The Gang-Up Against the PIB

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Mutiu Sunmonu
Mutiu Sunmonu

Nigeria’s new Petroleum Industry Bill, PIB, is receiving so much opposition that there is the fear that it might go the way of its predecessor, which was withdrawn in 2005

|  By Olu Ojewale  |  Dec. 17, 2012 @ 01:00 GMT

THE Petroleum Industry Bill, PIB, presented to the National Assembly by President Goodluck Jonathan in July this year, appears to be heading towards another rocky bank. Members of the International Oil Companies, IOCs, have again voiced out their opposition to the bill, saying it is not business-friendly and therefore would not attract new investments to the sector. Some of their arguments center on taxes, royalties, Joint Ventures, high charges and penalties. The IOCs are also arguing that the bill gives too much power to the minister of Petroleum.

Deizani Alison-Madueke, minister of Petroleum, who listened to some of them speak at the Nigeria Economic Summit, NES, in Abuja said Tuesday, December 3, that some critical aspects of the bill would be revisited with the aim of addressing the stakeholders’ concerns. Justifying the provisions of the bill, Alison-Madueke noted that even the ministry could not hire or fire managers and employees of the regulatory agencies in upstream and downstream sectors, as they would still operate within the civil service structure.

The minister assured that the Federal Government was open to dialogue with the major stakeholders on all critical issues. That in itself has created an apprehension in some quarters that the IOCs may, once again, delay the passage of the bill or that it might be watered down to accommodate their ‘selfish’ interests.

The PIB had already undergone its first reading, in both the Senate and the House of Representatives in September. On November 14, the bill also went through its second reading in the House of Representatives thereby throwing the floor open for members to debate on its draft.

Alison-Madueke
Alison-Madueke

The PIB, which takes a holistic look at the nation’s oil sector, is expected to overhaul the country’s oil industry with the aim of opening it up for more investments as well as minimise corruption and give more oil earnings to government. It provides for the unbundling of the Nigeria National Petroleum Corporation, NNPC, and the creation of more virile companies to take over its responsibilities, assets and liabilities.

It also provides for the establishment of a Petroleum Technical Bureau as a special unit in the office of the minister. The unit will consist of experts in the upstream and downstream sectors of the petroleum industry. Its functions will include the provision of technical and professional support to the minister; transformation and development of strategies to implement policies in the sector, among others.

In the same vein, the PIB has made provision for the establishment of the Upstream Petroleum Inspectorate. The inspectorate is the policeman of the upstream sector, who will enforce every rule and regulation relating to the sector. It will be responsible for efficiency, safety standards, regulate technical and commercial activities within the sector. Headed by a director-general, the inspectorate is to advise the minister on the issuance, amendments, or repeal of regulations relevant to the sector. The inspectorate will report to the Board of Directors, which supervises the sector, and will also advise the Minister on some technical and professional matters.

What may cause concern for some stakeholders about the Inspectorate division is the power given to it to accept gifts. Section 33 of the proposed bill says: “The Inspectorate may accept gifts of money or other property upon such terms and conditions as may be specified by the person or organisation making the gift provided such gifts are not inconsistent with the objectives and functions of the Inspectorate under this Act.” However, it adds that no member of the Board or staff is allowed to accept gifts for personal use. Given the level of corruption in the country, the section may raise suspicion among stakeholders that government is encouraging corruption.

Another controversial aspect of the bill is the creation of a Petroleum Host Communities Fund, PHCF. The bill says the purpose of the Fund is for the development of the economic and social infrastructure of the communities within the petroleum producing areas. According to the bill, every upstream oil producing company is expected to remit on a monthly basis 10 percent of its net profit

The profit is not restricted to upstream alone, but also includes operations in deepwater areas, onshore and offshore and shallow water areas. And the net is calculated after removing royalty, allowable deductions and allowances as well as Nigerian Hydrocarbon tax, and income tax. Some experts have welcomed the idea saying it would bring peace to the restive oil-rich region. They said giving more money to the communities could stop restiveness, disruption and vandalisation of oil and gas production.

