Reforming the Nigerian petroleum industry

The Nigerian Petroleum Industry Bill (PIB) is an ambitious attempt, 10 years in the making, to comprehensively reform the Nigerian oil and gas sector. While theoretically, it makes a great deal of sense, in practical terms it is flawed. Flawed principally because of the scope of its ambitions when set beside the limitations of our capacity to implement such far-reaching reforms.

Issues

I will come back to the practicalities of its implementation, but first let us look at just a few issues within the PIB that form the basis of the major objections from the IOCs and some more thoughtful intent on entering or expanding their businesses in Nigeria.

New fiscal regime

Firstly, there is the issue of the new fiscal regime for the offshore. The IOCs argue that it would make a lot of deepwater fields un-economical while the government argues that this is not the case. At the centre of this argument is the issue of the actual cost of deepwater exploration and development. For the government, the costs are lower than what the IOCs claim. What surprises onlookers like myself is that the government and the IOCs have Petroleum Services Contracts (PSCs) that have embedded within them processes and procedures for verifying and approving expenditures. So why after so many years of working and approving these developments should they not have the same notions of costs? Some other government officials argue that these same IOCs accept very tight margins in Iraq and Libya, so why not Nigeria?

Metering

Next, there is the issue of metering. The government says royalties should be paid on production and not on what is actually exported. The oil companies say that this practice cannot be equitable since some of that production is lost (stolen) during transmission to the export terminals and that the burden of guaranteeing security of the networks is the government's responsibility. In light of the situation in the Niger Delta, this seems like an issue worth discussing at some length.

IJVs

But, in my opinion, the most important issue is the concept of the Incorporated Joint Ventures (IJVs). Let me explain. Over the last 30 years or so, most of Nigeria's oil concessions have been held in Unincorporated Joint Ventures between the IOCs (Shell, Total, Mobil, Agip, Chevron, Mobil) and the Nigerian National Petroleum Corporation, NNPC. These unincorporated JVs, controlled by NNPC, always had their share of problems, principally because of the government’s inability to meet funding obligations. The IOCs always believed that if these JVs could be turned into normal companies - that is, incorporated - then the funding would become much easier, as capital could be raised in the capital markets.

The government took on board this recommendation in the PIB, but here is the problem: the PIB insists that the government controls these IJVs. The IOCs in turn argue that this will take them back to square one and would make it even more difficult for them to fund a corporation controlled by the government (there is also the issue of World Bank Negative Pledge, where indebted countries can't encumber new assets).

The future

So, we see, the debate in many respects has just begun, but what worries me most is if we have the capacity as a nation to carry out so many reforms at the same time (the PIB include reforms on the gas section, the downstream creates several new institutions and indeed new taxes). The Nigerian oil sector does need significant reforms, but rather than jump on all things with so few hands, we would have been better advised to have followed the old African proverb that says slowly slowly catch a monkey! 

Author: Osamede Okhomina is CEO of Energy Equity Resources Limited, an energy company with offices in London and Lagos, Nigeria. www.eeras.com.

Read the article online at: https://www.hydrocarbonengineering.com/gas-processing/29042010/refroming-_the_nigerian_petroleum_industry/