LEGAL IMPERATIVES FOR THE SPEEDY PASSAGE OF THE PETROLEUM INDUSTRY BILL

Transcription

1 1 LEGAL IMPERATIVES FOR THE SPEEDY PASSAGE OF THE PETROLEUM INDUSTRY BILL PAPER PRESENTED BY: NIYI AYOOLA-DANIELS (VISITING PROFESSOR OF ENERGY LAW AND PRESIDENT, INTERNATIONAL INSTITUTE FOR PETROLEUM ENERGY LAW AND POLICY (IIPELP) AT THE BREAKOUT SESSION OF THE 2015 ANNUAL GENERAL CONFERENCE OF THE NIGERIAN BAR ASSOCIATION INTRODUCTION The Petroleum Industry Bill (PIB) which was introduced by late President Yaradua to the 6th National Assembly in 2009 has generated unbelievable and almost unparalleled interest throughout the country and beyond. Very few legislation have attracted such high wattage attention. Without a shadow of doubt the PIB debate is the most influential next to the Nigeria constitution. As we all know the Nigerian economy is heavily dependent on the oil and gas sector, accounting for over 95% of export earnings and 85% of government revenue. After over 50 years of oil and gas production in Nigeria, the need for the country to revisit the basic tenets of our economic development has become critically paramount now more than ever. As the country currently grapples with a declining oil price, the case for economic development through industrialization with a view to reducing poverty and increasing the well-being of Nigerians via job creation and GDP growth, in line with vision 20:20:20, has never been more critical. While the great debate over PIB which started over 6 years ago lingers, Nigeria has lost several billions of dollars that could have been invested in the sector. The PIB over the last 6 years has passed through turbulent times and seasons ranging from the many versions of the bill which were widely circulated. The 7 th National Assembly will forever be hunted by its failure to pass the PIB into law despite several assurances by the then Senate President. Both the Senate and the House organized elaborate public hearings while spending huge sums of money which have effectively gone down the drain. Curiously, the House of Representatives on the last legislative day of the 7 th National Assembly, passed the PIB, but the Senate did not, thereby rendering the former s effort a futile exercise. The practical implication of this is that the PIB will start

2 2 de novo under the 8 th National Assembly. There is no available record to the best of my knowledge that the House Rules on this have changed. As a matter of fact, more than two-thirds of members in the 7 th Assembly did not succeed in their bid to return to the 8 th Assembly. While the late President Yaradua and President Jonathan as well as the 6 th and 7 th Assembly wasted over 6 years on the PIB circus show, Mexico s President, Enrique Pena Nieto spear headed the country s Energy Reform Bill and got the Congress to pass the Bill into Law within his first year in office. NIGERIA S KEY NATIONAL ASPIRATION FOR THE OIL AND GAS INDUSTRY Our country s national aspiration for the oil and gas industry revolves around the following: 1. Grow crude oil reserves to 40 billion barrels and production capacity to 4mm barrel per day. The objective here is to increase Nigeria s oil production within the overall framework of OPEC. Higher levels of production will mean more employment and business opportunities for Nigeria and more government revenue. 2. For natural gas, we aspire to significantly monetize gas, transiting the Nigerian oil sector from being an oil industry to an integrated oil and gas industry thereby generating as much revenue from gas as oil. Currently, Qatar is the world s most dominant gas exporter and has the highest per capita GDP and most of this is driven by natural gas. Nigeria has launched a Gas Revolution Agenda that will enable us to realize our objectives in the gas sector. At this stage, natural gas deserves a special mention. Natural gas unlike crude oil has an unbelievable multiplier effect on any economy, coupled with its tested capacity to propel rapid industrialization. Nigeria s dependence on oil for over 90 percent of her foreign exchange earnings makes her capital account vulnerable to the fluctuations in crude oil prices. Given the continued decline in global oil prices and future expectations to remain so there is need for government to give laser-beam attention to gas and re-strategize to ensure survival. These are hard times for Nigeria, and hard times call for hard-nosed re-examination and re-strategizing on the Nigerian Gas Master Plan. Nigeria must be in a hurry now more than ever to work towards the diversification of our economy and stimulation of our import substitution strategy anchored on natural gas development and commercialization.

