Under the provisions of the Petroleum Act, the Minister of Petroleum Resources has the absolute discretion to award oil prospecting licences and oil mining leases. The PIAB in its section 8 provides for a process through which the Commission may award upstream licences. Continue reading “PIAB – Who issues Petroleum Licences?”
A review of the Petroleum Industry Governance Bill 2016 (“the Bill”), which we reported last week passed first reading on the floor of the Senate shows that it largely retains the content of the first version, introduced late last year as the Petroleum Industry Governance and Institutional Framework Bill 2015, with a few amendments. The renewed attention given to the Petroleum Industry Bill (“PIB”) by the National Assembly by sponsoring this Bill is an indication of the lawmakers’ dissatisfaction with the seeming silence of the Executive on the matter.
Part One of this review focuses on the functions and powers of the Minister.
The Bill provides for the functions and powers of the Minister in two sections. Under Section 2(1) paragraphs a-i, the Minister is vested with eight functions similar to those provided in Section 6 of the PIB save for three distinct departures. The power to delegate is conferred under Section 2(2) whilst Section 3 addresses the Minister’s right of pre-emption.
- The Bill has done away with the Minister’s advisory and approval role stipulated in the PIB before the President can appoint the Board of the various agencies. The President is empowered to appoint the executive and non-executive members of the Board of the Petroleum Regulatory Commission (the “Commission”) (to be established pursuant to the Bill as the industry regulator) subject to confirmation of the Senate. This is a laudable improvement to the old Bill and extant legislation where the Chief executive of the Petroleum Inspectorate is appointed by the Petroleum Minister, (albeit with the approval of the National Council of Ministers) and is also subject to the direction and control of the Minister (and by extension, the Department of Petroleum Resources (“DPR”) and its Director General).
- The power to make regulations which is currently vested in the Minister by virtue of Section 9 of the Petroleum Act and maintained by the PIB has been removed and vested instead in the Commission as the regulatory body for the industry by Section 8(1) of the Bill. This provision deals specifically with regulations necessary to give proper effect to the provisions of the Bill and would not affect the provisions of other laws which grant the Minister powers to make regulations such as, the Nigerian Oil and Gas Industry Content Development Act, 2010. It is also worth noting that the Bill empowers the Minister to promote the development of local content in the Nigerian petroleum industry.
- Although the Bill maintains the Minister’s rights of pre-emption, a notable change has been made to this provision which is in keeping with current economic realities. Failure to comply with the Minister’s direction issued in respect of a right of pre-emption to petroleum and petroleum products brought on by a state of national emergency or war and obstruction or interference with the exercise of the powers of the Minister in this regard under the Petroleum Act attracted a maximum fine of NGN2,000 and NGN200 or a maximum prison term of six months or both respectively upon conviction. Under the PIB, the maximum fines for the two offences have been increased to NGN2,500,000 and NGN5,000,000 or a maximum prison term of two years or both respectively. The Bill however increases the fine for non-compliance to a maximum of NGN10,000,000 or a maximum prison term of six months or both; and for obstruction, a maximum of NGN5,000,000 or a maximum prison term of six months or both. The Minister is also empowered to make regulation to increase the financial penalties imposed under the Bill.
Under extant legislation, the Petroleum Act grants the Minister exclusive and unfettered power to grant licenses and leases and amend, renew, extend or revoke same pursuant to the provisions of the Act. The Bill, much like the PIB (save for the replacement of the word “advice” with “recommendation”), fetters the discretion of the Minister to issue licenses and leases for petroleum exploration and production activities. The Minister may now only exercise such powers based on the recommendation of the Commission. Currently, the grant of licenses is governed by the Petroleum (Drilling and Production) Regulations and applications are made to the Minister. It appears this would no longer be the case and such applications would now be required to be made to the Commission. Section 25 of the Petroleum Act entrusts the Minister with discretionary powers to revoke a license or lease based on certain criteria. Under the Bill, this power may only be exercised based on recommendations made by the Commission in this regard. Accordingly, Part 6, Section 84(1) of the Bill provides that the provisions of all existing enactments or laws, including the Petroleum Act, Petroleum Profit Tax Act and the Companies and Allied Matters Act, shall be read with such modifications so as to bring them into conformity with the Bill. We expect that regulations would be made which clearly defines new procedures to be adopted.
In our next report, we will continue with an analysis of the proposed sector regulator, the Petroleum Regulatory Commission.
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.
The Petroleum Industry Bill (PIB), which has been with us in one form or the other since 2008, proposes to completely overhaul Nigeria’s petroleum industry. The current draft of the Bill, sent to the National Assembly in 2012, seeks to, amongst others, restruc ture the regulatory and commercial institutions in the petroleum industry, change the fiscal dynamics and reform the operational mechanisms of the upstream, downstream and natural gas industries.
The below article by Dr. Adeoye Adefulu and Dr. Ekpen Omonbude highlights 5 actions the incoming government may take to get oil industry reform back on track.
