Framework for Development of Nigeria Oil and Gas Industry: Challenges and Opportunities

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The Chairman, Senate Committee on Petroleum Resources Upstream, Senator Tayo D. Alasoadura, presented a paper with focus on Oil and Gas Industry at the Federal University of Technology, Akure, Ondo State.

Seyi Anjorin brings the Excerpts:

I will begin this presentation by providing a simple explanatory clarification on the structure of the Nigeria oil and gas industry. This is to ensure that those of our students and faculty who are not very familiar with this field will easily understand and appreciate the issues and the information and knowledge we shall be sharing in the course of this lecture. Once the basic issues are explicated, I shall then highlight the major legal instruments regulating the industry and the industry governance framework. I will then go on to highlight the problems and challenges of the Nigeria oil and gas industry and then state the efforts government has made so far to resolve these problems and inadequacies. Thereafter, I will provide an extensive, copious and detailed analysis of our proposed legislative framework for the development of the oil and gas industry and then share some thoughts on the opportunities and potential impact of the this framework when signed into law and the challenges and ominous implications of not passing or withholding assent to the bills embodying the proposed framework.

Structure of the Nigeria Oil and Gas Industry

It is common knowledge for all industry practitioner that the oil and gas industry is usually operationally divided into three sectors comprising the upstream, midstream and downstream. Put simply, the upstream sector includes all activities encompassing the search for crude oil and natural gas, drilling exploratory wells, and subsequently drilling and bringing the crude oil or raw natural gas to the surface. Midstream activities include the gathering, processing or blending, transportation and storage of oil, natural gas and related products. The downstream sector is encompasses the refining of crude oil and the processing and purifying of raw natural gas, as well as the marketing and distribution of products derived from crude oil and natural gas. All activities in the oil and gas industry whether in the upstream, midstream or downstream are guided by our body of oil and gas laws and these laws are administered by the instrumentality of licences and leases issued by the appropriate government agencies.

Major Laws Regulating the Nigeria Oil and Gas Industry

The major laws regulating our oil and gas industry are numerous but the most important ones include the Petroleum Act (which came into force in November 1969) along with the various regulations made pursuant to it; the Oil Pipelines Act (enacted in 1956); the Nigerian National Petroleum Corporation Act (enacted in 1977); the Deep Offshore and Inland Basin Production Sharing Contracts Act (enacted in 1993); Petroleum Profit Tax Act (enacted in 1958); the Petroleum Products Pricing Regulatory Agency (Establishment) Act (2003); Petroleum Technology Development Fund Act (2004); the Petroleum Equalisation Fund (Management Board, etc.) Act (2004); and the Associated Gas Re-injection Act (1979).

Industry Governance Framework

In terms of governance, our oil and gas sector has several governance entities which can be separated into three functional categories. The first category includes the policy making organ which is the Minister of Petroleum whose functions and powers in this regard are specified in the Petroleum Act. The Minister also carries out extensive supervisory, regulatory and administrative functions and is supported in doing so by several agencies including the Ministry of Petroleum Resources, the Petroleum Technology Development Fund, the Nigeria Content Development and Management Board and the Petroleum Products Pricing Regulatory Agency. The second category is the regulatory organ. Under the Petroleum Act and in line with government directives, the industry regulatory functions are currently performed by the Department of Petroleum Resources which is an agency under the direct supervision of the Minister of Petroleum. The third category comprises the commercial entity which is the Nigerian National Petroleum Corporation which is established under the Nigerian National Petroleum Corporation Act, along with its several operational subsidiary companies.

Problems and Challenges of the Nigeria Oil and Gas Industry

Having provided this explanatory background, let me quickly move to the subject matter of our lecture today which is our proposed framework for the development of the oil and gas industry. As most of you are aware, the Nigeria oil and gas industry is plagued by numerous problems and the industry is in a state of instability and much uncertainty. Since the 1990s, successive administrations have noticed that the oil and gas industry is not operating at standards and levels of efficiency expected of a twenty first century oil and gas industry. At its inception in 1999, the new democratic administration under President Olusegun Obasanjo recognised that the industry could no longer meet the aspirations of government and key stakeholders nor could it match the pace of development of the global oil and gas industry.

The problems and challenges of the oil and gas industry since the 1990s and which are even more glaring today include the following:

Subsisting of an outdated legal framework comprising laws and subsidiary legislations dating back to the 1950s most of which have become obsolete and ineffectual;

Inefficient and poorly segmented regulatory entities, whereby there are several agencies carrying out the same regulatory functions which results in inefficiency, conflict of roles and  multiplicity of regulatory shops;

An upstream acreage management system featuring an inadequate licences and leases administrative system, discretionary acreage award process traditionally susceptible  to corruption and the whims of the government in power;

A poorly structured commercial entity that is not profit oriented or structured to create value for government beyond serving as a government cash cow;

A midstream sector that is bedeviled by inadequate gathering, processing and transportation facilities for oil and especially for gas as well as low refining capacity, inadequate gas delivery infrastructure, infrastructure vandalism and poor fiscal regime for investment in gas processing and pipeline;

A downstream characterised by products importation, deregulation, inefficient products distribution system and absence of third party access and anti-trust regulations.

