The Petroleum Industry Bill: What should President Buhari do?

Current State of the Petroleum Industry Bill (PIB)
The latest public version of the PIB was sent by the Presidency to the National Assembly in July 2012. After being in a state of flux for some time, the immediate past House of Representatives “passed” it along with 45 other bills during their Valedictory Session in June 2015. This last minute “passing” of the bill was of little or no consequence, as the bill did not get the nod of the Senate before the 7th Assembly ended its tenure.

Doubling as the President of Nigeria and the new Petroleum Minister, PMB has to juggle between running a complex country and giving Nigeria’s petroleum industry the close attention it deserves as the mainstay of the economy. He also has to make some very tough but necessary executive decisions. With the PIB, PMB has two options: he could choose to either hit the final nail in the coffin of a moribund PIB or he could choose to resuscitate and debug it.

The “Let-it-Die” Option
There was a time when the PIB was a very loud and ubiquitous term – it was mentioned everywhere, almost every day and by virtually everyone (even by those who did not know what the abbreviation stood for). Now it has been reduced to an occasional soundbite and a mere whisper.
The PIB is presently half-dead, why not just let it die naturally? Those in favour of this support their position with the following main arguments:

1.You should not throw good money after bad
Since the PIB journey started about 10 years ago, billions of naira has been spent in sitting allowances, stakeholders’ forums, committees, hearings, consultancy fees, estacode, travel costs, etc – in addition to an enormous amount of time, which going by the popular saying is money.

Will the current (8th) National Assembly continue from where its predecessor stopped or start the process all over again? Whatever decision is taken to progress the PIB, more money will be spent – to what end?

In this era of cost-cutting due to the fall in oil prices, can we really afford to waste more money on a piece of legislation which appears to be unpassable

2. There are already existing petroleum laws
The PIB is intended to combine 16 different petroleum laws into a single document and provide a legal, fiscal and regulatory framework for the Nigerian petroleum industry. Yes, some of these 16 petroleum laws are relatively archaic (for example, the Petroleum Act was promulgated in 1969). But why not just review, update and amend the different laws to reflect current realities instead of repealing and replacing them with the PIB?

3. Disincentive for the Gas sector
Currently gas income is taxed at the Companies Income Tax (CIT) rate of 30%. The PIB seeks to increase the tax rate for upstream gas income from 30% to 80% (50% Nigeria Hydrocarbon Tax (NHT) and 30% CIT). Some experts estimate that this will make about 90% of new gas projects unviable and the old ones largely unsustainable

4. Unnecessary Petroleum Host Community Fund (PHCF) levy?
Each upstream petroleum company will be mandated to remit to the PHC Fund on a monthly basis 10% of the net profit (adjusted profit less royalty, allowable deductions and allowances, less NHT less CIT).
Some stakeholders argue that the PHCF is unnecessary since the oil producing states already get 13% derivation. Others also point to an already existing Niger Delta Development Commission (NDDC) Act which imposes a levy of 3% of the total annual budget of any oil producing company operating onshore or offshore in the Niger Delta area. So do we really need a new levy?

5. Reduced profits and cost recovery for oil companies
Some experts opine that every fiscal element of the PIB significantly erodes investor returns thus making about 30% of new JV oil projects unviable. They point to the planned elimination of investment incentives, especially for companies in Joint Venture or Production Sharing Contract with NNPC.

6. Inherent uncertainties
Despite the argument that the PIB is robust and comprehensive, some uncertainties are inherent in the Bill. For instance, though royalties are expected to be set based on production and sales value at certain price thresholds which are not set out in the Bill. These inherent uncertainties do nothing to boost investor confidence.
Perhaps the bigger issue is the uncertainty created by the inability to pass the PIB into law which has made many investors to adopt a wait-and-see approach with its attendant consequence for the country.

The “Resuscitate-and-Debug” Option
Though the PIB was initially put forward by some stakeholders as a panacea or cure-all for all the defects of the Nigerian Oil and Gas industry, it is definitely not a perfect bill. Now realising this, these same stakeholders are hoping that PMB does not “throw out the baby with the bathwater”. To succeed in resuscitating and debugging the PIB, the following would have to be done:

1. Continuing from where the 7th Assembly stopped
The 8th Assembly should continue from where its predecessor stopped instead of starting the process all over again. This will save time and costs as it would focus only on exceptions and unresolved issues. To do this successfully, there must be political will to consider national over regional or personal interests both by the Legislature and the Executive.
2.Pass the PIB piecemeal
Easy wins such as the PIB provisions that deal with the unbundling of the NNPC can be passed while the more contentious ones are dealt with later.

3.Maintain 30% CIT rate for gas operations
Currently, about 40% of gas produced in Nigeria is flared. Gas producers in Nigeria need all the incentives they can get and not disincentives. The tax rate applicable to gas income should therefore be maintained at 30% and not increased to 80%.

4.Revisit the provision on PHCF
Proponents of the PHCF point out that it is deductible for NHT purposes, constitutes an immediate credit to fiscal rent obligations and that the cost of repairs to damaged facilities due to vandalism/sabotage would be offset from the contribution. To them, the PHCF section will address the host community concerns. However, this provision of the PIB would have to be revisited to determine if it is indeed desirable and if so in what format, the current draft seems sub-optimal.

5.Make more compromises
While one of the objectives of the PIB is to increase government take, the oil companies have raised concerns that the proposed fiscal terms in the Bill could erode investor returns and discourage investment in the oil and gas industry. With the fall in oil price, all the contentious provisions of the PIB have to be revisited with a view to reaching a compromise before the Bill can be passed.

6.Eliminate all uncertainties
All uncertainties and ambiguities should be eliminated from the PIB to instil investor confidence. All fiscal terms (e.g. royalty rates) should be clearly stated and spelt out. And just like the proponents of “Let-It-Die” option, passing the Bill will end the uncertainty perhaps even better.

Which option?
Since PMB or anyone for that matter cannot really satisfy everyone at the same time, he should bite the bullet and choose the option which most aligns with his government’s policy direction and which would be most beneficial to Nigeria as a whole.

Good luck Mr President as you make the tough choice.
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Seun Ajayi is a Senior Manager with the Tax and Regulatory Services Unit of PwC. He is a member of the Institute of Chartered Accountants of Nigeria, Chartered Institute of Taxation of Nigeria and Nigerian Association of Petroleum Explorationists.

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