The National Assembly has finally passed the Petroleum Industry Bill (PIB), 2021. The key objective of the PIB is to overhaul and transform the Nigerian oil gas industry. The Bill is now awaiting the assent by the President. However, the key question that is being asked is: will the PIB be the game changer for the industry at a time when major oil producers are seeking to transition to clean energy? Only time will tell.
The oil and gas industry has a significant impact on the Nigeria's economy. Though the industry contributes less than 10% to the country's gross domestic product, it contributes about 90% of the foreign exchange earnings and 60% of total income. Consequently, any adverse change in the industry will have a big and long-term impact on government finances. This is the reason why successive governments have remained focused on the sector despite various discussions on diversifying the economy.
For the past 20 years, there have been various attempts at reforming the industry. However, none of these efforts has yielded any tangible result until the introduction of the Petroleum Industry Bill (PIB) 2020. Prior to now, there were various iterations of the PIB. The PIB started as an omnibus bill and was later divided into 4 separate bills before emerging in 2020 as a consolidated bill.
It is a fact that previous attempts at passing the PIB in 2009, 2012 and 2018 failed because of factors such as lack of ownership, misalignment of interests between the National Assembly and the Executive, perceived erosion of ministerial powers, stiff opposition by the petroleum host communities and push back by investors on the perceived uncompetitive provisions in those versions of the bill. The PIB 2021 is set to address all the issues to the extent possible. It should be noted that the present administration and the 9th National Assembly have demonstrated unparalleled commitment to passing the bill. They understand the importance of passing a bill that is competitive, balanced, fair, reasonable and realistic.
The jury is out on whether the PIB will achieve these objectives. One thing is clear - government has tried to strike a balance between immediate revenues demands and the need to attract long-term investment for the industry. This has become extremely crucial when one considers the fact that only 4% of the $70billion investments made in Africa's oil and gas industry between 2015 and 2019 was in respect of Nigeria even though it is the biggest producer and has the largest reserves on the continent. According to the National Bureau of Statistics, only $53.5m or 0.55% of total investment of $9.680billion in Nigeria in 2020 was made in the industry.
If we must achieve our ambition of 40 billion barrels of oil in reserves and 4million barrels of oil per day, we need to attract new investments into the sector. This task has even become more daunting in the light of the various challenges facing the industry, especially with respect to the renewed focus on renewables and energy transition. The oil in the ground is of no use to the country if it cannot monetize it. Therefore, the PIB must lead to a massive transformation of the industry and succeed in attracting the desired investment required to reposition the industry. Otherwise, Nigeria's production will continue to decline significantly with the adverse effect on revenue. It is also important that we continue to explore new areas to increase our oil and gas reserves given that our reserves will get depleted within the next 50 years at the current rate of production. Our ability to increase reserves is only possible if the country carries out exploratory activities. This provides the justification for the introduction of the Frontier Exploration Fund.
Though the PIB 2021 is not a perfect law, It is a good way to start. Hopefully, the provisions of the PIB will be enough to stimulate the desired investment though it has not addressed the issue of energy transition from fossil fuel to clean energy.
Overall, the PIB 2021 should help to transform the Nigeria oil and gas Industry given the myriads of challenges it seeks to address: - encourage investments, improved focus on midstream operations, improved funding for JV operations, environmental remediation and abandonment, and transfer of effective control to host communities in terms of project selection, execution and ownership.
Key Provisions of the PIB
- Dual Regulators for the oil and gas industry - The Commission and the Authority.
- Voluntary conversion of existing oil prospecting or mining contracts in exchange for significant relinquishment of up to 60% of acreages.
- Effective acreage management through relinquishment, deep rights and drill or drop concepts.
- PIB Funds - Frontier Exploration Fund (30% of Profit oil and gas of NNPC Ltd), Midstream and Downstream Gas Infrastructure Fund (0.5% of wholesale price of petroleum products sold in Nigeria and natural gas produced and sold in Nigeria), Environmental Remediation Fund (will be based on size of operations), Decommissioning/ Abandonment Fund (as determined in the field development plan and periodic appraisal of the costs required) and Host Community Trust Fund (3% of annual operating expenditure in prior year).
- Incorporation of NNPC Limited with Ministry of Finance Incorporated and Ministry of Petroleum Incorporated as shareholders.
- Voluntary conversion to incorporated Joint ventures, subject to the guiding principles defined in the second schedule to the PIB.
- Ministerial approval of lease or consent on assignment subject to the recommendation of the Commission and must be given within the specified period; otherwise, it is deemed as given.
- Acquisition cost of interest in a lease to be broken into value of rights and value of assets.
- Establishment of New Licences and Leases under the Bill, namely: Petroleum Exploration Licence (equivalent to the current Oil Exploration Licence), Petroleum Prospecting Licence (equivalent to the current Oil Prospecting Licence) and Petroleum Mining Lease
- (equivalent to the current Oil Mining Lease). " Development of Model Licence and Model Lease, which shall be incorporated into contracts before approval of Licence or Lease by the Minister.
- Oil producing companies to pay HT and CIT. HT will be at 15% for PPLs and 30% for PMLs. However, deep offshore operations are NOT subject to HT while only costs directly related to production are allowable in calculating HT. The non-direct costs will, however, be deductible under CIT.
- Costs allowable for HT (i.e., capital allowances and operating costs but excluding rentals on PPLs and PMLs, royalties and contributions made in respect of Host Community Fund, Environmental remediation, NDDC and similar funds) limited to 65% of gross revenues.
- Operators are entitled to production allowances rather than investment allowances and investment tax credits.
- Additional Chargeable Tax may become payable by an Operator in an accounting year based on the fiscal price advised by the Commission.
- Requirement to submit revised HT returns whenever prices, costs and volumes change, and strict penalty for non-compliance.
- Royalty based on production and price. However, there is a preferential royalty rate for oil sold to Nigerian refineries and gas utilised in-country.
- Segregation of upstream operations from midstream/ downstream operations, except for strategic projects. However, stamp duties and CGT will not apply upon segregation.
- Requirement for Producing Marginal Field to convert to Petroleum Mining Lease within 18 months from the Effective Date of the PIB.
- Introduction of Environmental and Gas Flare Management with annual contribution that is dependent on the size of the operations and risk involved.
- PIB provides for suppliers and buyers to willingly agree on price. However, the Authority will still regulate gas prices.
- Companies with active refining licences or proven track record of international crude oil and petroleum products trading will be allowed to import any product shortfall that domestic refineries are unable to meet.
- Gas flare penalties from upstream operations to be utilized for environmental remediation and relief of the impacted host communities while that arising from midstream operations will be credited to the Midstream and Downstream Infrastructure Fund to be utilized for midstream and downstream infrastructure investment in the affected host communities.
- Marginal Field redefined as a field or discovery declared a marginal field prior to 1st January 2021 or which has been dormant for 7 years after its discovery prior to the enactment of the PIB.
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