THE NIGERIAN PETROLEUM INDUSTRY BILL

TOOL FOR ECONOMIC EMANCIPATION OR POLITY

DESTABILIZATION?SURAJ OYEWALE, ACA

FOUNDER, JARUSHUB CAREER PORTAL

Presented @ the 1st Public Discussion Forum organized by the Economic

Insight, the Press Arm of the Nigerian Economics Students Association,

Obafemi Awolowo University Chapter, Ile-Ife, Nigeria

Saturday, March 29, 2014

OUTLINE Introduction History of petroleum resources Milestones in the petroleum

industry in Nigeria A background of the PIB Objectives of the PIB Key implications of the

objectives Ownership of the petroleum

resources

OUTLINE (Cont’d) Agencies under the PIB Taxation under PIB Role of the petroleum Minister Contentious areas of the PIB Opposing forces in PIB passage Conclusion

History of petroleum resources

Petroleum is a naturally occurring liquid, consisting of a complex mixture of hydrocarbon and other organic compounds, formed from the fossilized remains of dead plants and animals by exposure to heat and pressure in the Earth’s crusts over hundreds of millions of years.

History of petroleum resources

Petroleum has been around for long, although usually used in unrefined form hundreds of years back. As far back as 8th century, some seven hundred years ago, the streets of Baghdad were reportedly tarred with substance derived from petroleum!

Oil fields were exploited in what is today Azerbaijan, far back 9th century.

History of petroleum resources

Kerosene lamp was invented some seven hundred years ago. (Zayn Bilkadi, University of California, Berkeley "The Oil Weapons"). You all know kerosene is a product of petroleum.

Nearly 200 small refineries operated in the suburbs of Baku by 1884. The first modern oil refineries were built in Poland from 1854–56 (Frank, Alison Fleig (2005). Oil Empire: Visions of Prosperity in Austrian Galicia (Harvard Historical Studies, Harvard University Press). The refined products were used in artificial asphalt, machine oil and lubricants.

The first large oil refinery opened at Ploiesti, Romania in 1856. Oil drilling in the United States began in 1859, in Titisville,

Pennsylvania. However, by the first quarter of the 20th century, the United

States overtook Russia as the world's largest oil producer.  The Superior Oil Company (now part of Exxon Mobil) built the

first offshore oil platform off the Gulf Coast of Louisiana in 1938. By the end of Word War II, the Middle East had gained

ascendancy in Oil production

LOOKING BACK: PETROLEUM INDUSTRY MILESTONES IN NIGERIA

  1908 -Nigerian Bitumen Co. & British Colonial Petroleum

commenced operations around Okitipupa. 1938 - Shell D' Arcy granted Exploration license to prospect

for oil throughout Nigeria. 1955 -Mobil Oil Corporation started operations in Nigeria. 1956- First successful well drilled at Oloibiri by Shell D'Arcy 1958 - First shipment of oil from Nigeria. 1961- Texaco Overseas started operations in Nigeria. 1962 - Elf started operations in Nigeria. (As Safrap) -Nigeria

Agip Oil Company started operations in Nigeria 1965 - Phillips Oil Company started operations in today’s

Delta State 1968 - Mobil Producing Nigeria Limited) was formed. 1970 –

The Department of Petroleum Resources Inspectorate started.

LOOKING BACK: PETROLEUM INDUSTRY MILESTONES IN NIGERIA

Noteworthy: By the mid-70’s, Nigeria had reached 2 million barrels of oil per day in production. Today, we still hover around 2 to 2.5m bpd, despite all the massive investments that had taken place between then and now.

THE PIB – A BACKGROUND

Shortly after President Olusegun Obasanjo assumed office in his first term, he set up a committee, called the Oil and Gas Industry Committee (OGIC), with a mandate to take a comprehensive look at Nigeria’s oil and gas sector and offer better ways of managing the industry. Obviously, many of the laws and regulations guiding the industry had been around for long, some far back 1950’s, and although they had undergone amendments, the federal government considered it necessary to take an holistic review of the industry with a review to getting the best of it by all stakeholders. The OGIC was led by Mr. Rilwanu Lukman, veteran petroleum engineer and former Secretary-General of OPEC, and had other oil industry eggheads. The committee submitted its report, and its recommendations formed the basis of Petroleum Industry Bill, which has since been subjected to further reviews and adjustments.

