What PIB is all About

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Membere

ABIYE Membere, group executive director, Exploration and Production, Nigerian National Petroleum Corporation, NNPC, was the former managing director of Nigerian Petroleum Development Company, NPDC. He is also a member of the technical committee on the Petroleum Industry Bill, PIB, and is well versed on the matter. In this interview with Maureen Chigbo, editor, Realnews, Membere, who has been in the oil and gas sector for more than 25 years, gives details of the contentious issues on the PIB, why the international oil companies are up in arms against it and other developments affecting the oil and gas sector in the country. Excerpts:

Realnews: The PIB is much talked about with a lot of misconception. Can you talk about the myth and the facts about the PIB and why there is so much confusion about the bill since 2000?
Membere:  In a nutshell, you know the PIB started way back in 2000. It went through some advances in the National Assembly in the 6th Assembly and after the end of the sixth Assembly, the bill was not passed. So recently, what we had done as members of the PIB team, was to get the government to set up a technical committee to review the document, modify and then fine-tune to the realities of the current global energy sustainability programmes. The aftermath of that is the setting up of a small think-tank that is going to work with the ministry and the National Assembly in the smooth passage of the PIB. If you look at the PIB in detail, the strong point of the PIB is that it is going to usher in transparency, accountability and most importantly ensure that the environment is protected. The fiscal regimes we have today are good, not only good, they are very competitive. Competitive in the sense that if you at the West African region especially in the deep water side, we are still lower than Angola. If you go outside to West Africa, we are still lower than Norway. If you go beyond Europe, we are still lower than Venezuela.  The reason we did that is to constantly ensure that we have investors’ confidence to continuously invest in the Nigerian oil and gas industry. In addition to these two points, we recommended a very strong regulatory body, a regulatory body that will be strong to ensure that there is constant change when change is needed in the existing laws especially in environment and safety.  I will give you an example. What happens to the IOCs in a place like the UK and in the Gulf of Mexico cannot be entertained in those areas vis-à-vis what happens in Nigeria. We are very liberal and lenient. That is not the way to run a deregulation so we recommended two strong regulatory bodies, one for the upstream and another for the downstream. The reason we did that is that if we consolidate them the way they are, they become so huge and we are scared that huge organisations like that have a lot of inefficiencies.  So, we decided that the upstream should focus in upstream regulation. The downstream will take the downstream regulation. And we expect that these two strong units should be able to drive the oil and gas industry in the years ahead. It is also designed that these two regulatory bodies have only dotted line responsibility to the minister. It is designed similar to what you have in the Nigerian Electricity Regulatory Commission.  They are pseudo autonomous bodies except that they will have the bite to be able to regulate the oil and gas industry. The NNPC, the it is, if one way or the other, as staff of NNPC we are selfish, we will keep NNPC the it is, one single body. But no, we decided that the NNPC should be unbundled into key three areas. One will be the joint venture area. The three key areas was done based on revenue generation and sustainability of revenue generation over the years. You will find out that the joint venture generates more than 82 percent of the total revenue in the oil and gas industry. The PSA generates only 15 – 20 percent. So, we want to fence the joint venture, JV, because up in our mind we wanted to privatise a part of the NNPC. So this part that is joint venture that has maximum generation for the country you can’t divest it. So, we re-fence and intend to set up an asset management company that is going to replace the current NAPIMs. So there is an asset management company that is going to manage all the six JVs because when the JVs mature, it is to the benefit of the IOCs in terms of rate of return is good. You have to re-fence it because of the revenue generation. The PSC, we transfer it to the National Oil Company. So the new National Oil Company will be the current NNPC, the way it is minus NAPIMs and minus Nigerian Gas Company. So, the refineries, NPDC, PPMC will now form the basis of a new national oil company for which we intend to divest 30 percent equity within the next six years. The third arm of the unbundling will be the Nigerian Gas Company, NGC. Because of the interest of both federal government and huge investment associated with gas, we decided to form a national gas company which will be the current NGC with both marketing, transportation and other infrastructures that are gas-related. The second reason for forming it is because the huge capital investment needs private sector investment to be able to put infrastructural base for mostly gas. We liken it to the LNG model, the 49/51 percent. Currently in the NLG, the NNPC equity is 49 percent. In this particular case, we flipped it over to 51 percent. We are very conscious of domestic gas.  So we needed, minimal control as a national oil company to ensure that we have gas to power this country and have gas based industrialisation and agriculture because these are the major job creation entities. So, that is part of the unbundling of the NNPC. In a nutshell, you have transparency enshrined in the PIB the way it is. All the companies that will be unbundled are CAMA based. Governance structure will be based on how the private sector should operate. Regulations are there to ensure safety, environmental and compliance with existing laws of the country and you have the national oil company unbundled to three different  sectors to be able to enshrine efficiency, high productivity and good revenue not only for this national oil companies but also for government. We have a fiscal model that is robust. Domestic gas has enough incentives, tax holidays, production allowances to encourage people to produce gas and take them to the domestic market. If you have to do export project, you will have to compete with any other project worldwide; you don’t have that incentive. We are not stopping people from doing export project but you have to do it on the premise that you can compete, you can stand alone without that much incentive that we give who are doing domestic gas supply to the country

