A New Dawn For Nigeria?
A New Dawn For Nigeria?

A New Dawn For Nigeria?

The government of Nigeria has announced that it expects to pass the long awaited Petroleum Industry Bill (PIB) very soon. It has already taken five and a half years to take the bill this far and a previous PIB was abandoned because of disagreements between the government and oil companies.

Now, however, President Goodluck Jonathan is actively supporting the legislation and it has been debated by both houses of parliament. The bill aims to restructure virtually the entire oil and gas industry in the country and the government insists that it will kick-start investment, although oil companies active in the country are lobbying hard to secure more attractive terms of investment.

The headline proposals in the PIB relate to the unbundling of state-owned Nigerian National Petroleum Corporation (NNPC) and payments from oil companies to the government. The NNPC will lose much of its supervisory powers, which will be transferred to the Oil Ministry. A new state-owned asset management firm will be created to handle the shares in joint ventures currently held by the NNPC, which has long been criticised as opaque and unwieldy.

What is left of the NNPC is to be turned into a commercially-driven state owned oil company, called the National Oil Company (NOC). Abuja has pledged to sell a stake in the firm via an initial public offering (IPO) within three years of the PIB becoming law but the size of the IPO has not been revealed.

It appears that the government is keen to turn the NNPC into a commercial company along the line of Malaysia’s Petronas. However, the concentration of power in the oil ministry raises doubts over the level of the new NOC’s independence.

Above all else, the PIB aims to separate the activities of the NNPC and the state. In the past, various arms of government have used the NNPC to fund state spending. A recent investigation discovered that the $14m presidential helicopter was paid for by the state oil company. A survey last year by Transparency International and Revenue Watch placed the NNPC as among the least transparent oil companies in the world, although the managing director and other senior figures at the NNPC were replaced by Jonathan in April.

Higher rates

Oil companies will pay a proportion of their profits to the government based on the difficulty of tapping the oil in question. A rate of 25% will be imposed for deepwater and particularly difficult production, while 50% is required for onshore and shallow water fields.

Existing deepwater investment legislation was introduced in 1993 when deepwater exploration and production had yet to take off and oil prices were about a fifth of their current level. Greater offshore development is vital to the future of the Nigerian oil industry, as production is falling on many established onshore and shallow water fields in and around the Niger Delta. The bulk of the country’s proven but untapped reserves lie in deepwater areas, as does prospective but unexplored acreage.

According to Oil Minister Diezani Alison-Madueke, the government’s total share of oil revenues from all taxes, royalties and other payments will increase from 61% under the current regime to 73% once the Bill is passed. However, Alison-Madueke insisted: “The proposed increase of government take to about 73% is not only competitive but considerate when we look at the scale of other entities around the world like Norway, Indonesia and even Angola with even higher government take.”

It is difficult to assess these changes as the lack of transparency in the Nigerian oil industry means that little information is known about current tax rates and other financial matters within the industry. Even the oil companies are sometimes forced to concede that they do not know the current level of tax rates. The Oil Ministry argues that the PIB will tackle this lack of transparency but it would help if a full breakdown of the existing web of taxes and royalties were published.

Ken Wiwa, the son of rights’ activist Ken Saro-Wiwa and senior presidential special assistant on civil society and international media, said that what independent auditors had found “led to a decision to end subsidies on petroleum products and also accelerated the need to pass a petroleum industries bill. I think what the bill will do is introduce fiscal disciplines to the state oil company. They have to be more transparent…It is very clear we need to take our numbers much more seriously. For too long we’ve lived this very cavalier attitude toward facts. We need to understand exactly how much oil we produce.”

The Department of Petroleum Resources (DPR) concedes that a large number of oil and gas sector projects have been delayed while the PIB is debated and delayed.

The fall in Nigerian oil production has generally been blamed on unrest in the Niger Delta but a combination of insecurity and an uncertain investment environment has deterred new projects for several years. Both national reserves and output are therefore lower than previously anticipated. It seems likely that the prolonged delay in passing the PIB has had as much impact on Nigerian oil production as the poor security situation. A string of deepwater fields were due to come on stream between 2007 and 2012 but most have been delayed because of the PIB. It is therefore vital that the Bill, in whatever form, passes into law as soon as possible.

Oil industry opposition

However, the oil majors appear unconvinced by the measures. At a meeting organised by the Nigerian Extractive Industry Transparency Initiative (NEITI), the Shell chairman for Nigeria, Mutiu Sunmonu, said: “A balanced PIB is what is required: one that will provide optimal revenue to the government whilst providing sufficient incentives for new investment to fuel growth. What we have seen of the draft PIB to date does not indicate a bill that fits these criteria … As it stands right now, the PIB will render all deepwater projects and all dry gas projects non-viable.”

Exxon too has suggested that it may not invest in further deepwater projects under the new regime.

The oil companies also argue that they should benefit from better terms of investment in Nigeria than elsewhere in the world because of the high level of illegal oil bunkering, piracy, armed robbery and corruption that continues to plague the country. While the government insists that it has listened to the complaints of the oil companies and acted accordingly, the 25% offshore profit rate is higher than the 20% rate that was included in the PIB as recently as May.

It is hoped that the Jonathan government will have the political will to back up its convictions by ensuring that the PIB passes into law and is actually implemented. However, the political muscle of those with vested political and business interests in maintaining an opaque oil industry could yet undermine the bill. Even if it is passed, the government needs to ensure that it includes sufficient measures to reform the corrupt downstream oil sector.

As Nigeria’s four refineries are regularly out of operation or working under capacity, Africa’s biggest oil producer is in the ridiculous position of importing most of its fuel requirements.

The state subsidises petrol and diesel but is in the position of paying subsidies on almost double the volume of fuel that the country actually consumes. It is sad but true that some of the refined petroleum products imported into the country are actually produced in Nigeria and then taken briefly out of Nigerian waters before returning to port in a practice known as ‘round tripping’. It is a scam that is symptomatic of the industry’s problems in a country that deserves much better.

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Written by African Business Magazine

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