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Thursday, 28 March 2019 19:35

PIGB ANALYSIS

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PIGB ANALYSIS

the Nigerian oil and gas industry must establish a strong and balanced board of directors; select chief executives and senior management based on proven competence and integrity; guide corporate strategy and monitor corporate performance; establish appropriate succession plan; and monitor effectiveness of the governance arrangements and change as necessary

 The newly established commercial entities are expected to be governed in line with the provisions of the Code of Corporate Governance issued by Nigeria’s Securities and Exchange Commission.However, the bill does not include recommendations to address possible conflicts that may arise between its provisions and those of the SEC Code, according to the analysts, who opined that to prevent possible ambiguity, there will be a need to emphasise the superiority of the provisions of the bill over those of the SEC Code, where such conflicts arise.

 With the broad powers and functions assigned to the NPRC, there are concerns that the NPRC must have to maintain proper structure to aid efficient execution of its mandate. KPMG, in the report, stated that, “One of the functions of the NPRC is to establish the framework for computing the fair market value of petroleum products and tariffs for gas processing and transportation.

 This seems to suggest that government may be unwilling to deregulate the downstream sector of the petroleum industry. Furthermore, the implication of this for Automotive Gas Oil (diesel), which has been deregulated, is unclear.

 “The NPRC is authorised to charge fees for ‘services rendered’ to players in the industry. This may create a conflict of interest with its role as regulator.

 “The Bill allows the commission to levy special fees on licencees and lessees for the implementation of any project that is of common benefit and value to the oil and gas industry. The amount of this special levy or its frequency is not stated in the bill. This may create uncertainty for potential investors.”

 With the PIGB providing for the divestment of at least 40 per cent of the shares in the NPC within 10 years of incorporation, it is however debatable if private investors will be willing to commit to a company which will be majorly owned and run by government in the long term.

Value is lost particularly in licensing and in the Nigerian National Petroleum Corporation’s sales of government oil, as well as when revenues from oil and gas are shared and saved,” the report stressed.

It added, “Furthermore, a history of scandals involving top officials at the NNPC has plagued the sector and drawn public attention to corruption and asset recovery.

Given the NNPC’s central role in all stages of the decision chain, improving governance of the state-owned enterprise is crucial.”

Licensing was identified as the weakest link in Nigeria’s value realisation component, with a score of 17 of 100, placing it 77th among the 89 country-licensing assessments.

The report noted that the score and ranking reflected high levels of opacity in key areas of decision-making, including qualification of companies, process rules and disclosure of terms.

According to the bill, the Nigeria Petroleum Assets Management Company (NAPAMC) shall be incorporated as a company limited by shares within six months from the effective date of the bill.

The shares of NAPAMC shall be held by the Ministry of Petroleum Incorporated (40 per cent), the Ministry of Finance Incorporated (40 per cent) and the Bureau of Public Enterprises (20 per cent).

Thus, NAPAMC, shall be responsible for managing all assets currently being held by the NNPC under the Production Sharing Contracts (PSCs) and Back-in-right provisions of the Petroleum Act of 1969, as amended.

But there are fears that bill does not state the specific type of liabilities that will be transferred or how the new company will be funded.

 

It is unclear whether government will appropriate funds to settle the liabilities transferred or whether shareholders will be required to fund the NAPLMC and settle the liabilities and this may negatively impact the viability of any investment in the NPC.

 

CRITIQUE

 

Our conclusion is that the version of the PIGB as passed by the Senate is an unconscionable attempt to legalize the appropriation of national oil and gas assets to some powerful private interests.

 

” In its current form,” the statement said, “the PIGB cedes virtually all powers on environmental regulation from the Ministry of Environment to the New Petroleum Regulatory Commission. Sadly, the Commission is saddled with functions that are conflicting with each other.”

 

 

 

This seems to be the passage of the first fragment of the comprehensive Petroleum Industry Bill (PIB), which was broken into parts to facilitate quick passage, almost 17 years after the original bill was proposed. This move by the Senate, is in actualization of 1 of the ‘7 Big Wins’ unveiled by the Minister of State for Petroleum Resources in the last quarter of 2016, with a view to reform and reposition Nigeria oil & gas industry. .Establishment of 3 Commercial Entities – 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). These entities will replace the Nigerian National Petroleum Corporation (NNPC).

