In the national interest: A critical review of the PIB-2012

Plot 1213 Birao Street, Wuse 2, Abuja, Nigeria. E-mail:centreforafricaprogress@gmail.com Cell: 07030386048

IN THE NATIONAL INTEREST: A CRITICAL REVIEW OF THE PETROLEUM INDUSTRY BILL 2012

By Omano Edigheji Nasir El-Rufai Ola Busari Jonathon Moses

Policy Review: Number 1

July 2013

In the national interest: A critical review of the PIB-2012

ABOUT THE CENTRE Centre for Africas Progress and Prosperity (CAPP) is an independent, non-partisan and not for profit think tank in Nigeria established by the Governance and Development Policy Centre. Vision An independent Centre whose research, policy proposals and capacity initiatives contribute positively to Nigeria and Africas progress and prosperity. Mission To promote the creation of democratic developmental states, inclusive societies and functioning markets by generating new ideas and policy proposals that will lead to Nigeria and Africas social, economic and political progress as well as environmental sustainability. Objectives Initiate and undertake high quality and independent research on the key factors pivotal to Nigeria and Africas social, economic and political progress. Generate new ideas and develop policy proposals and practical interventions that will contribute to the improvement of the lives of Nigerians in particular and Africans in general. Create space for policy-makers and civil society to engage in policy dialogues on Nigeria and Africas progress and thereby foster constructive debates among citizens and leaders on pertinent developmental challenges facing the country and continental. Provide a platform for capacity building on development planning and management, designed for improved the quality of decision-making and managerial performance in Nigeria and Africa. Contribute to forging a socio-political compact among the political and economic elites, and between the elites and citizens. Encourage the mobilization of our people, governments, CSOs and business around a shared vision of progress and prosperity.

In the national interest: A critical review of the PIB-2012

TABLE OF CONTENTS
ABOUT THE AUTHORS --------------------------------------------------------------------------

1. ............................................................................................................................................ IN TRODUCTION .............................................................................................................................6 2. A LABYRINTHINE LEGISLATIVE JOURNEY .....................................................................6 3. RATIONALE FOR CONCERTED ACTION ..........................................................................8 4. THE PIB-2012: FOCUS IN SUMMARY .................................................................................9 5. UNPACKING THE PIB-2012 .................................................................................................10 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 Governance & Regulatory Setting .............................................................................17 Commercial Reorganization ........................................................................................22 Gas Market Development .............................................................................................24 Fiscal Framework ...........................................................................................................25 Licensing, Leasing & Work Commitment ................................................................27 Participation of Indigenous Companies ...................................................................28 Promotion of Nigerian Content ...................................................................................29 Protection of Health, Safety & Environment ...........................................................30

6. MOVING FORWARD WITH PIB-2012 .................................................................................31

In the national interest: A critical review of the PIB-2012

About the Authors

Ola Busari, PhD, erstwhile Professor of Civil Engineering, has held executive positions in a variety of business environments, most recently as senior executive responsible for Knowledge Management and Strategic Partnerships at a state-owned enterprise in South Africa, mandated to finance and develop bulk infrastructure. Previously, he was Divisional Executive at the Development Bank of Southern Africa, heading up the provision of specialized advisory services across all economic and social sectors. Before joining the Bank, Busari served as Director with the national government in South Africa. He has undertaken and led international consultancy assignments for a wide variety of multilateral organizations, including the World Bank, AfDB, IFAD, CGIAR, UNDP, Unicef, UNOPS, UNFPA, WFP, WHO and the UN Secretariat, across issues as diverse as reform for good governance, income generation, institutional transformation and performance, strategy and strategic planning, and multi-stakeholder capacity building. His publications profile includes over 150 papers and commissioned reports. A licensed engineer and an alumnus of the Henley MBA Program, University of Chicagos Advanced Environmental Isotopes Program, and Cambridge Universitys Business and Environment Program for Senior Executives, he holds a doctoral degree in resource management. Omano Edigheji, PhD: Dr Edigheji is Executive Director of the Centre for Africas Progress and Prosperity (CAPP). He was previously a Research Director in the Policy Analysis Unit of the Human Sciences Research Council, South Africa, prior to which he was Research Manager at the Johannesburg based policy think-tank, Centre for Policy Studies. Renowned for his scholarly and policy work on state and development, he has published extensively, including his books, Governance in the New South Africa: The Challenges of Globalization (co-editor, University of Cape Town Press, 2003); and Constructing a Democratic Developmental State in South Africa: Potentials and Challenges. (ed) HSRC Press. 2010; and has made more than 100 presentations to policy-makers and academics across the globe. He has lectured at the University of Witwatersrand, Johannesburg and the Nelson Mandela Metropolitan University, Port Elizabeth, both in South Africa. He holds a PhD in Political Science with specialization in the political economy of development, with a focus on developing countries from the Norwegian University of Science and Technology, Trondheim, Norway. Nasir el-Rufai: Mallam Nasir el-Rufai, a member of the board of CAPP was a cabinet Minister, responsible for the Federal Capital Territory, Abuja from 2003 - 2007 under President Obasanjo. He was also a member of the presidential economic team that was responsible for the public sector reform. Prior to that, El-Rufia served at the pioneer DirectorGeneral of the Bureau of Public Enterprises (BPE) in 1999 - 2003. He was member, 4

