Petroleum Industry Bill Analysis
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ID: 1375062 Title of Dissertation: A Review Of The Petroleum Industry Bill 2012 And The Impact It Would Have On The Nigerian Petroleum Industry Year: 2013/2014 Supervisor: Dr. Djakhongir Saidov A dissertation submitted to the Law School of the University of Birmingham in Part fulfilment of the requirements for the degree of LLM International Commercial Law This dissertation consists of approximately 15,000 words Birmingham Law School University of Birmingham Edgbaston Birmingham B15 2TT
Transcript of Petroleum Industry Bill Analysis
ID: 1375062
Title of Dissertation:
A Review Of The Petroleum Industry Bill 2012 And TheImpact It Would Have On The Nigerian Petroleum Industry
Year: 2013/2014
Supervisor: Dr. Djakhongir Saidov
A dissertation submitted tothe Law School of the University of Birmingham
in Part fulfilment of the requirements for the degree ofLLM International Commercial Law
This dissertation consists of approximately 15,000 words
Birmingham Law SchoolUniversity of Birmingham
EdgbastonBirmingham
B15 2TT
1375062
United Kingdom
September 2014
Table Of ContentsChapter 1- Introduction.................................2
Chapter 2-Overview Of The Nigerian Petroleum Industry And
Its Impact On Nigeria...................................5
Chapter 3- The Legislative Framework, Regulatory Agencies
And Criticisms.........................................12
Legislative Framework................................12
Regulatory Agencies..................................16
Criticisms Of The Legislative Framework And Regulatory
Agencies.............................................17
Chapter 4- Overview Of The PIB.........................22
Chapter 5- Key Provisions Of The PIB...................24
Part 1- Objectives...................................24
Part 2- Institutions And Regulatory Agencies.........27
Part 3- Upstream Petroleum...........................42
Part 4- Downstream Licencing.........................48
Part 5- Downstream Petroleum.........................48
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Part 6- Indigenous Petroleum Companies...............53
Part 7- Health, Safety And Environment...............54
Part 8- Provisions On Taxation In The Petroleum Industry
.....................................................56
Part 9- Repeals, Transitional And Savings Provisions. 58
Chapter 6-Findings And Conclusion......................60
Final Thoughts.......................................63
Bibliography...........................................64Primary Sources..............................................64Secondary Sources............................................65
CHAPTER 1
INTRODUCTION
In this age, Petroleum is unarguably the world’s most
important commodity and backbone and lifeblood of the
Nigerian economy. With one of the world’s largest oil and
gas reserves, Nigeria is not classed amongst the
developed countries or at least rapidly devoting
countries mainly because the Nigerian petroleum industry
(referred to as the industry hereinafter) is bedevilled
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with problems. To alleviate the problems, an adequate
legislation is needed. The draft Petroleum Industry Bill
2012 (referred to as PIB hereinafter) has been proposed
to turn the industry around as recent developments have
rendered the current legislative and regulatory framework
set up inadequate. The aim of this paper is to examine
the key provisions of the PIB to see if it is fit for the
purpose that it was created for (that is whether it
conforms to its objectives) and to see the impact the PIB
would have on the industry and Nigeria as a whole.
In accomplishing this aim, this paper will be divided
into chapters so the reader will understand the situation
of the Industry, where the PIB fits in and the effect
that the PIB would have. This chapter is an introduction
where a summary of what will be discussed in the other
chapters will be explained.
Chapter two will give an overview of the industry and the
impact the industry has had on Nigeria. This chapter will
give a brief history of the industry, the stakeholders
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and regulators, how the government participates and the
state of the available resources and how far they have
been developed. This chapter will also discuss the
economic, environmental, and environmental impact the
industry has had on Nigeria and sentiments Nigerians have
towards the industry and the role they believe the
industry ought to play.
Chapter three will discuss the current legislative
framework, explaining the key legislations that underpin
the industry, the petroleum arrangement used in the
exploitation of resources, the awards process and some
fiscal arrangements. This chapter will explain the roles
of the key regulatory agencies and how they operate, so
the reader can understand how the industry is governed.
Lastly, the criticisms and the shortcomings of the
legislative and regulatory set-up will be examined. At
this point the reader will then understand the need for
reform in the industry and have an idea of what reforms
are needed.
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Chapter four will give a brief overview of the PIB,
examining what birthed the PIB, what the PIB seeks to
accomplish, how far the PIB has gone in the legislative
process and the mixed views stakeholders have towards the
PIB. The fifth chapter will then be an in depth analysis
of the PIB following the structure proposed. In this
chapter, the impact that the key provisions have will be
analysed and recommendations will be proposed where
necessary. The PIB is large, considering the word
constraint it would be impossible to extensively go
through all these provisions in a detailed process. For
this reason, only the key provisions will be discussed.
The concluding chapter will be a summary of the key
findings made and the final thoughts and recommendations
on how the PIB can be fit for purpose and adequate for
the industry will be given.
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CHAPTER 2
OVERVIEW OF THE NIGERIAN PETROLEUM INDUSTRY AND
ITS IMPACT ON NIGERIA
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Shell-BP and others found oil in Nigeria in 1956 and the
first oil field production started in 1958 in the Niger
Delta. This led to the formation of the industry with one
of the first major developments being the Nigerian
Petroleum Act (PA) 1969. This was the first and main act
regulating the industry, some years after Nigeria gained
independence. “This act vested the entire ownership and
control of all petroleum in, under or upon all land or
Nigerian territorial waters in the Nigerian government1.”
Nigeria then became an Organization of the Petroleum
Exporting Countries (OPEC) member in 1971. In 1971, the
Nigerian government formed the Nigerian National Oil
Corporation (NNOC) in accordance with the OPEC
resolutions, which directed that member states engage in
the oil industry by getting participating interests in
the concessions held by International Oil Companies
(IOCs). The NNOC had the legal right to purchase assets
in the IOCs on behalf of the government and thus gained
1Olajumoke Akinjide-Balogun, ‘Legal Framework of The Nigerian Petroleum Industry’ (Mondaq, 3April 2001)< http://www.mondaq.com/x/10726/Legal+Framework+Of+The+Nigerian+Petroleum+Industry> accessed 20 July 2014
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about 30% operating interests in both Agip and Elf2.
Currently the Government participates in the Industry
through the Ministry of Petroleum Resources (Ministry),
Department of Petroleum Resources (DPR), Department of
Gas Resources (DGR) and the Nigerian National Petroleum
Corporation (NNPC). The NNPC was formed in 1977 and
rearranged into 11 difference business units in 19883.
The industry has also brought about foreign investment to
the economy. The major international stakeholders are
Shell, ExxonMobil, Total, Chevron and Eni. The NNPC has
Joint venture agreements and Production Sharing Contracts
(PSCs) with these companies. There are indigenous oil
companies in Nigeria and “the Indigenous Concession
Programme’s aim was to retain ownership and control of
indigenous concessions in Nigerian hands and thereby
encourage the growth of local expertise production in
exploration, development and operations.4 Over the past2 ibid3 Budgit ‘Petroleum Bill Simplified’ (Budgit 25 November 2013) <http://www.stakeholderdemocracy.org/cgblog/566/89/Petroleum-Industry-Bill-simplified.html> accessed 20 July 2014 4 Energy Information Administration (EIA), ‘Nigeria Analysis’ (EIA, 30 December 2013) <http://www.eia.gov/countries/cab.cfm? fips=NI> accessed
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couple of years, Nigeria has seen the rise of indigenous
oil companies such as Transcorp, Sahara Energy, Dangote
Group5. These companies play a major part in the industry
as they now acquire and dispose of assets. However, not
all of these indigenous companies simultaneously
participate in upstream and downstream activities.
Furthermore, the current regulation and legislation gives
the IOCs a stronger stance and bargaining power than the
indigenous oil companies. This is evidenced by the fact
that they have the bigger market share and are more
technologically and technically developed than the
indigenous companies.
As of 2013, the value of Nigeria’s proven gas reserves
was 182 trillion cubic feet and at current production
level, these reserves could still produce gas for up to
80 years6. Thus Nigeria has the eleventh biggest reserves
globally, but despite having such large reserves, Nigeria
21 July 20145 Thisdaylive, ‘The Rise of Nigerian Oil and Gas Companies’ (Thisdaylive, 10 May 2014) <http://www.thisdaylive.com/articles/the-rise-of-nigerian-oil-and-gas-companies/178195/> accessed 20 July 20146 Ibid (4)
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is the twenty-fifth largest gas producer in the world.7
This is probably because gas production is hampered by
the deficiency of infrastructure to monetize these gas
reserves8. The security concerns especially in the Niger
Delta where majority of the gas reserves are located and
corruption by the leaders also play a part. Regardless of
these problems, Nigeria is still the fourth largest
exporter of Liquefied Natural Gas.9
Nigeria is the largest oil producer of oil in Africa.
Statistics have shown that Nigeria’s oil reserves amount
up to 37.2 billion barrels, Thus Nigeria has the second
largest quantity of proven oil reserves in Africa and the
11th largest in the world10. However, exploration has not
been at its peak for some years because of the security
concerns and regulatory uncertainty such as the two-year
delay of the PIB. Nigeria experiences inadvertent
production shortages as high as 500,000 barrels per day.
7 ibid 8 ibid 9 ibid 10 ibid
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Total oil production reached its peak of over 2.6 million
barrels per day in 2005, but started dropping because of
the violence by militant groups which forced many IOCs to
withdraw staff and stop production.11” Ever since, Nigeria
has not been able to reach its peak talk less of reaching
its target of 4 million barrels per day.
The economy of Nigeria is heavily reliant on the
industry12. Statistics shown that seventy-five percent of
Nigeria’s revenue comes from crude oil transactions,
taxes and royalties and ninety-five percent of Nigeria’s
foreign exchange comes from the sale of oil and
gas.13Nigeria has the biggest economy in Africa14. The
11 EIA, ‘Nigeria Overview/ Data’ (EIA, 30 December 2013) <http://www.eia.gov/countries/country-data.cfm?fips=ni#pet> accessed 21 July 201412 Samuel Diminas, ‘An Analysis of the Nigerian Petroleum Industry Bill 2012’ (Westpaq, May 2013) < http://www.westpaq.com/wp-content/uploads/2013/05/An-Analysis-of-the-Nigerian-Petroleum-Industry-Bill-2012_WESTPAQ_v1_FINAL.pdf> accessed 24 July 2014 page 113 ibid (3)14 BBC News, ‘Nigeria becomes Africa’s biggest economy’ (BBC, 6 April 2014) <http://www.bbc.co.uk/news/business-26913497> accessed 24 July 2014
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Industry largely contributed to Nigeria attaining this
feat because it is one of the main generators of GDP15.