OBJECTIVES OF THE PIB

The Bill seeks to achieve: A conducive business environment for petroleum operations Enhanced exploitation and exploration of petroleum

resources in Nigeria for the benefit of Nigerians Optimize domestic gas supplies, especially for power

generation and industrial development Encourages investment in Nigerian petroleum industry Optimizing government revenue Establish profit-driven oil entities Deregulate and liberalize the downstream petroleum sector Create efficient and effective regulatory agencies Promote the development of Nigerian content in the oil

industry Protect health, safety and the environment in petroleum

operations

OBJECTIVES – KEY IMPLICATIONS

More jobs for Nigerians – as it will become illegal to employ foreigners for certain skills that can be sourced locally

Where such skills are sourced from abroad due to unavailability locally, a local understudying the expat is a requirement

The above is applicable not only to skill, but to materials sourcing

The above means more jobs for Nigerian local contractors, especially those from the oil producing regions

Gas is still under-focused in Nigeria and the potential from this source of energy lays untapped. PIB seeks to maximize

If well explored, this will boost power supply in Nigeria

OBJECTIVES – KEY IMPLICATIONS

Government revenue from oil industry will increase. This means more funds in the hands of government to engage in developmental activities, ideally

The downstream sector becomes fully deregulated. In other words, subsidy will fully go.

Subsidy removal is not totally bad, if there are no distortions to market – this is my personal opinion as an economist (well, accountant with academic training in economics)

Environmental protection – what Saro Wiwa and co fought for, and the initial grudge of the Niger Delta militancy – will be addressed

Who owns the oil? The PIB vests ownership and management

of all petroleum resources, offshore or onshore, in the Federal Government of Nigeria, which manage on behalf of all Nigerians. This means irrespective of where the oil is found, it belongs to the government of Nigeria. Of course, equity calls for special consideration for localities where the resources are mined. This is taken care of by the Revenue sharing laws and other provisions of this Bill like the Host Community Fund.

Notable agencies under the PIB

PETROLEUM TECHNICAL BUREAU (PTB): This will be a special unit under the office of the Minister of Petroleum. It will be peopled by professionals from both the upstream and downstream sectors and charged with the responsibility of rendering professional support to the minister

  UPSTREAM PETROLEUM INSPECTORATE (UPI): The

UPI will regulate technical and commercial activities in the upstream sector. It will be responsible for issuing licences and permit. Representatives on Federal Mistry of Finance, NUPENG, PENGASSAN etc will part of UPI board, in addition to other professionals appointed by the president. The UPI is not profit-driven, it will therefore not pay income tax

Notable agencies under the PIB

DOWNSTREAM PETROLEUM REGULATORY AGENCY (DPRA): This is to be the downstream industry, what the UPI is to the upstream industry. So if you want to set up a filling station, for instance, you approach DPRA.

Note that the Directorate of Petroleum Resources (DPR) currently does what UPI and DPRA will be doing. In other words, PIB unbundles DPR into UPI and DPRA

THE PETROLEUM TECHNOLOGY DEVELOPMENT FUND (PTDF): The PTDF will continue to exist. The objective of the PTDF is to develop and train manpower necessary to service the petroleum industry in Nigeria. The body gives scholarships to Nigerians, sponsors and support researches etc

Notable agencies under the PIB

THE PETROLEUM EQUALIZATION FUND (PEF): The PEF continues to exist under the regime PIB seeks to introduce. The PEF is responsible for accounting for the ‘subsidy’ – the leverage given to Nigerians by making oil marketers sell at prices below market price i.e equalizing. But what is unclear to me is how this will continue to exist when subsidy will be totally removed. But my guess is the continuous existence will be to take care of the backlogs in the equalization funds or to continue its function until after final subsidy is finally removed

  THE PETROLEUM HOST COMMUNITIES FUND (PHCF):

Host communities are communities where petroleum resources are found i.e the Niger Delta and other areas it will be found in the future.

