Nigeria’s petroleum future in post-PIB

on   /   in Sweet Crude 5:00 pm   /   Comments

Last year, the Minister of Petroleum Resources, Mrs. Diezani Alison-Madueke delivered a paper on the future of Nigeria’s petroleum industry in the next five years. Below is an extract from the presentation:

… As you are aware, the Government has embarked on reforms within the petroleum sector in order to make the industry attractive to both local and international investors. Some of these reforms include; the National Content Act, the Amnesty Programme and an omnibus legislation called the Petroleum Industry Bill (PIB).

The PIB currently undergoing legislative processes at the National Assembly establishes the legal and regulatory framework, institutions and regulatory authorities for the Nigerian petroleum industry. It also stipulates guidelines for operations in the upstream and downstream sectors.

The objectives of the PIB are therefore as follows:

•To enhance exploration and exploitation of petroleum resources

•To significantly increase domestic gas supplies especially for power and industry

•To create competitive business environment for the exploitation of oil and gas

•To establish fiscal framework that is flexible, stable and competitively attractive

•To create commercially viable national oil company

•To create strong and effective regulatory institutions

•To promote Nigerian content and

•To promote and protect health safety and environment

The proposed reforms in the PIB can broadly be divided into two; non-fiscal and fiscal reforms.  Non-fiscal reforms relate to institutional and policy re-orientation.

Institutional & Policy Reforms

At the heart of the PIB is the separation between policy, regulation and monitoring and commercial operations. Based on this model idea, the PIB seeks to build institutions around these core principles. Under this, the Ministry of Petroleum Resources has responsibility for the evolution of policy in the oil and gas sector. Under the Ministry are the Regulatory Institutions charged with regulation and monitoring and thirdly, the National Oil Company with responsibility for commercial operations.

The building blocks of these institutional and policy reforms are as follows:

•      The Unbundling of NNPC as presently constituted through the creation of a National Oil Company that promotes indigenous operational capacity development

•      The Creation of an Asset Management Limited Liability Company to manage the JV assets on behalf of the federation

•      The excision of Nigerian Gas Company (NGC) from NNPC as a separate partially privatised entity to cater for domestic gas marketing and gas infrastructure development.  The intention here is to accelerate national gas infrastructure development for effective gas supply to power and industrial sectors of the economy.  This will be realised through private equity participation of up to 49%.

The proposed PIB will change the role of NNPC. Currently all NNPC’s revenues arising from the management of federal government assets flow directly to the Federation Account and its funding for the JVs is then provided by the government. This role will now be taken over by the Asset Management Company which will be capitalized with a two year loan in place of the annual cash calls and would later be expected to be self-financing through the retention of its earnings. All royalty and taxes would however be paid to the government as and when due.

The new National Oil Company will broadly consist of the PSC assets which shall be used to capitalize the National Oil Company, the National Petroleum Development Company (NPDC), the current three domestic refineries (WRPC, KRPC and PHRC) and the Pipelines and Products Marketing Company (PPMC).

The new National Oil Company will also be partially privatised. It is expected that up to 30% equity shall be divested to provide private participation as done in other NOCs such as Petrobras, Petronas etc. Government expects the partial privatization to provide a culture change to a fully accountable and commercial company.

Along with the unbundling of NNPC, two new regulatory institutions; upstream petroleum and downstream petroleum inspectorates are to be created to promote effective regulation and monitoring in line with operational best practices. These regulatory entities are expected to perform both commercial and technical regulation in the upstream and downstream petroleum sectors respectively.

Nigeria’s quest to grow its reserves will be engendered in the proposed new PIB through a robust acreage management system to be superintended by the Upstream Petroleum Inspectorate. Similarly, the PIB proposes the establishment of a Technical Bureau in the Ministry of Petroleum Resources charged with the responsibility for frontier exploration services.

Over the years, Nigeria has underexploited its bitumen resources. The Frontier Exploration Services will provide necessary coordination and preliminary work for the Upstream Petroleum Inspectorate, which will through its acreage management system offer opportunities for investors. In order to underpin this, the PIB incorporates a fiscal regime for these frontier areas and specifically incorporates bitumen under the upstream fiscal framework.

Additionally, a Petroleum Host Community Fund is proposed in the PIB. The Fund is a mechanism to formally recognize host communities as important stakeholders by assigning oil and gas infrastructure security to the Host Communities and minimizing environmental degradation due to vandalism and crude oil theft. As a freedom to operate tool, it incorporates penalties to host communities in the event of vandalism in their localities. The proposed legislation includes modalities for using regulations to increase flexibility in managing host community issues.

Fiscal Reforms

The PIB represents the largest overhaul of the government petroleum revenue system in the last four decades. This overhaul has four central objectives:To simplify the collection of government revenues,

• To cream off windfall profits in case of high oil prices

• To collect more revenues from large profitable fields in the deep offshore waters, and

• To create Nigerian employment and business opportunities, by encouraging investment in small oil and gas fields.

Simplification of the collection of government revenues is accomplished through extensive revision of allowable deductions for the purposes of tax. Only direct costs wholly and necessarily incurred in petroleum operations are eligible for deductions.

Given the recent upward oil price movements, the PIB introduces price based royalty for crude prices beyond $70/bbl and gas prices beyond $7/mmbtu.

Thirdly all cost based incentives have now been replaced with production based incentives because government revenues are impacted by oil production and efficient cost management. This therefore imposes strict discipline on cost escalations and de-incentivizes gold plating. The proposed new fiscal regime also seeks to harmonize oil and gas fiscal systems. Gas fiscal terms are fully integrated into oil fiscal systems for the first time in Nigeria.

In line with our National Content objectives and the provision of employment opportunities for Nigerians, there is a distinct preference for Nigerian goods and services through a cap on deductions on foreign based capital expenditure, thus creating incentives for domestication of capital spending.

Of course, with fiscal changes there may be concerns by investors as to project profitability and long term sustainability of production in Nigeria. From our models of profitability, the proposed fiscal terms in the case of onshore/offshore JV projects delivers comparable value to investors to the current system, but additionally improves the economics of small fields significantly through generous production allowances and smaller royalty rates.

With respect to the deep offshore production sharing contracts (PSCs) the 1993 fiscal terms were designed for oil prices of $20 per barrel and below. Section 16 of the Deep Offshore Act prescribes that changes be made to this fiscal regime to restore benefits to the government commensurate with the increased oil prices once oil prices have exceeded $20 per barrel in real terms or 15 years after the commencement of the PSC (2008).

I wish to state that Nigeria is not alone in “tightening” of fiscal terms during successive bid rounds or ad-hoc awards. The goal has always been to achieve a fair balance between government and contractor share.  This is to ensure that Nigeria remains competitive when compared to other countries with similar petroleum resource base.

Nigeria remains one of the most attractive countries in terms of fiscal regimes (Government Take). As an indicator of competitiveness, the latest Angola rounds shows Government Take (GT) at the level of Nigeria’s 2005 PSC terms which is less favorable to contractors than the current terms proposed in PIB 2012. Interestingly, these terms will also apply to the National Oil Company as it is not intended to be discriminatory.

Conclusion

Based on the foregoing, Nigeria’s strategy is therefore to address the challenges highlighted above and transform the oil & gas industry in line with the proposed PIB.  This will ensure the realisation of the national objectives of four million barrels per day oil production and 40 billion barrels crude oil reserves by in the next seven years.

Extract from: “Nigeria’s Oil & Gas Strategy in the Next Five Years”

By Mrs Diezani Alison-Madueke Minister of Petroleum Resource, at the Nigerian Oil & Gas Conference (NOG13)

    Print       Email