3 3 Some food for thought here: At the beginning of 2010, Nigeria s total export was worth 49.9 billion dollars of which 85% was crude oil export. Similarly, total import was 33.9 billion dollars, dominated by goods that can be easily be produced in Nigeria if gas were to be effectively leveraged! Natural gas is the primary feed stock for petrochemicals and fertilizer and agriculture remains the dominant contributor to Nigeria s GDP. The Gas Master Plan if effectively implemented would be Nigeria s true success story and a key component of our march to industrialization. Gas is of special significant to Nigeria not just because is an environment friendly fuel but rather because of its impact on agriculture which is often not properly stated and mostly overlooked. Nigeria has one of the most under-nourished soil in the world. This is due to the fact that per capita usage of fertilizer is very low. If we establish sufficient fertilizer plants across the country, there will be enormous agricultural productivity and agriculture remains the largest contributor to GDP. Increased fertilizer utilization to about 40kg/per hectare can almost double agricultural productivity, jumpstart agro-processing industries and thereby meet Nigeria s increasing food demand. KEY CHALLENGES CURRENTLY FACING THE NIGERIA OIL AND GAS INDUSTRY Before I delve into the legal imperatives for the speedy passage of the PIB, I consider it appropriate to draw our attention to key challenges currently bedeviling Nigeria s oil and gas industry and which the PIB will be seeking to address if passed into law. 1. NNPC Funding Challenges in the Upstream Sector of the Industry: The Joint Venture arrangements between NNPC and the IOCs presently account for more than 60% of Nigeria s crude oil production. Despite this fact, NNPC has always been defaulting in payment of its counterpart funding obligations. Indeed, the upstream sector activities have been greatly hampered and almost being grounded completely by the challenges of funding the operating budget and NNPC cash call obligations. Available statistics show that over 50% cut in joint venture funding and irregular release of cash call have made the operators to scale down on the whole spectrum of exploration and production operations. 2. Crude Oil Theft and Pipeline Vandalisation: It is conservatively estimated at about 100,000 barrels per day (bpd) value at 1.18 billion is stolen daily which translates to N billion annually. This figure does not include those suspected to have been

4 4 stolen from the export pipelines, cost of oil spillage clean up, loss of income to the fishing communities and environmental degradation. 3. Decline in Nigeria s Crude Oil Production Caused largely by the two factors above (NNPC funding challenge in the Upstream Sector of the Industry and Crude Oil Theft and Pipeline Vandalisation). 4. Legal and Regulatory Uncertainties in Nigeria s Oil and Gas Industry: The current legal and regulatory uncertainties in Nigeria s oil and gas industry, lack of clarity, policy inconsistencies, executive fiat, discriminatory and discretionary practices including special waivers to favored companies are part of the challenges facing the oil and gas industry today. Even lawyers are sometimes victim of this uncertainty and lack of clarity. Interestingly there is a sharp divide among Nigerian lawyers on whether or not NNPC is empowered by the NNPC Act to remit to the Federation Account its net earnings after deducting cost of operations. I will use this opportunity to pose certain questions here: Does section 162(1) of the 1999 constitution which requires all revenue to be remitted to the Federation Account preclude the deduction of NNPC s expenditure or cost of business? Does the word revenue in section 162(10) mean net revenue as opposed to gross revenue? Does Sections 21 & 53 of the Fiscal Responsibility Act overrule section 7(4) of the NNPC Act thereby compelling NNPC to incur only expenditure that is appropriated by the National Assembly in an annual budget? By presidential fiat, 2.1 billion USD as dividends was paid into the Federation Account by NLNG and used by the Federal Government to bail out bankrupt states to settle their salary arrears. Is there legal justification for this presidential fiat when the so-called bankrupt states did not make any prior contribution in capitalizing NLNG or contributing to the funding of upstream operations of NNPC and its subsidiaries? These are crucial fiscal federalism issues in Nigeria. While I reserve my comments to these questions, I wish to draw the attention of this highly respected audience to the decision of the Supreme Court in Attorney General of the Ogun State & others Vs Attorney General of the Federation N.W.L.R. (Part 798) 232 at 284. In this case, the Supreme court in interpreting similar provisions in the Public Enterprises (Privatisation and Commercialisation) Decree No 28 of 1999 on what amounts to gross revenue and net revenue in relation to the Federation Account held as follows With regard to privatization of Government Enterprises by the Government of the Federation, section 20 of the Public Enterprises (Privatisation and Commercialisation) Decree No. 28 of 1999 provides that the Bureau of Public enterprises shall establish and maintain a fund from which shall be defrayed all expenditure incurred by the Bureau. The court went on to state that the Bureau