But there are also reservations about how the money would be used to address its objectives. “But the PIB does not specify how the money will be distributed. So political interference may be significant while the amount will fluctuate with the oil prices,” said Pedro van Meurs, of Nassau Bahamas, a consultant to the Inter Agency Team which prepared the Nigerian government`s memorandum on the 2008 PIB.

Some interest groups are also apprehensive about the proposal for the creation the Petroleum Equalisation Fund, PEF, which gives the minister of petroleum resources powers to scrap the PEF whenever it is assumed that its functions are no longer relevant. Some stakeholders have kicked against this saying it is another way of taxing oil companies operating in the country.

David Mark
David Mark

If the PIB is passed, it is generally assumed in government quarters that it is going to sanitise the oil industry, and promote efficiency. One organisation slated for reform in the bill is the Nigeria National Petroleum Corporation, NNPC, which is splitting into three entities, namely the Nigerian Petroleum Assets Management Company, NPAMC, the National Oil Company, NOC, and the National Gas Company, NGC. All the three companies are to be established not later than three months after the PIB has become an Act. The companies are to take over different aspects of the NNPC operations, responsibilities and liabilities as new corporate entities.

According to the bill, the initial shareholding of the NPAMC would be in the ratio of 99 percent by the company and one percent to be in trust by the permanent secretary of the ministry. In the case of the NOC and the NGC, the government is mandated, within six years, to divest and sell some of the shares in the two companies to the public – 30 percent in the case of the NOC and up to 49 percent of the NGC.

That measure has been criticised by the IOCs. They claim it would rubbish the government’s privatisation policy and bring about inequality in the oil sector. One of critics of that policy is Imo Itsueli, managing director and chief executive officer, CEO, of Dubri Oil, who spoke at the just concluded NES. He said Nigeria is supposed to be the petroleum hub of West Africa, including Morocco and Algeria, but that the PIB would not help the country go in that direction.

Itsueli, a former NNPC boss, disclosed that the Idika Kalu Committee on Refineries, of which he was a member, had recommended the privatisation of the refineries between 18 and 24 months. He asked the federal government to reconsider the ownership structure of the proposed NOC and NGC saying it would be critical to the issue of growth and fair play in the industry.

According to him, the new companies should be listed in the Nigerian Stock Exchange to deepen the market and engender effective competition. He warned that if the government’s equity was above 50 percent in any company, it would jeopardise its chances of raising funds from the international community.

But Alison-Madueke disagrees. According to her the NOC, as provided for in the PIB, would strengthen indigenous capacity. She explained that part of the bill’s strength was the provision for a clear separation between policy formulation and regulation. She stated that, in line with the spirit of the reform, all revenues accruing to the NNPC currently flow directly to the Federation Account.

The PIB seeks to finally outlaw gas flaring in the country by prescribing fines that would equal the cost of the flared gas. According to the proposed bill, once the Act has been approved, the minister would announce the “flare-out date” and from that date, oil and gas operators with flared gas resources must submit within six categories of flared gas resources, including data of utilisation. The Inspectorate would then give approval of such plans within 60days and post same on its website for public consumption. Every petroleum and gas operation is expected to install the metering equipment specified by the regulatory body from time to time.

One of the major issues being contested by the IOCs is taxation. There is a new imposition called the Nigerian hydrocarbon tax on the profits of each company engaged in upstream petroleum operations. Besides, the PIB wants oil companies to pay 50 percent tax rates on their profits for onshore and shallow water areas, and 25 percent on their profits for bitumen, frontier acreages and deepwater areas. And where a company carries out more than one operation in a particular area or areas that are more than one tax rate, appropriate tax “shall be levied on the proportionate parts of the chargeable profits arising from those operations.” The bill gives a general production allowance to any company that is engaged in upstream petroleum operations with a production sharing contract with the NNPC.