 

The management company will hold and manage assets under Production Sharing Contracts (PSCs) and Back-in Rights assets on behalf of the government of the Federation, 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 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.

 

Key Highlights to Note

  1. The PIGB makes reference to the “Petroleum Inspectorate”, when stating the institutions which the NPRC replaces (in addition to the DPR and the PPPRA). The issue is that the Petroleum Inspectorate was excised from the Nigerian National Petroleum Corporation (NNPC) in 1988, during its structural re-organisation. It was then transferred to the Ministry of Petroleum Resources (MPR) as its technical arm, and renamed the DPR. It would seem that this reference was an oversight. .The Commission will have a special investigation unit which among other things, will keep surveillance on oil and gas installations for illegal activities and will have the power to work with the police to make arrests. This should give some comfort to stakeholders.

 

  1. The PIGB states that the NPC will not be subject to the Fiscal Responsibility Act (FRA) and the Public Procurement Act (PPA), even though it will remain a government owned institution before its shares are divested. Given that both laws were enacted to aid transparency in public institutions, this exemption appears counterintuitive, as one of the objectives of the PIGB is to promote transparency and accountability of petroleum resources.

 

  1. The NPC and the management company, will have the right to defray from their revenue, all expenses including cash call obligations (for NPC) and finance costs, before distributing the surplus as dividends in accordance with the respective companies’ dividend policy . This is a deviation from the current situation, where the government of the Federation’s share of crude oil sales virtually goes directly to the federation account (without considering expenses incurred). While the profit retention proposal is noble, and is the norm for commercial entities, government may need to consider a transition arrangement to minimise the impact of any profit retention by the NPC on funds available for distribution to various levels of government in the short to medium term given the current fiscal challenges.

 

  1. On the planned divestment of the NPC, it is important to point out that there is no specific plan in the Bill to list the NPC shares on any stock exchange, as is being proclaimed by some analysts. The Bill simply states that the shares will be disposed to the public in a transparent manner. This “public” includes institutional and strategic investors, as contemplated in the last version of the Bill, hence, the divestment may be via a private placement. Since the Bill does not go into detail about the modalities for the divestment, it is very important that there is transparency to prevent any abuse of diversion for vested interest.

 

  1. around the continuous need for the PEF (see point 8 below). From the Bill, there seems to be no clear plan to put an end to the current subsidy regime.

As earlier stated, the PEF was set up (as a temporary agency) to ensure uniform pricing of petrol in Nigeria, by reimbursing petroleum marketers for “any losses suffered by them solely and exclusively” as a result of the sale of petroleum products

 

Conclusion

They say progress is better than perfection. This fits perfectly when one thinks of the several attempts that have been made in the past to pass the almighty PIB. In line with recommendations made by various stakeholders, the government has decided to break it up and pass it in parts. While the version approved by the Senate is not perfect by any means, it is progress nonetheless – which is what we need in Nigeria right now.

 

 

 

 

Overview of the Bill

  1. Introduction of a new regulator – named the Nigerian Petroleum Regulatory Commission (“NPRC” or “the commission”), to serve as the supervisory body for Nigeria oil & gas industry. 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. This is slightly different from the provision in the previous version of the “complete” PIB, in which two regulatory bodies called the Upstream Petroleum Inspectorate (“the Inspectorate”) and the Downstream Petroleum Regulatory Agency (“the Agency”) were proposed.

 

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

 

The lack of consideration for the yearnings of people which has been the hallmark of this government may cause the country fortunes on account of not signing the Petroleum Industry Governance Bill.

 

Despite a general consensus that the bill should be signed into law no matter the level of its inadequacies so that it would be fine-tuned while  in operation, this government has found one excuse after another not pass it.

 

 If it is not signed into law there are indications that tempers might rise among the Niger Delta residents or militants that are feeling surcharged that the petroleum industry governance bill that has been passed by the national assembly to the president for assent will not see the light of day after all.

 

This may therefore resort in some aggrieved militants using the issue as the reason to start attacking oil facilities to draw the attention of the government to their displeasure over the matter. If this is allowed to happen in these days that the price of crude is hovering around $70 per barrel and above, the consequences would be colossal.

 

The feeling across the region is that the government is not interested in signing the bill because the present structure in oil and gas industry, especially the Nigerian National Petroleum Corporation (NNPC), which favours the president and his cronies.