However, this reliance has caused problems for other
industries. The Director General of Nigerian Association
of Chambers of Commerce, Industry, Mines and Agriculture
(NACCIMA) recently stated that “The petroleum industry is
creating distortion in the manufacturing and agricultural
sectors which are the main engines of an economy and this
kills the economy silently”.16 This statement has some
truism to it because the agricultural sector, which used
to account for twenty-seven percent of GDP and sixty-five
percent of employment, has seen a decline in efficiency
because it has been neglected for years17.
15 Patrick Atuanya and Bala Augie, ‘Breaking down Nigeria’s rebased $510 billion GDP’ (Businessday, 7 April 2014) <http://businessdayonline.com/2014/04/breaking-down-nigeria-rebased-510-billion-gdp/#.U-JzP4BdVUs> accessed 24 July 201416 Zakariyya Adaramola, ‘NACCIMA says Oil Sector is killing economy’ (allafrica.com, 13 February 2013) < http://allafrica.com/stories/201302130929.html> accessed 24 July 201417 Global Citizen, ‘Oil in Nigeria- a cure or curse?’ (Global Citizen, 31 August 2012) < http://www.globalcitizen.org/Content/Content.aspx?id=2e0d195b-5b4b-41d2-9c3a-bac3d7957be7> accessed 24 July2014
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Nigerians have very strong sentiments towards the
industry and the role the petroleum revenue should play
in the socio-economic wellbeing of the state. For
example, Nigerians are outraged by the fact that it
imports gasoline to meet domestic demand although it is a
major exporter of oil and gas18. They were also outraged
when fuel subsidies were lifted in January 2012 and the
price of fuel per gallon increased by a hundred percent19.
Nigerians have strong sentiments about the fact they
experience regular fuel scarcities20 when they have the
resources to last another generation. “Nigeria is having
a bumper harvest, but in famine, starving!”21
18 Emma Farge and Claire Milhench, ‘Nigeria orders 1.85 million tonnes of gasoline imports’ (Reuters, 20 April 2014) < http://uk.reuters.com/article/2014/04/28/nigeria-gasoline-idUKL6N0NK4Q320140428> accessed 24 July 201419 Adam Nossiter, ‘Nigeria Protest Rise in Oil Prices’ (New York Times, 9January 2012) < http://www.nytimes.com/2012/01/10/world/africa/nigerians-protest-oil-price-rise-as-subsidies-end.html?_r=0> assessed 24 July 201420 Michael Oche, ‘Why Nigeria still Experiences Fuel Scarcity’ (Leadership Nigeria, 6 April 2014) < http://leadership.ng/news/363433/nigeria-still-experience-fuel-scarcity-nupeng> assessed 24 July 201421 Paul Adujie, ‘Petroleum: What Benefit to Nigerians?’ (Nigerianvillagesquare.com 5 October 2004) < http://www.nigeriavillagesquare.com/petroleum-what-benefit-to-nigerians.html> assessed 24 July 2014
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The environmental damage caused by resource exploitation
and oil theft is enormous. This is what has led to the
violence in the Niger Delta region where estimates show
that over a thousand people die every year22. There have
been over 7000 oil spills since the 1970s23. This has led
to drinking water contamination, damage to coastal
environments and fishery deterioration. Nigerian
regulations on this are not tough and hardly enforced so
oil companies have the leeway to do as they please.24
There are strong sentiments against gas flaring.
Nigerians have opposed this and brought legal action
against Shell in 2005, where the Federal High Court of
Nigeria ordered that gas flaring must stop as it
contravenes the constitutional right to life and
dignity25. However, this ruling has not been enforced as
22 Anup Shah, ‘Nigeria and Oil” (Global Issues, 10 June 2010) < http://www.globalissues.org/article/86/nigeria-and-oil> assessed 24 July 201423 Julia Baird, ‘We Don’t Hear about Africa’ (Newsweek, 18 July 2010) <http://www.newsweek.com/baird-we-dont-hear-about-africas-oil-spills-74469> 24 July 201424 ibid25 Gbemre v Shell Petroleum Development Company Nigeria Limited and Others (2005) AHRLR 151 (NgHC 2005)
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companies still continue this damaging practice26.
Currently, Nigeria flares the second largest quantity of
gas and 10% of the gas flared globally. The international
community and environmental groups oppose gas flaring
because causes it climate change and releases toxic
chemicals into the environment27.
Nigerians have the belief that the petroleum revenue
should be used for the development of the state’s
infrastructure, and poverty alleviation. According to
World Bank statistics, “the bulk of Nigeria’s petroleum
revenue gets siphoned by 1% of the population and around
350 billion US dollars of petroleum revenue has been
stolen by government officials since the 1960s”28. Any
form of protest is usually met with strong government
suppression such as the use of military force against
civilians29. The best the government has done is creating26 Climate Law, ‘Shell Fails to Obey Court Order to Stop Gas Flaring, Again’ (Climate Law, 2 May 2007) < http://www.climatelaw.org/media/2007May2/> assessed 24 July 201427 ibid (4)28 Sebastian Junger, ‘Blood Oil’ (Vanity Fair, February 2007) < http://www.vanityfair.com/politics/features/2007/02/junger200702> assessed 25 July 2014 29 ibid
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the Petroleum Technology development fund (PTDF), which
the government uses to send citizens to foreign and local
universities for undergraduate and postgraduate study and
other forms of training. Considering the amount of
petroleum revenue available, this is not satisfactory to
the Nigerian populace. Nigeria as a whole does not have
stable power supply; most areas have no electricity,
running water, tarred roads, and access to education and
healthcare.
From the above overview of the industry, one can see that
the industry plays a significant role in Nigeria.
However, the current regulatory and legislative set up
has not catered for the needs of the industry and the
state has suffered as a result. It has not ensured that
the reserves are as productive as they ought to be, it
gives the IOCs too much power and it is rarely enforced.
The next chapter will explore this regulatory and
legislative set-up in more depth.
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CHAPTER 3
THE LEGISLATIVE FRAMEWORK, REGULATORY AGENCIES
AND CRITICISMS
Legislative Framework
There is no single encompassing legislation that
regulates the petroleum industry, but rather there are
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several. The PA 196930 and all amendments, subsidiary
legislation and instruments enacted under it, is the main
act regulating the industry and it provides “for the
exploration from territorial waters an continental shelf
of Nigeria and to best ownership of and all onshore and
offshore revenue from petroleum resources in the Federal
Government”31. The Petroleum Profits Tax Act (PPTA) 1990
provides for the imposition of taxes on petroleum profits
and how they will be assessed and collected. The Oil
Pipelines Act 1965 provides for how licences will be
awarded for the development and maintenance of pipelines.
The Oil in Navigable Waters Act 1968 implements the terms
of the Convention of Prevention of Pollution of the sea
by Oil 1954 and provides for prevention of pollution in
the Navigable waters. The PTDF Act 1973 established the
PTDF with the objective of training and educating locals
to manage the industry and develop Nigeria. The NNPC Act
1977 dissolved the NNOC and established the NNPC, which
is also authorized to implement all regulatory measures
regarding the control of the industry. The Associated Gas
30 PA 196931 ibid
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Reinjection Act (AGRA) 1979 provides that every oil and
gas producing company must submit to Nigeria’s plans for
gas re injection and provides for the implementation
process.
The Environmental Impact Assessment Act 1992 provides for
issues that must be considered prior to undertaking
certain projects because of impact to the environment.
This is the main law that regulates the impact of the
industry on the environment and the act is quite out-
dated because it was enacted before some environmental
developments like the Kyoto protocol. Deep Offshore and
Inland Basin Production Sharing Act 1993 provides for
fiscal incentives given to oil companies operating in
deep offshore and inland basin areas under PSCs. The
Petroleum (Amendment) Decree 1996 legislates on marginal
fields.
Petroleum Products Pricing Regulatory Agency (PPPRA) Act
2003 established the PPPRA and provided for how it will
operate. The Nigeria Oil and Gas Industry Content
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Development Act 2010 (Local Content Act 2010) provides
for the enhancement of local content in the industry
through the utilization of Nigerian goods and services.
The above are the key legislation that underpins the
industry.
The current legislative framework also regulates on the
rights to oil and gas. By virtue of Chapter 2 of the
Constitution of Nigeria 199932 and Section 1 PA 1969, the
ownership and control of petroleum resources in Nigeria
and within its exclusive economic zone33 is vested in the
Federal Republic of Nigeria. The Ministry awards Oil
Exploration Licences (OELs), Oil Prospecting Licences
(OPLs) or Oil mining Leases (OMLs) for the exploitation
of petroleum34. OELs gives the licensee the non-exclusive
exploration rights within the awarded acreage, OPLs gives
the licence the exclusive exploration rights within the
awarded acreage and the right to extract and dispose of
petroleum won in the course of its activities. If a
32 Constitution of the Federal Republic of Nigeria 1999, ss 16-1733 Exclusive Economic Zone Act 1978, ss 1-234ibid (30) s 2
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commercial discovery is made, the licensee may then apply
for an OML. This allows the licensee to conduct
exploration and prospective activities within the leased
area and to lift, store, transport or export petroleum
discovered in that leased area35. Ownership of land in
Nigeria does not vest ownership of petroleum underneath;
petroleum reserves are government property. The PA 1969
legislates on how licences and leases are awarded and
worked, how they can be assigned or disposed and their
durations36.
The Petroleum arrangements used for upstream activities
are PSCs. PSCs came into the fray in 1973 (the first of
which was with Ashland Oil)37. Previously, the NNPC
entered into Unincorporated Joint Venture’s with the IOC.
These JVs were governed by Joint Operating Agreements
with the NNPC, with the NNPC having a minimum of fifty-
five percent participatory interest38. This arrangement35 ibid, s 2(c)36 Ibid 1st Schedule – 2nd Schedule37 ibid (1)38 Olaniwun Ajayi LP, ‘Nigeria’ (Freshfields, March 2013) < http://www.freshfields.com/uploadedFiles/SiteWide/News_Room/Insight/Africa_ENR/Nigeria/Nigeria%20oil%20and%20gas.pdf> assessed 29 July 2014
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was problematic because of the government’s incapability
to consistently meet its cash call obligations to finance
JV activities. The government decided to resort to PSCs.
Since then all new contracts with the IOCs have been
PSCs39. Thus explaining the rationale behind the enactment
of the Deep Offshore and Inland Basin Production Sharing
Act 1993 and Petroleum (Drilling and Production)
Regulations 2003 which makes provisions for royalties in
PSCs at a sliding scale dependant on the barrels produced
per day40.
The Nigerian PSCs have some generic and unique features.