Aminu Tambuwal
Aminu Tambuwal

According to the bill, all the companies including those with production sharing contract with the NNPC, are mandated to file tax returns on their upstream petroleum operations profits. The bill further demands that every company engaged in the upstream petroleum operations for each accounting period of the company, must furnish the government with comprehensive accounts on its profits and losses, including allowances due, repaid, refunded, waived or released to it during the period, arising from its operations. The declaration must be signed by a duly authorised person from the company who will say it is true to the best of his knowledge. The bill provides that additional assessments may be done within six years if it is discovered that a company has not paid adequate tax on its operations. However, anyone or company who is wrongly assessed, may also seek for redress from the federal high court within 30 days that the service is charged on that person or company.

The bill similarly provides for penalty for non-payment of tax and enforcement of payment. If the tax is not paid as and when due, it attracts 10 percent of the total sum to be added to the tax. If the tax is payable in Naira, it shall attract interest “at the prevailing minimum rediscount rate of the Central Bank of Nigeria, plus a spread to be determined by the minister from the date when the tax becomes payable until it is paid.” If the tax is payable in foreign currency, the tax shall similarly attract interest at the prevailing London Inter Bank Offered Rate with a spread to be determined by the minister.

There are penalties for tax offenders. The bill says any person who fails to abide by the tax rule is liable to a fine of N1.5 million, and where the offence is failure to submit information or keep records on income tax, there is additional N300,000 for each day the offence continues. In default, the person may get six months jail term. Where an incorrect account is made the immediate penalty is N150,000 and to double the amount of tax payable.In the case of false statements and returns with the aim of paying less or getting reduction for self or the company, the offence attracts N150,000 fine and three times the amount of tax for which the person or company is assessable. There are also penalties for offences by authorised and unauthorised persons. Any official who is involved with tax assessment and collection, who demands in excess of the amount payable or withholds, for his own use, any portion of the tax collected, or render false return of the amount of tax collected and not being authorised to do so shall be liable to N1 million fine or three years in prison.

The PIB provides for production allowance for crude oil production for companies engaged in onshore. Each company is allowed less $30 per barrel or 30 percent of the official selling price up to a cumulative maximum of 10 million barrels, and the lower of $10 per barrel or 30 percent of the official selling price for volumes exceeding 10 million barrels up to a maximum of 75 million barrels. For the shallow water areas, the allowance of $30 per barrel or 30 percent of the official selling price is given up to a maximum of 20 million barrels and the lower of $10 per barrel or 30 percent of the official selling price for volumes of more than 20 million barrels to maximum of 150 million barrels.

As for the bitumen deposits, the frontier and deep water areas, $15 per barrel or 30 percent of official selling price is removed up to a cumulative maximum of 250 million barrels PML, and it is $5 per barrel or 10 percent of the official selling price when it is for volumes in excess of 250 per petroleum mining lease, PML.

Similar allowances are also provided onshore, and shallow offshore for natural gas and bitumen deposits in frontier acreage and deep water areas, which range from $.50 to $1.0 per one million British thermal unit, MMBtu of gas. But all these do not seem to impress some big players in the industry as so far demonstrated by IOC members. Speaking at the plenary session on “The PIB and the future of Nigeria’s oil industry” at the Nigeria Economic Summit, NES, Tuesday December 4, Austin Avuru, managing director of Seplat Oil, a marginal field operator,  first of all pointed out the merits and demerits of the provisions of the PIB on oil players and government, and then said that the revised bill would not solve any of the problems in the downstream sector, especially as the issue of privatising the refineries was excluded from the document.

He noted that discussions on the PIB had been reduced to the question of taxes and royalties, thereby neglecting the more critical issue like Nigeria’s Joint Venture terms, even when the country is still battling with risks of bunkering and security matters. Avuru observed that the PIB was initiated in 2000 to engender institutional reforms and the attendant competitiveness, but lamented that the current bill would not fare better because it seeks to strengthen failed institution and frustrate private ventures.

