Re­view of the Petroleum In­dus­try Gov­er­nance Bill

Financial Nigeria Magazine - - Contents -

For over five decades, the petroleum in­dus­try in Nige­ria has re­mained the bedrock of the Nige­rian econ­omy (it ac­counts for 90% of for­eign ex­change earn­ings and about 80% of re­cur­rent and cap­i­tal ex­pen­di­tures). In spite of this, there have been calls from stake­hold­ers for the re­form of the in­dus­try.

Af­ter the re­turn to civil­ian rule in 1999, the jour­ney to re­form the oil and gas sec­tor be­gan. The var­i­ous ef­forts cul­mi­nated in the draft­ing of the Petroleum In­dus­try Bill (PIB). The PIB sought to com­pletely over­haul the petroleum sec­tor through the en­force­ment of a sin­gle all-en­com­pass­ing leg­is­la­tion, fo­cused on max­i­miz­ing eco­nomic ben­e­fit to the na­tion through ef­fi­cient man­age­ment of re­sources. The pro­posed leg­is­la­tion was de­signed to en­hance so­cial and eco­nomic de­vel­op­ment whilst meet­ing the na­tion's en­ergy needs at a com­pet­i­tive cost and in an en­vi­ron­men­tally ac­cept­able man­ner.

The PIB has been fraught with un­prece­dented de­lays. As a re­sult, the bill's in­tended goals of tack­ling is­sues of over­reg­u­la­tion and the dom­i­nant pres­ence of the gov­ern­ment in the in­dus­try have not been re­alised. The cur­rent ad­min­is­tra­tion of Pres­i­dent Muham­madu Buhari has, there­fore, adopted the ap­proach of un­bundling the leg­is­la­tion into the fol­low­ing bite-sized bills to en­able timely en­gage­ment, re­view and pas­sage by the eight Na­tional As­sem­bly:

(I) Petroleum In­dus­try (Gov­er­nance &

In­sti­tu­tional Re­forms) Bill;

(ii) Petroleum In­dus­try (Down­stream Petroleum Ad­min­is­tra­tion Re­forms) Bill; (iii) Petroleum In­dus­try (Up­stream Petroleum Ad­min­is­tra­tion Re­forms) Bill;

(iv) Petroleum In­dus­try (Fis­cal Frame­work

& Re­forms) Bill;

(v) Petroleum In­dus­try (Rev­enue

Man­age­ment Re­forms) Bill.

The bills are be­ing con­sid­ered as a mat­ter of ur­gency, with the Gov­er­nance and In­sti­tu­tional Re­forms Bill be­ing given the high­est pri­or­ity on ac­count of the need to first tackle the more foun­da­tional in­dus­try is­sues such as cor­rup­tion, func­tional over­laps and in­sti­tu­tional in­ef­fi­cien­cies. Ex­actly 17 years af­ter the com­mence­ment of the in­dus­try re­forms, the Petroleum In­dus­try Gov­er­nance Bill 2017 (the Bill), was passed by the Nige­rian Sen­ate on the 26th of May, 2017, leav­ing high ex­pec­ta­tion for the cor­re­spond­ing pas­sage by the lower house (the House of Rep­re­sen­ta­tives) and set­ting

the stage for the much-an­tic­i­pated in­dus­try over­haul.

This ar­ti­cle re­views and high­lights the key leg­isla­tive changes in the Bill in light of the petroleum sec­tor re­form ob­jec­tives of the cur­rent ad­min­is­tra­tion. It also pro­vides rec­om­men­da­tions that may fur­ther as­sist the gov­ern­ment in achiev­ing the ob­jec­tives of the Bill.

High­lights of the PIGB

The key ob­jec­tives of the Bill in­clude pro­mot­ing trans­par­ent ad­min­is­tra­tion of petroleum re­sources; en­abling a sin­gle, in­de­pen­dent in­dus­try reg­u­la­tor; cre­at­ing a con­ducive en­vi­ron­ment for petroleum op­er­a­tions; un­bundling the NNPC into ef­fi­cient com­mer­cial en­ti­ties; stream­lin­ing the over­reach­ing pow­ers of the min­is­ter; and re­defin­ing and de­lin­eat­ing the roles and re­spon­si­bil­i­ties of in­sti­tu­tions across the value chain.

