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Worry as PIGB fails to address critical governance issues in petroleum industry

By Stanley Opara
18 July 2018   |   3:29 am
Even with the passage of the Petroleum Industry Governance Bill by the National Assembly, is still being faced with unaddressed issues, which originally should have been dealt with in the legislation, STANLEY OPARA writes It is no news that the current National Assembly has passed the Petroleum Industry Governance, which seeks to provide for the…

National Assembly

Even with the passage of the Petroleum Industry Governance Bill by the National Assembly, is still being faced with unaddressed issues, which originally should have been dealt with in the legislation, STANLEY OPARA writes

It is no news that the current National Assembly has passed the Petroleum Industry Governance, which seeks to provide for the governance and institutional framework for the petroleum industry.

This bill is certainly the first part of the Petroleum Industry Bill to be passed by the National Assembly.

One highpoint of the PIGB is that it imposes a five per cent fuel levy on fuel sold across the country to be used to finance the Petroleum Equalisation Fund.

By the provisions of the bill, Nigerians should expect the unbundling of the Nigerian National Petroleum Corporation (NNPC) and the establishment of the Federal Ministry of Petroleum Incorporated, Nigerian Petroleum Regulatory Commission (NPRC), Nigerian Petroleum Assets Management Company and National Petroleum Company (NPC).

Although this development is coming after several failed attempts to pass a law to regulate the country’s petroleum industry, Nigeria appears not to have employed the right model, even with the Senate first passing the bill in May 2017.

The PIGB, however, was only passed in January 2018 by the lower chamber of the National Assembly (the House of Representatives), paving way for the passage of a synchronised version. The 10 year-old bill was only transmitted to President Muhammadu Buhari for his assent in July 2018.

The bill, which was initiated by then President Umaru Yar’Adua and sent to the 6th National Assembly in 2008, has been ensnared in controversy due to some of its provisions.

The Senate had on March 28 passed the PIGB having adopted the report of the conference committee of the PIGB which harmonised the versions earlier passed by both Senate and House of Representatives.

The harmonised version of the Bill seeks to, among others, unbundle the NNPC and merge its subsidiaries such as Department of Petroleum Resources (DPR) and Petroleum Products Pricing Regulatory Agency (PPPRA) into one entity.

Why the worry?
Some stakeholders have commended the passage of the bill by the National Assembly, describing the development as a much needed step in the country’s pursuit to reform the oil and gas sector and encouraging investments.

However, there are a number of issues which some see as major lacuna in the framework and need to be addressed in the quest to make the petroleum industry competitive.

One major area of concern, according to Pricewaterhouse Coopers, is that the Minister still possesses significant powers, given the provisions of the bill.

For instance, ”in the event of a national emergency, the minister will have the right of pre-emption, over all petroleum and petroleum related-products, under any license or lease granted under the bill,” analysts at the firm warned while commenting on the passage by the Senate.

By this, the minister can order any crude oil producer or petroleum marketer to supply products either to the government or specified license holder.

The fine for contravention is technically limitless, as the minister may increase the fine imposed by the Bill (N10m), through regulation.

The minister also has the powers to determine the assets, liabilities and employees, which will be transferred to the new entities subject to an audit, which the bill is silent about.
The Bill proposes the establishment of boards for the commercial institutions.

However, the composition of these boards, according to analysts’ views at KPMG, may not reflect the appropriate balance of powers to ensure effective board oversight; reduce the risk of executive-led decision-making; and promote adequate independence on the board to minimise undue government interference.

The firm, thus, advised that It may be necessary to increase the ratio of non-executive to executive directors and provide specific criteria to guarantee the independence of the non-executive directors.

The NNPC has historically experienced frequent board and management leadership changes, which have severely impacted on the performance of the corporation for decades now.

Although the PIGB has defined tenures for the non-executive directors, there are currently no provisions that help to ensure stable tenures for the executive directors and insulate them from changing dynamics of the political context, as far as possible, KPMG noted, saying that the issuance of well-defined contracts to the executive directors may address the issue.

The newly established commercial entities are expected to be governed in line with the provisions of the Code of Corporate Governance issued by Nigeria’s Securities and Exchange Commission.

However, the bill does not include recommendations to address possible conflicts that may arise between its provisions and those of the SEC Code, according to the analysts, who opined that to prevent possible ambiguity, there will be a need to emphasise the superiority of the provisions of the bill over those of the SEC Code, where such conflicts arise.

With the broad powers and functions assigned to the NPRC, there are concerns that the NPRC must have to maintain proper structure to aid efficient execution of its mandate.