 

Some industry operators are citing the recent promotions carried out in the NNPC in which some young men from the president’s region are put in sensitive and juicy positions to the detriment of their more experienced seniors who are from the southern part of the country.  Such exercise they say may not have been possible without it being based on merit if the PIGB that was intended to restructure and reform the NNPC has been signed into law by the president.

 

The recent observation by the NNPC is an indication that the government may not sign the bill. This is because the NNPC must accept the contents of the bill before the president would assent to it. The Nigerian National Petroleum Corporation (NNPC) has picked several holes in the bill. According to the corporation the provision in the PIGB that the NNPC should be split up would be resisted by the oil worker trade unions unless it was communicated properly.

 

 Maikanti Baru, group managing director of NNPC highlighted the issues and urged that they should be clarified when he spoke on emerging issues and concerns in respect of PIGB at a conference organised by National Associate of Energy Correspondents of Nigeria in Lagos.

 

Maikanti Baru who was represented by Roland  Ewubare, group general manager, National Petroleum Investment and Management  Services ( NAPISM) said the issue of divestment of 40 percent of Nigeria Petroleum  Company shares to the Nigerian Stock Exchange, needs clarity on the process of divestment and the steps should be clearly  provided for in the law.

 

The corporation wants to know if the shares are going to be sold to Nigerian public or foreign portfolio investors. This it says is not stated in the law.

 

There is no clarity regarding the nature of NNPC  liability  to be transferred  to the Liability  Management  Company  NPLMC, asides the outstanding  pension obligations  of the Department  of Petroleum  Resources. The bill, it says does not provide adequate clarity on type and nature of liability to be inherited and the process for the settlement of such liability.

 

He said adequate clarity should be provided on funding of NPAMC and the newly created NPLMC.

 

The NNPC boss advocated that the NPAMC should to be structured in the form of an agency rather than a company with limited role in the administration of production sharing contract assets. He said similar institutions across the world are structured as agencies for example Petition Norway.

 

.

 

“The issuance of well-defined contract terms to the executive director may address this issue,” he said.

 

All these observations according to some industry source are tacit indication that president Muhammadu Buhari administration may not sign into law the PIGB.

 

Already, analysts are of the view that Nigeria is about to miss out on another opportunity to put in place some well-defined regulatory laws in the oil sector as time is running out for the passage of the Petroleum Industry Bills (PIB).

 

 

At the moment, there is a frosty relationship between the National Assembly and the Presidency. This is likely to make it difficult for the bills to be passed. If they are not before the end of the tenure of the current administration, all the work done on them so far would have been wasted and the next government will have to start afresh on the bills.

 

The proposal for a new legal regulatory framework for the oil sector has been stuck in the Legislative arm of the Federal Government since 2008 and the continued delay in giving Executive life to the bills is said to have cost the country over $20 billion a year in new investments.

 

However, Nigeria is expected to dominate the oil and gas sector in Africa in the next seven years with her Capital Expenditure (CapEx) outlook projected at $17.3 billion. At the current exchange rate, this will amount to some N6.21 trillion.

 

GlobalData, a leading data and analytics company says in sub-Saharan Africa, Nigeria will be leading with 10 planned oil and gas projects expected to start operations between 2018 and 2025.

 

 

Among companies, Eni SpA, Royal Dutch Shell Plc, and Total SA have the highest level of spending on planned projects with $7.2 billion, and $5.6 billion and $3.4 billion respectively. The highest level of spending on early-stage announced projects is by Shell, Exxon Mobil, and Eni with $15.5 billion, $12.9 billion, and $6.9 billion spent on CapEx, respectively.

 

This expectation could be stalled if Nigeria’s oil and gas region decides to disrupt production activities in protest against the seeming jig-saw puzzle over the petroleum industry bills.

 

 

THE BILL

 

 

So that the petroleum industry would be saved from the current near stagnation of activities in the sector. The non-passage of the 18-year old PIB has stalled activities by the oil and gas companies because they cannot decipher what direction the new policy would take and they believe it would not be okay to operate in blindness.

 

The other aspects of the bill that are currently under consideration apart from the PIGB are the Fiscal Regime Bill, the Upstream and Midstream Administration Bill and the Petroleum Revenue Bill and Host Community Bill.