In the national interest: A critical review of the PIB-2012

Programmes Implementation Committee (PIMCO) supervised by the then Head of State, Gen. Abdusalami Abubakar that designed and implemented the political & economic transition programmes of military government that led to the election of Chief Olusegun Obasanjo as President in 1999. Nasir has held other senior positions in government, including as member, National Energy Council that advised President Umaru YarAdua on oil, gas and power in 2007 and 2008. Prior to joining government in the late 1990s, he founded and managed one of the top two quantity survey firms in the country. His training cut across various disciplines. He holds BSC Degree (with first class) and an MBA from Ahmadu Bello University, Zaria; LLB from the University of London and Masters of Public Administration from Harvard University. Jonathon Moses, PhD: Moses is a Professor of Political Science at the Norwegian University of Science and Technology (NTNU) in Trondheim, Norway. He works on the effects of economic integration on political sovereignty, including the political management of economic resources. He is currently developing a new study program at NTNU for petroleum engineering students, on the politics of resource management. His most recent publications include, Moses and Knutsen, Ways of Knowing, 2nd Edition (Palgrave, 2012) and Emigration and Political Development (Cambridge, 2011).

In the national interest: A critical review of the PIB-2012

1. INTRODUCTION This document presents a critical review of Nigerias Petroleum Industry Bill (2012), in the form approved by the Federal Executive Council and tabled at the National Assembly, in the light of the overarching national interest to reform the oil and gas sector and promote its optimal development in a manner that benefits the people of Nigeria. This brief forms part of an initiative of the Centre for Africas Progress and Prosperity (CAPP), an independent and non-partisan think-tank in Nigeria, to engage members of the National Assembly and other key stakeholders on the win-win pathway forward, including policy makers, industry organizations, non-governmental activists and ordinary Nigerians at large. In the analysis that follows, we show that in its current format the PIB is unlikely to have broad developmental impacts laying the foundation for diversification of the Nigerian economy, and as a basis for industrialisation, ensure environmental sustainability and job creation, and contribute to reduction of both poverty and inequality in our country. As a consequence, we offer some proposals on how the Bill can be improved to ensure that it lays a foundation for sustained development. To be sure, our aim is to ensure that the legislation that will be passed by the National Assembly ensures that Nigeria and its people maximise the benefits from oil and gas, while at the same time ensuring thriving companies in the sector. 2. A LONG LEGISLATIVE JOURNEY Nigeria has struggled for some time to put in place a coherent and comprehensive policy and legal framework, in the stead of no less than 16 pieces of legislation, to govern its oil and gas sector. Some of the key laws date as far as back as 1959: the Petroleum Profits Tax Act; 1969: the Petroleum Act; and in 1977: the Nigerian Petroleum Corporation Act. Other sundry legislation address fiscal issues, with memoranda of understanding (MoUs) selectively negotiated and signed periodically. In the absence of a robust and contemporary national legislation conforming to global best practices, it has been difficult to effectively regulate the oil and gas industry, and to optimize its potential for Nigerias development. Against this background, successive civilian governments since 1999 mapped out mechanisms for the restructuring of the oil and gas sector, with the explicit goal to ensure that 6

In the national interest: A critical review of the PIB-2012

the sector operates to achieve its full potential and to the benefit of Nigeria. The initial step in this regard was the setting up in 2000 of the Oil and Gas Sector Reform Implementation Committee (OGIC) under the auspices of the National Council on Privatisation (NCP). The work of the Committee resulted in the formulation of the National Oil and Gas Policy (2005), with the following overriding objective: To maximize the net economic benefit to the nation from our oil and gas resources and to enhance the social and economic development of the people while meeting the nations needs for fuel at a competitive cost, accomplishing all in an environmentally acceptable manner. In furtherance of that objective, the policy requires: increased value addition to the economy through further commercial processing of the crude oil and natural gas produced. Nigeria shall consequently not be content to simply extract its natural resources for sale as raw products. Amongst others, the economic benefits shall be maximized through appropriate fiscal regimes, sustained profitability of the industries, development of additional commercial activities, and the development of improved direct linkages between the oil sector and the other sectors of the Nigerian economy, including an active local content policy. The reform process gathered fresh momentum in 2007, with the OGIC reconstituted to leverage the policy provisions for setting out legal and institutional framework for regulating and managing the industry. The 2008 OGIC report formed the basis of the first draft of the Petroleum Industry Bill (PIB) that was tabled as an Executive Bill before the National Assembly the same year. Since then, controversies have dogged various versions of the PIB, including the work of an inter-agency team in 2010 and another committee comprised of members of the House of Representatives in 2011. The latest version (PIB-2012) is the output of the additional work of a special task force reporting in June 2012, which was approved by the Federal Executive Council for representation to the 7th session of the National Assembly in July 2012. 7