First, the contract is between the NNPC and the company,
who becomes the contractor. Second, NNPC holds the OPL
and the OML of the acreage. Third, the contractor is
appointed to do the exploration and production work in
the allotted acreage for a duration of 40 years. Fourth,
the contractor has to finance the work. Fifth, The
contractor’s costs will only be recovered if exploration
and development is successful. Sixth, production is split39ibid (1)40 Petroleum (Drilling and Production) Regulations 2003, s62
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into royalty oil (oil allotted to pay royalties payable
per month of production and also concession rentals due
for that period), Cost oil (this oil will be sold to
recover the contractors operating costs and other costs
as agreed), tax oil (oil allotted to pay the Petroleum
Profit Tax as governed by the PPTA 1990 as companies
income tax does not apply to petroleum activities) and
profit oil (this is the remaining oil divided between
NNPC and the contractor after the above have been
allotted and it is usually apportioned at pre-agreed
percentages41. The introduction of royalty and tax oil is
quite unique to PSCs in general. The royalty oil and tax
oil is allocated to the NNPC for the payment of royalties
due and tax payable to the government because the NNPC
holds the OPL and OML42. Lastly, a Joint Management
Committee oversees petroleum activities and work
obligations.
41 Bernard Taverne, Petroleum, Industry and Governments: A Study of the Involvement of Industry and Governments in the Production and Use of Petroleum’ (Wolters Kluwer’s Law & Business, 2nd Edition, 2008) page 27242 ibid 274
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Regulatory Agencies
The Ministry is the authorized to oversee the industry.
It exercises its powers through the Minister who
formulates, executives and implements the government
policies for the industry. The Minister issues the OELs,
OPLs and OMLs,43 awards PSCs44 and decides on assignments
of assets45. The DPR is within the Ministry; its main
responsibilities are to ensure that industry regulations,
procedures for licences, leases and the environment are
complied with. It also oversees the activities performed
by licensees and leaseholders comply with petroleum
legislation and good oilfield practice. The DPR is the
“technical arm of the ministry”46. The DGR was created by
legislation47 and its role is to ensure gas is supplied to
the local market. It is also an arm of the Ministry. The
NNPC is the corporation through which the government
participates in the industry. It undertakes all forms of43 ibid (30) 44 Deep Offshore and Inland Basin Production Sharing Contracts Act 1993, s 245 ibid (30), 1st Schedule, s 1546 Tominiyi Owolabi and Others, ‘Oil and gas regulation in Nigeria’ (Practical Law, 1 May 2014) < http://uk.practicallaw.com/5-523-4794?q=*&qp&qo&qe#a362733> assessed 29 July 201447 National Gas Supply and Pricing Regulations 2007
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commercial activities in the industry such as entering
into joint ventures or PSCs with oil companies. It has
some administrative control of the industry through the
Petroleum Inspectorate, which issues permits for
exploratory and production activities48. The NNPC is also
a customer as it buys petroleum from the Government for
trade. Lastly, the NNPC is an investor in LNG projects.
The above agencies are the major regulators of the
industry and their powers are provided for by
legislation.
However, there are some agencies charged with somewhat
minor responsibilities but altogether still oversee the
industry. The Nigerian Content Monitoring Board (NCMB)
ensures the Local Content and domestic preference
provisions by the Local Content Act are met49. There are
numerous agencies responsible for the environment such as
the National Oil Spill Detection and Response Agency
(NOSDRA) and The National Environmental Standards and
Regulations Enforcement Agency (NESREA) whose roles are
48 ibid (1)49 ibid (38)
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explained by their titles. There are numerous regulatory
agencies created for any aspect of the industry that
needs to be regulated.
Criticisms Of The Legislative Framework And Regulatory Agencies
Dr Momodu has argued that the current legislative
framework is obsolete and out-dated50. This is perhaps why
Diminas stated that, “The PIB was conceived out of the
need to bring the regulatory framework of Nigeria’s oil
and gas industry up to speed with global standards.”
These arguments are very justified because the PA 1969
has been around for 45 years. Although there have been
amendments, these only patch up the act. The act does not
meet the needs of the age.
Lack of enforcement is another challenge. The gas flaring
laws provided for in the AGRA 1979 have not been enforced
as the cease flaring date has been pushed back for over
50 Dr. Momodu Kassim-Momodu and Professor Cornelius Nwajide, ‘The Nigerian Petroleum Industry Bill 2012: Some Observations and Suggestions’ [2012] PTDJ Vol. 2; No 2 page 1
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30 years. This is particularly bad as gas is flared in
rural areas and neither the oil companies nor the
government are taking any steps to protect the locals. A
reason for the lack of enforcement may be that the
legislative provisions are not practical.
The legislative framework has not catered well for the
environment. This is one of the main reasons for the
tension in the Niger Delta region. Due to the
environmental ruin, the locals have not particularly
welcomed the oil companies. It is appalling that the
government has not made serious efforts to sort this out
because it is a major reason why foreign investors are
pulling out of Nigeria. There is legislation on
environmental protection but there has been a lack of
enforcement.
The current framework has failed in taking care of the
socio-economic wellbeing of Nigerians. Seventy-three
percent of Nigerians live below the poverty line. The
infrastructure is undeveloped and there is unemployment.
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Nigeria is suffering from the “resource curse” and the
legislative framework has not really provided sufficient
mechanisms for alleviating these problems. The
legislation has failed to address the failure in domestic
supply of petroleum.
The Nigerian legislative framework is not easily
accessible. There are too many petroleum legislation and
investors who are new to the industry will have
difficulties understanding their rights and obligations
and the duties placed on them. This is why there is an
outcry for the PIB because it is believed that it will
“consolidate a plethora of laws, statutes and regulations
which regulate the industry and would, if passed, reform,
review and streamline existing legislation, in order to
deliver a fair, economic return for Nigeria as well as
for investors”.51 This framework is also not transparent
so there are loopholes for corruption. Lack of
51 Debbie Legall, New Petroleum industry Bill for Nigeria (International Bar Association) <http://www.ibanet.org/Article/Detail.aspx?ArticleUid=6fa3d18b-635f-41f4-b90d-bbfb85d00649 > assessed 31 July 2014
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transparency and an overpowered minister52 is a recipe for
disaster.
The fiscal regime is problematic. A level of stability is
required for sustained foreign investment, but the
industry lacks a stable regime. “Fiscal concerns are,
arguably, the beating heart that sustains any oil and gas
industry”53. It comes as no surprise that one of the key
objectives of the PIB is to provide a better fiscal
regime. The royalties and tax rates are high considering
all the risks and concerns foreign investors face in
Nigeria. This is perhaps why investments have reduced and
Shell is selling their assets in the industry.54
The regulatory agencies are bedevilled with problems.
There is no clear separation of functions between the
52 Onyekachi Duru, An Appraisal of the Legal Framework for the Regulation of Nigerian Oil and Gas Industry, with Appropriate Recommendations (2 August 2011) <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2137979> assessed 31 July 2014 page 1053 ibid (51) 54 Kathleen Caulderwood, Royal Dutch Shell to Sell $5b in Nigeria Oil Assets’ (International Business Times, 27 August 2014) < http://www.ibtimes.com/royal-dutch-shell-sell-5b-nigeria-oil-assets-1671232> assessed 2 September 2014
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agencies. This is particularly evident with the NNPC and
DPR. The DPR is a regulator and to a large extent
regulates the NNPC. However, both agencies share
facilities, employees and the NNPC directly funds the DPR
for employee payment and monitoring activities. This
creates a regulatory capture and does not allow the DPR
to supervise the NNPC efficiently.
“The NNPC had the poorest transparency record out of
forty-four national and international energy companies”
and scored 0% on reporting anti- corruption programmes55.
The current legislative framework has soft disclosure
requirements, as account statements only ought to be
disclosed to the president and not the public.
The NNPC is too powerful. The NNPC is a commercial agency
with regulatory powers. The NNPC theoretically has the
power to regulate on matters that are in its favour
55 Dr Cobus de Swandt and Karin Lissakers, “Promoting Revenueand Transparency: 2011 Report on Oil and Gas Companies (RWI and Transparency International 2011) <http://www.transparency.de/fileadmin/pdfs/Themen/Internationales/TI_PRT_2011_report_FINAL_EN.pdf > assessed 10 August 2014 pg 2
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rather than in the interest of the government. This lack
of separation in the regulatory framework does not
promote transparency, effectiveness and efficiency in the
industry. The PIB must “ensure separation and clarity of
roles between policy, regulation and commercial
activities”.56
The NNPC is failing as a commercial body and is not
profitable. The NNPC could not fund forty-two percent of
its JV investments. The NNPC resorted to substitute
financial mechanisms, which on average had an interest
rate of eight percent57. NNPC’s Managing Director
publicly said, “the NNPC has been insolvent for the past
four years and could not remit over thirty billion US
Dollars of internally generated revenue to the
Consolidated revenue fund.”58 56 Odujinrin & Adefulu, ‘A Critical Analysis of Institutional Reforms in Nigeria’s Oil and Gas Industry’ (Odujinrin & Adefulu, 9 June 2008) < http://www.odujinrinadefulu.com/documents/A%20Critical%20Analysis%20of%20%20Institutional%20Reforms%20in%20Nigeria's%20Oil%20and%20Gas%20Industry.pdf > assessed 10 August 2014 page 357 ibid (3)58 Transparency for Nigeria, ‘NNPC is Broke- Andrew Yakubu’ (Transparency for Nigeria, 14 February 2014) <http://www.transparencyng.com/index.php/news-categories/23-business-and-economy/7345-nnpc-is-broke-
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The current legislative framework is having a ruinous
impact on the industry and this is perhaps why the Oil
and Gas Sector Reform Implementation Committee (OGIC) set
up to probe the Industry found that there was corruption,
no transparency, poor investment environment, gas flaring
had still not stopped even though the AGRA 1979 set the
cease flaring date in 1984, oil spills were still
occurring and pricing instability was still present,
although there was an act and agency dedicated to sort
this out. Based on these findings, the OGIC recommended a
new legislation (PIB), which would sort out of the
problems. Nevertheless, The biggest failure of the
current framework is the lack of enforcement.
The present regulatory and legislative set up is failing
the industry. This is where the PIB comes in; the key
purpose of the PIB will be to address the problems in the
industry. The remainder of this paper will be focused on
scrutinizing the PIB to see if it is fit for the purpose
gmd > assessed 11 August 2014
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it was created for and to see if the key provisions are
adequate for the industry.
CHAPTER 4
OVERVIEW OF THE PIB
The PIB was birthed because the industry was not up to
global standards. The initiative for a legislative reform
dates back to year 2000 where the OGIC was formed to
probe the industry and recommend improving reforms. Over
the years, there have been different PIB drafts, however,
this paper deals with the most recent draft that was
presented to the National Assembly by the President on 18
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July 2012. The PIB has been read in both houses of the
National Assembly59 but it has still not been passed into
law. Some analysts are happy that the bill has not been
passed and see the delay as a ‘blessing in disguise’ as
they think the PIB is bedevilled with numerous problems.60
On the other hand, people are unhappy that the government
has been lackadaisical in passing the PIB into law and
strongly hold on to the view that the delay hurts and
deflects investments61 because statistics prove that
investments in upstream assets have reduced62.