Abiye MembereRealnews: These are lofty objectives which people should key into. The IOCs do say they hope that Nigeria will get its act together. The PIB as you have demonstrated is a step towards getting our acts together. But yet the IOCs don’t buy into it. And you are a member of this technical committee, did you take the grievances of the IOCs into consideration and why are they dead set against the PIB?
Membere: We discussed in details. We exchanged data with the IOCs. We developed the model, we validated it together and we know we are using the same type of model. Having said that, the major difference between the IOCs and the current outlook is cost. Our model has a very high cost. If your cost is high, your profitability is low. We made rooms for the uncertainties talked about. We provided money, allowances for the host community fund which will reduce your security cost, which will reduce regular disruption of operations, and then which will minimise your community issues. These ones are what will drive down your cost. We have created room, this time, with lease administration model, how you manage your acreage, will help new competitors to come in. We strongly believe that is going to drive down cost. If you see your competitor working and producing oil at a lower cost per barrel, you don’t have any choice than to … if not you will go out of the market.. We encourage this competition. That is the basic difference. We have given them all the incentives. Let me tell you, as a capitalist and as a commercial person, if I can get a 100 percent profit do you think I will stop?  No, I will not. I will guard it, I pursue it whether I will get it or not is entirely a different thing. All of us are looking at the oil and gas based on the rate of return on your investment outcome, the level of risk you take and we will continue to emphasise that the PIB as currently proposed is that if you take the risk and how it is being measured and adequate profitability is assigned to those risks and investment that everybody is taking.  Come to think back, NNPC will be in the same fiscal regime like any other person like Shell, Mobil etc. Are you saying, that as government we are going to punish the NNPC too? No. Development is open. It is no longer the Shell, the Mobil. Now you have all oil companies under the fiscal policy being regulated by the upstream person. You can’t say the NNPC, the national company, doesn’t like to be profitable? At this stage, you are not doing business for government alone, there is a private investor in it. So you are going to be profitable as any other private company.

Realnews: Talking about cost. What exactly do the IOCs have about it?
Membere: The issue is on profitability. They believe that government’s stake in this model is higher than what they anticipate to get.

Realnews: What is government stake?
Membere: Government’s stake in different regimes either the JV or offshore is completely different.

Realnews: We want to get to the nitty-gritty of this matter. Is there a particular percentage of the revenue the IOCs are asking for the government to take in the fiscal regime to enable them to operate?
Membere: You have to understand, what is the fiscal regime? Fiscal regime is mostly royalty and tax. So, there is a royalty that government will take as soon as you produce one barrel.  There is royalty that government takes especially from what we have done, royalty before is based on terrain. If you are on land, you pay a percentage royalty whether you produce one barrel or produce one million barrels. If you are on offshore, there is a percentage royalty depending on how much you produce is immaterial. Putting this in the PIB, because you cannot ask somebody who produces one barrel to pay 20 percent royalty and somebody who produces one million to pay 15 percent. So Royalty now is based on production. If you produce this, you pay this amount of royalty. For the large producers, they pay higher amount of royalty. It is just to make sure allow the eagle fly and also allow the kite to fly. We encourage smaller producers to continue to be in business. Then, the second element is tax. Before, there was no distinction between the petroleum profit tax, PPP, and company or corporate income tax.  Now, there is a clear distinction. All over the world, everywhere companies pay tax. There is no exemption anymore. We are now lumping it together. All the companies will pay the corporate income tax fixed at 30 percent. Then, we have introduced natural hydrocarbon tax which is on top of the company income tax. These are the two things that make up the fiscals and contribute mostly to the government take. So the royalty and the tax system are the two revenues the government has. And when you go the Production Sharing Contract, PSC, government has part of the profit. These are the elements that make up government take.

