For over half a century, ever since oil was discovered, the growth of the sector has been an integral part of Nigeria’s economy. Hence the debate about the ambitious petroleum industry bill (PIB).
Oil companies, while recognising government’s prerogative to enact laws, are uncomfortable with fiscal and non-fiscal aspects of the bill, as is. Sotto voce, commentators are tenuously mulling the question: isn’t Nigeria better off without the new PIB?
Take the non-fiscal aspect. It does nothing to boost investor certainty and confidence. The bill, as currently understood, affects bankability. Stringent license relinquishment, renewal and revocation provisions along with broad discretionary powers of agencies and Minister were highlighted.
Unaddressed, such discomforts will slow the pace of development and new investment in the sector. Oil industry professionals are concerned about the transition process eg, staffing, training, when operations will commence, will existing contracts be respected etc. So long as these remain unclear, the confidence of investors, local and international, remains shaky.
Reform of the oil and gas sector is being driven by fiscally strained upstream and an import-dependent downstream sector dogged by stealing, smuggling and subsidy scandals.
Nigeria’s JV terms, pre-PIB, are already one of the highest in the world. The governments of Oman and Libya take the most revenue from oil. Nigeria’s percentage of revenues is estimated to be 94 percent.
Post-PIB, if no changes are made to the bill, it will increase to 96 percent. But JV oil production has been declining in recent years; government finds it difficult to meet its cash calls.
More income is line with government’s objective to augment its oil income, especially from deepwater profit sharing contracts (PSC). Oil companies counter that, this intention, however valid, makes further investment in the industry unattractive.
Opposing views about what government earns from JVs and PSCs is a major contention. But analysts corroborate the IOCs: that Nigeria’s JV concession regime is among the strictest in the world. They also assert that the bill will worsen matters, making Nigeria off limits.
Comparison of global deepwater regimes show that, as proposed under the PIB, Nigeria’s deepwater terms do not give the country a competitive edge. Rather Nigeria’s royalty rate, as proposed in the bill is over 25 percent, from 0 to 8 percent. This is more compared to 0, 10, 5, 0 and 10 percent in Angola, Ghana, Indonesia and Malaysia respectively.
Nigeria’s tax rate, though, stays the same. At 50 percent it is at par with that of Angola and Malaysia; Brazil’s tax rate is 34 percent, the lowest among the six countries compared.
However, the government reasons that the steep rise in royalties, due to a change in the yardstick for payment, makes for a fair balance between small and big operators, irrespective of location. The current rate is based on location ie, onshore/swamp, shallow offshore and deep offshore. The new royalty rate is predicated on output and value (it triggers off when oil price is more than $50 a barrel). Those knowledgeable about the industry say that the terms do not match assets and business climate and that a little less than three-quarter of new production is viable.
What’s more, the excessively high royalties and burdensome taxes – eg, the tax on gas is likely to increase from 30 percent to 80 percent – without allowances for, say, companies in onshore/shallow water and marginal fields will deteriorate the investment climate.
In addition, investors are uncomfortable with the bill’s non-fiscal provisions eg, stability and contract sanctity, unresolved JV issues, they question making confidential contracts and proprietary data public and the exercise of pre-emption rights.
They fear that the fiscal balance between royalties, taxes and enablers is lost. Government, they argue, cannot cherry pick; one or two enablers are insufficient. This is because an attractive investment is established by the combined impact of fiscal and non-fiscal enablers.
Oil and gas revenues are important for the Nigerian economy. Success in the power sector requires a gas industry favourable to both investors and government. But government’s challenge is to dispense itself of its monetary obligations like JV cash calls, and increase what comes to the federal account.
Looked through geopolitical lens, the government’s request are not in step with time. Digging its feet will discourage funds from rejuvenating a deteriorating sector and will not help it attain its aspiration to grow crude oil capacity.
Curiously, the presentation made to the president on submission of the present bill noted both geopolitics and economics of oil. It stated that the immediate outlook was not promising. Oil prices are declining, threatening investments and income; both will erode the country’s fiscal conditions.
An ample amount of hydrocarbon is yet to be found, within and outside Nigeria, from Liberia to Angola, West Africa’s oil story is considered a regional success. Even more, the 21st century is being touted as the century of gas.
Competition from countries with new oil and gas discoveries coupled with the concern of industry operators may limit the sector’s impact on Nigeria’s Vision 2020, Nigeria aspires to produce 4 million barrels of oil a day, wants to have 40 billion barrels in reserve, deliver the power road map and gas master plan and secure a robust, long term revenue stream.
Aspirations aside, the reality is that the natural gas bonanza in the West will change consumption, commerce and competition. Is this is the time for us to prove hard to get? To enhance the link between our hydrocarbon industry and the economy we need to develop our natural gas. Without a developed gas chain, as envisaged in the Gas Master Plan, dreams of increased domestic consumption and gas-powered turbines generating uninterrupted electricity will come to naught.
Marrying feasible terms with incentives is the balance government, its advisers and the oil industry operators have to strike. Otherwise the gas sector will not be energised with new investments, and jobs. Using other countries as proxies, industry experts paint a gloomy picture: a 60 percent and 45 percent decline in investment and employment, respectively, is estimated.
“The bill is long overdue and generally most welcome. However, it’s important for most, if not all, concerned stakeholders to okay it as well.
Hopefully the allegations regarding its having been watered down are not true or otherwise, not as significant an impact on its expected benefits”, says Victor Ndukauba of Afrinvest.