59Dr. Pedro van Meurs, ‘Nigerian Petroleum Industry Bill 2012’ (Ernest & Young, 26 October 2012) <http://www.ey.com/Publication/vwLUAssets/Nigeria_Petroleum_Industry_Bill_%E2%80%94_2012/$FILE/Nigeria_Petroleum_Industry_Bill_26Oct12_lowres.pdf > assessed 2 August 201460 Charles Kennedy, ‘ Nigeria’s oil industry threatened by Petroleum industry Bill (Oilprice.com, 25 August 2013) <http://oilprice.com/Latest-Energy-News/World-News/Nigerias-Oil-Industry-Threatened-by-Petroleum-Industry-Bill.html > assessed 4 August 201461 Collins Nweze, ‘Delay in PIB’s Passage hurts $100b investment’ (The Nation, 25 July 2014) <http://thenationonlineng.net/new/delay-in-pibs-passage-hurts-100b-investment/ > accessed 10 August 201462 Adepetun Caxton-Martins Agbor & Segun, The Petroleum IndustryBill 2012: A Synopsis (Adepetun Caxton-Martins Agbor & Segun, 10 August2012) < http://www.acas-law.com/newsletter/The%20Petroleum%20Industry%20Bill%202012%20%28PIB%29%20-%20A%20Synopsis%20by%20ACAS-LAW%20%2810%20August%202012%29.pdf> assessed 4 August 2012 page 3
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The PIB contains over three hundred and sixty sections
and five schedules63. Upon enactment of the PIB twelve
petroleum legislations will be repealed64. The PIB will
also create seven new institutions in the industry. By
creating a stable and sound legal, fiscal and regulatory
framework for the upstream and downstream sectors of the
industry, the PIB “seeks to ensure that the management
and allocation of petroleum resources in Nigeria and
their derivatives are conducted in accordance with the
principles of good governance, transparency and
sustainable development in Nigeria”65.
63 PIB 201264 ibid s 35465 ibid (61) page 5
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CHAPTER 5
KEY PROVISIONS OF THE PIB
The industry’s legislative framework must be “clear,
complete, transparent, accessible, flexible and
practical.”66 “The fiscal terms must be stable, a
consultative process must be established for dialogue
with the stakeholders to ensure that the laws are
practicable and the further the national energy policy
objectives of the Government.”67 These will be some of the
yardsticks that will be used to judge whether the PIB is
fit for purpose and adequate for the industry.
Part 1- Objectives 68
66 ibid (1)67 ibid68 PIB 2012 ss 1-4
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The objectives of the PIB are to “(a) create a conducive
business environment for petroleum operations;(b) enhance
exploration and exploitation of petroleum resources in
Nigeria for the benefit of the Nigerian people;(c)
optimize domestic gas supplies, particularly for power
generation and industrial development;(d) establish a
progressive fiscal framework that encourages further
investment in the industry while optimising revenues
accruing to the Government; (e) establish commercially
oriented and profit driven oil and gas entities; (f)
deregulate and liberalise the downstream petroleum
sector; (g) create efficient and effective regulatory
agencies; (h) promote transparency and openness in the
administration of the petroleum resources of Nigeria; (i)
promote the development of Nigerian content in the
industry; (j) protect health, safety and the environment
in the course of petroleum operations; and (k) attain
such other objectives to promote a viable and sustainable
industry in Nigeria.”69
69 ibid s 1
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Observations
Looking at these objectives in isolation enables one to
understand the direction the Nigerian government wants to
go as regarding the industry. First, the objectives show
that the Nigerian government has acknowledged the need to
reorganise the industry in a structured and balanced way
to increase and guarantee investments. This view is
firmly reflected in all the objectives, especially
objective (a), (d) and (h). Second, the objectives show
that the government is concerned with the social,
economic and environmental development of Nigeria. The
government wants to use the industry to achieve these
developments. This is reflected in objectives (b), (c),
(i), (j) and (h). Environmental protection will also
boost investments because the Niger Delta militancy was
caused by mainly environmental concerns. People in the
Niger Delta region would welcome this objective
Third, provisions of the act contradict some objectives.
Objective (h) is an example. Objective (h) as important
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as it may be to the industry may not be achieved. The PIB
provides that the President has the competence to grant
leases or licenses70. While this seems okay, it
contradicts the previous section, which provides for
transparent, open and competitive bids for leases and
licenses71 and objective (h).
Fourth, some objectives are in line with the objectives
of recent legislative and policy developments. Objectives
(c), (i) and (j) are in line with the 2005 National Oil
And Gas Policy (NOGP) and Local Content Act 2010
respectively. The NOGP aims to increase economic benefit
from the oil and gas resources, increase economic and
social development, ensure domestic supply and protect
the environment. The above shows that the government has
acknowledged a positive direction to go and are heading
in that direction. It is pleasing to see that Government
wants to exploit Nigeria’s gas reserves that have been
unexploited efficiently. If this can be exploited
70 ibid s 19171 ibid s 190
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properly, the government will not only get fiscal
benefits, but the power supply can be improved.
The Federal Government still retains ownership and
control of all the petroleum resources in Nigeria and its
exclusive economic zone72 for the benefit of Nigerians. A
better provision on ownership should include the clause
that “ownership is vested in the Federal Republic of
Nigeria on trust and behalf of the people of Nigeria”73.
It will give Nigerians a sense of calm that the resources
will be used for the good of the populace.
The PIB tries to ensure that the management and
allocation of resources are in accordance with the
principles of good governance, transparency and
sustainable development74. The PIB provides that the
Nigerian Extractive Industries Transparency Initiative
72 PIB 2012, s 273 NEITI, ‘NEITI’s Position on the Petroleum Industry Bill 2012’ (NEITI 2013), < http://neiti.org.ng/sites/default/files/press-release/uploads/neiti-position-final.pdf> assessed 14 August 2014 page 3074 PIB 2012, s 3
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Act (NEITI) 2007 shall bind regulatory agencies and
companies created by the Act75.
Part 2- Institutions and Regulatory Agencies 76
The Minister (Sections 5-8)
The role of the minister does not really change; it is as
it was under the old legislative framework. Nevertheless,
The PIB vests more powers in the Minister. The PIB
empowers the Minister to award, amend, extend or withdraw
upstream and downstream licences and leases77. The
Minister has the power to appoint executives of
regulatory agencies or corporations formulated under the
PIB such as the Upstream Petroleum Directorate, National
Oil Company and so on.78 The Minister also has the power
to formulate regulations necessary to enforce the
provisions of the PIB79; it is interesting to note that
he/she can do this without conducting a public inquiry
75 ibid s 476 ibid ss 5-16977 ibid s 6(h)78 ibid s 6(i)79 ibid s 8
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where he/she deems it necessary to do so 80. The Minister
is in charge of setting royalties, fees and rentals.81
Observations
Theoretically, it seems like a great idea to grant the
minister the power to supervise and control the industry
and to ensure a smooth running. However, in practice, the
Minister will have unmatched discretionary power. This is
problematic because it reduces the checks and balances in
the industry, therein making the industry less
transparent. Lack of transparency will mean that the
objectives of the PIB will not be accomplished. It is
recommended that if the Minister must be really powerful,
there should be some provisions on checks and balances
and accountability mechanisms in place.
Furthermore, the power to set royalties and other fiscal
incentives is not really welcomed by oil companies and
investors. Stakeholders fear this because it introduces
80 ibid s 8(6)81 ibid s 197
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an unwanted level of fiscal instability. This power can
lead to an unstable fiscal regime, corruption, political
interference and lack of transparency. If these problems
pop up, the PIB will fail in its objective of “promoting
efficient and efficient regulatory agencies”82 and will
not be adequate for the industry. Nevertheless, it is
recommended that provisions on royalties and other fiscal
incentives should be clearly spelt out in the PIB. This
will help in preventing disputes in the future between
regulators and stakeholders. Lastly, the power to create
regulations necessary to properly enforce PIB paves way
for abuse of power and political interference. The
checks and balances provided in the respective section
are not adequate as the minister can override them when
he deems it fit, it is advisable that the Senate review
this power. The fact that the minister has too many
powers is contrary to objective (g) of the PIB, which is
centred on creating effective regulatory agencies.
Petroleum Technical Bureau (PTB) (Sections 9-12)82 ibid s 1
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The PIB provides that the PTB will be a unit in the
Ministry, which will provide technical, and professional
support to the minister on issues pertaining to the
industry83. The PTB will now take over the functions of
the frontier exploration services of the NNPC, which
means the PTB is responsible for finding opportunities in
frontier acreages and exploiting these opportunities
through developing strategies and effective management.
The PIB also provides for how the staff of the PTB will
be appointed84
Observations
The role of this agency is very vital as it can serve as
an agency that supervises the Minister. However, the way
this institution was set up defeats that purpose. This is
because the PTB should be established as an independent
agency rather than a unit in the Ministry. There is a
sweeping provision, which gives the Minister the power to
83 ibid s 1084 ibid s 11
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direct the operations of the PTB.85 This is not a
reasonable provision because one of the main functions of
the PTB and an objective of the PIB will not be
accomplished. Second, since the PTB comprises of experts
and professionals who are relevant to the industry, the
PTB should also have to competence to make government
policies and suggest future regulations. Third, the PIB
provides that the appointment of PTB staff should be
through a transparent process, however, the PIB did not
explain what a transparent recruitment process is. It is
thereby recommended that the Ministry and the President
should not have the competence to appoint the majority of
the staff. The PTB has to be independent and to a large
extent be free from political manipulation. This will
make the agency transparent and the industry more
attractive to investors.
Upstream Petroleum Inspectorate (UPI) (Sections 13-42)
and Downstream Petroleum Regulatory Agency (DPRA)
(Sections 43-72)
85 ibid s 10(h)
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The UPI will now undertake the DPR’s functions, assets
and liabilities in relation to the upstream sector and
will also undertake many of the NNPC’s regulatory
functions. From its title, its main functions will be to
regulate on all technical and commercial issues of the
upstream sector86 such as ensuring payment of royalties
and rentals and authorizing seismic works. More
interestingly, the UPI will now award, amend or revoke
licences, leases and other permits and hold bidding
rounds on behalf of the ministry87. It also has special
investigatory and monitoring powers over regulatory
agencies and persons in the industry to ensure that they
are not violating the PIB or not performing their duties.
