PIB 2020: Will the Gains be Sustainable in the Long-term?

PIB 2020: Will the Gains be Sustainable in the Long-term?

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This week, we provide perspective on some of the potential economic benefits and downside risks that can accompany the recently passed Petroleum Industry Bill (PIB) 2020 by the National Assembly (NASS). For context, the PIB is an omnibus legislation, designed to reposition the Nigerian oil & gas industry through far-reaching reforms in four (4) key areas of Governance, Administration, Host Communities Welfare, and Fiscal Provision.

Historically, the oil & gas industry has remained Nigeria’s major source of foreign exchange (FX) earnings, accounting for c.90.0% of inflows and c.58.0% of FG’s revenue over the past two decades. This was made possible by Nigeria’s huge proven oil (37bn bbl.) and gas reserves (206tcf) which places the country in the league of top-10 countries with the largest crude oil & gas reserves in the world. Despite its strategic state to the Nigerian economy, the oil & gas industry is still largely governed by an outdated Petroleum Profit Tax (PPT) Act of 1959 and the Petroleum Act of 1969, both with provisions that have made Nigeria an unattractive destination to global oil & gas investors. Foreign Direct Investment (FDI) data pulled from the NBS website revealed that only 1.7% ($1.8bn) of total FDI inflows worth $97.2bn between 2014 and 2020 went to the oil & gas sector. This is significantly low given the pivotal status of the industry to the Nigerian economy and its large oil & gas reserves. The economic loss of lacking a reformed oil & gas industry policy also manifested in widespread environmental pollution, low government revenue, rigid bureaucratic process, illegal exploration, multiple taxations, and corruption to mention but a few.

Based on our analysis of the recently passed PIB, we highlighted below, some key reforms under each of the 4 segments of the PIB that are expected to benefit the Nigerian economy, going forward.

Governance: To drive an efficient governance system in the industry, the PIB proposed amongst others, the formal segmentation of the petroleum industry into two – the Upstream sector (to be managed by the Nigerian Upstream Commission) and the Midstream & Downstream sectors (to be managed by the Midstream & Downstream Authority). The Upstream Commission is expected to drive efficient governance by enforcing, administering, and implementing all relevant laws in the upstream segment. On the other hand, the Midstream & Downstream authority is expected to regulate petroleum liquid operations, domestic natural gas operations, and the export of natural gas. This is a major shift from the previous governance settings, with conflicting responsibilities among several agencies under the petroleum ministry. Hence, we expect this clear segmentation to reduce the bureaucratic process in the industry.

In addition, the governance provision of the PIB also directed on the privatization of the NNPC within 6-months of commencement of the PIB (to birth NNPC Ltd), with ownership of all shares vested in the government and held by the Ministry of Finance & Ministry of Petroleum incorporated in equal proportion. The new NNPC Ltd and any of its subsidiaries will conduct their affairs on a commercial basis profitably and efficiently without recourse to a government fund. We believe this development is laudable as it will eliminate recurrent expenditure and contingencies provision for the NNPC or any of its subsidiaries in the national budget and enhance efficiency and transparency of the business.

Administration: The administration segment of the PIB is aimed at promoting the exploration and exploitation of petroleum products for the benefit of the Nigerian people. To achieve this objective, the bill empowers the Upstream Commission to make recommendation on the issuance/withdrawal of oil leases or licenses to the minister of petroleum for consideration. The bill also empowers the Commission to drive environmental sustainability objective by ensuring that upstream operators have and are implementing environmental management plans. This is a deviation from the previous system of administration in the industry where the petroleum minister enjoys the exclusive power of granting/withdrawing oil lease/licenses.

Also, the PIB empowers the management of the Midstream & Downstream authority to grant, renew, modify and extend licenses and permits to operators in the mid-and-downstream, excluding license relating to the operation of a refinery which remains delegated to the petroleum minister. We expect this to significantly reduce the bureaucratic process and political bias that have characterized mid-and-downstream license renewal for many years.

Host Community: To drive the objective of improving the socio-economic welfare of the host community, the PIB amongst others created a Host Community Development Trust (HCDT) Fund. This will see operators in the upstream contribute 3.0% and mid-and-downstream operators contribute 2.0% of actual annual operating expenses of the preceding year to the fund, in addition to the existing contribution of 3.0% to the Niger-Delta Development Commission (NDDC). We believe this development will increase resources available to cater to the host community’s needs if efficiently utilized.

In addition, the PIB provision on the contribution of oil firms to the HCDT fund also came with the clause that will see the host community forfeit to the extent of the cost to repair damage on petroleum assets or disruption of production activities within their community. We believe this provision will aid host communities in developing an ownership mindset of oil & gas assets, and reducing/eliminating the act of sabotage which for years has remained a major concern to foreign investors.

Fiscal Provision: The overarching objective of this section of the bill is to establish a progressive fiscal framework that will encourage investment in the oil & gas industry and expand the revenue base of the government while ensuring a fair return to investors. To drive this, the PIB replaced the Petroleum Profit Tax (PPT) regime with Hydrocarbon Tax (HT) and Company Income Tax (CIT) respectively. Players in the Upstream segment will be subjected to both HT (range: 10.0% and 22.5%) and CIT (30.0%), both of which will be lower than the current rates of 50.0% for PSCs and 85.0% for non-PSCs under the PPT regime. On the other hand, players in the mid-and-downstream will only be subjected to CIT. We believe the new tax regime will be more attractive to investors, especially the upstream players whose investment risk is much higher in the value chain.

Downside risks to the PIB
Aside from the above-highlighted positives that may come with the PIB passage, we also identified some key gaps in the PIB. First, the new PIB provided that 30.0% of NNPC’s profit in addition to 10.0% from rents on petroleum prospecting licenses and mining leases be committed to exploration in frontier basins. While we are not opposed to capacity expansion, we believe the share of profit committed to frontier exploration will in the immediate term weaken the contribution of the NNPC to the federation account.

Secondly, the bill does not reveal any plans of the government to leverage its hydrocarbon resources today to build a future of cleaner energy that will guarantee steady cash flow for the country in the medium-to-long term. Given the rapid shift of global attention to cleaner energy sources, we think the PIB might have left a major vacuum that may become manifest over the next decade as major oil buyers reduce demand while shifting focus to cleaner energy.

Finally, the provision of the PIB does not restrict the presidency from also doubling as the petroleum minister (just as we currently have). Hence, we are of the view that political interest may continue to play out in the operation of both the Upstream Commission and Midstream and Downstream Authority, given that the management of both agencies is still directly answerable to the petroleum minister who can also double as the president.

 

Afrinvest


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