Notable agencies under the PIB

THE PETROLEUM EQUALIZATION FUND (PTF): The PTF continues to exist under the regime PIB seeks to introduce. The PEF is responsible for accounting for the ‘subsidy’ – the leverage given to Nigerians by making oil marketers sell at prices below market price i.e equalizing. But what is unclear to me is how this will continue to exist when subsidy will be totally removed. But my guess is the continuous existence will be to take care of the backlogs in the equalization funds or to continue its function until after final subsidy is finally removed

  THE PETROLEUM HOST COMMUNITIES FUND (PHCF):

Host communities are communities where petroleum resources are found i.e the Niger Delta and other areas it will be found in the future.

Notable agencies under the PIB

THE NATIONAL PETROLEUM ASSETS MANAGEMENT CORPORATION (NAPEMC): The NAPEMC will be responsible for managing government investments in the upstream industry. It will have subsidiaries to carry out different aspects of these activities. It will take over assets and liabilities of NNPC, will be incorporated and fully profit-driven. It is not a regulatory entity. NNPC employees shall be transferred to this entity.

  THE NATIONAL OIL COMPANY (NOC): This will also be an offshoot

of NNPC, but unlike NAPEMC which will be a limited liability company, the NOC will be listed on the Stock Exchange, meaning you and I can buy its shares. Up to 30% of its share will be available for grabs by the public. Certain employees, assets and liabilities of NNPC will also be transferred to the NOC.

THE NATIONAL GAS COMPANY (NGC): This will also be listed as a PLC and certain employees, assets and liabilities of NNPC will be transferred to it.

Taxation under PIB The PIB effectively repeals the Petroleum Profits Tax

Act (PPTA), which has been governed fiscal framework in the upstream sector pre-PIB. Upstream oil and gas companies will now be subject to

Companies Income Tax (CIT): Like the downstream businesses. It remains at 30% of adjusted profits

Hydrocarbon Tax (HCT): This is a new tax to be introduced by the PIB for upstream operators. The rate is 50%

Roughly, the effective tax rate in the upstream industry comes to around 80%. It should be noted the repealed PPTA ranges from 66.75% to 85%. So it may be net benefit or hit to companies depending on their operations.

Education Tax remains unchanged at 2% of assessable income.

Key role of the minister Exercises supervisory function over the petroleum

industry Advise government on matters pertaining to the

petroleum industry Represent Nigeria at international organizations on

petroleum Negotiate and execute international petroleum treaty

and agreements with other sovereign countries and international organizations on behalf of government

Advise the President on the appointment of CEOs of UPI, DPRA, NOC, AMC and other agencies that will be formed pursuant to PIB.

Upon the advice of the inspectorate, grant, amend, renew, extend, or revoke upstream and downstream petroleum licences and leases pursuant to the provision of the act.

Process for award of licence Open and transparent competitive

bidding Parameters such as signature

bonus, work commitment etc shall be used

No discretionary award

*However, section 191 gives the President the power to grant discretionary award of licence

Contentious Areas of the PIB

PIB vesting ownership of oil in the FG

Deregulation Host community Fund Power of the petroleum

minister Presidnet’s discretionary power

to award licence Gas flaring

Opposing forces in PIB passage

The Niger Delta/Oil producing region

The northern legislators

The International Oil Companies

The independent activists

Conclusion

References

1. PIB DRAFT DOCUMENT – 2012 VERSION

2. OVERVIEW OF OIL & GAS INDUSTRY IN NIGERIA, EBEN AKINYEMI, OIL & GAS TAX SCHOOL, GHANA, AUGUST 2012

It’s not the law, but the people

implementing it!!!