88
The DPRA will undertake the DPR’s assets and liabilities
relating to the downstream sector and the functions of
the PPPRA. The DPRA’s main function will be to regulate
the downstream sector through the development of an oil
and gas transportation system, facilitation of oil and86 ibid s 14-1587 ibid s 1688 ibid s 40-41
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gas supply and trade and ensuring domestic and
international environment standards are complied with89.
It also has special investigatory powers90.
Observations
It should be noted that these two agencies are separate
and this paper puts both of them together for some
reasons. First, both agencies take over the functions of
the DPR and dissolve the DPR. Secondly, For the PIB to
be successful, the UPI and DPRA will have to executive
their respective functions effectively. This is because
the upstream and downstream phases are very important.
Hence, when these agencies fail in their duties, there
will be problems.
For the UPI and DPRA to be successful, the following
recommendations should be enacted. First, the staff of
both regulatory agencies should be remunerated very well
as a mechanism against corruption. Secondly, the
89 ibid s 45-4690 ibid s 70-71
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executives and chairpersons of these agencies should be
appointed on technical and professional merit instead of
political reasons. Employment and appointment should be
through a fair, transparent and competitive process and
the staff should be well trained before and after
appointment. Third, these agencies should be made more
transparent and accountable to the public. Thus, it is
recommended that periodical audits by independent
corporations be performed and there should be extensive
disclosure requirements.
Nevertheless, the creation of these two agencies is a
very good innovation and it will be highly beneficial to
the industry. The functions are clear, feasible and
flexible. The recommendations proposed will just allow
for better execution of functions.
Petroleum Technology Development Fund (PTDF) (Sections
73-99)
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The PTDF still exists and has the same objective of
developing the industry and Nigeria through training
Nigerians in different fields. This objective will be
accomplished by awarding scholarships and bursaries to
Nigerian citizens, traineeships of citizens and grants to
Nigerian universities and so on91.
Observations
The PIB does a fantastic job in clearly spelling out the
functions of the PTDF, the staff and other miscellaneous
provisions on how the PTDF will operate. The PTDF is
highly beneficial to the industry and to Nigeria as a
whole. The main concern with this institution is the way
it will be managed and the members of the board.
A major concern of the PTDF set up is the fact that the
Minister is the chairman of the board.92 It is recommended
that the Chairman should not be the chairman of the PTDF
board and the PTDF should be independent of the Minister
91 ibid s 7692 ibid s 77(2)(a)
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and ministry as a whole. Secondly, The functions of the
PTDF will require specific and professional expertise to
effectively executive them. However, The PIB does not
provide extensively for professionals with managerial and
technical experience to be on the board. Hence, it is
recommended that there should be provisions made for
this. Lastly, it is also recommended that a clear and
transparent process for awarding scholarships and other
grants, bursaries etcetera should be provided for in the
PIB as this has been abused in the past.
Petroleum Equalisation Fund (PEF) (Sections 100-115)
The PIB provides that the PEF will receive the net
surplus finances obtained from petroleum profit marketing
companies and hold these finances on trust for companies
who have suffered losses due to the fact that petroleum
products are at uniform prices throughout the nation93.
The PEF will cease to exist when the petroleum product
market is deregulated94.
93 ibid s 103(a)-(j)94 ibid s 100(4)
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Observations
It is highly recommended that the PEF be abandoned in the
PIB. Companies are not established to make losses and the
provision establishing and defining the PEF implies this.
The goals of the PEF may not be achieved in a capitalist
economy because of the intentions of the stakeholders but
rather it paves the way for fraud and misappropriation.
In practice petroleum products are rarely uniformly
priced across the country.95
Nevertheless, this PEF has a positive aspect. It is a
very good incentive to stakeholders in the industry who
may be affected by uniform prices. This can go as far as
attracting investment as it provides security. Although
the PEF has positive aspects, the recommendation that it
should be scrapped is still maintained because a fiscal
incentive that can lead to fraud will be problematic.
95 ibid (16) page 7
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Another problem with the PEF is that it does not
stipulate a time frame for the PEF to cease to exist and
it does not make sufficient provisions for the staff of
the PEF when the PEF ceases to exist. This means the PEF
can be kept in operation for longer than needed and in
the process, the available revenue may be mismanaged. It
is recommended that there should be a set date when the
PEF will cease to exist and if that is not possible a
clearer and definite time frame should be stated.
Petroleum Host Communities Fund (PHCF) (Sections 116-
118)
The PHCF is a new innovation under the PIB. On a monthly
basis, the PHCF will receive 10% of the net profits from
upstream petroleum corporations. These finances will be
used to develop the social and economic infrastructure of
communities where petroleum production activities are
undertaken96. The net profit is defined as “adjusted
profit less royalty, allowable deductions and allowances,
96 PIB 2012 s 117
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less Nigerian Hydrocarbon Tax less Companies Income
Tax”.97 The Minister is the chairman of this fund.
Observations
In Principle, the PHCF seems to be a brilliant idea. It
may improve peace in the Niger Delta regions, as the
communities will be benefiting from production. Increase
in production would mean an increase in funds for the
PHCF, which would be used to develop the community. This
will create a relationship and an understanding between
companies and locals as the profit or the loss of the oil
companies will affect the development of the community,
so arguably the locals will be on their best behaviour to
ensure more profits for the oil companies. In essence,
the PHCF may increase government take, develop
infrastructure, reduce production disruptions and promote
investor confidence and stability. Oil companies may not
welcome this concept, but in the long run it may bring
stability.
97 ibid s 118(2)
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In practice, the PHCF provisions made for this PHCF may
be inadequate for the industry for some reasons. First,
the PIB did not define what constitutes a host community.
This lack of clarity will spark debates amongst
communities, which may not benefit because they are not
“host communities”. Such communities that are not
benefiting may then take out their frustrations on oil
companies by sabotaging their operations, which then
defeats the purpose of the PHCF. It is recommended that a
host community is defined very clearly in the PIB and the
definition should be clear, reasonable, fair and just. If
this is not done the PHCF will cause more harm than good.
In many communities in Nigeria there are well-defined
community development councils and committees who own
lands and enjoy benefits that come to communities98. The
PIB should consider using these councils in defining a
host community and distributing funds.
Second, the PIB does not make provisions for the host
communities of petroleum infrastructural and
transportation facilities such as pipelines. It is98 ibid (16) page 8
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recommended that the PIB address this because those areas
are equally as important as the areas where reserves are
located. Catering for such communities may reduce
sabotage to petroleum infrastructure that has previously
plagued the industry. Furthermore, states and communities
that are not benefiting from this fund will contest the
PHCF. In the second reading in March 2012, the Northern
Senators opposed the PHCF.99 Judging from past experiences
in Nigeria, there may be community conflict and the
Senate really need to consider how this can be managed.
Third, the PIB does not clearly state what the funds will
be used for and what they should not be used for It just
provides for the development of economic and social
infrastructure of the communities. This means that the
funds can be used for frivolous things. A further problem
is that the PIB makes no provision for the administrative
structure of the PHCF, but rather gives the minister the
discretionary power to regulate on the entitlements,
99 Delegation of the European Union (EU) to Nigeria, ‘The Petroleum Industry Bill: A multi- stakeholder Analysis’ (EU, 13 March 2013) < http://www.oilrevenueng.org/PIB%20Analysis%2013-03-13.pdf> assessed 19 August 2014 page 7
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structure and governance100. This is counter-productive
and allows for corruption, fraud and mismanagement. It
is recommended that the regulations guiding the PHCF
should be provided for in the PIB and not left to the
Minister who is also the chairman of the PHCF. It will be
better if another person is the chairman because asides
from the fact that the Minister will have too much power,
he may not be able to perform all the functions expected
adequately.
Fourth, there is an existing petroleum derivation, which
goes to state governments of oil producing states. This
has not been efficiently utilized for the good of
communities and has not helped better the relationship
between locals and oil companies. One would assume that
the PIB would rather aim to fix this inefficient use of
funds rather than creating a new fund. The new fund asks
more questions than produces answers. It is recommended
that the PHCF is revisited and amended, as it is highly
problematic. If it cannot be fixed, then it should be
100 ibid s 118(6)
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scrapped and provisions on how the existing derivation
can be properly applied should be made.
National Petroleum Assets Management Corporation (NPAMC)
(Sections 120-147), National Oil Company (NOC) (Sections
148-158) and National Gas Company (NGC) (Sections 159-
169)
It is important to note that the above corporations and
companies are different and have different functions.
They are treated together because the NNPC is to be
broken up into these three companies. Once the PIB
successfully passes into law, the two companies and the
Management corporation will be incorporated by virtue of
the Companies and Allied Matters Act 1990. These bodies
take up the commercial aspect of the NNPC’s operations.
This innovation is reasonable as it was quite absurd that
a commercial body competing in a free market economy has
regulatory functions.
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NPAMC would be responsible for managing the NNPC’s
interests in six unincorporated JVs and then “any
upstream asset as the Government may from time to time
deem fit”.101 The NPAMC would operate as a holding company
and its subsidiary would be the Nigerian Petroleum Assets
Management Company Limited (Management Company)102. The
PIB provides that the NPAMC will be funded from and by
the Government’s annual takings and the revenues accrued
from the JVs will be paid to the Federation’s account103.
The NPAMC will be 100% government owned. The Minister is
once again the chairman of the corporation and the PIB
provides for the administrative and board members and
structure.104
After Incorporation, the NOC will be responsible for the
NNPC’s assets and liabilities, which are not vested in
the NPAMC and NGC105. Within six years of incorporation,
“the government shall divest up to thirty percent of the
shares of the NOC to the public in a transparent manner101 ibid s 125(1)-(2)102 ibid s 123103 ibid s 121(1)-(2)104 ibid s 131(1)-(5)105 ibid s 152(1)-(3)
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on the Nigerian Stock Exchange (NSE).”106 The Ministry
will create the memorandum and articles of association
that will be used to run and manage the NOC and NGC.107
Similarly, after incorporation, the NGC would receive
some of the NNPC’s assets and liabilities.108 Within six
years, the government shall divest up to forty-nine
percent of NGC shares to the public in a transparent
manner on the NSE109.
Observations
The PIB provides that the government will fund the NPAMC.
This suggests that there would be no change in the
current JV funding arrangements. It is common knowledge
that the NNPC has failed to fund JV cash calls in the
past. The PIB leaves this funding problem unaddressed and
this will have an adverse effect on future projects.
106 ibid s 151107 ibid ss 156 and 167108 ibid s 163109 ibid s 162
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With a high level of government control and ownership,
the objectives of limited political manipulation,
transparency and commercialisation will not be met. It is
recommended that the government divest at least forty-
five percent of the shares available on the NSE to the
public.
The Minister should not be the Chairman of the NPAMC.
