill a priority.

The PIGB really only seeks to strengthen the governance and institutional structure of Nigeria’s oil and gas industry, and therefore does not directly address the largely fiscal concerns of IOCs. IOC’s are more likely to be interested in the Petroleum Industry Fiscal Bill, for example, which defines the revenue and tax structure of the sector.

At present, it is unclear how the House of Representatives will approach the PIGB, and what changes will be made in the coming months. However, what is clear is that the passing of the PIGB appears to be the first significant step taken over the last several decades that appears to be going in the right direction to reposition Nigeria’s petroleum sector as a serious competitor on the global stage.

By Shadow Governance Intel

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