History, objectives, institutions, and controversies
The Petroleum Industry Bill is an attempt to bring under one law the various legislative, regulatory, and fiscal policies, instruments and institutions that govern the Nigerian petroleum industry. The Bill is expected to establish and clarify the rules, procedures and institutions that will entrench good governance, transparency and accountability in the oil and gas sector. It aims to introduce new operational and fiscal terms for revenue management to enable the Nigerian government to retain a higher proportion of the revenues derived from operations in the petroleum industry. The purpose of this document is to articulate in one place the history, objectives, institutions, and controversies shrouding efforts to pass the Bill into law. This document is intended for members of the Nigerian National Assembly, industry stakeholders, decision makers, and policy analysts as a part of Nextier’s effort to support the passage
of the Petroleum Industry Bill.
HISTORY OF THE BILL
- Oil and gas production commenced in Nigeria in 1958 after the discovery of oil in Oloibiri (Bayelsa State) two years earlier. Since then, no comprehensive law has been put in the place for the administration of the industry. The PIB seeks to replace sixteen (16) petroleum industry Acts.
- By the 1990’s Nigeria engaged in a number of unincorporated joint ventures with international oil companies to develop the industry. However, the country had challenges funding its commitments to the joint ventures. As a result, Production Sharing Contracts (PSC) were introduced as alternative funding mechanisms.
- However, PSCs lack transparency, good governance practices, and are not in line with international best practices. For instance, Nigeria does not capture any part of windfall profits from increases in crude oil prices. Additionally, cost controls, accounting procedures, and acreage management are inadequate.
- In response to these challenges, the Obasanjo government in 2000 constituted the first Oil and Gas Reform Implementation Committee (OGIC) to recommend a policy for reforming the sector. The recommendations defined the need to separate the commercial institutions in the sector from the regulatory and policy‐making institutions.
- In 2007, the Yar’Adua government reconstituted OGIC under the chairmanship of Dr. Rilwan Lukman to use the provisions of the National Oil and Gas Policy to setup legal, regulatory, and institutional structures for managing the oil and gas sector.
- The Lukman Report, submitted in 2008, recommended regulatory and institutional frameworks that when implemented will guarantee greater transparency and accountability. This report formed the basis for the first Petroleum Industry Bill (HB 159) that was submitted in 2008 as an Executive Bill.
- The controversy raised by the Bill prompted the constitution of a federal inter‐agency team headed by Dr. Tim Okon (former NNPC’s Group General Manager on Strategy) to review the Bill. The team’s report submitted in 2010 (IAT 2010) is at the crux of the controversies around the PIB because it introduced more stringent fiscal provisions that guarantee a higher share of oil revenues to Nigeria.
- In 2011, the Senate submitted its version of the Bill (SB 236) that is seen as a much‐weakened version.
- Subsequently, the House of Representatives submitted its version of the Bill (HB. 54) in 2011. The Bill was sponsored by six Honourable Members:
» Hon. Emmanuel Jime (PDP, Benue)
» Hon. Aliyu Madaki (PDP, Kano)
» Hon. Usman Bello Kumo (PDP, Gombe)
» Hon. Dakuku Peterside (PDP, Rivers)
» Hon. Fatai Akinderu (ACN, Lagos)
» Hon. Irona Gerald (PDP, Imo)
- This document is based on the 2011 House Bill 54.
OBJECTIVES OF THE PIB
The PIB seeks to repeal the 16 petroleum industry acts and replace them with an omnibus Act that provides for better fiscal and regulatory management of the oil and gas sector. The key objectives of the PIB include:
1. Enhance exploration, exploitation, and production:
The PIB will eliminate funding
bottlenecks, increase investments in the sector, and increase acreage available for investment.
FUNDING: Restructuring of NNPC will remove the constraints of government funding and barriers to the entry of new players under a new set of rules that are transparent to all parties.
INVESTMENT: Comprehensive deregulation of the downstream sector will make it attractive for investments. Removal of the fuel subsidy should free up funds for investment in critical infrastructure.
ACREAGE: One of the challenges with increased investment in Nigeria’s oil industry is the lack of new acreage. The PIB will reclaim acreage that is not being developed by the current owners. This provision may free up about 30% of prospective petroleum acres for new investors.
2. Increase domestic gas supplies:
The Bill provides that all existing and future petroleum mining lessees shall meet their domestic gas supply obligations for the specified periods as the gas will be used for power generation and industrial development. Failure to meet this obligation attracts a stiff penalty. According to this latest version of the Bill (HB.54), gas flaring or venting will cease from December 31, 2012.
3. Create a peaceful business environment:
The Bill seeks to align the interest of the host communities to those of the oil companies and the government. The Petroleum Host Communities Fund, which will be funded with 10% of the net profit of the oil companies operating in the communities, shall be used to develop the economic and social infrastructure of the host communities. Communities will forfeit contributions in the Fund when vandalism or unrest causes damage to upstream facilities.