This can lead to abuse of power because the Minister has
the power to determine JV operations and processes. This
can also lead to conflict of interests because the
minister has the power to regulate the industry in the
favour of the NPAMC. It is recommended that the Chairman
is independent of the ministry, to prevent manipulation
and promote transparency.
The provisions made for the NOC and NGC are praiseworthy
to an extent, but some improvements need to be made to
guarantee efficient and effective commercial operations.
First, for the NOC at least 49% should be divested in
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order to raise funds quicker and reduce the pressure of
the government in responding to cash calls. Second, the
PIB should make clear which NNPC assets and liabilities
will be vested in the NGC and NOC. The assets and
liabilities allocated to the NPAMC were made clear by the
PIB but no so for the NGC and NOC. Third, the proposed
division of the NNPC’s commercial functions is vague and
is silent on several important matters. According to the
Revenue Watch Institute (RWI),“it is an ill-advised
approach to leave the specifics to future Memoranda and
Articles of Association and thus to the power of the
minister.”110 It is recommended that the PIB address such
a matter specifically. The PIB should also mandate annual
audits, which should be disclosed to the public, thereby
promoting transparency.
Fourth, it is recommended that the PIB provide a clear
framework for the transition from NNPC to NPAMC, NOC and
NGC rather than giving the minister the power to direct
the members of the NNPC board to do what needs to be done
110 ibid (99) page 8
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to ensure transition111. This is an unclear and lazy
provision. A clear, practical and flexible transition
process should be provided in the PIB as such a provision
will be enforceable and good for the industry. Fifth,
Branding plays a very important role in modern day
business. A commercially oriented name would be
beneficial if and when the corporation decides to get
listed on international stock markets, so rather than NOC
or NGC, it is recommended that commercial oriented brand
names such as PetroNig, NigGas are adopted. The companies
the NOC and NGC are modelled after do not adopt the names
National Oil Company or National Gas Company, but rather
Petrobras, Petronas and Statoil and the like are examples
of the brand names used. The PIB is unclear on who will
be the board members of the NOC and NGC and how the
members will be appointed. Theoretically, this means that
a non-transparent selection process can be used. This can
lead to incompetence if the wrong people are allowed to
manage the corporations. It is recommended that the PIB
legislate on a transparent procedure for selecting board
111 PIB 2012, ss 155,166
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members who should be seasoned technocrats with
professional managerial experience.
The objective of the Government is to create a National
Corporation similar to Saudi Aramco and Petronas112.
However, it is difficult to understand how this objective
will be achieved by breaking the NNPC into three
corporations. Judging from international experience, the
division is not really necessary as renowned companies
who have operations in oil and gas have been very
successful without such a division. The PIB did not
provide a mandate for how these three companies will
effectively work.
The financial scrutiny provisions are arguably not
transparent. The UPI, DPRA, PTDF and NPAMC are under a
duty to publish only summaries of their annual financial
statements online.113 However, the NOC and NGC are not
under a duty to disclose any financial statements. It is
recommended that the disclosure requirements be extended
112ibid (59) page 13113 PIB 2012, ss 35(2), 65(2), 94(2), 141(2)
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to the NOC, NGC and all other regulatory agencies and
institutions because as governmental agencies they ought
to be accountable to the public.
The UPI, DPRA, PTDF and NPAMC have the power to accept
gifts of “money or property upon terms and conditions
specified by the person or organisation making the gifts
provided such gifts are not inconsistent with the
objectives and functions of the regulatory agency”.114
This provision can induce corruption and favouritism
towards the person or organisation making those gifts.
This provision is anti transparent and considering the
fact that Nigeria has corrupt leaders, it is baffling to
see how such a provision was included in the PIB. This
provision would blur the distinction between a gift and a
bribe both in theory and practice. The PIB ought to be
making provisions that combat corruption in the industry.
It is recommended that this provision should be expunged
from the PIB because it legalises corruption. Adoption of
the above recommendations would mean that the provisions
114 ibid ss 33(1), 63(1), 92(1) 139(1)
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of the PIB would conform to objective (e) to a very large
extent.
Part 3- Upstream Petroleum 115
This Part of the PIB deals with the exploration and
production phases and environmental protection. The UPI
is the regulatory agency responsible forwarding acreages
for exploration, development and production of
petroleum.116 The UPI will create a national grid system
to manage such acreages117. Nevertheless, the power to
grant and revoke licences and leases is vested with the
minister.118
The PIB provides that the awards process is open,
transparent and competitive119. The awards process is by a
discretionary bidding system. The points based system is
used in such a manner that the winning bidder will bid
the respective points and have the highest points120. The115 ibid ss 170-205116 ibid s 170(1)117 ibid s 171(1)118 ibid s 172119 ibid (71)120 ibid s 190(2)(b)
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PIB provides for some specific bidding parameters, which
are used in the awards process121. The UPI under the
minister’s direction carries out the bidding process and
sets the parameters122. Notwithstanding the above
provisions, the President has the power to grant licences
and leases under special circumstances123.
The OELs are now referred to as Petroleum Exploration
Licences (PELs), the OPLs are now referred to as
Petroleum Prospecting Licences (PPLs) and the OMLs are
now referred to as Petroleum Mining Leases (PMLs). There
is no change in significance but just title, this is
fairly reasonable as the current titles connote that such
leases and licences are for oil alone, which is quite
misleading. The PEL is valid for only three years and is
only for exploration purposes.124 A PPL is issued for a
maximum duration of five years for onshore and shallow
water acreages and eight years for deep-water acreages.125
In PPL’s the licensee is obligated to work with minimum121 ibid s 190(2)(a)122 ibid ss 190(4)-(5)123 ibid (70)124 ibid s 175125 ibid ss 176-177
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work obligations or a work programme and commence
drilling within 18 months of the effective date.126 The
PIB also makes provisions for steps to be taken if a
commercial discovery is made; for instance, there is a
provision on unitization whereby the UPI can decide that
a commercial discovery should by developed by the
unitization process.127 A PML can be granted when a
commercial discovery of petroleum is made, the UPI
approve the discovery, development plans and work
commitment to develop the discovered resources.128 A PML
can be issued in respect of each commercial discovery
made. The maximum duration of a PML is 20 years or 27
years for onshore and shallow water areas or 30 years for
deep-water areas if in conjunction with a PPL.129
The UPI is responsible for determining the volume of
natural gas that would be supplied to the domestic market
under the Domestic Gas Supply Obligation130 and where a
lessee fails to comply with the UPI’s DGSO requirements,126 ibid ss 178(1)-(2)127 ibid s 180128 ibid ss 181(1)-(2)129 ibid ss 184-185130 ibid s 183(1)
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the lessee shall be suspended from exporting gas.131 This
provision tries to enforce the exploitation of unexplored
acreages or to have the acreages dropped so they can be
available for the next bidding round132. The PIB provides
for royalties and fees to be paid by licensees and
lessees, but leaves the determination of the rates to the
Minister’s discretion.133
Licensees and lessees are required to submit an
environmental management plan spelling out their
environmental commitments and policies which ought to be
in accordance with domestic and international laws and
regulations.134 The UPI in consultation with the Ministry
of Environment must approve this plan135. The lessee shall
install equipment to measure the gas being flared and pay
penalties from time to time as determined by the
minister136 and contribute to an environmental remediation
fund, which will be established by the UPI137. 131 ibid s 183(5)132 ibid ss 193(1)-(7)133 ibid s 197134 ibid ss 200(1)-(3)135 ibid s 202136 ibid ss 201(1)-(2)137 ibid s 203
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Observations
The maximum duration for production licences of thirty
years has also been criticized. Under the current regime,
the maximum period is forty years and the drop of 10
years is unfavourable to oil companies. This might be
problematic for deep-water projects with long lead times.
It is recommended that the 40-year maximum duration for
production licences be maintained. This will attract
investment because oil companies will have sufficient
time to operate.
Section 178 and 179 spell out a detailed work programme,
which is quite beneficial to the industry as it keeps
companies on their toes, promotes quicker development and
prevent acreage sitting. However, IOCs are criticizing
the work programme attached to licences, because they are
too ambitious138. Another problem with the PIB’s work
programme is that the requirement to provide a bank
guarantee for the work to be done has been removed. This138 ibid (99) page 8
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creates a problem of lack of enforcement that is the UPI
may struggle to enforce that the work is done in
accordance with the work programme and development plan.
It is recommended that the obligation to submit a bank
guarantee be reinstated and the level of detail in the
work programme be left to subsidiary legislation or
negotiations. This will be more flexible and easier to
amend when the programme becomes unfavourable or
impractical. Adopting both recommendations would help in
achieving objective (b) of the PIB.
The PIB does not define what a commercial discovery is
but leaves the determination of a commercial discovery to
the UPI. This is problematic because it opens the door
for disputes and can slow down activities. It is
recommended that a commercial discovery be clearly and
objectively defined. A reasonable definition of a
commercial discovery can be “a discovery that produces at
least ten thousand barrels per day of crude oil from the
license or leased area”139.139 Nigeria Union of Petroleum and Natural Gas Workers andNational Petroleum and Natural Gas Senior Staff Association of Nigeria Joint Committee (NUPENGASSAN),
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A deleterious provision in the PIB is that which gives
the president the power to grant leases and licences
without a competitive and transparent process. This
allows for political manipulation and corruption. These
are issues that currently bedevil Nigeria and it is sad
to see that the PIB still wants to carry on these
problems. The president of the United States of America
does not have such a power and such a power is anti-
transparent. It is recommended that this provision should
be scrapped. If this provision must be maintained, then
the PIB must at least specifies what constitutes ‘special
circumstances’ under which the President can grant a
license or lease. This will prevent abuse of power
because such a power has been used previously to award
licences to companies, which the President has
connections with140.
‘NUPENGASSAN’s Position on the Petroleum Industry Bill 2012 (NUPENGASSAN, 2013) <http://www.pengassan.org/pdf/pib2.pdf> assessed 21 August 2014 page 41140 ibid (59) page 14
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The relinquishment provisions in the PIB are very sound
and are set up for the right purposes, especially to
prevent acreage sitting. However, Section 193(3)(c)
defeats the purpose of relinquishment to prevent acreage
sitting. This section provides that the relinquishment
date will be at the end of the PML; by this time the
whole concept of relinquishment will be defeated. It is
recommended that the relinquishment date should be before
the end of the PML so the acreage can be available on the
next bidding round to ensure continued exploitation.
The PIB to an extent does not meet the upstream
objectives set by the Local content Act. The Local
Content Act 2010 proposed that indigenous stakeholders
would be given first consideration in the awarding of
acreages; oil lifting licences and other upstream
operations141 but no such provision was made in this part
of the PIB. It is recommended that the policymakers keep
to their word and make such provisions that give
incentives to indigenous stakeholders. Furthermore, it
would be great for the Nigerian economy and industry if141 Local Content Act 2010 s 1(3)
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indigenous companies were given priority in upstream
petroleum operations. Nigeria could then develop the
capacity to develop.