President Jonathan
President Jonathan

“Nigeria post-PIB will not be a globally attractive fiscal regime,” he said. Avuru asked for further close of ranks by the federal government and the oil players to find workable solutions for the industry. He emphasised: “The Bill cannot solve refinery issues. Cash call issues are not mentioned in the bill at all. Unbundle, deregulate and privatise the downstream sector.”

Mutiu Sunmonu, the managing director of Shell Petroleum Development Company (SPDC) and chairman of Shell Companies in Nigeria, had made similar remarks in the past saying that the new bill was not fair to investors.

Speaking in Lagos on “Investors’ Perspective on the PIB,” at a stakeholders’ meeting organised by the Nigeria Extractive Industries Transparency Initiative (NEITI), Sunmonu said the current bill had highlighted the differences of views between industry and government, but insisted that there were still gaps to close. He said the bill did not take into consideration local business challenges in Nigeria such as bunkering, corruption and militant activities and the impact on existing investments made in good faith at current legal and fiscal terms.

According to him, the PIB has not created a level-playing field or be fair to all investors – big, small, new or old. “What we have seen of the draft PIB to date does not indicate a bill that fits these criteria. And this is the opinion not only of the major players in Nigeria’s oil and gas industry, but, as I mentioned earlier, industry analysts as well,” he said.

Sunmonu said what the oil industry required was a balanced bill that would provide maximum revenue to the government and sufficient incentives for new investment to increase growth in the oil and gas sector. He warned that the PIB would render all deepwater projects and all dry gas projects – whether for domestic or export markets – non-viable.

He also pointed out that lower exploration activity and very few final investment decisions were responsible for the current fiscal and legal uncertainty in the country. He noted that oil and gas production was not being replenished and that there was a serious threat of a significant reduction in production in the medium term with attendant consequences for revenue generation for the country.

According to Sunmonu, there is need for the government and industry operators to discuss further because, “the outside world is watching and waiting. Analysts are commenting — Woodmac has just published its assessment of the current state of play, and it is not flattering. The media is portraying this as industry versus government – which, frankly, doesn’t help – and the clock is ticking,” Sunmonu said.

Another critic, Mark Ward, managing director of ExxonMobil in Nigeria, warned that the country’s oil production would fall by 40 per cent by 2020 without new investments. However, he said the industry could grow by 50 per cent over the same period if government could encourage (new investments) planned investments to go forward.

Mark Ward
Mark Ward

He said although his company had been a major player in the oil and gas sector in Nigeria since its 50 years of existence, it would be keen to stay on for another 100 years or more, but the federal government should create the enabling environment by addressing the major issues at stake. “Without investment, production drops; so, government needs to grow the overall pie by stimulating investment. Changing contracts through some legislative fiat is a very dangerous game that discourages investment,” Ward said.

In the same breath, members of the IOCs are also saying that the draft PIB would make it unprofitable for new investments worth $108 billion to survive. According to Ward, the $108 billion is the sum of the planned capital expenditure of all the oil majors from 2012 to 2025. This, he said, would raise Nigeria`s oil production per day, by 64 percent to about four million barrels from its current average of slightly more than two million barrels a day.

It is believed that some IOCs have been threatening government to either water down the provisions in the bill or they would divest their entities in the sector. Experts say this is perhaps the only way some IOC members could escape maturing onshore liabilities and what they consider as an unfavourable profit-sharing arrangement in the PIB.

Madueke has insisted in a statement that the new draft “is fair to all,” adding that concerns by some operators over the proposed increase in government take from 61 percent to 72 percent in the deep and ultra-deep offshore was competitive “when we look at the scale of other entities around the world like Norway, Indonesia and even Angola.”

In view of the virulent opposition from the IOCs, it is feared that the bill may not either see the light of the day or it would be watered down that the purpose for its proposition may be defeated all together. Analysts also fear that the bill could go the way of the previous one which was withdrawn as a result of stiff opposition to it.

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