It is commendable that after 20 years, the current set of lawmakers are likely to pass the Petroleum Industry Bill (PIB). Femi Gbajabiamila, the speaker of the House of Representatives assured that by April, the bill would become law. However, it is unwise that maximising oil rents is the major objective of the proposed law. We urge lawmakers to be open to suggestions, especially from operators on how to improve the bill.
The revised PIB restricts a company from operating in more than one major stream of oil production. The obvious implication of this is that it will limit diversification. The bill proposed that if they must engage in another stream, they would have to register another company. The trouble is, this would raise taxation costs, which is already quite challenging with this bill.
The revised PIB has also introduced a Hydrocarbon tax that will be applied to crude oil, condensates and natural gas liquids produced from associated gas. This is in addition to the statutory Company Income Tax (CIT) and new royalty rates indexed to the price of crude in the global oil market.
Understandably, oil sector operators are concerned. At the public hearing organised by the Joint Committee on Petroleum Upstream, Downstream and Gas, Mike Sangster, Chairman of Oil Producing Trade Section (OPTS) a trade group of oil producers, said the deepwater provisions do not provide a favourable environment for future investments and for the launching of new projects.
The operators are concerned that the PIB did not grant deepwater oil projects a full royalty relief at the initial stage of investment. Deepwater projects require considerable capital investments but then, the Nigerian government can argue that these oil companies have had over two decades of favourable tax relief until the Deepwater Act was signed into law in 2019.
The oil sector operators also argue that a hydrocarbon tax increases the burden of taxation considering that companies will still be subject to CIT. They also say that the bill does not address the major challenges facing gas development in Nigeria, such as inadequate midstream infrastructure, regulated gas pricing, huge debts, thereby potentially jeopardising the realisation of government’s aspirations for the domestic gas sector.
While these arguments can be disputed by the Nigerian government with records indicating that the country’s regressive fiscal systems have disproportionately benefited the oil companies while short-changing Nigerians, the present reality calls for deeper introspection and the need to make concessions.
Countries in Europe, Asia as well as major oil companies are betting on green energy as concerns about climate change steer the world away from fossil fuels. Many countries including Sweden, Costa Rica, Nicaragua, Scotland, Uruguay, Germany, Denmark, China, Kenya, Morocco and USA are gravitating towards a low-carbon future by embracing solar, wind and geothermal energy.
Some of the world’s major funds are divesting from fossil fuels. Recently, the New York State’s pension fund, one of the world’s largest and most influential investor with $226billion in assets, said it will drop many of its fossil fuel stocks in the next five years and sell its shares in other companies that contribute to global warming by 2040.
Battery technology is rapidly improving and costs are falling. Solar energy and other renewable energy sources are on the ascendancy. Yet, many countries are reporting huge oil and gas discoveries, turning buyers to competitors, as they are lowering barriers to investments into their countries.
Nigeria with the largest oil reserves on the continent is getting some of the least investment dollars. Oil production is fraught with challenges including instability caused by militants, host community agitations, environmental pollution and general insecurity. Nigeria should not be doubling down on conditions that will rankle investors.
The problem with the PIB in its current state is that the cash flow implications for upstream companies may discourage investments, especially given the huge capital outlay required for new projects. It also allocates too much power to the Petroleum Minister. Buhari’s woeful experiment at playing petroleum minister has done immense damage to the sector. Therefore, the regulatory commission should be empowered to take action on leases, commercial contracts and smart regulation rather than waiting on a minister’s approval.
Yet, Nigeria has a litany of oil projects awaiting investment decisions. Projects like the 120,000bpd Zabazaba-Etan project; 140,000bpd Bosi project; 110,000bpd Uge project and 100,000bpd Nsiko deepwater project; 1billion barrel Owowo field development are all stalled in Nigeria. The ideal PIB should be aimed at helping to unlock these investments, create new jobs, and deal with challenges in the host communities.