The PIB provides that the minister will determine
royalties and fees by regulations but this is not a good
idea. It can cause fiscal instability because setting
royalties and fees through regulations rather than
spelling them out in the PIB may lead to pressure on the
minister to reduce royalties for a variety of reasons.
Not determining royalty may also affect investments
because investors may not be able to properly plan and
calculate how much will be invested. It is recommended
that royalties and fees be determined in the PIB so that
an important source of revenue will not be fluctuating.
Environment organizations criticize the environmental
provisions. These provisions are labelled as weak and
unfeasible142. It is recommended that the policymakers
provide for clearer and more practical environmental
protection provisions. An example of such a provision142 ibid (99) page 7
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that could be made is that licences and leases should
only be awarded to companies who have insurance policies
covering for environmental disasters caused by their
activities. It is also preferable to set out how much the
gas flaring penalties would be. Leaving it to the
minister does not show a sign of seriousness, it is not a
transparent process, it is open to manipulation and it
may lead to disputes. Nevertheless, the decommissioning
provisions are adequate for the industry as they are
flexible, feasible and reflect international and good
oilfield practice.
Part 4- Downstream Licencing 143
The DPRA is responsible for issuing and revoking
licensing for all downstream operations such as
construction and operation of plants, pipelines,
distribution networks and undertaking in supplying
downstream products144. The minister can extend the list
of operations, which require licences and will determine
certain specific matters such as licence durations, fees,
143 PIB 2012 ss 206-220144 ibid s 206
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refineries and refining operations by regulation.145 This
part also deals with conditions for obtaining a licence,
assignment and grounds for revocation. Lastly, a register
of all granted licences shall be made available to the
public146.
Part 5- Downstream Petroleum 147
Operations (Sections 221-229)
The PIB aims to establish a fully deregulated downstream
market to ensure a market related pricing, adequate
supply of petroleum products and so on148. The PIB then
provides for the ‘principle of open access’ to current
downstream infrastructure for any licensed company149 and
the DPRA is responsible for establishing a tariff
methodology for pipeline transportation, bulk storage
facilities and all other regulated open access
facilities.150 The DPRA is also responsible for monitoring
145 ibid 220(1)-(2)146 ibid ss 213, 217147 PIB 2012 s 221-283148 ibid 221(a) –(d)149 ibid 222150 ibid 224(1)
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petroleum prices in the downstream market151 and mediating
disputes between downstream stakeholders152.
Observations
It seems that the open access provisions apply to current
downstream infrastructure and not future infrastructure.
These provisions do not also apply to gas processing
infrastructure. Limiting open access will mean that small
stakeholders would have difficulties in getting access to
vital transportation and processing infrastructure. It is
recommended that the open access provisions be extended
to future infrastructure and gas processing facilities so
as to ensure a more competitive downstream sector.
The power to set gas processing tariffs is not included
in the tariff methodology. This may make it difficult to
set the fair market value for natural gas royalty and
taxes because gas-processing costs would normally be a
deduction for determining the value of gas at the
151 ibid 226(1)-(2)152 ibid 229
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metering point. This would be problematic for the
government because where companies own gas production and
processing facilities; excessively high gas-processing
fees can reduce the value of produced gas, which would
reduce the value of royalties and taxes. It is
recommended that the PIB provides that the DPRA should
have the power to set gas processing tariffs.
A recent report has shown that IOCs prefer judicial
dispute resolution means to dispute resolution by
government agencies153.
Specific Provisions Applicable to Gas (Sections 230-268)
The DPRA is responsible for granting licenses for gas
transportation pipelines and transportation network
operator licenses154. The PIB provides for the possibility
of transitional gas pricing arrangements155. The DPRA
grants gas supply licenses enabling the supply of gas to
the downstream sector156 and gas distribution licenses
153 ibid (99) page10154 PIB 2012, ss 230-236155 ibid s 256156 ibid ss 237- 240
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that enable distributors to own and operate distribution
chains within the various local gas distribution zones157.
The minister is charged with the responsibility of
creating a wholesale gas market by enacting future
regulations158. The DPRA also has the power to regulate
gas prices in undeveloped markets, monopolies or when
dominant market positions have been abused159. Finally,
the DPRA is an antitrust authority, which monitors,
investigates and sanctions the abuse of market power for
anti competitive purposes in the gas market.160
Domestic Gas Supply Obligations (DGSO) (Sections 269-274)
“The UPI shall allocate the Domestic Gas Demand
Requirement to every petroleum mining lessee by means of
a domestic gas supply obligation DGSO, which for each
lessee will be a function of gas production and proven
gas reserves”.161 The DPRA and UPI will monitor the
economics and transparency of gas trade through a gas157 ibid ss 241-244158 ibid s 247(1)-(2)159 ibid s 252(1)160 ibid ss 262-268161 ibid s 269(4)
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management model, which they shall implement.162 The PIB
provides for the creation of franchise areas for gas
processing163 and then goes on to provide for penalties
for non-compliance with the DGSO, which include
revocation of gas export licence and paying of fines.164
Observations
The DGSO is not specific and gas market pricing is not
provided for in the PIB but rather the possibility of
transitional gas pricing is provided for. This creates
problems for investors, as there is a lack of certainty
which investors may not be comfortable with. It is
recommended that the PIB provide for a minimum gas
pricing structure. This will better protect customers,
promote certainty, help in developing a fully competitive
gas market, thus encouraging more investment. It is also
advisable to include Domestic Supply obligations for
crude oil to ensure availability for refining and
distribution. 162 ibid s 270(1)163 ibid s 271164 ibid s 272(1)-(2)
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The duty to comply with the DGSO is qualified and where
the company can show that “the non-compliance is caused
by force-majeure; or the company has made reasonable
commercial endeavours to make gas available”, the company
may not be penalised by the DPRA. The problem is what
constitutes ‘reasonable commercial endeavours’? It is
likely to be open to subjective interpretation.
‘Reasonable commercial endeavours’ can get easily get a
non-complier off the hook. Hence, the penalties for non-
compliance can be viewed as weak. It is highly
recommended that the ‘reasonable commercial endeavours’
clause be made clear. This would help in achieving
objective (c) of the PIB.
The PIB allows for the development of gas franchise
areas, which is a good innovation. However, there are no
open access provisions for gas processing and gas
processing tariffs are not set. It will create a barrier
to commerce for small gas producers because they may not
be able to construct gas-processing facilities.
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Indigenous oil companies would be the biggest losers
because they lack the resources to set up such
infrastructure. The earlier recommendations on gas
tariffs and open access to gas processing areas must be
adopted.
Gas Flaring (Sections 275-283)
Gas flaring shall be prohibited by ministerial regulation
at a date set by the minister165 nevertheless certain
permits allowing gas flaring may be granted by the
minister166. Companies who flare gas without such a permit
after the flare out date would be fined and penalised167.
Companies will be under a duty to measure and inform the
ministry about the quantity of gas flared and provide
reasonably detailed gas utilisation plans and reports.168
Observations
165 ibid s 275166 ibid s 277(1)-(3)167 ibid s 281168 ibid ss 278-280
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It seems illogical that after banning gas flaring, the
PIB still creates the possibility for exceptions to be
granted by the minister. The provision allows for a
situation that is not different from the current
situation in Nigeria. The problem of gas flaring is also
caused lack of enforcement of legislation. The PIB does
not adequately address this problem. It is recommended
that the gas-flaring ban should be absolute.
Part 6- Indigenous Petroleum Companies 169
The PIB does not offer a lot of incentives to indigenous
oil companies and is not really in the same spirit as the
Local Content Act 2010 in terms of offering incentives to
indigenous companies. Indigenous companies would be
subject to the same provisions as IOCs with regards to
licensing and taxation. As earlier mentioned, this is
contrary to what was provided for in the Local content
Act 2010.
Nevertheless, the PIB offers a few incentives to
indigenous companies. A major incentive is that the
169 ibid ss 284-288
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government will not participate in the operations of
indigenous companies, which produce less than twenty-five
thousand barrels per day or the gas equivalent170. The UPI
can also allow indigenous companies producing within this
limit to produce up to the ‘technical allowable output
set for the license or the lease’.171 These are major
commercial incentives that will facilitate more
investment and lead more players entering the industry,
which will then generate competition. The minister is
also authorised to make regulations to facilitate the
increase of indigenous petroleum reserves and
participation172, which is a flexible approach,
theoretically.
The PIB defines ‘indigenous oil company’ with three
features173. This is particularly problematic because the
phrasing makes the intention of the draftsman unclear. So
the question that comes to mind is whether the definition
is conjunctive (that is all three features must be
170 ibid s 285171 ibid s 286172 ibid s 287(a)-(b)173 ibid s 362
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present) or disjunctive (that is any of the three
features)? It is recommended that the PIB properly define
an indigenous oil company so that the IOCs do not
unconscionably benefit from incentives set aside for
indigenous companies because if that happens, the purpose
of the provisions for indigenous oil companies in the PIB
and Local Content Act 2010 would be defeated.
Part 7- Health, Safety and Environment 174
Companies are under a duty to protect, maintain and
restore the environment in accordance with good oilfield
practices175. However, where environmental damage has been
caused by sabotage and vandalism, local and state
governments shall carry the costs of restoration.176
Companies can be liable to pay a ‘fair and adequate
compensation’ to people who have been affected by the
company’s operations and the rates of compensation shall
be assessed through a consultative process177. Lastly, any
174 ibid ss 289-298175 ibid s 293176 ibid s 293(2)177 ibid s 296(1)-(4)
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stakeholder who contravenes any of the provisions in this
part shall face a penalty or sanction, which will be
decided by the UPI or DPRA in consultation with the
minister.178
Observations
The provisions on duty to the environment are extremely
vague. It is recommended that the PIB should specifically
spell out minimum environmental standards and practices
that companies are required to act in accordance with.
The UPI and DPRA’s ability to levy penalties is a good
provision. However, the PIB does not spell out sanctions
and penalties for non-compliance. This is not the best
because it can cause a whole range of problems such as
disproportionate penalties. It is recommended that the
PIB provides on specific offences and prescribe penalties
that are in accordance with international standards of
environmental protection.
178 ibid s 298
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The provision that makes companies not liable for
environmental damage as a result of sabotage is a good
provision to an extent. This may attract investment as
investors feel more secure that they would not bear the
costs of sabotage to the facilities. However, looking at
the flip side, it may cause problems for a couple of
reasons. First, the local and state governments may have
little incentive to clean up because failure to clean up
may have a minimum fiscal effect on the state or local
government. Second, states and especially local
governments do not have the capacity and acumen required
to restore the environment. Third, oil companies may bear
the immediate cost of sabotage because production may be
disrupted and it would not be wise to wait for the state
or local government to act bearing in mind that they may
not be capable. Fourth, proving that the environmental
damage was caused sabotage and not by the company’s
operations may lead to disputes. This paper recommends
that the PIB should either scrap this provision or
provide that the funds spent by the company to clean up
will be deducted from the state’s entitlement from the
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PHCF. This would be more practical and states would have
the incentive to warn the locals about the consequences
of sabotaging infrastructure.