4. Fiscal Framework for increased revenue: The PIB establishes a progressive fiscal framework that encourages further investment in the industry whilst increasing accruable revenues to government. The Bill simplifies collection of government revenues from the oil assets, increases the share of royalties in the case of high oil prices, etc. The tax computation has been simplified and no company is tax‐exempt.
5. Create a commercially viable National Oil Company: The Bill provides for the full commercialisation of NNPC and the creation of other institutions that will ensure a restructuring of the sector for improved efficiency. The table below provides the objectives, powers, and functions of the
6. Deregulate petroleum product prices:
The Bill proposes the full deregulation of the downstream oil sector. A number of the institutions will be responsible for developing the infrastructure to support the sector, funding concessionaires and facility management operators. The Petroleum Equalisation Fund will be phased out in line with the development of the support infrastructure.
7. Create efficient regulatory entities:
The Bill provides for the creation of eight institutions to drive greater transparency and accountability.
8. Create transparency:
The Bill makes public the terms of the licenses, leases, contracts and payments in the petroleum sector. When passed, the legislature will transform Nigeria from being one of the most opaque oil industries in the world to one that sets the standards of transparency.
9. Promote Nigeria content:
The PIB has far‐reaching local content components. No project will be approved without a comprehensive Nigeria Content Plan including obligations of the investor to purchase local goods and services, engage local companies, employ Nigerians, ensure knowledge transfer and encourage Research and Development. The Nigeria Content Monitoring Board will regularly verify compliance. Through the local content provisions in the Bill and the opportunity to develop small indigenous oil and gas companies, Nigerians will begin to participate more actively in the industry and jobs will be created.
10. Protect health, safety and environment:
Every company requiring a license, lease or permit in the upstream and downstream petroleum industry in Nigeria shall conduct their operations in accordance with internationally accepted principles of sustainable development which includes the necessity to ensure that the constitutional rights of present and future generations to a healthy environment is protected.
Different stakeholders have raised concerns about certain provisions of the Bill. Below is a list of the
most controversial issues.
1. Fiscal provisions increase cost of doing business:
The Bill provides for multiple taxes (Nigeria Hydrocarbon Tax, Company Income Tax), higher rents and royalties, and levies (Niger Delta Commission Levy, Petroleum Host Community Fund, Education Tax). This is most noticeable in the deep offshore operations.
2. Retroactive reversal of contracts:
The PIB advocates reversal of provisions of prior agreements and contracts, and introduces new fiscal regimes even for old Petroleum Sharing Contracts.
3. Relinquish acreage:
The PIB provides for the revocation of acreage that is yet to be developed by the allocated owners. Opponents of this provision claim that it is an infringement on earlier agreements while its proponents argue that it is required to bringing new investment to the industry.
4. Calculating payments:
The Bill advocates that oil companies will pay for quantities produced instead of quantities exported. The oil companies have argued that solving the security challenge and fixing sabotage
of logistics infrastructure is the core responsibility of
5. Duplication of roles:
There are overlaps of roles and responsibilities with a number of the institutions created under this Bill. For instance, the Nigerian Petroleum Inspectorate, Petroleum Products Regulatory Agency, and Petroleum Infrastructure Development Fund have conflicting responsibility for funding the development of infrastructure especially for the downstream sector of the petroleum industry.
6. Deadline for Gas flaring:
According to the PIB (HB.54), December 31st 2012 is the deadline for gas flaring. The integrity of this date is questioned given that the Bill is yet to be passed
7. Too much power:
The Bill provides the Minister of Petroleum too much power to grant, revoke and reallocate licenses.
8. Regulatory Independence:
Regulators need to be fully independent and not under the supervision of the Minister of Petroleum.
9. Potential delays in passing the Bill:
Can the 7th National Assembly continue debates from where the last Assembly stopped? This is possible according to Rule 111 of the Senate but there are voices in the Senate that dissent to this interpretation and want the Bill to be reintroduced and for the process to be started all over again. There is also the challenge of harmonizing the different versions of the Bill (Executive, Senate, and House).
CONCLUSION: WHY THE PIB MUST BE PASSED NOW
The Petroleum Industry Bill is a landmark opportunity to herald a new era of reform in the oil and gas industry that will maximise Nigeria’s vast potential, restore transparency and facilitate a thriving industry and overall economy. Failure to pass the PIB has and will lead to a reduction of investments in the Nigeria petroleum industry. To date, most of the oil companies have ceased investments in the sector until there is clarity as to what provisions will be contained in the final Bill and how it will affect the industry. With the rise of other attractive petroleum industries in Africa (Angola, Ghana, etc), Nigeria must understand that investments are fungible and will eventually flow to alternative countries that are more receptive. Lastly, the recent 2012 efforts to deregulate the downstream sector creates an opportunity for lawmakers and other stakeholders to push for the swift passage of this Bill.