5 5 was only required to pay the net surplus receipt of payment made to it in every year to the Federation Account. Problems with the Present Legal and Corporate Structure of NNPC: NNPC as presently constituted is not structured to succeed commercially since it combines the role of a Policymaker, Regulator and Tax collector and Operator especially when you read Section 10 (1) of NNPC Act which makes the Department of Petroleum Resources (DPR) as an integral part of NNPC. It operates very much as a Government Department and is dependent on Federal Government funding by appropriation through National Assembly. This lack of commercial focus leads to inefficiency in its operations and leaves room for corruption. NNPC s current legal and corporate structure has given room to heavy political meddling and interference into its affairs. The funding problem of NNPC is further made complicated by the decision of the Supreme Court in Attorney-General of the Federation Vs Attorney-General of Abia State (No. 2) (2002) 6 N.W.L.R part 764 when the Supreme Court held that funding of Joint Venture contracts and NNPC priority projects as first line charge on the Federation Account is illegal and unconstitutional and a clear violation of Section 162 (3) of the 1999 constitution. THE PETROLEUM INDUSTRY BILL AS A CRUCIAL LEGISLATIVE INTERVENTION TO ADDRESS THESE CHALLENGES Which PIB? My preferred version of the PIB is the Government Memorandum on the PIB, This is a comprehensive proposal to amend the PIB submitted in 2009 and is based in part on the original work of the 1999 Oil and Gas Sector Reform Implementation Committee (OGIC) which committee was chaired by the highly revered Late Dr. Rilwanu Lukman. The Government Memorandum on the PIB, 2009 was prepared by the Inter Agency Team ( IAT ) comprising of the following: Ministry of Petroleum Resources (MPR) Ministry of Finance (MOF) Budget Office of the Federation (BOF) Ministry of Justice (MOJ) Department of Petroleum Resources (DPR) Nigerian National Petroleum Corporation (NNPC)

6 6 Federal Inland Revenue Service (FIRS) Revenue Mobilization and Fiscal Commission (RMAFC) Nigerian Extractive Industry Transparency Initiative (NEITI) To appreciate the critical importance of the PIB as a crucial legislative intervention to address the challenges discussed above, it is important to list the underlining key objectives of the PIB. 1. The need to establish clear and enduring good governance principles in the Nigerian oil and gas industry. 2. Establish Fiscal provisions in the petroleum industry and the gas sector that are flexible and encourage investment while guaranteeing optimal take for Government. 3. Support the domestic gas utilization through the implementation of the Nigerian Gas Master plan. 4. Establish good acreage management systems that are based on international best practices for acreage availability, bidding and awards. 5. Adjust government s take in large deep water PSCs consistent with the Deep Offshore Production Sharing Contract Act. 6. Establish provisions to enhance Local Content. 7. Establish a new National Oil Company that will achieve strategic autonomy as a commercially focused corporate entity, self-financing with a distinct competitive edge, operational excellence, growth, agility and a strong brand name. 8. Establishment of a new National Gas Company. 9. Establishment of a National asset management company. 10. Establishment of Strong and Independent Regulatory Institutions. 11. Enthronement of transparency and accountability principles, practices and processes in the oil and gas industry. 12. Implementation of the Nigeria s national aspiration to build and support strategic linkage of oil and gas to domestic economy, industrialization, diversification and import substitution. 13. Deregulation of downstream petroleum products pricing thereby creating open access to the downstream sector. 14. Tackle Niger-Delta crisis and the host communities issues. WHY THE GOVERNMENT MEMORANDUM ON THE PIB, 2009 IS PREFERRED

7 7 1, This Government Memorandum on the PIB 2009 will create a stable and commercially competitive environment that will remove legal and regulatory uncertainties in the oil and gas industry. 2, It will tackle headlong NNPC Funding Challenges in The Upstream Sector of the Industry: To address this critical funding challenge, the 2009 PIB (Federal Government Inter-agency Memorandum) recommended that the current Joint Venture arrangements between NNPC and the IOCs should be converted into Incorporated Joint Venture Companies (IJVs) in order to ensure that the IJVs will be able to finance oil field development through globally tested commercial financing models rather than relying on Federal Government funding through National Assembly appropriation. The government memorandum of the PIB further recommended as follows: i. The New National Oil Company (NNPC Limited) should be incorporated under the Companies and Allied Matters Act. ii. NNPC limited will operate under the terms and conditions as any other petroleum Company in Nigeria and will pay all royalties and taxes including taxes on its profit oil from PSCs. iii. The IJVs and the NNPC limited will have a professional board that will reduce to the barest minimum political meddling and interference by government. iv. The IJVs and NNPC Ltd will be designed to operate good corporate governance and mechanism of organizational management that will be designed to be efficient, transparent and effective. In this regard, the NNPC and the IJVs will not be subject to the provisions of the Fiscal Responsibility Act and Public Procurement Act in order to ensure that these companies can operate like any other company with professional boards that will make decisions on the basis of international best practices. v. To check abuses, corruption and protect rights of minority shareholders, the Government Memorandum on the PIB further recommended as follows: (a) The National Oil Company and the other parties to the existing joint operating agreements will execute the shareholders agreement and approve the memorandum and articles of association and incorporate such companies. (b) Each incorporated joint venture company will be owned by the parties to the existing joint operating agreements in proportion to their participating interests at the time of incorporation.

