Nigeria’s proposed wide ranging oil and gas industry reform bill, the Petroleum Industry Bill (“PIB”), has failed to secure the approval of the National Assembly since 2008. The bill which seeks to reform government institutions, change the fiscal framework,and institute domestic gas reforms amongst other objectives has stalled at the National Assembly due to a wide range of disputes over its terms and mechanisms. According to Austin Avuru, the Managing Director of Seplat, one of Nigeria’s leading indigenous oil and gas companies, the delay in passing the PIB has contributed considerably to reduced investments into the sector.
The fall in investments will have a long term negative impact on Nigeria’s oil and gas industry with a reduction in government revenues, loss of jobs and the damaging effects associated with a failure to replace reserves. In spite of these apparent consequences, the new government is yet to enunciate its proposals with respect to the PIB, its passage and proposed timelines. Indeed, the Senate Majority Leader, Ali Ndume has stated that the passage of the PIB is not currently a priority of this Senate. In any case, we believe that the new government will seek to make changes to certain aspects of the bill including fiscal & institutional reforms.
In recognition of the expected delays to the passage of the PIB, the newly appointed Group Managing Director of the Nigerian National Petroleum Corporation (“NNPC”) recently announced the intentions of the NNPC to carry out key reforms prior to its passage.
In this paper we highlight six key areas in which the government and the NNPC may seek to introduce reforms without the need for the passage of the PIB or indeed any additional legislative reforms.
Our recommendations derive from the inherent administrative and executive powers of the President under the Nigerian constitution and the wide ranging powers of the Minister to issue regulations “providing for such other matters as in his opinion may be necessary or desirable in order to give proper effect to this Act” under the Petroleum Act. In addition, existing legislation already include provisions which have either been ignored or have only been partially complied with by the relevant parties.
This article is divided into three parts. This first paper examines NNPC restructuring, and resolving JV cash call issues.
1. NNPC Internal Restructuring
The internal reforms of NNPC have already started with the appointment of a new Group Managing Director and a new executive team, the cancellation of oil processing arrangements and crude oil lifting contracts and the commitment to carry out full independent audits of its accounts.
Beyond the steps already taken, it is important that a board is appointed for the NNPC to formulate a new strategic and policy direction for the organisation and ensure its implementation. NNPC must also engender transparency in its operations by publishing accounts on its website, competitive bidding for its commercial contracts and complying with the provisions of the Public Procurement Act, where required by law. Other reform initiatives which may be taken by NNPC include empowering subsidiaries through adequate funding, reducing bureaucracy by providing clear authority mandates and rightsizing to ensure efficiency. It is also important to clearly spell out the commercial arrangements between the NNPC and the government with respect to matters which it carries out on the government’s behalf. This would mean for example, providing clarity on what the government pays to NNPC for selling Tax and Royalty crude on its behalf.
Finally, the National Council on Privatisation (“NCP”) may choose to implement the provisions of the Public Enterprises (Privatisation and Commercialisation) Act (“Privatisation Act”) which provides for the (partial) privatisation of a number of subsidiaries of the NNPC. Such an exercise would allow private capital to be invested in these companies and the entities to operate with private sector discipline. In implementing this, NCP and the Bureau of Public Enterprises would need to consider whether the level of private sector investment should be increased from those set in the Privatisation Act.
Responsibility: Federal Government, NNPC board & management, NCP, BPE,
2. Resolving JV Cash Call Issues
NNPC carries out its upstream oil and gas operations through its relationships with various partners under three petroleum development arrangements – the participating joint venture (“JV”), the production sharing contract (“PSC”) and the service contract (“SC”). One of the key challenges that NNPC has faced in relation to its joint venture relationships has been the inability of the Corporation to fund joint venture cash calls. JV cash calls are the calls to contribute to the funding of the operations of a joint venture asset made by the operators on all the partners. NNPC’s portion of the cash calls are funded by budgetary allocations, which subject them to the vagaries of politics, including delays and inadequate funding. The cash call challenges have led to reduced investment in JV leases and NNPC partners being owed significant amounts of money.
There are a number of options available to reform the current arrangements without legislation. We shall comment on three of those options below.
- Ringfence NNPC JV receipts – This means allowing NNPC to retain its portion of the JV receipts to allow the Corporation fund JV operations without resorting to the Federal budgetary system. Under this option, NNPC would no longer turn over its receipts with respect to the JV into the Federation Account.
This is a controversial option and some may even consider it unconstitutional. In our view that position is incorrect. The arguments for and against this proposition are too long to be detailed in this paper. In brief, it is our view that the key to determining the constitutionality or otherwise of such a proposition is answering the question who owns the underlying asset. We believe that the assets are owned by the NNPC directly and there is no trust relationship as commonly asserted with the Federal Government in this regard. Therefore, constitutionally, NNPC is only required to transfer dividends to the Federation Account and not all of its receipts. Our view is backed by the NNPC Act (sections 7(4b) and 9), section 162(10c) of the Constitution, and provisions of the NNPC Amendment Bill, which seeks to legalise the assumed position by providing, belatedly, that NNPC holds its interest in the JV, PSC & SC assets on behalf of the Federal Government.
The adoption of this option may however prove politically difficult due to the reduction in revenues to the Federation Account and consequently to the state governments. Indeed, there have been some criticisms of a similar arrangement with respect to NLNG dividends which have been retained by NNPC to ensure the funding of NNPC’s portion of future LNG trains.
- Convert JVs to PSCs – An even more complicated option is the conversion of the joint venture arrangements into production sharing contracts. Under the PSC arrangement, NNPC will be the sole holder of the Oil Mining Lease (“OML”), whilst its current JV partners would be its contractors. Under this arrangement, all funding would be carried out solely by the contractors and the costs would be recovered from oil production.
This option requires thinking through how to convert a proprietary license interest to a contractual right. Such an arrangement may require some payment by NNPC to acquire the proprietary interests of its partners, before entering into PSCs with them. Such payments by NNPC will of course be reduced by the value attached to guaranteed contractor status under the PSC. The transaction may also be structured to eliminate cash payments by postponing (some) of NNPC’s revenues under the PSC for as long as it takes for the contractor to recoup the acquisition costs.
An alternative arrangement is the unique structure under OML 130, where NNPC’s interest is covered by a PSC, whilst a Production Sharing Agreement covers the rest of the interest in the OML. The adoption of this model would mean that NNPC’s interest in some of the JVs would be financed using a PSC mechanism and would not require the conversion of the entire asset to a PSC asset.
Whichever model is adopted, a lot of thought would need to be given to the details of the contractual arrangements, and seeking the cooperation, not compulsion, of NNPC’s partners. One size may not fit all and each asset may be treated differently, dependent on strategic considerations, the existing partnership relationships and the dynamics of the commercial arrangements.
- Reduce NNPC interest in JV assets – NNPC currently holds over fifty percent of the interest in the various joint ventures. NNPC may seek to reduce its interest to a manageable portion by divesting some of its interests in these assets. This option has the dual advantage of reducing NNPC’s costs of funding JV operations, and raising revenue for the government through the disposal of these shares. The sale of these assets may be used to achieve other strategic objectives such as increasing indigenous participation in the oil and gas industry.
All the options outlined above are not mutually exclusive. A number of other options such as the incorporated joint venture and alternate funding arreangements may also be considered to address the JV cash call chalenge.
Responsibility: President Buhari, Minister of Petroleum, NNPC Board & Management
Part II of the paper will examine Downstream Sector Deregulation & Domestic Gas Market Reforms.