We have con­sid­ered be­low the sub­stance of the re­form mea­sures pro­posed in the Bill, and the po­ten­tial is­sues that may arise from their im­ple­men­ta­tion:

1. In­tro­duc­tion of a New Reg­u­la­tor

The Bill es­tab­lishes the Nige­ria Petroleum Reg­u­la­tory Com­mis­sion (the Com­mis­sion). The Com­mis­sion is to be­come the sole reg­u­la­tor of the petroleum in­dus­try. It as­sumes the in­ter­ests, rights, obli­ga­tions, and li­a­bil­i­ties of the De­part­ment of Petroleum Re­sources (DPR) and the Petroleum Prod­ucts Pric­ing Reg­u­la­tory Agency (PPPRA) (Sec­tion 4 PIGB 2017), and will be prin­ci­pally re­spon­si­ble for li­cens­ing, mon­i­tor­ing, su­per­vi­sion of petroleum op­er­a­tions, in­clud­ing en­force­ment of laws, reg­u­la­tions and stan­dards within the sec­tor.

It is ex­pected that this move would elim­i­nate ad­min­is­tra­tive over­laps, bu­reau­cratic bot­tle­necks and un­due po­lit­i­cal in­flu­ence in the li­cens­ing and reg­u­la­tory pro­cesses. It must be noted that the Bill at­tempts to limit the right to in­sti­tute pro­ceed­ings against the Com­mis­sion to twelve months (Sec­tion 31 of the PIGB 2017). This im­plies that any ac­tion against the Com­mis­sion be­comes statute barred af­ter 12 months.

The Com­mis­sion will also have a Spe­cial In­ves­ti­ga­tions Unit (SIU), which will be re­spon­si­ble for keep­ing sur­veil­lance on oil and gas in­stal­la­tions. It will, in col­lab­o­ra­tion with the Nige­rian Po­lice, be per­mit­ted to ar­rest per­sons who carry out il­le­gal petroleum op­er­a­tions (Sec­tion 34 PIGB 2017). With the cur­rent surge in pipe­line van­dal­ism and prod­uct theft, the col­lab­o­ra­tion of the SIU and the Nige­rian po­lice will pro­vide the ap­po­site mea­sure to de­ter il­le­gal petroleum ac­tiv­i­ties. This will al­lay the ap­pre­hen­sions of stake­hold­ers and po­ten­tial in­vestors in the in­dus­try.

2. Cur­tail­ing the Pow­ers of the Min­is­ter of

Petroleum Re­sources

The cur­rent reg­u­la­tory regime con­cen­trates enor­mous dis­cre­tionary pow­ers in the Min­is­ter of Petroleum Re­sources (the Min­is­ter), in­clud­ing the pow­ers to grant, amend, re­voke and ex­tend Oil Prospect­ing Li­cences and Oil Min­ing Leases. The Min­is­ter, who seats on the Boards of NNPC and DPR, wears both the hats of the Prin­ci­pal Reg­u­la­tor and the Prin­ci­pal In­dus­try Par­tic­i­pant (hold­ing Gov­ern­ment's in­ter­est in the JVs and PSCs). In re­sponse to calls from stake­hold­ers to cur­tail the ex­ces­sive pow­ers wielded by the Min­is­ter, the Bill lim­its the scope of pow­ers of the Min­is­ter to pol­icy for­mu­la­tion and mon­i­tor­ing, (Sec­tion 2 (1) PIGB 2017) whilst trans­fer­ring the pow­ers and other func­tions of the Min­is­ter un­der the Petroleum Act and the Oil Pipe­lines Act to the Com­mis­sion. This im­plies that there will be less po­lit­i­cal in­flu­ence in the is­suance of li­cences and the Min­is­ter will no longer ex­er­cise reg­u­la­tory over­sight within the sec­tor.

Notwithstanding these lim­i­ta­tions, it is in­ter­est­ing to note that the Min­is­ter has been granted a right of pre-emp­tion over petroleum and petroleum prod­ucts within the coun­try ir­re­spec­tive of own­er­ship or sub­sist­ing ben­e­fi­cial in­ter­ests when­ever a state of emer­gency is de­clared (Sec­tion 6(1) PIGB 2017). Though po­tent and only ex­er­cis­able where a state of emer­gency is de­clared – many stake­hold­ers may view this as a sub­tle ex­pro­pri­a­tion threat.

