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PIGB Nigeria

IS THE PGB FATALLY FLAWED?

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IS THE PIGB FATALLY FLAWED?

Ten years after the Petroleum Industry Bill began its tortuous odyssey which has included the Bill being broken into four portions, both houses of the National Assembly have finally harmonized the Bill's first portion, the Petroleum Industry Governance Bill (PIGB). The PIGB which replaces Nigeria’s main legislation in the Oil and Gas Industry seeks to promote transparency and accountability, establish a framework for the creation of commercially viable petroleum entities, create the governing institutions with clear and separate roles and foster a conducive business environment for petroleum industry operations. This Bill will dissolve The Nigerian National Petroleum Corporation (NNPC) and create three companies out of it; one regulatory commission and two independent companies with shareholders.

There are three other bills — the Petroleum Industry Administrative Bill (PIAB); the Petroleum Industry Fiscal Bill (PIFB); and the Petroleum Industry Host Community Bill (PIHB) which have all gone through public hearings in both chambers

of the National Assembly. They are currently awaiting their third and final reading before they are sent to President Buhari for assent.

The companies which will replace the NNPC are namely, The Nigeria Petroleum Liability Management Company (“Liability Management Company”), The Nigerian Petroleum Assets Management Company Limited (“the Management Company”) and the National Petroleum Company (NPC).

 

The Management Company will hold and manage assets under Production Sharing Contracts (PSCs) and Back-in Rights assets on behalf of the Government, while the NPC will be responsible for all other assets currently held by NNPC. Both companies will be 20% owned by the Bureau of Public Enterprises (BPE), 40% by the Ministry of Finance Incorporated (MOFI), and 40% by the Ministry of Petroleum Incorporated (MOPI). 10% of the shares of the NPC will be divested within 5 years of incorporating the company, while an additional 30% will be divested within 10 years. There are no plans in the Bill for the Asset and Liability Management companies to be divested.

The Bill also Introduces a new regulator – the Nigerian Petroleum Regulatory Commission (“NPRC” or “the commission”). The NPRC will replace the Petroleum Inspectorate, the Department of Petroleum Resources (DPR) and the Petroleum Products Price Regulatory Agency (PPPRA), and carry out their functions. In marked contrast to the previous version of the PIB, which contemplated two regulatory bodies the Upstream Petroleum Inspectorate (“the Inspectorate”) and the Downstream Petroleum Regulatory Agency (“the Agency”).

Much has been done to provide the Regulator the independence to conduct its responsibilities free of political interference in a transparent and accountable manner. For example board appointments and dismissals require Senate approval. The Bill provides for independent decision making subject to public hearings and freedom of information where the governing board determine such is in the public interest. Concerns have been raised by NNPC regarding stable tenures of Board Directors, even though the PIGB has defined tenures for non-executive directors, there are currently no provisions that provides for stable tenures for the executive directors and insulate them from changing dynamic of the prevailing political context.

The Bill allows the Commission to make new rules subject to public hearing. Any rule made without public hearing shall not last more than six months. In cases of conflict, the commission may seek technical advice or direct any body affected by its order to seek judgment from the Federal High Court. It remains to be seen how much alacrity foreign investment will demonstrate for the Nigerian legal system constituting their final legal recourse.

The Petroleum Equalization Fund (PEF ) will continue to exist, but the PEF Act will be repealed, and the PIGB will serve as the relevant legislation for the existence of the fund.

President Muhammed Buhari identified the scope of the PEF as one of the reasons he initially refused to sign the Bill into law. There is a valid issue as this regulatory function seems to usurp policy decision making with respect to deregulation which should be the exclusive preserve of the government of the day.

Confusingly one of the functions of the Petroleum Regulatory Commission (NPRC) is to establish the framework for calculating the fair market value of petroleum products. In that respect it inherits the functions of the PPPRA . The NNPC currently pay billions of dollars in fuel import subsidies without any appropriation from Parliament which is both politically and economically unsustainable. They do this by importing gasoline and selling into the market at a regulated price far below the purchase price of the product. It also creates a constitutional issue. It is difficult to see how the Government can pursue a policy of deregulation whilst seeking to set the market price via the regulator. Agencies of Government have a poor track record when it comes to creating pricing templates. Historically they have become frameworks for actors to short circuit as happened during the fuel subsidy scandal which cost the country billions of US dollars in fraudulent payments.

The establishment of the PEF was populist in its conception and ostensibly political in nature . Counterfactually without the fund, regulation cannot exist and it stands to reason the inclusion of the PEF in the Bill creates policy implications for the Government. The reimbursement mechanism employed by the PEF to pay Marketers has been subverted and despite the good intention when created it is now a significant area of abuse and corruption.

The PIGB creates further confusion with the funding mechanism which requires clarity. As it stands the PEF is to be funded by way of a 5% fuel levy in respect of all fuel sold and distributed within the Federation. This will be charged subject to the approval of the Minister. Setting aside the 5% levy which warrants further scrutiny, what it is not clear is if this levy would be passed to the consumers, both for regulated and unregulated products.

There is also a disagreement regarding the 10% the Commission is allowed to retain. The Executive feel the sum is far too high and there is a lot of justification for that view. The receivable from the oil industry is distributed to both Federal, State and Local Governments. 10% percent represents a huge amount far in excess of what any Regulator might require in discharging and enforcing their duties. There is substantial push back from state governments in particular as for most of them it is the single largest income they receive. Quite how the Bill arrives at 10% is a mystery. There is an argument to be made that a well funded regulator is required to ensure its independence and its ability to meet all its obligations without having to rely on Government funding.

