One year after: Has the PIA impacted the oil & gas sector?

Last week, I moderated a panel on the Petroleum Industry Act (PIA), and I asked the panellists for their thoughts on the PIA’s impact one year down.

The most optimistic answer I got was from Dayo Okusami, a partner at Templars, who said he never thought the PIA would be passed, so it exceeded his expectations. For context, the Act took 20 years to pass, so you can appreciate Okusami’s point of view. However, if I had to answer the same question, I would say that my opinion on the PIA written in this article when it passed still stands—it’s too little and too late.

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Yes, there have been some changes—the NNPC is now a private limited company, and there are new regulatory agencies for the oil and gas sector, two significant changes the PIA achieved. But, when we assessed the PIA last year, we assessed it based on its core objective: to attract investment to Nigeria’s oil and gas sector. Taking our analysis back to the PIA's first principle allowed us to look at its provisions through a singular lens, and we concluded that it wasn’t enough. One primary reason was that the PIA’s terms were no match for the poor state of the sector, especially due to vandalism and theft.

Before the PIA passed, the statistic that shook the Nigerian government was that out of $70 billion invested into African oil and gas between 2015 and 2019, our oil and gas industry only attracted 4%. With this low investment and our recent production, it’s easy to miss that we’re supposedly the giants of African oil.

Well, one year has passed, so we’re going to assess what the PIA has achieved for Nigeria’s oil and gas industry. We’ll dive into this, but first, we need to understand what it was supposed to do in the first place.

What was the PIA supposed to do?

The PIA should be the industry’s bible that sets the foundation for the industry’s development. It sets out fiscal terms (taxes and financial commitments), regulatory hierarchy, and other provisions to guide the oil and gas sector. With five chapters and 319 sections, it’s a pretty lengthy document, but we will focus on the key provisions.

The three key things the PIA sets out are the fiscal, regulatory and host community terms. The PIA introduces more favourable terms for oil and gas operators on the fiscal side, given the need to attract investors. So, under the PIA, oil companies pay lower taxes than before, which means higher post-tax earnings for expansion, dividends to shareholders, research and development, etc. For instance, before the Act, taxes for oil companies were as high as 85%, but now, oil companies should be paying about 52% in taxes.

On the regulatory front, the PIA clears up regulatory overlaps by introducing two distinct regulators for the upstream and downstream segments of the sector value chain. The Nigerian Upstream Regulatory Commission (NUPRC) regulates upstream, while the Nigerian Midstream and Downstream Petroleum Regulatory Agency (NMDPRA) regulates midstream and downstream operations. It also sets the framework for privatising the Nigerian National Petroleum Corporation (NNPC) to free the national oil company from the chains of government control so it can operate as a profit-maximising company.

Finally, it introduces a fund for host communities that have suffered some of the world's worst human rights and environmental violations. Some of the effects include environmental degradation, which has eroded sources of livelihood and caused high poverty rates and conflict. However, the PIA also blames communities for oil theft in Nigeria as it states that for incidents of vandalism caused by communities, the cost of repairs will be deducted from the fund which is supposed to be used to develop these communities.

But while these are the three significant reforms the PIA introduces, how has implementation been so far? 

Slow and unsteady

Is it too soon to assess the PIA’s impact?

We raise this question for two reasons. First, it is too soon for some reforms because we haven’t gotten to the commencement date. The new fiscal terms fall under this category. But, for others, the PIA is just late.

The fiscal reform is the only part of the PIA that falls under the “too soon to tell” category. Section 303 of the PIA states that the Act’s provisions don’t apply to licences awarded before the PIA unless they try to convert their licences. Essentially, before the PIA, oil and gas company licences which gave them the rights to operate in Nigeria were tagged “oil” licences. But post-PIA, these are now called “petroleum” licences. So, rather than oil exploration, oil mining, and oil prospecting licences, we now have petroleum exploration, petroleum mining and petroleum prospecting licences. This ensures that the differences between the old and new regimes are apparent.

So, Section 303 of the PIA states that most of the act's provisions don’t apply to companies with old licences unless they expire and try to convert to new ones. Given that most existing company licences in Nigeria’s oil sector haven’t expired or been converted, the fiscal terms don’t apply just yet. As a result, we can’t assess whether the new fiscal regime has impacted the sector until the conversion deadline, February 15th 2023.

But, for other parts of the PIA, the problem is that implementation is behind schedule. For instance, there hasn’t been much progress on the host community fund even though the timeline set by the Act was 12 months which should have been August 15th 2022. What’s causing the delay? According to Dr Adeoye Adefulu, partner at Odunjirin&Adefulu and PIA expert, the delay is caused primarily by the regulators. The upstream regulator should have issued an implementation framework to allow the incorporation of host community trusts to manage the funds by the deadline. But, the Commission only released the host community development regulations in June, making it impossible for the host community funds to be applied by the August deadline.

The host community provision is still one of the most controversial reforms in the PIA because several stakeholders, from the communities to state and local governments, have said that the fund is too small. The PIA states that oil companies should contribute 3% of their operating revenue for the preceding year. Given the controversy and the impact of oil exploration on communities in the Niger Delta, we would have expected the government and the regulators to prioritise this reform. But, here we are, one year later. It’s not surprising because the PIA implementation neglects the critical low-hanging fruits.

