By Greg Tonye
There you go! The Petroleum Industry Act (PIA) is here. We’re over the hump, right? This piece sees it differently. Popular Nigerian columnist and publisher of TheCable, an online newspaper, Simon Kolawole, did a good job of educating and enlightening those who genuinely do not understand the fiscal elements of the PIA. In a piece titled The Triumph of Mischief, Kolawole also informed those who mischievously distorted the facts in the new legislation. He made the point that not everyone was being fooled by the mischief-makers who tended to serve the PIA as poison in a chalice offered to oil-producing states to deny them their entitlement from the natural resources around them. Kolawole’s piece was enough anatomisation of the legislation, and a word to the wise.
Perhaps a quick clarification is important on profit oil and profit gas, which Kolawole described as “NNPC’s share of the profit from its production sharing contracts (PSCs) after the contractor – the provider of finance and expertise – has taken the bulk.”
Contrarily, the government, through the national oil company, the Nigerian National Petroleum Corporation (NNPC), corners the bulk through royalty oil and tax oil, both of which are deducted from the revenue before profit oil and profit gas are shared among the parties. So, by the time the relevant tax agencies finish the feast on the revenue, what is left as net profit oil and profit gas for the operator is a fraction, yes, a tiny fraction, of what accrues to government.
That said, hopes and hopes are hinged on the PIA. With the enactment of PIA, we’re being fed with a sense of boom and bliss. The legislation is presented as the silver bullet that will address all the issues, acrimonies and challenges in the Nigerian oil and gas sector. I’ll examine the most ambitious and critical of these hopes – multibillion-dollar Foreign Direct Investment to develop Nigeria’s oil and gas resources and grow the economy.
Nigerian President Mohammadu Buhari and the NNPC are united in the wild imagination that, but for the delay in the passage of the PIA, some $50bn investment should have happened in the country in the last 10 years. So, with the enactment of the legislation, they are quick to jump into a frenzy of impending windfalls of petrodollars. Each time I read this daydream, I fail in suppressing a chuckle, albeit I remain an optimist.
Simplifying the ‘massive investment logic’, may I add that PIA in itself is not going to sway investment decisions in Nigeria’s direction, if the necessary enablers are lacking, and one of these is security. PIA will not stop militancy in the Niger Delta; it won’t deter the massive crude oil theft that is a huge enterprise subscribed to by politicians and their financiers, including some leaders in oil-bearing communities. Rivers State Governor Nyesom Wike had recently added military top brass to the subscribers’ list.
Pause for a moment and ask why leading global energy companies are reconsidering their continued business interests in Nigeria even at a time when the PIA was almost a done deal. From the giant in their fold, Shell, to Chevron, to Mobil, to Agip and to Total, they are more of vendors of their controlling interests in Nigeria’s oil blocks than they are of acquirers of new ones. In the last 10 years, for instance, Shell says it has sold over half of the OMLs where it held interests in the Joint Venture arrangement with NNPC, Total and Agip. And, for every exit move by Shell from any block, it’s not a coincidence that two other international oil companies in the Joint Venture – Total and Agip – follow suit, instanter. Scratch not your head for the systematic shrink in IOCs’ interests in Nigeria. Group CEO of Royal Dutch Shell has the answer. At the last annual general meeting of the company, Ben van Beurden said, “Over the last 10 years, we have reduced the total number of licences in onshore Nigeria by half. But, unfortunately, our remaining onshore oil operations continue to be subject to sabotage and theft…This means that the balance of risk and reward associated with our onshore oil portfolio in Nigeria is no longer compatible with our strategic ambitions. Because of this, we have started discussions with the Nigerian government to align on a way to move forward.”
Beurden’s frustration is just one of the issues that the PIA will not address while the hope of El Dorado in the Niger Delta remains a chimera. Community issues won’t go away with the Host Community Development Trust Fund. For instance, how will the PIA stop the bizarre situation in Belema, Rivers State, where some community members, reportedly sponsored by a highly connected individual, took over an oil producing critical national asset, chased out the staff and contractors of the operator and have remained in occupation of the facility for over four years, insisting that the asset must be sold to their financier or no deal. This act of lawlessness denies the country tens of thousands of barrels of oil per day and the best the government has done was to direct the facility operator to negotiate with the group’s financier to repossess the facility. It will, therefore, be nothing but a ridiculous fallacy to assume that the host community fund solution is a panacea for community issues. Added to that is the fact that the default but unrealistic expectation of direct cash benefit to individual oil-bearing locals from the fund will only fuel conflicts, distrust and disruptions of exploration activities. The risks this will pose to oil companies may be more daunting than any business case for investment can override.
In the ecstatic wait for the billions of petrodollars is yet another issue that the PIA has, rather than addressed, diminished unthinkingly. Competitiveness! How competitive is Nigeria’s oil and gas regulatory, fiscal and social climate for investible funds? The cost of producing a barrel of oil in Nigeria ranks among the highest three on the list of top 13 oil producers in the world. At circa $30 production cost per barrel, Nigeria ranks only below UK at about $45 per barrel and Brazil at $35 per barrel. The other markets boast more competitive investment climate, including some with the cost of production less than $10 per barrel.
The Nigerian oil production cost template is burdened by high gross taxes, capital spending, administration and transportation costs, and production costs. And with the PIA comes the imposition of additional 3 per cent of operating expenditure of oil companies payable into the host community fund. The potential negative impact on the competitiveness of the Nigerian market cannot be negligible.
If the derivation funds of 13 per cent cannot address the underdevelopment in host communities; if the 3 per cent of annual budget of the E&P companies, including those not operating in the Niger Delta and even those not in E&P payable to NNDC and running into billions of dollars in the last 11 years will make no visible impact in the transformation of the socio-economic life of the oil-bearing people of the Niger Delta; and if the combined budget of the Ministry of Niger Delta and Presidential Amnesty Programme are better seen in the enrichment of a few individuals, then the additional 3 per cent of OPEX of oil companies may go the way of the other intervention funds.
The fight has begun already on who manages the fund. I hope that by the time the dust settles we still have an industry we can count on for the survival of our monoeconomy. However you look at it, if in our unthinkingness we willfully replace the IOCs with Nigerian companies in the oil and gas industry, the result is better imagined with the history of oil exploration in Warri, the whilom oil and gas capital of Nigeria.
•Tonye, public affairs analyst, writes from Port Harcourt