The Liability Management Company will assume “certain” liabilities of the NNPC and the pension liabilities of the DPR, so as not to encumber the newly formed companies. The shares of the Liability Management Company shall be held by the management company, the NPC and the NPRC, in ratio of their respective liabilities. The Minister of Petroleum Resources (“The Minister”) shall initiate the winding down of this entity once the liabilities have been settled. Once more the Bill neither provides adequate guidance with respect to how government will appropriate funds to settle the liabilities transferred or whether shareholders will be required to settle the liabilities or indeed clarify the specific liabilities.

The Bill also confers the NPC and the Petroleum Assets Management Company , the right to defray from their revenue, all expenses including cash call obligations (for NPC) and finance and operational costs, prior to remitting the balance as dividends to the Government of the Federation . Currently the Governments take goes directly to the Federation Account so this marks a significant departure. It is a crucial difference and should enable the NPC to meet its financial and contractual obligations in a more effective manner. It remains to be seen how this will work in practise as the revenues generated from the oil industry are the bulk of funds distributed to the 3 levels of government. I suspect in reality this will create a significant issue with consequences for the public purse.

This is why it is difficult to fathom out the logic behind exempting the NPC from existing Acts which ensure good governance, transparency and accountability namely , the Fiscal Responsibility Act (FRA) and the Public Procurement Act (PPA), despite existing as a government owned entity . Surely the raison d'etre of the PIGB is to promote good governance and transparency

One of the issues the Bill was supposed to resolve is the delicate matter of Ministerial discretion and political interference. Yet the Bill still confers substantial powers to the Minister to constrain and pre-empt market participants operating under any license or lease granted under the Bill in the event of a national emergency, with any contravention attracting technically limitless fines and censure. The Minister also has the powers to determine the assets, liabilities and employees, which will be transferred to the new entities subject to an audit which remains undefined in the Bill.

The PIGB still enables the Minister to retain certain powers of discretion to “do all such other things as are incidental and necessary” for the performance of his ministerial functions. The wording of this clause is nebulous and creates an ambiguity which seems to be in stark contrast to the stated objective of the Bill. This clause is open to various interpretation which could serve to undermine or circumvent the regulatory powers of the 'Commission'

Yet the bill significantly reduced the power of the minister in respect of the use of his discretion . Under the Petroleum Act 1969, the Minister has an absolute discretion to grant, amend, revoke and extend oil prospecting licenses and oil mining leases to applicants that satisfy statutorily prescribed conditions. But the PIGB has removed this discretion by subjecting the exercise of the powers to grant, amend, renew, extend or revoke petroleum exploration and production licenses and leases to the recommendation of the Commission. In effect the Commission is empowered to manage the process of applications, amendments, renewals and extensions to the exclusion of any other actors and as a consequence all application must be made to the Commission. The Bill does not stipulate any process for such applications which creates a concern around transparency which may serve to produce opaque practises that defeat the objective of the Bill.

There is sufficient vagueness in the Bill in respect of the divestment of the NPC to warrant further clarification. Beyond the amount of equity to be divested and a timetable for the divestment of the equity to the public there is alarmingly very little clarity save for a broad commitment to dispose the shares to the "Public" in a "Transparent" manner. The 'Public' is quite frequently a synonym for vested interests be they corporate or individual entities and the concern is that the vagueness might provide an avenue to abuse the process as has happened on previous occasions. Furthermore the newly established commercial entities are expected to be governed in line with the provisions of code of corporate governance by the Security and Exchange Commission. But the bill does not include recommendations to address possible conflicts that may arise between its provisions and those of the SEC code where such conflict may arise.

The PIGB also cedes virtually all the powers of the Ministry of Environment to the Regulator and this has created consternation with communities inhabiting the oil producing areas such as the Niger Delta. Not least since the Act seeks to limit any environmental litigation by imposing a time moratorium. Litigation remains a potent tool of making environmental polluters accountable for their actions, the PIGB effectively places time restrictions on civil actions. The imposition of a maximum of 12 months for actions against the institutions and agencies created under the PIG is inadequate. The process of raising funds and compiling evidence of culpability by impoverished local stakeholder communities can takes time.

 

The PIGB is essentially a fudge to the extent that it is by no means perfect and in many respects contradictory. It is not the panacea that is being anticipated. Many of the provisions are vague and ambiguous and it is silent on the process of how some of the provision will be given effect and their resource implications. That it has been passed through the National Assembly is in part due to the need for the Legislature to exert control over the industry which has largely been the preserve of the Executive. The Bill has broadly sought to create a distinction between policy makers (the Government), the regulator (The Commission) and implementation (The Companies) In that respect the diminution of Ministerial influence seems to be the most notable aspect of the Bill. There are many commentators that believe the Bill will enhance investment in the sector and they may have a point. It is however the opinion of this analyst that it will be the terms of the Petroleum Industry Fiscal Bill (PIFB) which will trigger and attract investment into the sector

It also remains to be seen if the 'Technocrats' can withstand political interference in maintaining the integrity of the newly formed institutions and companies. For example, licensing has long been identified as the weakest link in Nigeria's value realisation chain, with a score of 17 of 100 in a recently published NGRI report , placing it 77th among the 89 country-licensing assessments. This is because licensing and contract awards have long been a staple of political patronage. It has been possible due to the opaque nature of the processes surrounding these awards in Nigeria. It seems very likely that pressure from the public will soon force the recalcitrant President Buhari to sign the PIGB but the Bill is far from perfect

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