Another instance is petrol subsidy removal. Per the PIA, the petrol subsidy should have been removed in February, but the minister of Petroleum, President Buhari, decided to shift the date. Again, the petrol subsidy hurts Nigeria as we will borrow over ₦6 trillion to spend on petrol subsidies this year. Rather than prioritise the quick significant wins, what have the regulators and government been doing for the past year?

So far, we’ve seen that it’s too soon to judge the impact of fiscal reforms because we haven’t gotten to the commencement date, and for host community reform, the PIA is just late. As for regulatory progress, it’s mostly been on paper.

Actions speak louder than words

One thing about implementation plans in Nigeria is that they’re either very slow or shallow. We’ve seen the slow execution with the host community and subsidy implementation, but the regulatory reform shows us the latter.

Over the past year, the upstream commission and the downstream agency have been very busy drafting regulations and holding stakeholder consultations on these regulations. I’m not saying these aren’t vital steps because they are. For instance, the upstream commission has released thirteen draft regulations for industry comments, but only one has been finalised, and that’s the host community development regulation we discussed earlier. The downstream agency has also issued twelve draft regulations and held stakeholder workshops for feedback.

While this is commendable on paper, actions speak louder than words. By this, I’m referring to the Exxon-Seplat debacle. Regulators exist to maintain balance. On the one hand, they have to ensure operators comply with rules for safety and fairness. But on the other, fairness also applies to the operators because too much regulation can stifle growth. This also depends on the development stage or the sector's needs.

Nigeria’s oil and gas sector is desperate for investment. This requires attractive regulation to investors with transparency, clarity and fiscal incentives. Remember I mentioned that Nigeria only attracted 4% of $70 billion worth of oil and gas investment in four years? This shows that we’re not just trying to attract investment but also competing with other oil and gas regions. Furthermore, given the high cost and non-existent ease of doing business in Nigeria’s oil sector due to vandalism and theft, we’re not in any position to play hardball with prospective investors.

But, back to the Exxon-Seplat debacle. It’s the first merger and acquisition (M&A) deal under the PIA, and the regulator’s body language is nothing but hostile. We covered the deal's details in this article. Given the lack of clarity on the regulator’s decision, many have cited political reasons for the regulator’s rejection of Seplat’s acquisition of ExxonMobil’s onshore production company. As more international oil companies divest from Nigeria’s onshore operations due to vandalism, theft and resultant production shut-ins, it’s acquisition season in the oil sector. The Seplat-Exxon deal doesn’t bode well for future deals. Still, more significantly, it reveals a regulatory strategy that is not open to investors, which is at odds with the state of the sector and the PIA’s objective.

Another example of the PIA’s shallow implementation is the NNPC’s incorporation. Before the ink on the incorporation papers was dry, the new NNPC limited had already unveiled a new website and logo, taking off all its old financial reports. However, as we covered in a previous article, its implementation is spotty, as it hasn’t been structured to address the issues for which it was incorporated. Issues of transparency, lack of accountability, failure to maximise profit, and the petrol subsidy had always impeded the NNPC’s progress. But cue NNPC limited, and we have a board with a Chairperson appointed to repay a favour to the president and a petrol subsidy bill that exceeds the company’s revenue.

Again we see that even the parts of the PIA that have been implemented haven’t been very successful. Still, there has been increased interest in gas investment in Nigeria, but we can’t even attribute this to the PIA because there is a global gas crisis. 

Right place, right time

There’s been renewed interest in Nigeria’s gas reserves since the PIA passed. We’ve had visits from EU delegates, signed agreements (again) for a gas pipeline from Nigeria to Algeria, and the government seems confident they’ll get funding this time.

It just happens that we have significant gas reserves when the world is hungry for gas. With the Russia-Ukraine invasion, Europe’s reliance on Russian gas has put the region in a bad spot. Currently, Russia has cut gas supplies to Europe, stating that it’s doing repair work on its Nord stream pipeline when it’s just a scare tactic against Europe. As a result, Europe is desperate for other sources of gas. This has created an opportunity for Nigeria to develop gas infrastructure to serve Europe and domestic needs. 

But whether this opportunity will bring tangible results is another matter. While Nigeria has one of the largest gas reserves in the world, vandalism and theft also affect gas infrastructure. We’re not producing enough to fill or expand our current capacity.

However, as we’ve just explained, this renewed interest in Nigeria’s gas doesn’t have anything to do with the PIA or Nigeria. It’s just that we have gas when the world needs it. For oil, on the other hand, despite high oil prices, IOCs are still leaving thanks to Nigeria’s poor production due to vandalism and theft. There hasn’t been renewed interest as the costs don’t make up for any potential earnings, especially compared to other regions.

The PIA hasn’t done much for the oil and gas sector. While implementation has been slow and shallow, the improvements we’ve seen have been caused by external factors. But, even the fact that it’s too soon to measure the PIA’s impact tells us everything we need to know about it—one year later, the petroleum industry act is still too little and somehow manages to be even later than we thought.