A lopsided, poorly structured and outdated fiscal regime that does not support efficient revenue generation for government, fresh investment by companies and the growth and competitiveness of the Nigerian oil and gas industry. This is in addition to the endemic absence of adequate provisions for effective tax administration and fiscal terms and incentives for gas development.

Government Effort at Providing Solution and Framework

In order to establish a proper framework to deal with the above-stated inadequacies of the oil and gas sector, the Obasanjo administration decided to set up the Oil and Gas Sector (Reform) Implementation Committee (OGIC) on April 24, 2000 under the Chairmanship of Dr. Rilwanu Lukman who was then serving as the Presidential Adviser on Petroleum and Energy. The OGIC was reconstituted by President Umaru Musa Yar Adua on 7th September, 2007 to complete the work of the initial committee. In setting up the OGIC, the government’s viewpoint was that the legal, institutional and fiscal framework regulating the industry were the major problems and constraints to the development of the Nigeria oil and gas industry.

The OGIC made far reaching recommendations towards establishing a framework for the development of the oil and gas industry through a comprehensive reform of the industry. These recommendations culminated in the 2008 National Oil and Gas Policy and eventually the Petroleum Industry Bill 2008 which was sent to the 6th National Assembly for legislative consideration. This bill comprises the basic legislative instrument containing the legal, institutional, operational and fiscal framework for the development of the Nigeria oil and gas industry.

Since 2008 when it was first introduced, the Petroleum Industry Bill (PIB) has been in the works in one form or the other.  During the 7th National Assembly (2011-15), additional efforts were made to pass the 2012 version of the Bill but it unfortunately was unsuccessful, similar to attempts at prior parliamentary sessions.

Role of National Assembly in Developing Industry Reform Framework

Let me state emphatically that the duty to birth the new legal framework for the development of our oil and gas industry is the responsibility of the National Assembly. I believe we are all familiar with the fact that one of the principal roles of the National Assembly is to receive, either from the executive or its private members, legislative proposals in form of bills and to consider and pass these bills into law. This power to make laws is derived from section 4 of the Constitution of the Federal Republic of Nigeria 1999 (as amended) which confers the responsibility to make laws on the National Assembly. In addition, section 58 of the same constitution provides that the power to make law is to be exercised by bills passed by both chambers of the legislature. Therefore, my discussion of our proposed framework shall centre on the framework proposed for development of the oil and gas industry as encapsulated in the reform bills passed or still before the National Assembly.

Having put the basic issues in proper context, I will now go on discuss salient issue relating to the PIB as the framework for developing the Nigeria oil and gas industry.

Legislative Approach of the 8th National Assembly

It is on record that all attempts to reform our oil and gas industry since the year 2000 have suffered unprecedented setbacks. As a result, Nigeria has lost more than ten billion Dollars in terms of income and investment in the industry. The more intriguing fact is that in spite of these losses, which was accumulating every day, previous sessions of the National Assembly failed to conclude the legislative consideration of the petroleum industry reform. Our finding was that this failure was largely because the PIB which was a single holistic bill was too complex for legislators and stakeholders to consider and pass.

Therefore, when we commenced work on the Petroleum Industry Reform in 2015, the leadership of the National Assembly and the petroleum committees took two critical decisions. The first was to split the petroleum industry reform legislation into four bills namely the Petroleum Industry Governance Bill, the Petroleum Industry Administration Bill, the Petroleum Industry Fiscal Bill and the Petroleum Host and Impacted Communities Bill. The second decision was to encourage private member sponsorship of the bills and yours sincerely is the sponsor of the Petroleum Industry Governance Bill 2017 and the Petroleum Industry Fiscal Bill. These decisions have paid off. Together with the House of Representatives, we have passed the Petroleum Industry Governance Bill and the remaining three bills have gone through first and second readings and Public Hearings and work on them will soon be concluded by the relevant  committees.

Let me summarize the content of the four bills, namely the Petroleum Industry Governance Bill, the Petroleum Industry Administration Bill, the Petroleum Industry Fiscal Bill, and the Petroleum Host and Impacted Communities Bill. I will then follow up with some clear statements on the opportunities and potential impacts of the bills when signed into law and the challenges and ominous implication of further delay or withholding of assent to the bills. Let me start with the content of the bills.

The Petroleum Industry Governance Bill 2017

As you are aware, the Petroleum Industry Governance Bill 2017 has been passed by the 8th National Assembly after extensive legislative consideration that included well-attended Public Hearings and committee consideration of the far-reaching input by all stakeholders. Let me briefly summarise the content of this bill.

The bill clearly separates the roles of the major actors to ensure clarity of role and eliminate inter-agency conflict. The bill provides that the Minister will be in charge of policy making and general non-intrusive supervision of the industry.

