Oil companies criticize Nigeria's petroleum reform bill

Aug. 3, 2009
Nigeria’s Petroleum Industry Bill (PIB) will substantially increase taxation for operators and discourage investment, companies complained last month at a public forum in Abuja.

Uchenna Izundu
OGJ International Editor

LONDON, Aug. 3 -- Nigeria’s Petroleum Industry Bill (PIB) will substantially increase taxation for operators and discourage investment, companies complained last month at a public forum in Abuja.

The companies are unhappy that their contracts could be renegotiated, particularly those covering deepwater projects, with higher costs under the draft legislation that would allow the government to seize blocks that remained unexplored.

The PIB has received first and second readings in the Senate, but observers have alleged that different versions have been circulated among the National Assembly and other industry officials.

Minister of State for Petroleum Resources Odein Ajumogobia said that there was only one version of the PIB before the National Assembly and that this one had been approved by the Federal Executive Council.

Nigeria’s petroleum industry provides more than 80% of the country’s federal revenues, and the PIB, which has taken almost 10 years to reach this stage, has been touted as major reform that would address funding shortfalls, domestic gas shortages, and crippling fuel subsidies.

Legislation’s objectives
Stakeholders were invited to present comments at hearings organized by the House of Senate and House of Representatives, which are debating the bill.

The legislation aims to introduce transparency through publication of all licenses, leases, and contracts, along with payments to the government.

The PIB will create new regulatory agencies, simplify the industry’s structure, and transform Nigerian National Petroleum Corp. (NNPC) into an international oil company on a model similar to those of Petrobras or StatoilHydro (OGJ Online, May 6, 209). Oil workers, however, have raised fears about whether their employment contracts would be changed under these new arrangements and what would happen if they lost jobs.

NNPC, which suffers from conflicting interests because it has operating, national assets management, and regulatory roles, has been unable to meet its financial obligations under joint ventures with foreign companies. In its new structure, Nigerian National Petroleum Co. Ltd. would be able to raise money in markets rather than rely on the government for funding.

According to the PIB, NNPC's joint ventures with Royal Dutch Shell PLC, Total SA, Chevron Corp., and ExxonMobil Corp. would be transformed into independent companies led by a new management team. But there are worries about who would manage them, how these firms would function, and how profits would be used.

Operators have welcomed the benefits of reform but urged the government to consider the effects on present and future work programs. International oil companies (IOCs) said in a joint presentation that their returns on investment would fall to below 8% from more than 15% if the bill passed.

Shell Nigeria Managing Director Mutiu Sunmonu said gas exploration in the country would become uneconomic. “The existing fiscal legislation recognizes the fundamental difference between oil and gas, but the proposed PIB treats oil and gas fiscals equally, making all gas projects uneconomic,” he said.

The IOCs noted that the new law would affect returns on wet gas investments, leaving 65% of new gas production at risk.

They raised concerns about the fiscal terms for their joint ventures with the introduction of a multiplicity of taxes.

The Indigenous and Marginal Field Operators’ group demanded that the fiscal regime be changed to recognize its members’ need to work with leases that had been abandoned by the majors. It also said that the government needed to support indigenous operators up to a threshold of 50,000 b/d of production so Nigerian companies could provide 20% of national production by 2020.

The group called for preferential access to onshore and shelf acreage on an open and competitive basis.

Niger Delta backlash
A backlash against Minister for Petroleum Resources Rilwanu Lukman, with calls for his resignation, came from Niger Delta interests who believe they have been ignored in the PIB.

Some have called for the legislation to be withdrawn completely. Representatives from the Niger Delta, where militants have been campaigning for a greater share of oil revenues, criticized the draft legislation for stripping them of their privileges as host communities. They described it as draconian, adding they have seen a version of the law different from what is being debated in public.

Chief Favour Izoukumor, leader of the Izon-Ebe Oil Producing Communities Forum, said the PIB was anti-Niger-Delta and urged the government to incorporate the interests of host communities.

One suggestion was that that institutions and individuals have equity shares in NNPC under the reforms, according to the Rivers State government.

Lukman’s defense
Lukman launched a robust defense of the bill, arguing that future petroleum prospecting licenses and petroleum mining leases would be awarded through a truly competitive bidding process, open and accessible to all qualified companies.

"Every company involved in the upstream petroleum industry will be subject to the same system of rents, royalties, and taxes, depending on whether they operate in the onshore, shallow or deepwater, or inland areas," he added.

Pat Utomi, an economist, told the panel that the PIB could boost the gross domestic product of the country. He commended the legal framework, adding that climate change needed to be addressed.

Ajumogobia said that the PIB tried to reconcile all the 16 laws that regulate the petroleum industry.

He called for deregulation. “Nigeria’s long-term energy security depends on our ability to deliver petroleum products in the domestic market at cost-reflective prices,” he said. “This can only be attained in an environment where clear groundrules are set and oligopolistic market distortions are removed. For an effective and competitive domestic petroleum products market to be developed in Nigeria, the downstream petroleum sector must be deregulated. This will encourage investment in refining and marketing infrastructure.”

The two committees will consider the submissions and then choose whether to present the legislation or an amended version to parliament for its final vote. It is likely that the committees will introduce several alterations that would delay its progress through the National Assembly.

Contact Uchenna Izundu at [email protected].