Nigeria’s long-awaited PIA aims to overhaul the oil industry

On August 16, President Muhammadu Buhari signed the long-awaited Petroleum Industry Act (PIA) to reform Nigeria’s lucrative but chaotic oil and gas industry. Over the past 20 years, several governments have tried to pass an all-encompassing law, the scope and complexity of which have failed time and again.

In September 2020, President Buhari submitted a new law on the oil industry to the National Assembly for consideration by the Senate and the House of Representatives. After several months of scrutiny, the bill was passed on July 1st, a relatively quick process that avoided lengthy clause-by-clause negotiations.

Oil and gas are the mainstay of the Nigerian economy, contributing around 10% to the country’s gross domestic product. Oil export revenues account for around 86% of Nigeria’s total export revenues. Providing a new legal, administrative, regulatory and tax framework, the PIA seeks to reshape the community’s relationship with the industry while fighting waste and corruption.

Given the bogus history of the bill, its passage marks a major political victory for the president. With the price of oil rebounding from a low of around $ 35 last year to $ 74 a barrel as the global economy adjusts to the Covid-19 pandemic, the government hopes the PIA will help boost the country’s oil revenue and to stimulate a limited federal budget.

Joe Nwakwue, an oil and gas expert and former chairman of the Society of Petroleum Engineers, says signing the bill is a step in the right direction.

“[The act will allow] larger investments along the value chains with potential for more employment, taxes and improved economic activities, peace, development and economic growth in the host communities, a more efficient and competitive sector and improved value creation throughout the value chain. ”

Read more about the oil industry reforms in Nigeria

Numerous challenges

The oil and gas industry has long been haunted by structural, legal, regulatory, and operational challenges that have undermined its performance while repelling credible investors.

Value is depleted by opaque licensing agreements, inexplicable middlemen, a lack of refining capacity, and interference with the government and the state-run Nigerian National Petroleum Corporation (NNPC). Sabotage and pipeline theft in the oil-rich Niger Delta have caused taxpayers to lose billions of dollars in annual revenue. As problems in the industry have risen, Nigeria’s oil production has also declined, currently at 1.5 million barrels a day, compared to a high of 2.5 million barrels a day in 2005.

Meanwhile, the downstream and midstream sectors involved in transportation, storage, marketing and refining have not contributed to the growth of the industry.

Nigeria has four public refineries with a combined capacity of 445,000 barrels per day. However, refineries have been operating at a fraction of their capacity for over two decades, making Nigeria dependent on imports of refined petroleum products for 80% of domestic consumption. In 2020, the Nigerian National Petroleum Commission (NNPC) announced that the refineries had suffered a total loss of N154 billion ($ 374 million).

Oil and gas expert Zakka Bala says the PIB can offer a new vision for the country’s refineries and restart the midstream and downstream sectors.

“We hope that the refineries will start working and that we can move crude oil from the oil wells in Nigeria to the respective Nigerian refineries.”

Transparency concerns

The Nigerian oil and gas industry has historically been mired in corruption, with allegations centering on the role of the cumbersome NNPC, which has acted as both a trader and a regulator. In 2012, a parliamentary investigation revealed a $ 6.8 billion fuel subsidy scandal involving top Nigerian officials.

The current NNPC managing director Mele Kyari took office in 2019 and promised a new fight against corruption. The law provides for the sale of shares in a reformed NNPC, the replacement of regulators, and the reduction and streamlining of license fees.

Bala says the PIA will address longstanding concerns about corrupt practices and a lack of transparency: “The Petroleum Industry Act will have some value if we choose to wear our thinking hats and remove political affiliations, religious affiliations, and sectional affiliations. “And even sectarian affiliations. If we largely eliminate all these nepotism attitudes, we will benefit from the Petroleum Industry Act. ”

Legislation suggests that the NNPC will eventually become “a commercially-minded and for-profit national oil company” that is independent from the government and is audited annually, although no stock sale dates are known yet.

The law also lays down rules for environmental remediation, introduces new dispute settlement mechanisms between the government and oil companies, and sets up a government midstream infrastructure fund.

“It would play a vital role in addressing the inefficiencies plaguing the NNPC, from slow approval of oil projects to budget constraints that hamper its ability to pursue public-private partnerships. In addition, the law would create a supportive environment for both IOCs and indigenous oil companies, help protect the environment and the interests of host communities, support economic diversification in Nigeria, and, critically, transparency in the management of petroleum resources Promoting Nigeria, ”wrote NJ Ayuk, Executive Chairman of the African Energy Chamber, in October 2020.

Relationships with local communities

One of the most controversial areas in the negotiations was the amount of money companies pay to local communities that are driving 10% of the region’s oil wealth out of production. The House of Representatives approved an increase in the proportion of regional oil wealth that comes from production that the host communities can claim from 2.5% to 5%, but the Senate ultimately approved 3%.

Bala says that interacting with the host communities will be key to the PIB’s success: “Regardless of how the departments will please international investors, when they come they will work with the local communities. So we have to make sure that the local communities are comfortable. “

Nwakwue says the PIA offers an opportunity to rebuild relationships with host communities that have long seen no benefit from the sector while suffering from the impact on the environment.

“The terms of the Petroleum Industry Act are better and far more competitive than what we have today,” he says. “It provides an olive branch to host communities for shared prosperity and should therefore be able to attract significantly more investment into the sector.”

The test of the law’s effectiveness, however, will lie in its implementation. It will be of paramount importance to protect this process from the self-interest that traditionally failed Nigeria’s extractive industry, he argues.

“We always have to keep an eye on the stated goals of the measure when implementing it. It is vital to meet the deadlines and get the right people into the institutions created by the law, ”he says. “We should shield the implementation process as much as possible from the influence of politics and special interests.”

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