Opponents of the deregulation of Nigeria's downstream petroleum sector argue that the measure would push up the price of petrol.
Nigeria's oil and gas industry, which accounts for 95% of the country’s export revenue, is set for a major shake-up should a new oil Bill be approved and the deregulation of the downstream sector go ahead. Jaco Maritz reports
Stakeholders in Nigeria's oil and gas industry are debating heavily over the proposed Petroleum Industry Bill (PIB). The bulky draft document intends to establish a fresh legal framework for the organisation and operation of Nigeria's entire oil and gas industry. The Bill is currently before the National Assembly.
According to the federal government, the necessity for the Bill was borne out by the fact that the laws governing Nigeria's oil industry have not been comprehensively reviewed in almost 40 years. The PIB combines 16 different Nigerian petroleum laws into a single transparent and coherent document that establishes clear rules, procedures and institutions for Nigeria’s petroleum industry.
Highlights of the Bill
Some of the main reforms of the proposed Bill include:
Transparency: The Bill will remove secrecy and confidentiality in the petroleum sector. The texts of all licenses, leases and contracts, as well as changes to these documents will no longer be confidential. Under the new legislation, payments to the government will be public information. Petroleum prospecting and mining licences will also be awarded through a competitive bidding process.
Revenue collection: To improve revenue collection by government from the oil and gas industry, a new fiscal regime for the upstream sector of the industry will be introduced. Government feels that its take from the industry is relatively low when compared with other countries. The PIB will split the current Petroleum Profits Tax into two: the Corporate Income Tax and the Nigerian Hydrocarbon Tax. All oil companies will be required to pay Corporate Income Tax, from which they are currently exempted. The Hydrocarbon tax will be payable on a company’s production, not profit.
Every company involved in the upstream petroleum industry will be subject to the same system of rents, royalties and taxes, depending on whether they operate in the onshore, shallow or deep offshore or inland areas. This means it will not be possible under the Bill to treat certain companies more favourably than others.
Administration: To handle the administration of the sector a number of new agencies will be created. The idea is that each of agencies will focus on a specific area of the sector to avoid the overlapping of responsibilities.
Role of NNPC: The Bill will change the role of the Nigerian National Petroleum Corporation (NNPC). The NNPC currently has the character of a government department, whereas the Bill will commercialise the NNPC so that it can operate as viable and self-financing company. It will however still be owned by government. The idea is that that the NNPC will function like other successful state-owned oil companies such as Norway's Statoil, Brazil's Petrobras, Malaysia's Petronas and Venezuela's PDVSA. The new NNPC will also pay government the same royalties and taxes as any other oil company.
Joint ventures: To assist the new NNPC in the financing of new projects, the Bill will create a new joint venture structure, called incorporated joint ventures. The NNPC and foreign companies will join into a single company of which they will be shareholders.
Reaction to the PIB
"The main laws [that currently govern the industry] are the Petroleum Act, the Petroleum Profits Tax Act and the Nigerian National Petroleum Corporation Act. These, and practically every other law regulating the industry, needed to be holistically updated to reflect the changing dynamics of the oil and gas industry worldwide,” says Dr Rilwanu Lukman, minister of petroleum resources.
The government is expecting the new law to boost investment into the oil and gas sector, while some of the existing oil companies feel it will drive away investment because the increase in taxes will make operations unprofitable.
Newswatch quoted Basil Omiyi, the country chair for the Shell companies in Nigeria saying "the aggregate impact of multiple taxes, higher royalty rates and loss of incentive under PIB will have a significant negative impact on gas and deep water projects. The majority of gas and deep water projects will not be viable under the PIB as currently proposed".
Commenting in his personal capacity, Zaid Kolawole, Ventures Coordinator with Total Upstream Nigeria says many oil companies "believe that the new tax regime will decrease by half the capital investment in the sector in the next 10 years and new oil and gas production will be reduced by nearly 50%, with a high proportion of new projects becoming uneconomic."
He adds that "government will have to strike a balance between taking a significantly higher stake from industry operations and ensuring the sustainable growth of the industry."
In a memorandum to the House of Representatives public hearing on the Bill, the Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN) also expressed concern that the government would continue to interfere in the affairs of NNPC; and about the lack of provision in the Bill for protecting the interests of host communities in the form royalties or equity ownership, amongst other issues.
Despite these complaints, government is adamant that once certain parts of the Bill have been amended by the National Assembly, the majority of stakeholders will be happy.
Deregulation of downstream sector
Running alongside the PIB is the proposed deregulation of the downstream sector of the petroleum industry. The deregulation was supposed to start early in November but due to opposition from various quarters, this has now been put on hold to a later date.
The deregulation essentially means that the pump prices of petrol will no longer be subsidised by government. Government's arguments for deregulation is that it cannot sustain the current subsidy; it wants to reduce the level of distortions or corruption involved in oil transactions; and because it believes deregulation will lead to better quality of services and constant availability of product. It also hopes deregulation will encourage investment in refining.
The Nigeria Labour Congress (NLC) argues the large subsidies government are currently paying is due to mismanagement by government in the first place. In a statement it mentions the fact that the federal government has contracted companies in Spain, which is not an oil producing country, to refine petroleum products for the Nigerian market. Given the fact that Spain is not an oil producing country, it argues, the costs of refining there are higher than what ca. be obtained in countries that have domesticated technology for refining oil because they produce crude oil. These higher costs are passed on to Nigerians as 'subsidy'.
"It is our view that the deregulation of the downstream sector of the oil industry will only spell doom to the economy and bring untold hardship to the Nigerian people," says Abdulwahed Omar, president of NLC.
"If deregulation is allowed, the country will return to the era of arbitrary high prices, profiteering, adulteration of commodity, artificial queues [at filling stations] as well as endless importation of refined petroleum products," he added.
Wale Tinubu, CEO of Nigeria's largest fuel importer, Oando, told the Financial Times that "today, the Nigerian [fuel] price is 65% of import parity, so the deregulation in Nigeria will only mean an increase in price, which is why it’s been a difficult political decision."
"I think logic will prevail in the long term, that $4 billion [subsidy] in 2007, when the government spent less than $3 billion on infrastructure, is a wrong call," he said.
Tinubu also mentioned the fact that the subsidised fuel currently simply get smuggled across Nigeria's borders and sold for a profit. "The frustration is really going to become even worse, because what the country really needs is that $3-4 billion which is usually spent on the subsidy, which ends up in leakages or smuggled across the borders, where they’re selling the product at half the price of the international pricing, which leads to inefficiency in the economy, serious inefficiencies," he told the newspaper.
If the PIB gets passed into law and the deregulation of the downstream sector go ahead, government will need to ensure that these new laws and measures are not just simply new wine in old wineskins and that it truly has a positive impact on the country's oil and gas industry.
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