3. Un­bundling of NNPC into Three

Com­mer­cial En­ti­ties

The Bill sets out to un­bun­dle the NNPC into smaller and more ef­fi­cient com­mer­cial en­ti­ties. The Bill, when signed into law, will birth the fol­low­ing com­mer­cial en­ti­ties: I. Nige­ria Petroleum As­set Man­age­ment Com­pany (NPAMC): The NPAMC will act as an As­set Man­ager to the gov­ern­ment; hold­ing and man­ag­ing the Pro­duc­tion Shar­ing Con­tracts and Back-in Right as­sets cur­rently held by NNPC (Sec­tion 37(2)(a) PIGB 2017). It will be a lim­ited li­a­bil­ity com­pany to be wholly owned by gov­ern­ment as fol­lows: Min­istry of Petroleum In­cor­po­rated (40%), Min­istry of Fi­nance In­cor­po­rated (40%), and Bureau of Public En­ter­prises (20%) (Sec­tion 38(1) PIGB 2017). To fos­ter trans­parency and ac­count­abil­ity, the NPAMC is re­quired to pub­lish its an­nual re­ports and ac­counts on its web­site and at least three na­tional news­pa­pers. The com­pany will be gov­erned by the Code of Cor­po­rate Gov­er­nance of the Se­cu­ri­ties and Ex­change Com­mis­sion (SEC) (Sec­tion 55 (1) PIGB 2017). II. Nige­ria Petroleum Com­pany (NPC): The NPC will re­main as the Na­tional Oil Cor­po­ra­tion, which will hold and man­age all petroleum as­sets of the Fed­eral Gov­ern­ment ex­clud­ing those trans­ferred to the NPAMC. It is to be run as a pri­vate com­pany reg­is­tered un­der the Com­pa­nies and Al­lied Mat­ters Act and gov­erned by its Ar­ti­cles of As­so­ci­a­tion (in other words it is ex­pected to run as an in­de­pen­dent busi­ness ve­hi­cle). Un­like the cur­rent prac­tice where the gov­ern­ment's share of crude sale pro­ceeds is paid into the fed­er­a­tion ac­count and ap­pro­pri­ated be­tween the Fed­eral and State Gov­ern­ment with­out any re­serves to meet the cash call obli­ga­tions of the Fed­eral Gov­ern­ment un­der its JVs, the NPC is, by the law, per­mit­ted to re­tain its rev­enue and uti­lize same to meet its op­er­at­ing costs and ex­ter­nal li­a­bil­i­ties such as cash calls. (The Na­tional Petroleum Com­pany will only pay div­i­dends to the gov­ern­ment out of its prof­its.) III. Nige­ria Petroleum Li­a­bil­ity Man­age­ment Com­pany: The NPLMC will serve as a hold­ing ve­hi­cle which will as­sume the li­a­bil­i­ties of the NNPC and the pen­sions li­a­bil­i­ties of the DPR (There is cur­rently an es­ti­mated $5-10 bil­lion fund­ing short­fall per an­num, due to gov­ern­ment's in­abil­ity to fully fund its JV in­vest­ment cash calls). Upon the dis­charge of these li­a­bil­i­ties, the NPLMC is ex­pected to be wound up. It ap­pears from all in­di­ca­tion that the NPLMC will be funded by its share­hold­ers (NPRC, NPC and NPAMC) who will hold shares in NPLMC in pro­por­tion to their re­spec­tive li­a­bil­i­ties. This is un­like the power sec­tor's Nige­ria Elec­tric­ity Li­a­bil­ity Man­age­ment Com­pany, which is funded from bud­getary al­lo­ca­tions from the

Fed­eral Gov­ern­ment. The NPLMC will al­low the com­mer­cial en­ti­ties to achieve fi­nan­cial sta­bil­ity by ring-fenc­ing them from the cur­rent li­a­bil­i­ties of the NNPC. This gives guar­an­tee against value ero­sion to po­ten­tial in­vestors in the NPC.