 

The PIGB which replaces Nigeria’s main legislation in the Oil and Gas Industry seeks to promote transparency and accountability, establish 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.

 

Some of the fundamental changes introduced to the PIGB are these:

 

  • Establishment of the Nigerian Petroleum Liabilities Company

 

Reduction in the amount of government share that should be divested to the public from 30percent to 10percent before the provisions on appointment of the Board members of National Petroleum Company will cease to have effect.

 

  • Inclusion of Section 55(a) which makes the Minister of Petroleum the non-executive chairman of the Board of the Nigeria Petroleum Assets Management, etc.

 

  • Deletion of the Fourth schedule which originally listed the assets to be transferred to the Nigeria Petroleum Assets Management Company as the Listing of assets in the schedule is no longer necessary as assets distribution has been taken care of it in the Bill

 

  • The inclusion of Petroleum Equalisation Fund (PEF)

 

  • Enhanced penalty for violation of the orders of the Minister in the case of emergency under Rights of Pre-emption.

 

  • Increase in the number of the members of the Governing Boards/Directors of Institutions created by the PIGB.

 

  • Increase in the experience required for managing director of the National Petroleum Company.

 

  • Change in the initial shareholding of the Commercial entities.

 

  • Reduction in the amount of Government share that should be divested to the public from 30percent to 10percent before the provisions on appointment of the Board members of National Petroleum Company will cease to have effect.

 

  • It makes the Minister of Petroleum a non-executive chairman of the Board of the Nigeria Petroleum Assets Management.

 

  • Deletion of the Fourth schedule which originally listed the assets to be transferred to the Nigeria Petroleum Assets Management Company as the Listing of assets in the schedule is no longer necessary because assets distribution has been taken care of it in the Bill.

 

  • Vesting full responsibility of environmental matters in the Petroleum industry on the Nigeria Petroleum Regulatory Commission

 

  • Requirement of senate approval in the appointment and dismissal of the Board members of the Nigeria Petroleum Regulatory Commission.

 

According to ACIOE Associates, a consultancy company, the bill reduced the power of the minister significantly. Under the Petroleum Act, Cap P10, Laws of the Federation of Nigeria (LFN) 2004, the federal 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 in its current form seeks to curb this discretion of the Minister 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. This presupposes that there would be a new method for application for amendment, renewal, extension and revocation of a license or lease which will involve application through the Commission rather than directly to the Minister. The PIGB is, however, silent on the procedure for application for amendment, renewal, extension and revocation of licenses and leases.

 

“The power of the Minister to exercise a right of pre-emption on all petroleum and petroleum products marketed or otherwise dealt with under any licence or lease granted under the Act in the event of a state of national emergency or war is retained in the PIGB. Furthermore, The PIGB also clarifies the role of the Minister of Petroleum Resources, which will be streamlined towards policy supervision,” ACIOE Associates said.

 

As regards the regulation of the industry, the Nigeria Petroleum Regulatory Commission (NPRC) will  be the most powerful entity created under the PIGB with a role to take up the assets, resources, funds properties, liabilities, interests, and obligations of the Department of Petroleum Resources (DPR), the Petroleum Inspectorate and the Petroleum Products Pricing Regulatory Agency (PPPRA). It also regulates the petroleum industry.

 

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The bill has created three commercial entities for the promotion of accountability and self-sustainability. These are Ministry of Petroleum Incorporates (MOPI), National Petroleum Company (NPC) and National Petroleum Asset Management Company (NPAMC).

 

 Ministry of Petroleum Incorporated (“MOPI”) has the role to hold, on behalf of the Government, shares in the successor commercial entities incorporated pursuant to the provisions of the PIGB.

 

 The NPC has the role of managing all the assets held by NNPC except the Production Sharing Contracts and back-in Rights assets which shall be assumed by the NPAMC.

 

The PIGB provides that the initial shares of the NPAMC at incorporation shall be held by the Federal Ministry of Finance Incorporated (“MOFI”) and the Bureau for Public Enterprises (“BPE”) in a ratio of 99percent to 1percent, respectively. It further provides that within 3 months of incorporation, the Minister shall make an order that the assets, rights, obligations, employees, and liabilities of the NNPC shall be transferred to the NPAMC.

 

By the time the bill is fully implemented, the industry operation would no longer be shrouded in secrecy as it is today

 

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