Proposed PIA Amendment: Killing the Gains in Nigeria’s Oil and Gas Industry

The proposed amendment to the Petroleum Industry Act, PIA, will not only set the nation’s oil and gas industry back by decades, but also erase the gains of the last five years. Samuel Ajayi writes.

As the Nigeria’s the oil and gas industry tries to rival those of other advanced countries, the signing of the Petroleum Industry Act, PIA, on August 16, 2021, remains a massive game changer. The PIA did not only reduce a lot of legal and operational bottlenecks from the operations of the upstream sector of the nation’s oil and gas industry, it also created an unprecedented confidence in the minds of foreign investors in the sector. One does not need to go far before realising what effect the PIA has had on the upstream sector of the oil and gas industry.

Between 2015 and 2019, about $70 billion investment came into the African oil and gas industry. Despite Nigeria holding Africa’s largest crude and gas reserve, Nigerian was able to attract only 4% of the $70 billion investment that came to Africa. The remaining 96% went to other African countries like Gabon and Angola. Industry sources told this newspaper that major international oil and gas companies operating in Nigeria took decision to take their investable funds to these other African countries and were even seconding their Nigerian staffs to these countries. Such were the disadvantages the nation was suffering due to absence of strong legal framework and effective legislation for the nation’s oil and gas industry. To experts, the signing of the PIA was a game changer. And the reasons for this are very obvious.

However, it seems some individuals and interests within the corridors of power are bent on destroying whatever gains the country has made since the passing of the PIA. Sources close to the corridors of power told THISDAY that an amendment to the PIA is being packaged as an Executive Bill.

For instance, the proposed amendment of Section 8 of the PIA states that “the Commission (i.e. Nigerian Upstream Petroleum Regulatory Commission, NUPRC) will act as the government representative in all model contracts attached to the licenses and leases contemplated in section 85 as well as replacing NNPCL as concessionaire in all subsisting Production Sharing Contract and Risk Service Contracts, and in this role, be responsible for evaluating and approving relevant work programs and for verifying and approving all contractor costs for the purpose of determining cost recoverable expenditure under all such contracts.”

An oil and gas expert told THISDAY said that this is not only an anomaly but stands logic on its head. His words: “This amendment simply implies that the Commission (NUPRC) will be regulating itself and simultaneously bid and award concession rights to itself. That is to say that NUPRC will now be sitting in judgment over its own bid and lease applications.  This unusual dual role offends the impartiality requirement under Section 36 of the PIA and violates the basic principle in law (nemo judex principle). Summarily, granting the NUPRC the Concessionaire status in the PSCs completely undermine regulator credibility and will destroy investors’ confidence in the Nigerian Oil and Gas industry. Under the principle of separation of powers, regulatory agencies are to remain independent and focused solely on regulation, and guiding policy implementation, rather than competing commercially with the entities they regulate.”

He added that with proposed amendment of Section 8 of the PIA, the Commission will become both the “regulator” and the “regulated” persona which upsets the principle of separation of powers.

“Where a regulator becomes both referee and player, it undermines transparency and credibility of the licensing regime, potentially exposing Nigeria to disputes before international arbitral tribunals or deterring foreign investment. And this weakens the stability of the oil and gas industry in Nigeria as it further obliterates the basis of predictability of investments in the industry.,” the expert stated.

To understand how this new amendment might harm the nation’s oil and gas industry, one may need to go back in time to 2014 as this was the last time there was any major investment in the nations deepwater. It is a well-known fact that deepwater investment is very costly and it is only the likes of Exxon, Shell and Chevron that have the financial wherewithal and the technology for this.

The last deepwater investment that was undertaken in Nigeria was in 2014 and it was the last Final Investment Decision (FID), until after the signing of the PIA in 2021. It must be noted that investment in oil and gas does not involve just one party but multiple parties who are investors. FID, according to experts, usually signals a concrete decision of the investors to stake their funds into the development of an oil and gas asset. It specifies what and what to be done and how they are to be done and how to fund them.

Between 2014 and the time when the PIA passed in 2021, there was no major development except Egina field development. The first oil from Egina field development came on stream in December 2018 and eventually came to the market in early 2019. Even the development of Egina field did not come easy. Major investors in that field development could not boldly stake their funds because they were skeptical. It took the intervention a Chinese oil firm, China National Offshore Oil Corporation (CNOOC) for Egina field development to become a reality. This was primarily because CNOOC was hungry for investment, hence were ready to dare the risks of uncertainty of the Nigerian legal/fiscal frameworks, which others could not face. Clearly, the fear on the part of investors was that the Petroleum Industry Bill, as at then, was undergoing reviews and various legislative debates. So, there was no stability of legal and fiscal frameworks and so the government could wake up one day with a new legislation encapsulating a framework that might be different from the basis of the economics of their investment.