In the national interest: A critical review of the PIB-2012

3. RATIONALE FOR CONCERTED ACTION While various stakeholders engaged in intense labyrinthine debate, with acute positioning by powerful interest groups with the means to stall, distort and reinvent paths leading to no concrete progress in the advancement of the reform agenda, it is Nigerias national interest that suffers. Partly because of the inability to enhance the potential of the oil and gas sector, Nigeria remains one of the least developed countries in the world. The country is characterized by high levels of unemployment and underemployment, and a majority of its people (72.9%) live below the poverty line of less than two dollars a day.

Yet, Nigeria is one of the worlds largest oil producers, with the oil and gas sector accounting for about 80 percent of foreign exchange earnings and 90 percent of government revenue. While the narrow production base of the oil and gas sector accounts for a substantial share of GDP, it has a low labour absorption rate, and maintains weak backward and forward linkages to the rest of the economy. Effectively, ordinary Nigerians have largely been excluded from the benefits that accrue from oil wealth.

Until recently, the few Nigerian actors in the industry have been more preoccupied with collecting rents (fees), than with developing local capacity for actively playing in the sector. And such rents from mineral resources have become the main source of corruption, further fuelling the politics of rent-seeking in a cyclic manner. In addition, there have been few incentives for the participation of indigenous oil companies. The oil and gas sector has also been marked by a history of environmental pollution and degradation, mostly as a result of gas flaring and oil spillage. One of the consequences of this situation is an adverse impact on the normalcy and livelihoods of people in oil-producing communities. In turn, mistrust and anger leading to conflicts have characterised the relationships between oil companies and local communities. Considering the foregoing challenges in the oil and gas industry, especially the impacts of the sectors continuing murkiness and corruption, and the potential of investment stagnation in 8

In the national interest: A critical review of the PIB-2012

the face of regulatory and fiscal uncertainty, there is urgent need for concerted action that elevates national interest above narrow parochialism and self-interest. Such action is required to take the reform agenda beyond the PIB, into an Act of the National Assembly, that would comprehensively reform the industry, maximise its benefits to the nation and move Nigeria forward. 4. THE PIB-2012: FOCUS IN SUMMARY The PIB-2012 seeks to align the management of the nations petroleum resources in accordance with the universal principles of good governance and sustainable development, including bringing the industry legislative framework under a single comprehensive umbrella. The reform spans through both the upstream and downstream segments, and the gas industry, providing what should ultimately be a more effective regulatory environment and a revised fiscal regime that assures improved revenue streams to the country in times of rising oil prices, simultaneously with fair returns on investments. More specifically, the PIB outlines the following objectives:

(a) Create a conducive business environment for petroleum operations; (b) Enhance exploration and exploitation of petroleum resources in Nigeria for the benefit of the Nigerian people; (c) Optimize domestic gas supplies, particularly for power generation and industrial development; (d) Establish progressive fiscal framework that encourages further investment in the petroleum industry while optimizing revenues accruing to the Government; (e) Establish commercially oriented and profit-driven oil and gas entities; (f) Deregulate and liberalize the downstream petroleum sector; (g) Create efficient and effective regulatory agencies; (h) Promote transparency and openness in the administration of the petroleum resources of Nigeria; (i) Promote the development of Nigerian content in the petroleum industry; and 9

In the national interest: A critical review of the PIB-2012

(j) Protect health, safety and the environment in the course of the petroleum operations; and attain such other objectives to promote a viable and sustainable petroleum industry in Nigeria. 5. UNPACKING THE PIB-2012

5.1

Comparing the objectives of the National Oil and Gas Policy with those of the PIB

An important starting point is to review the PIB against the backdrop of the objectives of the National Oil and Gas Policy (NOGP), with a view to assessing whether or not the legal and regulatory framework, and institutional arrangements, are in sync and will meet the said policy objectives.

