Petroleum Industry Act 2021: Status & Sector Implications

The Act has been 13 years in the making, since the first Bill draft was presented to the 6th NASS in September 2008.

The Petroleum Industry Act 2021 (PIA) provides a legal, governance, regulatory and fiscal framework for the Nigerian Petroleum Industry, the development of Host Communities and related matters. The Act replaces obsolete industry Laws such as the Petroleum Act of 1969.

Recent Timelines

§?15th July 2021: The National Assembly passed the Petroleum Industry Bill 2021 to the President

§?16th August 2021: President Buhari signed the Petroleum Industry Bill 2021 into law

§?18th August 2021: President Buhari approved a Steering Committee to oversee the process of implementation of the newly signed Petroleum Industry Act (PIA) within 12 months.

Steering Committee Composition:

a)?????Headed by the Minister of State for Petroleum Resources - Timipre Sylva

b)?????Permanent Secretary, Ministry of Petroleum Resources

c)?????GMD, NNPC

d)?????Executive Chairman, FIRS

e)?????Representative of the Ministry of Justice

f)??????Representative of the Ministry of Finance, Budget and National Planning

g)?????Senior Special Assistant to the President on Natural Resources

h)?????External Legal Adviser - Barrister Olufemi Lijadu

i)???????Executive Secretary, Petroleum Technology Development Fund - as Head of the Coordinating Secretariat and the Implementation Working Group.

Some Key Implications of the Act

1.?????The Reorganisation of the NNPC to NNPC Limited within 6 months of the Approval: The Corporation is to be equally owned by the Ministry of Petroleum Incorporated and Ministry of Finance Incorporated. According to the law, shares held by the government are only transferable if approved by the government and endorsed by the National Economic Council on behalf of the Federation.

NNPC Limited will lift and sell Royalty Oil and Tax Oil on behalf of the Commission and the Federal Inland Revenue Service respectively, for an agreed commercial fee. In the case of profit oil and profit gas payable to the concessionaire, NNPC Limited will remit the proceeds of the sales of the profit oil and profit gas to the federation, excluding its 10% for management fee and 30% for the Frontier Exploration Fund. NNPC is expected to declare dividends to its shareholders and retain 20% of profits to grow its business.

Opinion: The 6-month timeline is obviously no longer feasible. Besides the 12-month timeline given to the Implementation Committee, there are several structural, administrative and personnel related issues that need to be addressed.

There has been kick-back from the State governments around the defined ownership of the newly incorporated NNPC Limited, apparently ‘sidelining’ the states. The GMD NNPC has tried allaying concerns by stating NNPC Limited will remit taxes which will be allocated across all tiers of Govt. However, we doubt this will be satisfactory considering the current fiscal constraints and expect the State Governments to take this matter further.

Another consideration is how ‘different’ the new company will be in terms of efficiency? More than a change in name and structure is required to transform the current NNPC into an independent and profitable organisation.

2.?????Other Changes in the Sector's Administrative Structure (The Commission & The Authority): The Petroleum Products Pricing Regulatory Authority (PPPRA), the Petroleum Equalization Fund (PEF) and part of the Department of Petroleum Resources (DPR) will be merged to form the Midstream and Downstream Regulatory Authority (The Authority), while the DPR Upstream and Petroleum Inspectorate will be merged to form the Nigerian Upstream Regulatory Commission (The Commission).

Opinion: Like the case of NNPC Limited, there are questions on the efficiency of the new institutions. From all indications, they will wholly subsume the existing PPPRA, DPR and PEF. There is no defined framework for ensuring restructuring of operations, staffing fit based on qualification / expertise. Discretion for deployment is placed with the Minister.

3.?????Amendments in Royalty Rates: There are amendments aimed at providing incentives to operators. These include:

§?For production delivered for local refining, royalties may be wholly or partly paid in Naira (at CBN exchange rate)

§?Reduction in Royalty rates per month

a)?????Onshore - 18% to 15%

b)?????Shallow Water - 16% to 12.5%

c)?????Deep Offshore - 10% to 7.5%

d)?????Frontier Basins - retained at 7.5%

e)?????Reduction of Royalty rate based on production for natural gas and natural gas liquids from 7.5% to 5%

f)??????Reduction of Royalty rate for natural gas produced and utilized in-country from 5% to 2.5%

Opinion: These are welcome developments for operators who have experienced pressures from falling crude prices, demand disruption from the Covid-19 pandemic and persistent losses from facility sabotage.

4.?????Host Communities Development Trust Fund (3% vs 10%): The PAN Niger Delta Forum (PANDEF) and other related civil society groups have expressed deep dissatisfaction with the President’s signing of the PIB with the contentious funding of the Host Communities Development Trust Fund with 3% of the OPEX of Upstream Operating Companies. Annual fund management inflow from the Host Community Fund Trusts is estimated to be more than $100million/year.

Opinion: There is a possibility of court action against the government relating to this. The success of such action remains in doubt and is likely to be protracted.

At the risk of paying advocate for the Federal Government, there is a case to be made for lowering this mandatory contribution to incentivize existing and prospective Operators. This is in view of the lower margins, alarming drop in exploration/production capital investments and global agenda to shift from fossil fuels.