“There was no concrete legal framework as the last law governing oil and gas in Nigeria was enacted over 60 years ago. Petroleum Act of 1969 was the only law an investor could rely on. Even the Petroleum Act had been undergoing what could best be described as mutilation. One government would come and take one aspect of it and amend or adjust to suit some perceived preferences. There was no holistic law that definitely and specifically explained what happens when you want to invest either in the downstream or upstream sector of the oil and gas industry. No law even specified who was a regulator or not. The then Department of Petroleum Resources, DPR, was created to fill in the regulatory gap. But then, there were no specific provisions of the law backing the establishment of then DPR,” Ayokunle Victor, a senior petroleum engineer with one of the indigenous oil firms explained.

These and many more are the major reasons for how the idea of the PIB (Petroleum Industry Bill) came about, which was meant to provide clarity and stability and give investors the confidence needed to take a plunge.

“Investors too had to do their economics and due diligence based on parameters of existing laws before coming in,” Victor added. “It was when they signed PIA in 2021 that you started seeing developments everywhere. As we speak today, Shell is developing one deep water field called Bonga North and it is expected to come on stream in 2027 or 2028. That is a project with estimated recoverable reserve of over 500 million barrels of oil and oil equivalent”. The interesting thing is that it is not the Nigerian government that is funding the project. The funding is coming 100% from Shell and her partners who are parties to OML118 PSC. Sources say that Shell and Exxon are major parties in this ongoing Bonga North Development project. And the interesting thing is that they started developing this Bonga North project immediately after the PIA was passed. Before PIA, Shell did not show enough interest in the project.

Findings also show that quite a number of other FIDs are on the table and are about to be taken. In fact, TotalEnergies is about taking FID to develop Preowei field which is in close proximity to Akpo and Egina fields.

“The ongoing Bonga North project alone has a total estimated development cost of about $5billon – the means about $5billion foreign direct investment into Nigeria. And this is a Production Sharing Contract, PSC. The underlining principle of the PSC is that the investor would bring money and technology, develop the field from the beginning to the end and then open the well and let oil start flowing. It is when oil starts flowing that government comes in to start sharing profit with the investor. Government will start taking royalty, tax and at same share profit with the IOC investors. The fundamental guiding rule in a PSC model is that risk is completely transferred to the investor such that after investment is made in field development, and oil does not flow in commercial quantity, the investor bears the loss all alone. This contractual principle is designed this way to protect the government from funding risk, because the government does not have the funds. It is the investor that does necessary seismic studies and draws conclusion that there is enough oil and gas in commercial quantity in the field,” Victor further explained.

He added that the tragedy is that when politicians come in, they do not understand these things. They come in and start putting political considerations above anything else.

“Let me tell you that removing the NNPC as the concessionaire would destroy the oil and gas industry in Nigeria,” he explained. “All the commercial agreements for existing developments and investments had been executed and designated the NNPC as the Concessionaire and the Nigerian Upstream Petroleum Regulatory Commission, NUPRC, as the regulator. If you make the NUPRC as the Concessionaire, going by what those pushing the amendment are planning, then you are saying that the NUPRC should be the regulator and Concessionaire at the same time.”

He als explained that if the PSC investor parties and the Concessionaire – NNPC has some disagreements, it is the NUPRC that should adjudicate between the two; and not the NUPRC being a judge over a case that it might be and definitely is an interested party.

The global best practices all over the world are that it is the regulator that issues licenses on behalf of the government and that is what NUPRC does. And part of their job is to also provide the regulatory frameworks (rules based on the provisions of the law) on how to go about the commercial agreements. It is the Concessionaire (NNPC) that receives that license and then works in partnership with investors, usually IOCs, like Shell, Chevron, Exxon, etc. So, the Concessionaire will now draft a commercial contract (the PSC) with the investors, which would specify the rights and responsibilities/obligations of the investors and Concessionaire and how to share accruable profit oil and gas from the investment. The PSC will draw from existing legal framework (the law, e.g. PIA) to recognise the royalty to be paid, and the tax to be paid. So, it is the NNPC that serves as the commercial partner in this regard, from development of the field to production. In fact, they will start from crafting and executing a good commercial contract – the PSC. They will then move on to work with the investors who are always the Operators to implement the PSC agreement. In doing all these, the NNPC plays a very critical role which is to ensure that whatever the operator and investor claims to have spent on developing and operating the field is the actual cost spent. This is achieved by NNPC setting the budget in conjunction with PSC parties. They also do other necessary technical reviews and agree the work programmes with the PSC Investors (the Operator).  And then they monitor budget implementation and project execution. They do all these to ensure that project is executed profitably to deliver value to the Federation of Nigeria.

Summarily, any effort put into changing this existing protocol and arrangement as enshrined in the extant PIA, may spell doom for the nation’s oil and gas industry and destroy the gains achieved since 2021. President Bola Ahmed Tinubu has done very well for the oil and gas industry since he assumed office in May 2023. If the President Tinubu supports this amendment, he will destroy all he has achieved in the oil and gas industry.