Nigeria’s oil sector reforms edge closer to law
The framework for investments in Nigeria may be about to change. But as ever, there are complications
Nearly two decades after Nigeria first constituted a panel to commence deliberations on oil industry reform, the country is on the verge of passing legislation that could help unblock long-stalled major investment in its most lucrative economic sector—if the president can be brought onside.
After more than a year of deliberation, the first stage of the current version of the legislative reform package, the Petroleum Industry Governance Bill (PIGB), has been passed by the National Assembly—comprised of the Senate and House of Representatives. It has since been passed on for final assent by President Muhammadu Buhari.
Yet, Buhari was still to approve the PIGB in early June, several weeks after it emerged from the National Assembly, raising questions over the pace at which the whole legislative package would make it on to the statute books.
Industry observers say he may be concerned by the extent to which the PIGB transfers power away from the president and the petroleum minister—a post also currently held by Buhari—to a regulatory commission. Its composition would be heavily influenced by the National Assembly.
Under the previous Petroleum Act, the president had considerable power over the creation, designation and award of marginal fields. Meanwhile, the petroleum minister had discretionary powers over renewal of contracts, the size of signature bonuses and other negotiated payments for oil activities. Under the PIGB, the new regulator would be granted the power to collect all bonuses, renew contracts and award oilfield licenses.
Although the executive arm of government may select members of the governing board of the commission under the PIGB, their appointment would still be subject to approval by the National Assembly. Furthermore, the commission’s budget and funding would also be regulated by the assembly, providing it with another lever of influence over the commission.
The expectation among those close to the government is that the legislation will become law in the near future, though there is a chance that Buhari could demand changes that could delay it further or cause political unrest. According to the Nigerian constitution, where the president refuses to give his assent to a bill, the National Assembly can override him and pass the bill into law, if the move achieves a two-thirds majority in both houses. This has been done previously, when then-president Olusegun Obasanjo withheld his assent to the Niger Delta Development Commission Bill in June 2000.
In the meantime, lawmakers in the National Assembly have also been making progress on drawing up two further bills linked to oil sector reform—the Petroleum Industry Fiscal Bill (PIFB) and the Petroleum Host and Impacted Communities Bill (PHICB).
The PIFB is intended to provide a reassuring framework to allow the return of major oil investments that have virtually dried up in recent years due to poor prospective returns and legislative uncertainty. However, this must balance the need to incentivise investments by international oil companies against the government’s objective of enhancing its revenues from the oil sector.
The IOCs had been concerned that, in an earlier version of proposed legislative reforms, overly punitive fiscal terms would have discouraged investments in deep-water operations—especially for gas projects. However, in the current revised draft of the PIFB, deep-water fiscal taxes have been reduced. Instead of an earlier planned increase in tax to 55% (inclusive of a company income tax of 35%), deep-water operations would incur only a profit tax of 40% under the PIFB, with no mention of a company income tax.
Royalties are also set out in detail and depend more on production volumes than on water depth. Analysts note this could discourage investments in smaller deep-water oil and gas fields.
Efforts to encourage cost efficiency in developing projects in the PIFB are well intentioned, but may be ineffective unless the sector’s bureaucracy can be reduced.
Companies will only be permitted to claim production allowances based on a cost-efficiency factor capped at one-fifth of revenues. In other words, if they can keep their costs below 20% of revenues, they will be able to claim a certain amount of production allowances.
This is intended to reduce the number of projects that overshoot budget, which is a common occurrence in Nigeria. It should make producers more disciplined in project development, but it will also require government agencies to reduce red tape, as that’s a major factor in the lengthy contracting cycles seen in the industry.
While the PIFB’s impact lies largely in the sphere of big-budget offshore operations, the third bill, the PHICB, is targeted mainly at onshore activities. It’s primarily designed to reassure local communities in oil and gas producing areas—principally the Niger Delta—that they’ll benefit adequately from production.
If the PHICB achieves that, its passage could signal an end to militant attacks on oil installations that have hampered production for years.
This legislation still needs honing, not least in establishing a tighter definition of what constitutes a host community, analysts say. However, it builds on what has proved a relatively successful form of engagement in the Niger Delta, by providing a framework to set up trusts for groups of host communities.
The onus for establishing these trusts will be placed on the oil companies operating in the region. The current draft legislation also calls for the firms to fund them via an annual payment set at 2.5% of their operating expenditure in the previous year, alongside funding from elsewhere.
This contribution is in addition to the 3% of annual capital expenditure that is to be contributed towards the Niger Delta Development Commission.
Oil companies won’t welcome the additional burden and the terms may yet be modified before the legislation becomes law. But if it brings prolonged peace to the Delta and boosts their production—and revenues—they may consider it a price worth paying.
Presidential and national assembly elections, due in February 2019, are another factor that could upset the speed at which the PIGB bill, in particular, can be passed.
Buhari may call for a review of the PIGB legislation in an effort to delay giving his assent until after the elections, when, if he wins, he would be in a stronger position to insist on retaining greater influence over the oil sector. If he’s defeated, then a new leader could seek to pass any outstanding bills speedily to bolster foreign support and investment in Nigeria.
Buhari’s most notable opponent, Atiku Abubakar—a fellow northerner and former vice president—hasn’t made any public statements regarding his view on the petroleum sector legislation. But his support for a reduction in state control and more private-sector involvement in key areas of the economy, as well as further steps to open up investment in the oil sector, suggest he may view the legislation more favourably.
However, seasoned Nigeria watchers say that reducing presidential power over the oil sector, the biggest lever of the economy, may be a difficult pill to swallow for the winner of the election, whoever that may be.