Nigeria: Petroleum law and competitive markets

The Petroleum Industry Act 2021 (PIA) is the extant legal framework, which regulates the legal, governance and fiscal configuration of Nigeria’s petroleum industry. This traverses exploration, drilling, pipeline transportation and otherwise, plus, commercial compacts. The intention of the PIA is to brigade various ordinances and statutes within the province of oil and gas into a coherent whole. Thus, the Act repeals, and integrates, inter alia, the: Hydrocarbons Oil Refineries Act 1965; Petroleum Equalisation Fund (Management Board) Act 1975; Associated Gas Reinjection Act 1979; Nigerian National Petroleum Corporation (Projects) Act 1993; Petroleum Product Pricing Regulatory (Establishment) Act 2003; Petroleum Profit Tax Act 2004; Deep Offshore and Inland Basin Production Sharing Contract Act 2019.

Section 318 of the PIA defines petroleum as hydrocarbons and associated substances as exist in their natural state in strata. It includes crude oil, natural gas, condensate and any mixtures thereof excluding bitumen and coal. Accordingly, the word “petroleum” is used in that wide sense within this treatise to include crude, natural gas and condensates.
Petroleum is the mainstay of Nigeria’s economy and has, over several decades, been the largest source of the country’s foreign exchange earnings. Through 2017 and 2021, according to OPEC, Nigeria earned over $206 billion from crude oil exports; $37.9 billion in 2017, $54.5 billion in 2018 and $45.1billion in 2019. 2020 was an outlier because of the COVID- 19 pandemic and the country earned $27.3 billion. Again, this rose to $41.3 billion in 2021.
Approximately nine tenths of Nigeria’s foreign exchange revenue, and two thirds of the government’s income emanates from the export of petroleum. Yet, crude oil exports constitutes less than a tenth of gross domestic product. Therefore, the criticality of petroleum to the national economy cannot be overstated.

It is in that context that Nigeria’s economy is doubly described as largely “monocultural” and “petrodollar”! For global strategic leverage, Nigeria joined the Organisation of Petroleum Exporting Countries (OPEC) in 1971 and, is not only a major player internationally, but is Africa’s leading petroleum exporter. The other 12 OPEC members include Algeria, Angola, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Saudi Arabia, United Arab Emirates and Venezuela.

So what? Given the vast foreign exchange earnings from crude oil sales, why does Nigeria continue to rank low in the Global Multi-Dimensional Poverty Index (MPI)? Do policy choices impede or positively impact the necessary transformation of the petroleum industry? In the 21st century, should government develop, own and/or run refineries? Does this expertise inexorably lie in government? What are the informed strategic choices of the contentious issues of derivation? From an import substitution, value creation and foreign exchange conservation perspective, what are the practical and sustainable alternatives to refining Nigerian petroleum products abroad? What, in a competitive global order, is the place of petroleum subsidy in a neo-capitalist Nigerian economy?

These issues will be addressed concurrently and contextually. The MPI which measures acute poverty utilising objective quantitative education, health, and standard of living metrics, in over 100 developing countries ranks Nigeria as having 54% of people multi-dimensionally poor! Nigeria’s population is approximately 217 million (Worldometers 2022). So, that’s about 117,118, 000 people in poverty notwithstanding the country’s supposedly vast oil wealth. In the absence of a viable social security safety net, that’s patently a recipe for criminality, terrorism and banditry – as the country is already witnessing in territorial swathes.

In the first six months of 2022, Nigeria’s revenue was N1.63 trillion whilst expenditure was N1.94 trillion; a gaping deficit of N0.31billion. This, at a time when oil prices are trading for approximately $106 barrels per day, more than three times the value in 2020 at the height of the COVID pandemic. Linked to this, Nigeria’s OPEC quota over the last decade averaged approximately 2 million barrels of oil per day (mbpd). Nigeria’s has struggled to meet that quota and in first 6 months of 2021 aspired to pump 1.6 mbpd and, within the same period in 2022, managed only 1.4 mpbd. The challenges are, it has been established evidentially, attributed to commercial scale crude oil theft. The Nigerian Extractive Industry Transparency Initiative (NEITI), for instance, asserts that the country loses approximately $4 billion annually to oil theft and vandalization.

