Buhari weighs up oil reforms - African Business Magazine
Buhari weighs up oil reforms

Buhari weighs up oil reforms

It has been clear for many years that the Nigerian oil and gas industry needed deep-seated reform.

The Nigerian National Petroleum Corporation (NNPC) is clearly not fit for purpose; a large proportion of oil revenues go missing; gas price regulations deter gas production; and Africa’s biggest oil producer is forced to import most of its refined petroleum products. The list of problems goes on and on. The country’s new president, Muhammadu Buhari, was elected on a promise to tackle corruption in the oil industry and in the flow of oil revenues, but the situation has been made even more urgent by the tumbling price of oil.

The scale of financial haemorrhaging is breathtaking. Buhari estimates the losses to the public pursue from corruption over the past decade at $150bn. The National Economic Council calculates that the NNPC earned N8.1 trillion ($41bn) between January 2012 and the end of May 2015, but paid just N4.3 trillion ($21.6bn) to the government. While the management of the NNPC may not be directly responsible for oil theft and more general unrest in the Niger Delta, the culture of corruption does create an environment within which other illegal activities can prosper.

The previous administration of Goodluck Jonathan seemed to recognise the various problems and bundled up its reforms in a single piece of legislation, the Petroleum Industry Bill (PIB), but the PIB became mired in parliamentary dispute. Its passage was repeatedly held up before it was shelved as it became clear that it would not become law before the 2015 elections.

It now looks likely that the government will press ahead with many parts of the PIB rather than attempting to draft entirely new legislation. However, it will be broken up into its constituent parts in order to ensure that dispute over one part does not hold up the entire reform process.

Opposition is expected from oil industry trades unions, who are keen to block any job losses, and also from the international oil companies (IOCs), which do not want existing contracts changed in the government’s favour. The first portion, which will be debated in the National Assembly this year, will focus on tackling corruption and reforming the NNPC.

Nigeria will therefore have to wait for gas sector reform. At present, oil companies receive low regulated prices for the gas they produce in order to minimise the cost for Nigerian power plants and other domestic users. However, the uncommercial rates discourage them from developing the required transmission infrastructure and particularly from developing non-associated gas fields. As a result, Nigeria goes without both gas and electricity. It is surely better to have more expensive energy than no energy.

The huge fall in the price of oil over the past two years has complicated the reform process. With crude trading at below $30 a barrel as we go to press, the Nigerian government’s oil revenues – which account for 70% of its total income – have tumbled. Nigerian oil exports were worth $78.3bn in 2014, followed by gas at $12.9bn. The next biggest export earner was coffee, tea, cocoa and spices at just $1.2bn, so it is clear just how much the country relies on hydrocarbons.

It is therefore more important than ever that Abuja plugs the holes in the flow of state oil income and halts continued widespread corruption. Energy consultancy Wood Mackenzie estimates that the government will receive $75bn less in oil sector royalties and taxes between 2014 and 2018 than previously expected.

NNPC reforms

Buhari is certainly taking his time over reforming the structure of the NNPC but on assuming the presidency in May, he quickly sacked NNPC group managing director Joseph Dawha and replaced him with Emmanuel Kachikwu, who was previously executive vice-chairman and general counsel at ExxonMobil. Kachikwu in turn replaced dozens of other managers, including the heads of all eight NNPC directorates, bringing in executives from IOCs operating in Nigeria. The managing director has now also been appointed oil minister.

The president hopes to make the NNPC operate along commercial lines, but this may require breaking the company up into its constituent parts. At the very least, its activities as an upstream investor need to be separated from its position as industry regulator. You can’t be both referee and player at the same time.

It should be possible for a state oil company to operate effectively, as the experience of Saudi Aramco of Saudi Arabia, Malaysia’s Petronas and Petrobras of Brazil has demonstrated. An initial public offering of stakes in the NNPC’s refining and distribution operations is planned, plus some of its upstream assets.

Abuja has already taken greater control over supervising the accounts of state-owned companies, including the NNPC, in order to tackle the siphoning off of funds.

The oil parastatal’s finances were previously excluded from government finances, despite the fact that they comprised the biggest source of revenue.

Apart from failing to pass money on to the government, the company has failed to provide its share of joint venture funding. The chief executive of independent oil firm Seplat, Austin Avuru, says that the NNPC’s inability to pay its partners comes a close second to the falling oil price as an operational problem.

The impact on investment

All existing joint venture and production sharing contracts are to be reviewed to “reflect current day realities in the global oil and gas industry”. It is unlikely that the reforms will affect investment into most parts of the oil and gas sector.

The IOCs have been selling onshore and shallow water assets over the past few years because of the poor security situation and corruption. This has allowed Nigerian companies to play a bigger role in the upstream sector but any reforms should encourage both foreign and domestic companies to develop new projects. Apart from anything else, it will give them greater certainty over the investment environment.

The one area that could be affected is deepwater oil production. The government wants to change the terms of deepwater concessions in its favour and the IOCs have warned that this could deter development.

However, deepwater projects have been largely immune from the attacks that have plagued the Delta and the international price of oil is likely to have more impact on deepwater investment decisions than regulatory changes, although it is vital that any new concession agreements take possible fluctuations in oil prices into account.

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