Beyond the Petroleum Industry Act and energy transition

“Breaking news” on August 16, 2021, informed that the President of the Federal Republic of Nigeria; Muhammadu Buhari had signed the Petroleum Industry Bill (PIB) into law.

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This automatically converts the PIB into a Petroleum Industry Act (PIA), thereby concluding the over two-decade effort to reform Nigeria’s oil and gas sector.

The objective of the PIA is to reform and improve the management of the country’s hydrocarbon resources, transform the Nigerian National Petroleum Corporation (NNPC) into a world-class national oil company, create an enabling environment for growth, maximize returns on the country’s investment, and address the development of the host communities impacted by the extractive industry. 

In like manner, on May 2021, the International Energy Agency (IEA) also released a “groundbreaking” report outlining a route to net-zero emissions by 2050. The report contained some critical issues, including a demand to halt investment in fossil fuel exploration. In addition, the Paris-based agency also recommended some restrictive policies, such as phasing out sales of internal combustion engines and prohibiting natural gas connections to new buildings. Concerns about climate change have fuelled vigorous attempts by the agency to cut the worldwide consumption of fossil fuels, prompting companies, organizations, and nations to divest from oil and gas.

IEA was founded in 1973 to coordinate the energy policies of its 28-member countries. Notwithstanding its limited membership, most analysts observe that the IEA remains the single most significant body for energy-importing countries. At the time of its pronouncement, countries such as Nigeria, whose economies were impacted by the COVID-19-induced recession, were beginning to recover. However, despite the IEA pronouncement on the global transition to renewable energy, the Federal Government of Nigeria stated that the country would continue to use natural gas as a transitional fuel for its power generation while exploring renewables for off-grid electricity. 

Since the discovery of crude oil in Oloibiri, present-day Bayelsa State, in 1956, the oil sector has played a significant role in the nation’s sociopolitical and economic development. Nigeria currently sits atop the largest oil and gas reserve in Sub-Saharan Africa, with crude oil accounting for over 90% of its export earnings. Prior to the enactment of this Act, this critical industry was governed by the Petroleum Act of 1969, the Petroleum Profit Tax (PPT) Act of 1959 and a plethora of legislation. The inadequacies of these Acts, despite subsequent amendments, are evident in the stunted growth and magnitude of losses, leakages, and unscrupulous practices in the industry.

The road to the PIA commenced in April 2000 with the establishment of the Oil and Gas Sector Reforms Implementation Committee (OGIC), to reform and enhance the administration of Nigeria’s hydrocarbon resources. The OGIC was mandated to provide recommendations for a comprehensive reorganization of the nation’s oil and gas industry. In September 2008, the PIB was presented for the first time to the National Assembly (NASS). Thereafter, the Bill had passed several readings in NASS through successive government administrations without success.

No other Bill in the history of the country’s fourth Republic had generated as much passion and intrigue as the PIB. This is due to the criticality of the Bill to Nigeria’s economy, which is highly dependent on revenue from oil and gas operations. This was also exacerbated by the fact that most of the laws governing activities in the petroleum industry were enacted more than 50 years ago and are contained in pieces of legislation. Sadly while all these were going on, investment in the sector had diminished, with loss in revenue running into billions of dollars. On the other hand, other African countries such as Ghana, Kenya, and Uganda were attracting investment to develop their oil and gas assets.

The PIA provides legal, governance, regulatory and fiscal framework for the Nigerian Petroleum Industry, Host Communities, and other related concerns. The Act prescribes the breakup of the industry into two sectors; the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) and the Nigerian Midstream/Downstream Petroleum Regulatory Authority (NMDPRA) to regulate the technical and commercial operations respectively. It also provides for the commercialization of NNPC and the creation of the Host Community Development Trust Fund (HCDTF). The purpose of HCDTF, among others, is to provide direct social and economic benefits to host communities to enhance peaceful and harmonious coexistence between licensees or lessees and host communities. 

In addition, the PIA allots 30% of NNPC Ltd.’s income to establish a Frontier Exploratory Fund (FEF) to finance exploration activities in other basins across the country. Furthermore, the Act establishes a new tax regime to replace the petroleum profits tax and levy a new hydrocarbon tax on revenue from oil and gas companies. Finally, the fiscal framework also provides for revenue generation from penalties on gas flaring from midstream operations. 

Beyond the euphoria of the PIA, some schools of thought believed that the Act failed to adequately address climate change and energy transition in compliance with the Paris Agreement. Others also criticized the 30% allocation to the FEF and the 3% provision for the HCDTF as undesirable addition to the plethora of levies and taxes borne by oil and gas firms. On the other hand, the host communities decried the percentage provision allocated to them in the Act, requesting an upward review. Furthermore, some stakeholders complained that the Act is multifaceted and thus presents a challenge in its interpretation. However, some analysts believe the Act will create opportunities for significant investments in the sector, with other multiplier effects, such as price stabilization.

The PIA represents the objective of Africa’s top oil producer to reform the petroleum industry for optimal performance and increase revenue generation. If effectively implemented, it can represent the standard for Nigeria’s petroleum resources management, with clear and separate roles for the sub-sectors of the industry. However, these outcomes are contingent on the country overcoming its many significant challenges. Will Nigeria be able to achieve its PIA objectives in the context of IEA policy and dwindling foreign investments in fossil fuels? Time will tell… 

Soremekun worked in the oil & gas industry with over three decades of professional experience.