KPMG, in the report, stated that, “One of the functions of the NPRC is to establish the framework for computing the fair market value of petroleum products and tariffs for gas processing and transportation.

This seems to suggest that government may be unwilling to deregulate the downstream sector of the petroleum industry.

Furthermore, the implication of this for Automotive Gas Oil (diesel), which has been deregulated, is unclear.

“The NPRC is authorised to charge fees for ‘services rendered’ to players in the industry. This may create a conflict of interest with its role as regulator.

“The Bill allows the commission to levy special fees on licencees and lessees for the implementation of any project that is of common benefit and value to the oil and gas industry. The amount of this special levy or its frequency is not stated in the bill. This may create uncertainty for potential investors.”
With the PIGB providing for the divestment of at least 40 per cent of the shares in the NPC within 10 years of incorporation, it is however debatable if private investors will be willing to commit to a company which will be majorly owned and run by government in the long term.

According to the bill, the Nigeria Petroleum Assets Management Company (NAPAMC) shall be incorporated as a company limited by shares within six months from the effective date of the bill.

The shares of NAPAMC shall be held by the Ministry of Petroleum Incorporated (40 per cent), the Ministry of Finance Incorporated (40 per cent) and the Bureau of Public Enterprises (20 per cent).

Thus, NAPAMC, shall be responsible for managing all assets currently being held by the NNPC under the Production Sharing Contracts (PSCs) and Back-in-right provisions of the Petroleum Act of 1969, as amended.

But there are fears that bill does not state the specific type of liabilities that will be transferred or how the new company will be funded.

It is unclear whether government will appropriate funds to settle the liabilities transferred or whether shareholders will be required to fund the NAPLMC and settle the liabilities and this may negatively impact the viability of any investment in the NPC.

Market experts bare their minds

The Managing Director, Cowry Asset Management Limited, Mr. Johnson Chukwu, expressed worry over the retention of the Petroleum Equalization Fund in the PIGB, saying such move remained a huge deviation from what objective stakeholders wanted for the petroleum industry.

He said, “This will make us to continue to regulate the downstream section of the industry with its attendant problems cum set-backs.

This is the reason why our refineries are not working; we have continued to import petroleum products, we should ordinarily be exporting.

“With the PEF still in place, we will concretise regulation of the market, and this will be backed by law.

The president won’t have the discretion to adjust the price regime, as he would need to get the National Assembly’s approval to do so.

“This, according to him, would multiply the woes of the industry.

The Chairman, Council Institute of Oil and Gas Research & Hydrocarbon Studies, Prof. Akin Akindoyeni, said though the bill allowed for the decentralisation and commercialisation of the operations of the NNPC, major deficiencies still prevailed in it.

To a large extent, he said with the PIGB, “it will still be business as usual,” as more equity is still not yielded to the host communities. “

He said with the communities’ heavily degraded environment and major source of livelihood, there were no clear provisions in terms of alternative livelihood sources to the host communities.

But the Senate’s belief on the PIGB is unwavering

The Senate President, Dr. Bukola Saraki, had, recently listed the objectives of the PIGB to include, transforming the administration of the upstream, midstream and downstream sectors of the Nigerian petroleum industry.

Saraki had also hailed the move as one that represents a historic milestone for the country.

He added that the bill, when signed into law, would modernise the petroleum industry and overhaul the system to create a conducive business environment for petroleum industry operations.

“The PIGB will also promote openness and transparency in the industry — by clarifying the rules, processes, and procedures that govern the oil and gas sector.

This should eliminate, or at worse, reduce corruption significantly and make the sector more efficient and more productive,” he emphasised.

Saraki enthused, “Nigerians should know that the PIGB, once it becomes law, will help alleviate those issues that lead to scarcity, such as the limited supply of Premium Motor Spirit (petrol); the poor import planning schedule that leads to fuel importation constraints; the corruption, diversion and smuggling — that leads to artificial scarcity; and the absence of deregulation in the sector.”
IOCs express optimism

Amid this regulatory uproar, International Oil Companies in Nigeria have expressed some sort of hopefulness over current actions of the government in the petroleum industry, which they said was capable of attracting more investments, especially after the $5.1bn joint venture cash call argument between the Federal Government and IOCs was addressed.

The Managing Director, Mobil Producing Nigeria, Paul McGrath, said the Petroleum Industry Bill and the reform in the National Assembly were laudable, but stressed that there was a need for an end result.