The Petroleum Industry Act is a welcome development in that it seeks to streamline the complexity around the regulatory and fiscal framework of the industry. The hiving off of NNPC as a private limited company, pursuant to section 53 (1) of PIA 2021, is super. The real test would be in the demonstrable evidence that it is actually being run as a truly commercial venture.
Nevertheless, the clear inference from the foregoing is that the status quo, given these significant operational and strategic challenges in the Nigerian Petroleum industry, is manifestly unsustainable.

It is upon that foundation that I conclude with these practical recommendations.
One, Nigeria should urgently prioritise energy security. That is, the country needs to optimise domestic refining capacity as a matter of urgency. The current Ukraine/Russian war has imperilled European energy supplies as Russia has either cut off supplies entirely or reduced same significantly, and that offers a seminal lesson in international energy geopolitics for Nigeria. For example, given Nigeria’s current foreign exchange crisis, which has resulted in a major international airline signalling an intention to abandon Nigerian air routes effective 1st September 2022, what is to say that a similar conundrum won’t happen with Nigerian petroleum importers who are, to a greater or lesser degree, beneficiaries of state aid?

Afterall, Nigeria spent $37.5 billion between 2015 and 2019 importing refined petroleum products despite being a major oil exporter. The opportunity cost therein is capital to catalyse the domestic economy, exponentially boost productivity and GDP.

Two, the case for policy certainty and genuine competition is incontestable. For decades, the government owned Kaduna, Warri and Port Harcourt refineries have underperformed and consumed vast amounts of taxpayers’ money in so-called turnaround maintenance. Now then, what is turn around maintenance if it ill-affords Nigerians at Amukpe, Buni Yadi, Kano, Okokomaiko, Oke-Ado, Owo, Jos, Obiaruku, Ohafia etc access to petroleum products as and when due, at affordable and commercially viable prices? Simply, the policy offer here is for government to completely hands off the running of refineries. That is not, has never been, and will never be the core competence of any government.

In the developed economies of the United Kingdom and the United States of America to name just two, the government does not operate refineries. The implication is simple. That’s not the function of any government. The expertise lies in the private sector with the ideas, innovative wherewithal and financial muscle to optimise shareholder value within well-defined regulatory parameters rightly set by government. What the government may consider doing is to enter mid-stream sector contracting model as a strategic investor. The rationale is simply because petroleum is a strategic national asset. The case of Attorney General of the Federation v Attorney General of Abia State and Others (No 2) 2002 6 NWLR part 764 (542) illustrates the latter point.

Three, innovative action, and a definitive completion timescale, not rhetoric, is required on renewables, including shale, solar and wind energy. Environmental degradation, oil spills, pollution and the adverse health impacts on the population are only too real in the Niger Delta, the country’s breadbasket. Gas flaring is, perversely, still the norm.

Four, the rhetoric on Nigeria’s economic diversification is enticing and well-rehearsed. Now, is the time to incentivise proven firms with investment opportunities in the petroleum industry. Tax breaks may well be a pragmatic advance.

Five, petroleum subsidies are unsustainable and ought to be jettisoned. The logic is sound. In 2021 alone, Nigeria spent N1.4 trillion on subsidies. It is expected that figure will treble by the end of the 2022 financial year. That is capital, which could be properly re-targeted at education, health, defence and transport priorities.

The government should purposively prioritize genuine market competition, which, within the apposite strategic aims envisaged in the Petroleum Industry Act 2021, will stimulate innovation and efficiency, arguendo, better prices for consumers and fair returns on investments for the market. The necessary flip side therein is for government, parliamentarians and other key stakeholders, to formulate effective pragmatic policies, and legislation, on social security welfare programmes for citizens to cushion the effects of competitive markets, which are inevitable upon Nigeria’s econometric imperatives and, re-examine the economic justice arguments for petroleum derivation with a view to necessary Constitutional revisions. Of course, all these presuppose visionary leadership and sound political will.

Ojumu Esq is the Principal Partner, Balliol Myers LP, a firm of legal practitioners based in Lagos, Nigeria.