4. Re­peal of the Petroleum Equal­iza­tion Fund (Man­age­ment) Act and Es­tab­lish­ment of the Petroleum Equal­iza­tion Fund (PEF)

The Bill re­peals the Petroleum Equal­iza­tion Fund (Man­age­ment) Act but re­tains the PEF, which will be man­aged and ad­min­is­tered by its govern­ing board. The Fund will be cap­i­tal­ized from the 5% fuel levy on fuel sold in the fed­er­a­tion and any net sur­plus rev­enue re­cov­ered from petroleum mar­ket­ing com­pa­nies. The Fund is to be uti­lized solely for fi­nanc­ing in­fras­truc­tural de­vel­op­ment within the sec­tor as well as to re­im­burse any losses in­curred by oil mar­ket­ing com­pa­nies on ac­count of the sale of petroleum prod­ucts at the fixed uni­form price.

Even though the Bill is silent on the na­ture of in­fra­struc­ture de­vel­op­ments to be funded by the PEF, we ex­pect that it will be chan­neled to­wards the de­vel­op­ment of oil pipe­lines, re­fur­bish­ment of re­finer­ies, and such other in­fra­struc­ture that may bol­ster the pro­duc­tion ca­pac­ity of the in­dus­try. The uti­liza­tion of the PEF for re­im­burse­ment of losses to oil mar­ket­ing com­pa­nies ap­pears to have re-in­tro­duced petroleum sub­sidy, against the pop­u­lar clam­our for full dereg­u­la­tion of the sec­tor.

5. Di­vest­ment of Shares in the Nige­rian

Petroleum Com­pany to the Public

The Bill makes pro­vi­sions for the na­tion to fol­low the prece­dents of other oil pro­duc­ing coun­tries, such as Rus­sia (which re­cently sold a 19.5% stake in its na­tional oil com­pany Ros­neft) and Saudi Ara­bia (which is con­sid­er­ing di­vest­ing a mi­nor stake in Saudi Aramco), by man­dat­ing a phased di­vest­ment of 40% stake in the NPC to the public to en­able pri­vate sec­tor par­tic­i­pa­tion, and en­hance in­sti­tu­tional ef­fi­ciency.

The of­fer of 40% of the shares of the NPC to the public trumps sim­i­lar di­vest­ment ef­forts of other Na­tional Oil Cor­po­ra­tions by a huge mar­gin (Saudi Ara­bia in­tends to di­vest only 5% stake in Saudi Aramco and only 23% of the Nor­we­gian Sta­toil was di­vested to the public).

To pave way for the NPC to be run as a pub­licly-listed com­mer­cial en­tity de­void of bu­reau­cra­cies and un­due gov­ern­ment in­ter­est, it has been ex­empted from com­ply­ing with the pro­vi­sions of the Fis­cal Re­spon­si­bil­ity Act 2007 (FRA) and the Public Pro­cure­ment Act 2007 (PPA). It will, how­ever, be re­quired to com­ply with the code of cor­po­rate gov­er­nance of SEC and will be­come an en­tity reg­u­lated by SEC fol­low­ing the pro­posed di­vest­ments, which we ex­pect will be con­ducted by way of a public of­fer­ing of its shares.

6. In­creased Stake­holder Par­tic­i­pa­tion in

Pro­mul­ga­tion of Reg­u­la­tions

The Bill, in a bid to fore­stall the en­force­ment and im­ple­men­ta­tion of un­pop­u­lar reg­u­la­tions and to fet­ter the pow­ers of the Com­mis­sion, pro­vides that Reg­u­la­tions pro­mul­gated by the Com­mis­sion pursuant to this Bill shall be sub­ject to public hear­ings. Any reg­u­la­tion made with­out the req­ui­site public hear­ing will only be valid for six (6) months. This al­lows for more ac­tive en­gage­ment with stake­hold­ers in the pro­mul­ga­tion of reg­u­la­tions (Page 59 https://www.oecd.org/gov/reg­u­la­to­ry­pol­icy/1910833.pdf). It is ex­pected that these broad en­gage­ments will fos­ter co­op­er­a­tion be­tween the reg­u­la­tors and in­dus­try par­tic­i­pants, and also in­crease com­pli­ance.