Part 8- Provisions on Taxation in the Petroleum Industry 179
The PIB provides for a new taxation framework for the
industry and is centred on two concepts. First, the
Nigerian Hydrocarbon Tax (NHT) would replace the
Petroleum Profits Tax provided for in the PPTA 1990. This
tax would be levied on profits from all petroleum
production unlike the PPT, which was levied exclusively
on oil profits.180The rates would be 50 percent for
onshore and shallow water acreages and 25 percent for the
frontier and deep-water acreages181. Secondly, the PIB
provides that the Companies Income Tax (CIT) will become
applicable to upstream petroleum profits. Previously this
tax was exclusively levied on downstream operations. The
CIT is not deductible for the purposes of calculating the
179 ibid ss 299-353180 ibid s 304181 ibid s 313
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NHT and conversely182. The CIT rate would be 30 percent of
the company’s profits183.
Observations
Including the PHCF, the government can take up to ninety
percent of company profits for onshore and shallow water
projects and sixty-five percent of company profits for
deep-water projects. It should be noted that this does
not include royalties, fees and other payments. This new
regime would be beneficial to the government because they
will get more but this fiscal regime would not sit well
with oil companies. ExxonMobil’s CEO Mark Ward criticised
this new regime and has said the tax hike would make
Nigeria unattractive to invest.184 He said that the “terms
proposed would make Nigeria one of the world’s harshest
182 ibid s 353(1)-(3)183 Companies Income Tax Act 1979 s 40(1)184 ibid (99) page 13
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fiscal regimes”.185 Shell recently stated that the fiscal
provisions in the PIB are making them consider the
profitability of future operations in Nigeria186. The
current provisions of the PIB are quite unreasonable
considering the risks and instability in the nation. Wood
Mackenzie also noted that the government take of Nigeria
on enactment of the PIB would be ninety-six percent of
net revenue. This is high compared to Russia’s and
Ghana’s sixty-five and fifty-two percent respectively.187
Stakeholders are now looking to see if the government
will amend the taxation provisions. It is highly
recommended that they do so because it is a key concern
for IOCs and it can reduce the already dwindling rate of
investments.185 Emeka Chiakwelu, ‘Petroleum Industry Bill: Need for adaptive reconciliation (Daily Independent, July 2014) <http://dailyindependentnig.com/2014/07/petroleum-industry-bill-need-adaptive-reconciliation/> assessed 25 August 2014 186 Danielle Beggs and Others, ‘Nigerian Draft Petroleum Industry Bill 2012 (Dentons, 14 November 2012) <http://www.dentons.com/en/insights/articles/2012/november/14/nigerian-draft-petroleum-industry-bill-2012> assessed 26 July 2014187 Petroleum Club Lagos (PCL) ‘ Industry Concerns’ (PCL, September 2012) < http://www.dentons.com/en/insights/articles/2012/november/14/nigerian-draft-petroleum-industry-bill-2012> assessed26 August 2014 page 6
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The PIB fails to make provisions for PSCs and this
creates a problem, especially with respect to PSCs signed
at different times. Upon enactment of the PIB, the Deep
Offshore and Inland Basin Production Sharing Act will be
repealed. This means that there may be uncertainty with
regards to royalty rates, and other fees. The PIB should
also make provisions that make fiscal review and
redetermination possible in the event of some prescribed
occurrences. This would be a flexible approach and it may
also attract investment because it provides room for
renegotiation for the investor if things go wrong.
The PIB does not make provisions for an independent
verifiable mechanism for measuring petroleum production
and does not provide that the measuring point shall be at
the wellhead for the purpose of calculating revenue and
royalties. Nigeria currently has problems of oil theft
and if this problem continues, it would be possible to
steal oil or gas before it is measured. This means that
the Nigerian economy and government will suffer losses
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and those who perpetrate oil theft will still benefit. It
is recommended that the PIB makes provision for
measurement of petroleum and provides that the
measurement point should be at the wellhead.
Part 9- Repeals, Transitional and Savings Provisions 188
Twelve enactments will be repealed when the PIB is
enacted.189 The PIB then provides for safeguards for
current licenses, leases and contracts in force.190 The
PIB provides for how staff from the NNPC will be
transferred to the newly created institutions191 and
defines the key terms192.
Observations
It is recommended that the PIB should have provisions
that make review compulsory upon certain happenings such
188 PIB 2012, ss 354-363189 ibid s 354190 ibid 355191 ibid ss 356-357192 ibid s 362
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as a significant change in petroleum prices and the
international environmental regime. This would make the
PIB more flexible and adaptable to future situations.
CHAPTER 6
FINDINGS AND CONCLUSION
The above analysis of the PIB shows the merits and
demerits the PIB would bring to the industry. The word
constraint of this paper does not allow for a more
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comprehensive analysis of the fiscal, environmental and
downstream licensing and operations provisions.
Starting with the demerits, the PIB carries over problems
faced in the current legislative framework. Problems such
as corruption, lack of transparency, political
manipulation, environmental damage without proper
remediation and sanctions, an overpowered minister and
regulatory agencies, a poor fiscal regime which is
unattractive to investors, lack of clarity and
inconclusiveness for vital provisions, the possibility of
oil theft, no solution to fuel scarcity and weak
incentives to indigenous producers may continue in the
industry upon enactment of the PIB. Thereby, the PIB
cannot be said to be adequate for the industry. This is
why this paper has made so many recommendations. In a
nutshell, the PIB in its current state does not solve the
problems faced by the industry.
Another key finding of this paper is that the PIB is not
fit for the purpose created for that is, it does not
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conform to the reform objectives. The PIB proposes to
“strengthen the gas sector” but this objective may not be
achieved because most gas operations may not be
undertaken because of the onerous fiscal provisions.
These same fiscal provisions render deep-water and
onshore operations uneconomic, thus the objective to
“enhance crude oil capacity” may not be accomplished.
Furthermore, the PIB proposes to “reform the regulatory
structure” but it there is no transition plan for the new
regulatory structure, no provision on who will oversee
the privatisation of the NOG and NGC after six years of
establishment and who will be on the board of these
companies when established. There is also no provision to
solve the problem of JV funding. The PIB doesn’t make
sufficient provisions to facilitate the development of
local content in the industry. The argument that the PIB
is not fit for purpose is backed up with the earlier
argument that the PIB is not adequate for the industry.
This paper makes another finding concerning the impact
the PIB would have on the regions where the industry has
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or is currently causing conflict. The PIB lacks the
competence to facilitate peace, but it has the potential
to generate conflict not only at regional level as it is
now in the Niger Delta, but at national level. The cause
of this is the PHCF. The PHCF is a good innovation and
would be helpful for people in the Niger Delta, however,
it does not address the past damage, malfeasance,
injustice and loss of economic opportunities in the Niger
Delta. The Niger Delta locals hold on to this view
concerning the PHCF193. Environmentally and economically
the Niger Delta has lost over the years and the solution
being proposed by the PHCF is not adequate. On a national
scale, the non-producing regions are not happy that they
would not be benefitting from the PHCF. They believe the
resources belong to Nigeria and not the Niger Delta
alone, thus it is wrong to allow only one region to
benefit from the fund. Furthermore, if the PHCF is not
well implemented, hostilities and many evils will resume
in this region at the expense of IOCs and other
193 Funmi Makinwa, ‘Nigerian Petroleum Industry Bill 2012: Conflict Analysis Report (Integrity Nigeria, August 2012) < http://integritynigeria.org/wp-content/uploads/2012/09/PIBReportFinal_v3.pdf> assessed 4 September 2014 page 14
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stakeholders. Nigeria currently faces problems of lack of
implementation of laws and if this continues, the PHCF
will have a detrimental effect to not only the industry
but also Nigeria as a whole.
This paper has also found that the PIB does not balance
the interests of the government and industry properly.
History has shown that the industry supports the
government’s goals and has aided in attaining these goals
in quite a few ways. However, the PIB will not help the
government reach its goals because the “cumulative effect
of the PIB leads to an unattractive economic
environment”194. The PIB is set up in such a way that the
government’s take at federal, state and local levels is
increased, but a range of factors and provisions in the
PIB will make the industry unattractive. The fiscal
regime ought to facilitate more investments that would
‘grow the cake’ but the new fiscal regime does the exact
opposite. The IOCs are going to be the biggest losers and
this is not wise because the government really needs the
IOCs contributions.194 ibid (187) page 10
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This paper also found that the PIB does very little to
help indigenous oil companies. The Chairman of Indigenous
oil producers, Abdul Razaq Fadahunsi observed that the
PIB would have a negative effect on operations of
indigenous producers. Fadahunsi said “the PIB does not
boost indigenous participation because there was no
clause in the bill that sets aside any acreage category
for indigenous participants.”195
On a more positive note, the PIB would still have to go
through a third reading, public hearing and committee
sessions with industry stakeholders who would make their
inputs. Hence, the probability that amendments would be
made to the PIB is highly likely. During the course of
these processes, the recommendations that have been made
in this paper and even many more should be implemented.
Stakeholders and those affected by the industry would be
overjoyed that the PIB in its current state will not be
195 Udeme Akpan, ‘Criticisms trail Petroleum Industry Bill’ (National Mirror, 10 October 2012) < http://nationalmirroronline.net/new/criticisms-trail-petroleum-industry-bill/> assessed 5 September 2014
97
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passed into law. A benefit of the PIB is that it presents
an opportunity to reform the industry and bring it up to
internationally recognised standards to meet demands of
this age.
Final Thoughts
Adjustments need to be made to the PIB because it is not
fit for purpose and adequate for the industry. Once the
right adjustments are made, for the PIB to work
effectively, excellently and efficiently, two attributes
must be found in the industry. First, there must be
implementations of the provisions. Lack of adequate
legislation is a challenge faced by Nigeria but lack
implementation is a bigger challenge. The PIB maintains
some of the old laws that are beneficial to the industry;
however, the problem is that there is no implementation.
Regulatory agencies, institutions, stakeholders and those
affected by the industry must develop a culture of
implementation for the PIB to successful. Secondly, there
must be proper leadership. Regardless of how good the law
is, once corruption, political manipulation and poor
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leadership are present there will be a failure. Nigeria
must fight these evils to have an adequate petroleum
industry. Good law, adequate enforcement and good
leadership are the formula for a successful industry.
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