8 8 (c) Each incorporated joint venture company will have a Board of Directors to be appointed by the shareholders of the incorporated joint venture company. (d) The powers of the Board of Directors for each incorporated joint venture company shall be established in the articles of association relating to each incorporated joint venture company. (e) Decisions of the Board of Directors of each incorporated joint venture company will comply with the resolutions passed in the shareholder s meeting of each incorporated joint venture company. (f) The National Oil Company shall have the right to appoint majority of the members of the management for each incorporated joint venture company as determined in the shareholder s agreement and the other shareholders shall appoint the remaining members of the management. At least 80% of the nationals shall at all times be Nigerian nationals. 3. The Government Memorandum on the PIB 2009 will give legal teeth to the Gas Revolution Project, The Gas Master Plan as it relate to the Power Sector Reform in Nigeria Passing this PIB into law is central not only to finding solutions to the upstream petroleum funding challenges but also to the Gas Revolution project, the Gas Master Plan, the gas based Power Sector Reform and the next phase of Nigeria s industrial growth. This is because it is in this version of the PIB that the comprehensive commercial gas pricing framework which will adequately support the development of gas infrastructure, gas for power generation and the gas master plan are properly and clearly articulated. In addition, this PIB if passed into law will give the gas regulator more legal teeth. At the moment, there are many confusing concepts surrounding the role of the Gas Aggregator Company of Nigeria. Implementing the provisions of this PIB as it relates to the Gas Master Plan has three key levers through which natural gas can drive economic growth in Nigeria. This include 1. Unprecedented job creation, 2. Diversification of our export base, and 3. Stimulation of our import substitution. As earlier noted, natural gas has an unbelievable multiplier effect on any economy. Gas-based petrochemical value chain has the potential to generate over 3500 jobs per mmscf of gas which underpins numerous secondary industries ranging from small to large enterprises to the more high-tech advanced

9 9 industries. The ability and ingenuity of Nigeria to leverage gas to create a petrochemical industry of world class scale is critical to the job creation potential. Industry benchmarks suggest that every tone per annum (TPA) output of petrochemicals creates a job. In essence 5,000,000 tons per annum (TPA) petrochemical industry is capable of creating 5,000,000 direct and indirect jobs across the value chain. Trinidad and Tobago, Qatar, Russia, Saudi Arabia, UAE are examples of countries that have leveraged natural gas for major economic growth and reduced unemployment and increased their GDP per capital massively. Furthermore, passing this PIB into law would help establish a stable, reliable, predictable fiscal framework for the development of the Gas Master Plan. The provisions in the Government Memorandum on the PIB 2009, will help in tackling Crude oil theft and pipeline vandalisation in Nigeria I believe strongly that passing this PIB will establish a commercially focused and stronger independent midstream regulatory body that will adequately monitor mid-stream crude oil operations, and mid-stream export gas operations. The proposed National Mid-stream Regulatory Agency in this PIB is expected to regulate and coordinate the technical and commercial activities of all export pipeline systems in Nigeria in a commercially driven, non-discriminatory and transparent manner. The legal and regulatory framework in this PIB will no doubt play a critical role in halting crude oil theft and pipeline vandalisation through adopting a robust and sustainable infrastructural blueprint for Nigeria s export pipeline systems. It is also expected that the proposed National Mid-stream Regulatory Agency will carry out its operations vigorously in designing measurement points for fiscalisation purposes and adopt international best practices in inspecting the metering of pumps, oil terminals, and other facilities for mid-stream operations. CONCLUSION AND RECOMMENDATION President Buhari must see the speedy passage of the PIB under the 8 th National Assembly as a matter of top priority and national importance. As the head of APC the ruling party, the president must reach out to the National Assembly where his party is in the majority and take personal ownership and responsibility for the speedy passage of the Petroleum Industry Bill which by law has to start its legislative journey de novo. The President should as a matter of top priority develop a Legislative Agenda given the unique significance of the petroleum industry to Nigeria s economy. The legislative agenda for 2015 must be laid out by the President which should be outlined for both the National Assembly and the nation at large. The President should

10 10 vigorously lobby the leadership of both houses in order to help get this PIB passed soonest. Mexican President, Enrique Pena Nieto while signing into law Mexico s historic Energy Reform Bill, which was achieved within his first year in office, said: This is the moment to put the energy reform into action. There is no question about it. President Buhari wants change in the oil and gas industry, but if change is going to happen in the oil and gas industry and indeed in Nigeria, BIP must be passed latest within a year of his administration. I sign off here by reminding the president of what Mario Cuomo said You campaign in Poetry. You govern in Prose. I thank you for your attention.