Realnews: What about existing contractual agreement. The IOCs fear that when the PIB comes into being it will erase the contract they already have.
Membere: There are recognised contracts. Contracts exist. The PIB does not throw any contract away. What we are saying is that you can’t, because of a contract, fail to make a law. In terms of hierarchy, the law is superior to contract. But whatever happens to the PIB, contracts are bound to be kept. We are changing royalty and tax. But we cannot change the profit share in the old production sharing contract. We kept them whole. Nobody is going to change them. But what we are doing is that we are going to change royalty. We are going to change tax. Contract is between the IOCs and the NNPC. Royalty and tax are legal regulatory things that governments do. So they are two separate things. The PIB will not affect the contract. What will happen is that the NNPC and the IOCs will sit down and look at their contract.  Be rest assured that nobody has touched the profit sharing in the PSCs.

Realnews: And the PIB is not going to affect them?
Membere: There is the opening clause that allows for discussion on the contracts after 15 years or when there is a change in crude oil price above 20 dollars. You can trigger it now and say that crude oil price has been above 20 dollars or the PSC has elapsed after 15 years and they can talk and change the contract. So, those are between the NNPC and the contractors. It doesn’t come under the PIB.

Realnews: Before this interview you talked about the reserve; that the country has 30 million barrels onshore and seven million deepshore and yet people rush to offshore where they incur higher cost? Could you explain it more?
Membere: The deepshore environment is more expensive. You can imagine yourself now on the shore. If you are going to work in the river, you must buy a boat, different sizes of boat depending on how deep you are going to. So, the cost of developing the deepwater is far higher than the cost of developing on land where your leg is touching the ground. In offshore they have to get special rigs, special facilities, they have to use vessels. It’s cheaper to develop the onshore. Two, there are more reserves on the onshore than the deepwater as we speak today. We have a huge pool rather than running to where you have a small pool to develop. It tells you one thing and one thing alone, the profitability in the deepwater is far better than the profitability onshore. So, the IOCs, the big boys have elected to go where it pays them more.  Even though they are crying that their deepwater hands are tied, they are all going to the deepwater, you heard them today.

Realnews: But you have lesser reserves there?
Membere: We have lesser reserves there but they make more money from the deepwater than they make from the JV. So, everybody wants to go there.

Realnews: How do they make more money when they are spending more money?
Membere: It is because of the arrangement. The onshore where we have mostly joint venture arrangement, you have 60 percent while I have 40 percent.  In the deepwater where we have the production sharing contract, the contractor brings in the money and develops and after he develops or when we are signing the agreement, we put some clauses that when you spend this money and develop, when you produce, this is how we share it and because at the beginning you did not bring out the money. The profit share there is tilted towards the contractor or investor. So, they make more money than the JV arrangement. So, everybody wants to go to the deepwater.

Realnews:  So, there reason to go to the deepwater is not in anyway because of the militant activities in the Niger Delta?
Membere: Well, part of the argument you hear from the IOCs is because of insecurity. But beneath the insecurity is the profitability. It is minimal when you look at it from the point of view of insecurity. Yes, nobody supports insecurity; nobody supports kidnap but they spend a lot of money even at the deepwater because they have to engage gun boats to be able to secure the facilities and those things are not cheap. They feel a lot safer in the deepwater, that is, for sure because they fly out straight without going through the communities to the location. That we know but the cost is too high to develop than the onshore.

Realnews: What effect will this have on the reserve we have onshore when everybody if going offshore? How will it affect oil and gas production in the country?
Membere: I don’t see that much effect. As I said earlier, we have a lease administration model that says it’s either you develop the bloc and the area, if you don’t develop, you drop for somebody to take a look at it or use it. There are smaller companies that are very aggressive and hungry. They can take these small fields and then get good production and reserve out of it. So, the encouragement with the PIB is to attract more players into the system especially on the onshore side where we define the field and people can have access to smaller fields. Those who are hungry can go into exploration to increase reserve and increase production. We want to increase the production and as a kind of short to medium term on the onshore and then prepare ourselves to do detailed exploration activities in the deepwater. Yes, it is acknowledged that the deepwater usually has the big finds. But we cannot keep fishing looking for one big fish while all the smaller fishes are passing by you. So we want to catch the smaller fish, eat, sustain ourselves and get energy to go to the deepwater with our exploration activities while we use onshore as a strong base for this country and for the benefit of its citizens.

— Nov. 18, 2013 @ 01:00 GMT

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