McGrath said, “We need to have an industry reform bill or set of bills that will attract international investment, not push it away. I’ve been very encouraged with the dialogues we’ve had with the National Assembly and the technical teams till date.

“They have listened; they are listening and tried to engage the industry, and I think that is very interesting.

But at the end of the day, we need to stop talking about industry reform, have industry reform and then move on and unlock the potential.”

The Country Chair, Shell Companies in Nigeria and Managing Director, SPDC, Osagie Okunbor, said issues around security, contracting cycle, sanctity of contracts and thresholds of Joint Venturess and Production Sharing Contracts still needed to be sorted, as well as the reform laws in the industry.

He said, “We have talked about the Petroleum Industry Bill for some time, just like the funding.

For the first time we actually see very serious efforts to try and address this and what is helpful is that we don’t have a cacophony of voices.

The PIB needs to be passed to remove uncertainties but not a PIB that does not encourage investments.”

The Managing Director, Chevron, Jeff Ewing, noted that there had been less argument on the JV issues and that this had restored confidence in the industry.

Ewing recently said in Abuja that, “The government and our partners have done good things on the JV arrears.

The execution of those agreements has gone very well, and it has really boosted our confidence in the JV.

“Nigeria needs to be competitive globally in the fiscal policies and ease of doing business.

This is the discussion we have been having with the government and making sure that they understand the implication of the competitiveness of the industry.”

But Nigeria is doing badly among African countries governance-wise

In terms of governance of its oil and gas industry, the 2017 Resource Governance Index, which was unveiled by the Natural Resource Governance Institute, ranked Nigeria 55th among 89 assessments, lagging behind Ghana and 15 other African counterparts.

Its West African counterpart, Ghana, led the African countries in the report as it was ranked 13th, and was followed by Burkina Faso, which occupied the 20th position.

Others African countries that made the list were South Africa, Côte d’Ivoire, Cameroon, Niger, Mali, Tanzania, Morocco, Zambia, Mozambique, Sierra Leone, Uganda, Liberia, Botswana and Tunisia.

The report identified Nigeria as one of the world’s most resource-dependent countries, with oil and gas exports contributing the largest share of government revenue.

The NRGI pointed that the oil and gas sector’s governance issues in Nigeria impact the wellbeing of a large number of people because the country has the largest population on the African continent.

“Governance challenges are present throughout the extractive decision chain.

Value is lost particularly in licensing and in the Nigerian National Petroleum Corporation’s sales of government oil, as well as when revenues from oil and gas are shared and saved,” the report stressed.

It added, “Furthermore, a history of scandals involving top officials at the NNPC has plagued the sector and drawn public attention to corruption and asset recovery.

Given the NNPC’s central role in all stages of the decision chain, improving governance of the state-owned enterprise is crucial.”

Licensing was identified as the weakest link in Nigeria’s value realisation component, with a score of 17 of 100, placing it 77th among the 89 country-licensing assessments.

The report noted that the score and ranking reflected high levels of opacity in key areas of decision-making, including qualification of companies, process rules and disclosure of terms.

NRGI’s Nigeria Manager, Sarah Muyonga, explained that a well-organised and transparent licensing round gives Nigeria a huge opportunity to send a message of its recent deliberate efforts of improving the oil sector, adding that the move would clearly communicate that it’s not business as usual.

The NRGU report also pointed out that, “The Nigerian government does not regularly publicly disclose government officials’ financial interests in the extractive sector or the identities of beneficial owners of extractive companies, though it has made some early commitments to do so with the Extractive Industries Transparency Initiative and the Open Government Partnership.

“The government has committed to disclosing all oil, gas and mining contracts in its ‘seven big wins’ policy strategy and as part of its OGP action plan, but thus far, it has not disclosed contracts.”

The way forward

Governance generally is the set of processes, customs, policies, laws, and institutions affecting the way a corporation is directed, administered or controlled.

It is about building effective mechanisms and measures, either in order to satisfy current social expectations or to satisfy the narrower expectations of shareholders.

Addressing corporate governance and compliance issues, PwC said governance is about establishing direction and shaping strategy; improving transparency and
reputation via checks and balances; shaping the relationship between the business owners and the managers; providing appropriate oversight of senior management; and determining the rights and equitable treatment of stakeholders.

According to the consultancy firm, the Nigerian oil and gas industry must establish a strong and balanced board of directors; select chief executives and senior management based on proven competence and integrity; guide corporate strategy and monitor corporate performance; establish appropriate succession plan; and monitor effectiveness of the governance arrangements and change as necessary.