1. Delay the passage of the PIB
Given the potential impact of the Bill, its passage, at this late stage, will significantly hamstring the incoming government which has not had a chance to give its input. Indeed the current oil price crisis has changed the dynamics of the fiscal bargain and calls for a reconsideration and the introduction of flexible mechanisms to deal with any future crisis (see our point 4 below). Further, the current draft of the Bill remains controversial and it is necessary that the new government is able to take a position on its contents and implementation.
2. Set a timetable and stick to it!
One of the hallmarks of this process has been the failure of the government to keep its promises regarding the passage of the Bill. This failure has kept the industry in limbo, with several companies delaying investment decisions due to the uncertainties surrounding the post PIB fiscal and regulatory regimes. Whilst we have indicated above that it is necessary for the new government to review the Bill, it must do so with a clear and achievable timetable. In our view, it should take no longer than twelve months to undertake the necessary research and pass the Bill or Bills (see next point). Whatever time is agreed, it is important that the government achieves its objective within that framework. This will help to bolster its credibility and reduce investment uncertainties. Our suggested timetable is as follows:
3. Break up the Bill
With 363 sections in over 223 pages the current draft of the Petroleum Industry Bill is unwieldy. The Bill seeks to deal with a wide variety of issues, the majority of which are only peripherally related. This has made it difficult from a political and operational perspective to manage the diverse interests impacted by the Bill. Further, a thorough analysis of the Bill will show that a number of areas, such as the proposed reforms in the downstream petroleum and natural gas sectors, have been inadequately addressed. The new government should break the Bill up into its natural segments. We suggest the industry reforms be taken under the following bills:
- A fiscal reform bill – which deals with the tax and royalty issues surrounding the industry.
- Institutional reform bill – this bill will be focused on creating new or reforming existing institutions. This will include the regulatory bodies as well as provisions for the commercial entities to be established and the process for transferring assets, liabilities and staff to these institutions;
- An Upstream Petroleum Bill – focused on the upstream oil and gas industry
- A Petroleum Products Bill – focused on midstream and downstream matters; and
- A Natural Gas Bill – dealing with the operations of a domestic gas market. This bill should not address gas productions matters.
We believe that this approach is more consistent with the various parts of the oil and gas value chain which require varying degrees of regulatory oversight and fiscal arrangements. It would also encourage a more thorough coverage of the relevant issues, a robust debate from the impacted stakeholders and quicker timelines in passing the reforms.
4. Reflect further on the fiscal provisions
The provisions concerning the obligation and features of the royalty regime require clearer expression within the Bill. There are 21 references to the word “royalty” or “royalties” in the Bill but nothing is stated in terms of tangible values for any meaningful interpretation or analysis. This implies that the existing royalty regime will continue to hold, subject to amendments or pronouncements in subsequent regulations.
The level of fiscal burden on new investments based on the terms proposed in the Bill amounts to about 82% in effective tax. This compares favourably with other proven jurisdictions such as Norway, Iran, Kuwait and Egypt (at an average of about 85%). However, the fiscal regime offered by the Bill is regressive and should be addressed. The combined fiscal instruments of royalty, Nigerian Hydrocarbon Tax, Companies Income Tax and other fiscal impositions do not flexibly respond to changes in project profitability. The implication is that in the event of an oil or gas price increase or a significant reduction in costs, the State will not get an incremental share of the increased revenues resulting from such positive changes to profitability. Also, there are potentially significant negative implications on investors in the event of an oil or gas price decrease as is currently the case. Therefore the fiscal system requires the inclusion of more progressive mechanisms such as rate of return trackers in order to enable automatic adjustment to changes in economic circumstances of specific projects.
5. Fix the cash call challenge
One of the major drivers for energy reform in the first place was the need to address under investment in the joint ventures due to cash call deficiencies. Since one of the proposals to resolve that problem, the incorporated joint venture, was shot down after the first versions of the PIB, no concrete proposals have been put forward. Resolving this challenge should be one of the immediate priorities of the new government. Whilst this is an issue on which the authors do not agree, one of us believes that there is merit in reconsidering the motive behind the IJV structure and the specific risks it seeks to mitigate. Such an exercise will also provide an opportunity to objectively address the concerns within the originally proposed IJV structure in previous versions of the Bill such as the Board and Management compositions. We do however agree that if the IJV is to be reintoduced, it cannot be by compulsion and counterparts must negotiate the terms under which such a structure would be acceptable. In addition to this, consideration should also be given to the rationalisation of the Government stake in the joint venture arrangements through divestment of interests preferably to indigenous players.
Dr. Adeoye Adefulu is an Energy Partner in the law firm of Odujinrin & Adefulu and the Managing Editor of petroleumindustrybill.com; Dr Ekpen Omonbude is an Economic Adviser (Natural Resources) at the Commonwealth Secretariat and a regular contributor to petroleumindustrybill.com
All I want is a warm bed and a kind word and unlimited power.
