Sector Update/Oil & Gas
July 6, 2021/Cordros Report
Event: According to press reports last week, the National Assembly eventually passed the Petroleum Industry Bill (PIB) after much delay since its presentation to the house by the Executive in September 2020. The Senate and House of Representatives are expected to convene a committee to consolidate the two versions of the bill before transmission to the President for his assent. We highlight that the PIB was passed twenty-one years after the process of reforming the oil and gas sector was initiated. In this report, we highlight our views on the implications of the bill’s passage.
Cascading the outturn
Some Positives
We note that the separation of powers that the bill espouses will help in (1) reducing government interference in petroleum operations, (2) improve the efficiency, transparency and accountability of the NNPC and (3) potentially attract investors who have stayed away from the sector due to the incessant political interference.
Aside from the potential increase in government revenue, the new tax regime and royalty-focused system in the PIB would provide incentives to existing players and potential investors.
We like that the bill makes provisions for the host communities, as it creates a trust (Host Community Development Trusts; HCDT) to fund social, environmental and infrastructure projects in the host communities. After a lot of back and forth on the percentage to be remitted to the trust by the oil companies, the Senate and House of Representatives voted for 3% and 5% of operating costs, respectively, as opposed to the 10% the communities’ representatives demanded.
We also like that the government is taking steps to utilize the bountiful natural gas reserves in the country. The full adoption and efficient implementation of the gas framework should reduce the country’s reliance on crude oil as its major source of income.
There are concerns, nonetheless
According to the Nigerian Extractive Industries Transparency Initiative (NEITI), c. USD15.00 billion in investments was lost annually to the delay in reforms to the oil and gas sector. To our minds, realizing gains of this magnitude will be a far reach, given that the world is shifting from fossil fuels to renewables for energy usage, and most new energy investments have favoured the latter.
Also, we are concerned that the Federal Government (FG) will retain control over the selection of NNPC’s management, even after it has become a commercial entity. For one, this is not consistent with the tenets of transparency and accountability espoused by the PIB. In addition, we think this would limit the commission’s capital raising capabilities if the “new NNPC” decides to raise funds from the capital market.
We do not think the bill will wholly solve the problems the host communities have with oil companies and the FG regarding environmental pollution and the welfare of the indigenes, as their requests were not completely assented to.
On the Frontier fund for exploration, we highlight that the term used to describe “frontier basins” is quite ambiguous, as the PIB does not specify what qualifies as frontier states.
Subsidy payments remains a “big elephant in the room”
We note that there is no section in the bill supporting the deregulation of the price of petrol (or Premium Motor Spirit; PMS). Thus, we expect the price cap to remain and by extension continued NNPC under-recovery.
Who benefits the most?
Considering that the bill intends to improve the operating environment for oil and gas activities, especially in the upstream space, we view companies that operate in this space as the primary beneficiaries of the PIB passage.