There is also the issue of clearly defining a “Host Community”, arising from the controversy over the classification of communities where pipelines passed through as host communities. International benchmarks define this as “communities that are 50-km radius within a project site”.

5.?????30% Frontier Oil Exploration Funding: Stakeholders within and outside the industry have decried the appropriation of the 30% of NNPC Limited’s profit for Frontier Oil Exploration Fund. Also included is 10% of rents on petroleum prospecting licenses and 10% rent on petroleum mining leases.

Opinion: In view of the dire financial situation of the country, this is anything but prudent. The fact that there is inadequate funding to optimize our proven oil reserves of over 37 billion barrels, questions the reasoning behind channeling funds to ventures which the incumbent operators have avoided. There is a clear and present opportunity cost of investing in the real sector to diversify revenue, investing in infrastructure to drive real sector growth, improve FX earning capacity and reduce the current debt burden (serviced by over 90% of revenue).

6.?????The Subsidy Question: The PIA provides that the pricing of petroleum products in the downstream product sector shall be “deregulated to ensure market-based pricing, adequate supply and removal of economic distortions and creation of a fair market value for petroleum products in Nigeria’s economy”.

The Petroleum Products Pricing Regulatory Agency (PPPRA) this week revealed that the implementation of Petroleum Industry Act (PIA) will not result in an ‘automatic’ increase in the pump price of petrol in the country stating, “The current price will remain until negotiations with organised labour, which will develop a feasible framework that minimises the impact of a market-based pricing policy on the masses, is concluded.”

Opinion: On signing the PIB, it became a law, and this core element should have been promptly implemented. The Federal Government may have ‘bought’ some time with the convening of the Implementation Committee; this simply amounts to “kicking the can down the road”. Doubts remain as to whether the Federal Government has the political and social will to implement a full deregulation of the sector, this will likely remain unanswered till Q3 2022.

It is worthy of note that the Government spends over N100 billion monthly subsidizing one product, petrol. On an annual basis, this is higher than the capital allocation to Healthcare, Education, Works & Housing, Transport and Power sectors.

In any case, issues of product smuggling across borders and NNPC achieving optimisation will remail until this is put to bed.

7.?????Supply Chain Disruption? The natural order of a deregulated downstream sector would be that marketers are free to source products and leverage supply chain options. The benefit of better planning / forecasting by Marketers should drive efficiency and competition, ultimately benefiting consumers.

However, in a bid to ‘encourage’ investment in local refining, Section 317(8) of the PIA provides that “…licence to import any product shortfalls shall be assigned only to companies with active local refining licenses. Import volume to be allocated between participants based on their respective production in the preceding quarter.”

Opinion: This provision negates the free market thrust of the PIA. The NNPC currently accounts for the bulk of petroleum product imports. Besides the NNPC, companies with ‘active’ refining licenses are modular, land-locked refineries. The NNPC refineries are operating at near zero utlisation, this leaves the Dangote Refinery as the alternative, the most recent completion timeline is 2022. Importation by any other licence holder will imply double product handling or throughput costs passed to the final consumer. Also troubling is that this proposal applies to ALL petroleum products. An extreme view is that the potential of rendering several bulk storage facilities functionally obsolete.

On completion, we expect the Dangote Refinery with projected petrol production of at least 50 million litres per day, to bridge our refining deficit. The implication is that product importation will greatly diminish if not cease. Depot Operators will have options for product supply.

In a recent engagement with the Nigerian Association of Road Transport Owners (NARTO), it was stated the Dangote Refinery had no plans to play in the Retail space and would distribute about 70% of its products by sea and 30% by trucks (partnering with truck owners).

8.????The Future of the Petroleum Equalisation Fund (PEF): The PIA is to discontinue this scheme. It provides the collection of net surplus revenues from oil marketing companies shall cease, except for the collection of unpaid net surplus revenues earned prior to the effective date. The payment for reimbursements to oil marketing companies shall cease, except for possible remaining payment obligations incurred prior to the effective date.

However, Section 310 states that if the available funds are insufficient to make the reimbursements “…the Authority may prorate the amounts payable based on the ratio between the funds remaining and the outstanding payables, provided that where the Fund is in a deficit, oil marketing companies shall have no claim as to further outstanding amounts.

Opinion: This is concerning considering the current indebtedness to several Marketers, with backlogs of up to 6 months. Implying unrecoverable losses for Marketers and increased agitations as implementation draws nearer.

The eradication of the haulage reimbursement means Retail Marketers will have to seriously consider haulage costs in deciding on their product supply depots. As such, Depot customer bases will increasingly comprise Retail Stations within their geographical location.

Ultimately, the downstream landscape will be significantly impacted. We expect to see increased number of merger and acquisition transaction over few years. Competition will take a new dimension owing to the removal of any arbitrage, efficiency becomes key.?There will be a shift in the number and type of players as capacity and differentiation will become critical success factors. We may be late to the renewables party, but there is still a lot of value to be extracted from the oil and gas industry in the medium term. The PIA 2021 must be implemented one way or another to achieve this.