The phrases, “the Minister may”, “as may be decided or imposed by the Minister” “the Minister shall have the right” are phrases commonly sighted in the Petroleum Act 1969, the principal legislation currently governing the Nigerian petroleum industry as well as subsequent industry legislations. These Ministerial powers cover a multitude of issues ranging from power to grant upstream and downstream petroleum licences, prescribe terms and conditions of licences, control pricing of petroleum products, declare national emergency, order discretionary suspension of petroleum operations and make regulations, to mention a few. These provisions have resulted in the vesting of a huge amount of power in a single office with almost unfettered powers to direct the affairs of this very sensitive industry. The product has been an industry with a record of abuse of power, lack of transparency and accountability and ineffective regulatory oversight, resulting in little or no benefit being derived by the citizenry. Continue reading “The Extent of Ministerial Powers under the Petroleum Industry Bill 2012”
Feature Article by Humphrey Onyeukwu[i]
The Petroleum Industry Bill (PIB) is lauded to be the single most important legislation in Nigeria given our mono-economic set-up, however ridden with various mutations from the original intervention of the Oil and Gas Implementation Committee (OGIC) inaugurated by the Obasanjo administration in April 2000.
Several versions of the PIB materialized as an outcome and greatly skewed the many efforts in producing a bill that would fundamentally reform an industry lacking significant changes in administration and regulation. Discordant tunes emerged from the various stakeholders, each with self-confessed belief on how the reform agenda would have been carried out. The International Oil Companies, indigenous operators, international independents, regulators and even the minister alike joined in a macabre dance of what a PIB should be and what it should not be.
A sigh of relief may have seemingly arrived with the recent transmission of the bill to the seventh National Assembly. The Special Task Force for Implementation of the PIB, brainchild of the Federal Government’s concerted efforts to deliver on its promise to the nation in aftermath of the subsidy protests, submitted their finished product, a new Petroleum Industry Bill.
The new PIB, without doubt, has agitated the déjà vu trailing previous attempts. Questions answered and unanswered: Is it the much-needed cure to revive an ailing Nigeria’s oil industry? Would this be another stillbirth or is the stage finally set for culmination of the sector reforms. Who is really afraid of the Petroleum Industry Bill?
Continue reading “Who is really afraid of Nigeria’s Petroleum Industry Bill?”
This part concludes Dr Omonbude’s feature article on the fiscal provisions of the PIB
In the previous part of my note, I introduced and discussed two major features of the fiscal elements in the PIB. The aim of this exercise was to investigate these provisions in the context of how they had been presented within the Bill, and to set the ground for some of the analysis that would follow in this second part. The aim of this part of my note is to consider the other two big-ticket fiscal instruments as far as the Bill is concerned (namely the Nigerian Hydrocarbon Tax and the Companies Income Tax), and to then carry out a simplified analysis of these instruments. Continue reading “Fiscal Provisions of the Nigerian Petroleum Industry Bill: A not so quick-and-dirty assessment, Part II”
Feature Article by Dr. Ekpen J. Omonbude
After what can be described as a very, very long wait, the Nigerian Government has forwarded the Petroleum Industry Bill (‘PIB’ or ‘the Bill’) to the National Assembly. This follows a series of drafts, disputes and revisions as the Government, the international oil companies (‘IOCs’), and the legislature failed numerous times to agree on previous versions.
The Ministry of Petroleum Resources (‘the Ministry’) describes the PIB as potentially “one of the most important pieces of legislation in the history of the oil industry in Nigeria, changing everything from fiscal terms to the make-up of the state-oil firm”. It is clearly an ambitious document, one which in our assessment could change, fairly significantly, the way in which the oil and gas business is conducted in Nigeria if passed into law as-is.
The industry has greeted the PIB with mixed reactions. For some upstream E&P players, it does not appear that there is satisfaction with the fiscal terms as stated in the Bill. For others, there appears to be a certain degree of confusion as to what would apply when, and how. International organisations appear to have taken a position of quiet optimism for now.
At over 220 pages, the PIB is a daunting read for most non-lawyers. It does however try to simplify what is currently a difficult petroleum legislative and regulatory framework to explain to the untrained eye (lawyer’s paradise, anyone?). Highlights of such attempts at simplicity are the apparent amalgamation of the relevant petroleum sector laws into one piece, and a reduction of the points of fiscal burden to a handful of fiscal instruments. The Bill in fact defines fiscal rent as “the aggregation of royalty, Nigerian Hydrocarbon Tax and Companies Income Tax obligations arising from upstream petroleum operations”. This simplicity may not however translate to reduced fiscal burden. In my view at least three separate pieces of legislation could have been submitted to the National Assembly, rather than one, but this is not the purpose of this particular exercise. Continue reading “Fiscal Provisions of the Nigerian Petroleum Industry Bill: A not so quick-and-dirty assessment, Part I”