The 2005 National Oil and Gas Policy overriding objectives are: To maximize the net economic benefit to the nation from our Oil and Gas resources and to enhance the social and economic development of the people while meeting the nations needs for fuel at a competitive cost, accomplishing all in an environmentally acceptable manner (NOGP (1.1.1) This can be broken down into four component parts: 1) maximize economic benefit from oil/gas resources; 2) enhance the peoples economic and social development; 3) secure the nations needs for energy at competitive costs; and 4) ensure environmental protection. But the NOGPs specific recommendations go even farther than this, as they note that the first objective should be obtained not by simply increasing production/sales, but that there should also be an effort to further commercial processing of the crude oil and natural gas produced and by employing appropriate fiscal regimes, sustained profitability of the industries, development of additional commercial activities, and the development of improved direct 10

In the national interest: A critical review of the PIB-2012

linkages between the oil sector and the other sectors of the Nigerian economy, including an active local content policy (1.1.2, emphasis added). This seems to suggest that in addition to making it easier for firms to compete in Nigeria (which is where the focus of the Bill is aimed), there should be an attempt to establish a stronger domestic presence (both upstream and downstream) and a stronger tax and licensing regime. This broader focus (broader than the needs of the oil industry) is clearly evident in the policy objectives listed in 1.2.1. Here the four objectives from the general statement (above) are elaborated upon, so we get a list of 8 policy objectives (this is with a view to assess how the objectives of the PIB square up to these goals): 1. Maximisation of the economic benefits to the nation; 2. Meeting the nations needs for fuels at a competitive cost; 3. Carrying out operations in an environmentally acceptable manner, which provides for sustainable development and participation by the relevant associated communities; 4. Ensuring to the greatest extent possible, the elimination of systemic corruption by increasing transparency and accountability, and making system processes auditable; 5. Maximisation of local content and development of Nigerian capacity; 6. Achieving a diversification of the economy; 7. Fostering an enabling business environment with minimal political interference; and 8. Liberalising the sector and ensuring greater participation of the private sector. This is a list of objectives that makes a lot of sense from a national development perspective. We have divided objective 3 above into two: one for protecting the environment, the other for protecting communities, and we would have included a much clearer call for maximizing democratic control over the regulation of the industry, as well as the need for a discussion of how the revenues generated by that industry will be allocated to the people.

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In the national interest: A critical review of the PIB-2012

We can now compare the NOGP and Bill (see Tables 1 and 2) in terms of how they meet the needs of three important constituents: the existing petroleum industry, the people of Nigeria, and Nigerian entrepreneurs (who might hope to gain a piece of future competencies that develop as a result). We have then scored each objective according to which constituent it serves most. In doing this, two things reveal themselves. First, some of the objectives have conflicting constituent gains (and we should be suspicious of these). Second, most of the objectives, in both documents, support the industry (but the Bill does so even more forcefully). Overall (aggregating both sets of objectives, and assuming that the benefits obtained by each constituency are equal in value and hence comparable), 58% of the objectives service the needs of the petroleum industry; 26% service the peoples needs; and 16% service the needs of future indigenous employers in the Nigerian petroleum sector. To understand the basis of this comparison, we might elaborate on how these tables were constructed. Take the first line in Table 1, which considers Maximisation of the economic benefits to the nation. On the face of it, this objective, if met, could benefit the peoples interest, and it could develop local competencies, but we have scored it as supports industry needs. This is becausegiven no additional changes, and assuming the standard operating procedures of the pastit is clear that the peoples interests and local competency building havent benefited by earlier attempts to maximize oil returns. Similarly, with objective 7: Fostering an enabling business environment with minimal political interference. This objective is clearly beneficial for industry and it is explicitly opposed to the peoples interest (i.e. minimal political interference), but it is unclear whether this objective will support the building of local competencies (if we assume nothing else will change). The above two examples show the conservative nature of the comparative effort, as we are only scoring the positive effects of a given objective for one industry, not detracting points for possible negative effects. Another conservative element in this comparison is the granting of equal weights across benefits and objectives. After all, it is reasonable for a government bill to prioritize the general interests of the people over the particular interest of an industry or class. If we recognize this, then, it is conservative to assume equal weights, as it is implies that a bill is fair if it equalizes the particular interests of a group with that of the people at

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In the national interest: A critical review of the PIB-2012

large. Our moral point of departure would be to prioritize the peoples interestbut our method of scoring has not done this. In employing this conservative measure, we still find that the narrow interests of the petroleum industry predominate, and the protection of these interests has actually improved as we move from the NOGP to the Bill draft. In short, the draft of the bill has improved the interests of the petroleum industry (from 50 to 64%, or an increase of 14%), at the expense of Nigerian producers (-16%), and with only a slight improvement (2%) for the interests of the Nigerian people at large. It is clear that the Bill leans heavily in the direction of protecting the interests of the international petroleum industry, relative to the earlier NOGP draft.

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