The bill creates a single independent regulator for upstream, midstream and downstream;

It also creates two commercial entities, the National Oil Company and the Nigeria Petroleum Asset Management Company, that are profit driven with private sector orientation that eliminates cross subsidisation.

Finally, the bill provides a framework for funding and management of the liabilities of the current NNPC and Department of Petroleum Resources.

The Petroleum Industry Administration Bill

The objective of the Petroleum Industry Administration Bill, is to transform the administration of the upstream, midstream and downstream sectors of the Nigerian petroleum industry. Distinguished Colleagues, ladies and gentlemen, I believe this bill has three major laudable features that will fast-track our economic development. Firstly, the Bill will create a framework that will free up acreages that are not being developed by current licence and lease holders thereby creating opportunities for new investors. This will bring substantial new investment to our oil and gas industry.

Secondly, the Bill will also ensure strict and effective management of environment by oil companies and make companies pay for every environmental infractions. Thirdly, this bill will provide the framework for unleashing midstream activities which will open up the market for supply of gas and other downstream products for our economic growth. Finally, I believe the most important feature of this bill is that it will provide the much needed legal backing for deregulation of our downstream petroleum sector.

The Petroleum Industry Fiscal Bill

Most of you are aware that our existing fiscal framework for petroleum industry is outdated. The objectives of the Petroleum Industry Fiscal Bill is to fix the anomalies especially in our royalties and tax administration regimes.

We are all aware of how many billions of dollars this country has lost since the 1990s by not invoking the provisions of subsisting law, that is, section 16 of the Deep Offshore and Inland Basin Production Sharing Contracts Act whenever crude oil price was high. This bill will cure this ill. The bill will remove the difficulties and uncertainties surrounding our tax assessment and collection system and provide for improvement in our tax administration processes. It will remove the distortions created by the Associated Gas Framework Agreement and provide comprehensive gas fiscal terms for the development of our abundant natural gas resources. Finally, I think the most critical objective of this bill is that it will enhance our international competitiveness and make Nigeria a choice oil and gas investors’ destination.

The Petroleum Host and Impacted Communities Bill

The fourth bill, the Petroleum Host and Impacted Communities Bill 2018 seeks to provide for a legal framework for the development of the petroleum host and impacted communities. This means it’s a pan-Nigerian bill that will provide for all communities throughout the country that are host to upstream assets, and significant midstream and downstream assets and infrastructure. The bill takes into cognizance the aspirations of the petroleum host and impacted communities.

This Petroleum Host and Impacted Communities Bill is unique because it recognises the pitfalls of past efforts and is structured to bring funding for the economic and social development of petroleum host and impacted communities under the direct control of affected communities. This bill will bring the much desired harmony and partnership among the various stakeholders in the petroleum operations process.

Impact of the Bills when Signed Into Law-

Mr. Chairman, distinguished ladies and gentlemen, let me quickly highlight the imminent and foreseeable impact of the four bills when passed into law. These will include:

The role of the Minister as we have become used to it will change. The Minister will become more visible in policy making and overall supervision of the industry. Most practical industry matters will be handled by the regulator;

There will be a single regulator for the entire industry value chain. Upstream licences  and leases, midstream and downstream licences will be managed and administered by the regulator;

The reform will open up the midstream and downstream. There will be opportunities for midstream businesses including pipelines and processing plants. Open access will provide separate business in pipelines, etc.

The laws will encourage development of gas and gas infrastructure;

There will be increased attention on environmental management and the rules will be stricter; and

More attention will need to be focused on the economic and social development of petroleum host and impacted communities.

Challenges and Implications of Not Passing and/or Signing the Bills into Law

Let me state clearly that there will be huge and mounting cost for the delay in passing and signing the above reform bills into law. Let me list some of the most immediate ones which include:

Steady and progressive decline in revenues accruable to government;

Continuous decline in production and reserves;

Deferment of core investments;

Absence of funding for new investments;

Increase in divestments by the oil majors;

Nigeria’s loss of regional and global competitiveness;

Continuity and increase in the crisis in the midstream and downstream;

Steady industry-wide loss of jobs;

Insufficient gas for power generation and other domestic use; and

Return of destructive militancy activities and community agitation

Opportunities Offered by the Framework and Concluding Remarks

In concluding, let me emphasize that the legal framework we are proposing provides a robust framework consisting of the legal, institutional, operational and fiscal framework for the development of the Nigeria oil and gas industry. I believe that the objectives and provisions of the four bills are very laudable and would provide the opportunities for total transformation of the Nigerian oil and gas industry. This framework will attract substantial investment at this critical time that such investments are required to stimulate growth in the Industry with its concomitant effect on other sectors of the Nigerian economy. Mr. Chairman, distinguished ladies and gentlemen, we all have a burden to deliver these four bills that will together enhance the regulation and administration of our oil and gas industry, modernize our fiscal system and enhance our competitiveness while creating harmony for all stakeholders. Mr. Chairman, distinguished ladies and gentlemen I thank you for listening and sharing.

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