Rec­om­men­da­tions

1. Health, Safety and En­vi­ron­ment: Fol­low­ing the pas­sage of the Bill by the Sen­ate, there has been a ma­jor out­cry about the in­ad­ver­tent omis­sion of health, safety and en­vi­ron­men­tal pro­vi­sions, which are crit­i­cal is­sues plagu­ing the petroleum sec­tor. Hav­ing given over­rid­ing reg­u­la­tory pow­ers to the Com­mis­sion, it is un­cer­tain whether this does not fet­ter the pow­ers of the Min­istry of En­vi­ron­ment to en­sure en­vi­ron­men­tal and safety com­pli­ance in the op­er­a­tions of the in­dus­try par­tic­i­pants. Given the po­ten­tial im­pact of pol­lu­tion and other en­vi­ron­men­tal vi­o­la­tions in the oil pro­duc­ing re­gions, it is rec­om­mended that the House of Rep­re­sen­ta­tives take steps to re­in­force the health, safety and en­vi­ron­ment pro­vi­sions in the bill be­fore it is fi­nally signed into law.

2. The Petroleum Equal­iza­tion Fund: The Bill has rein­tro­duced the Petroleum Equal­iza­tion Fund with very lit­tle di­rec­tion on how this fund is to be man­aged and ad­min­is­tered by its govern­ing Board. We rec­om­mend that this fund be ad­min­is­tered by a pri­vate sec­tor, SEC-li­cenced fund man­ager and that ap­pro­pri­ate anti-cor­rup­tion safe­guards be in­tro­duced with re­spect to its man­age­ment and ad­min­is­tra­tion. 3. Pol­icy For­mu­la­tion: Po­ten­tial con­flicts could arise on ac­count of the Min­is­ter's power to for­mu­late poli­cies, which the Com­mis­sion has the dis­cre­tion not to im­ple­ment if in its opin­ion such poli­cies con­flict with the Bill (Sec­tion 15 PIGB 2017). This sets the Min­is­ter and the Com­mis­sion on a path of con­flict be­fore the re­forms have even taken off. We rec­om­mend that the roles and re­spon­si­bil­i­ties of the Com­mis­sion with

re­spect to pol­icy for­mu­la­tion and en­force­ment be re­de­fined in a way that is more col­lab­o­ra­tive.

4. Lim­i­ta­tion of Right to In­sti­tute Pro­ceed­ings: The at­tempt by the PIGB to limit the pe­riod within which an ac­tion may be brought against the Com­mis­sion and the PEF to 12 months could be viewed as coun­ter­in­tu­itive and med­dle­some, es­pe­cially given the wide pow­ers of the Com­mis­sion and the func­tions of the PEF. We, there­fore, rec­om­mend that ap­pro­pri­ate amend­ment be made to this pro­vi­sion to al­low for ad­e­quate checks on the pow­ers of the Com­mis­sion and the Govern­ing Board of the PEF through un­hin­dered re­sort to the ju­di­cial sys­tem. 5. Down­stream Reg­u­la­tion: The func­tions of the Com­mis­sion seem quite broad and ex­ten­sive, hav­ing to reg­u­late both seg­ments of the mar­ket each with its own com­plex­i­ties and wan­ton de­mands. It may, there­fore, be a more ef­fi­cient ap­proach to take a cue from neigh­bour­ing Ghana, which es­tab­lished sep­a­rate en­ti­ties to reg­u­late its up­stream and down­stream sec­tors.

Con­clu­sion

We ap­plaud the ef­forts of the cur­rent ad­min­is­tra­tion and the Na­tional As­sem­bly in tack­ling the is­sues of lack of ac­count­abil­ity and the over­bear­ing pow­ers of the Min­is­ter, which were iden­ti­fied as in­hibitors of growth in the petroleum in­dus­try. It is our ex­pec­ta­tion, how­ever, that the House of Rep­re­sen­ta­tives will take de­ci­sive steps to ad­dress some of the other im­mi­nent con­cerns of stake­hold­ers be­fore pass­ing the Bill in or­der to re­store the con­fi­dence of in­vestors, in­dus­try stake­hold­ers and the na­tion at large in the on­go­ing re­form ef­forts. De­tail Com­mer­cial Solic­i­tors is dis­tinct as Nige­ria's first com­mer­cial solic­i­tor firm to spe­cial­ize ex­clu­sively in non-court­room prac­tice. Based in La­gos, Nige­ria's busi­ness cap­i­tal, DE­TAIL is to­tally com­mit­ted to its clients' busi­ness ob­jec­tives and re­puted for deal­ing with the minu­tiae. Email: info@de­tail­so­lic­i­tors.com

Nige­rian Na­tional Petroleum Cor­po­ra­tion head of­fice, Abuja

Nige­ria's Min­is­ter of State for Petroleum Re­sources, Em­manuel Ibe Kachikwu

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