Nigeria Steps Toward Landmark Oil Reform with New PIB
Nigeria is about to make one of its most important laws since it returned to democracy about 20 years ago. The Petroleum Industry Bill (PIB) has the potential to reform the industry and initiate a process for the government to rid the state oil firm, the Nigerian National Petroleum Corporation (NNPC), of corruption and inefficiency. However, the bill falls short in addressing local community concerns which will continue to be a source of tension in the relationship between local stakeholders, oil companies and government.
Main Findings
President Muhammadu Buhari sent the latest iteration of the PIB to the National Assembly in September, two years after the parliament passed a previous version that he declined to sign into law.
The current version will change the legal structure of the NNPC and reorganise the regulatory system. Established by an act of parliament, the NNPC will be dissolved and its assets and liabilities will be transferred to a new entity, NNPC Limited, which will still be 100% owned by the federal government. A new Nigerian Upstream Regulatory Commission will regulate business upstream while a Nigerian Midstream and Downstream Petroleum Regulatory Authority will regulate the rest of the industry.
Further, oil firms in the upstream and midstream will be required to incorporate a development trust for host communities wherever they do business. They will also be required to pay into the trust fund 2.5% of their annual expenses for operations affecting these host communities.
Nigeria’s oil sector is vulnerable in a volatile Niger Delta region where militant groups backed by local politicians have previously disrupted oil operations. In 2016, militant attacks on oil facilities cut the country’s output by one-third within a few months and put government finances in danger.
A senior executive of a top community group in the Niger Delta told us the PIB does not rightly address the concerns of the region. He said, “The 2.5% is insignificant compared to what they are taking from host communities. They will also still be in charge of the trusts, so nothing changes much for us. The trusts should be jointly controlled by the host communities and the oil firms – or the firms will find a way around the system without sufficiently pursuing local development.”
President Buhari has a less cordial relationship with the region than his last two predecessors did. Indeed, the bill appears to be more empathetic towards the oil companies than the host communities. For instance, in the case of vandalism or civil unrest, the bill says an oil firm can deduct from a host community’s entitlement to recoup the costs of fixing the damage.
Buhari’s strained relationship with parliament in his first term also contributed to breaking up the enactment process for that parliament’s version of the PIB in 2018. This time, Buhari’s own people have prepared the bill and his allies are in charge of the legislature, having won control there in the 2019 elections.
The Nigerian government depends on petrodollars, including NNPC inflows, for more than half of its revenue. With that crude oil money, the NNPC has been subsidising petrol for the country without appropriate accounting measures, but its inflows have declined this year due to lower oil prices and government finances have been hit. Now, government is cutting some of those subsidies and rethinking the NNPC’s efficiency. In June alone, none of the three NNPC refineries produced anything but cost the public purse USD25 million.
The pandemic has also raised the need for reform in the industry as oil firms take measures to stay competitive and review investments in areas with less stability. Chevron’s unit in Nigeria announced in October that it planned to cut 25% of its staff in the country in response to lower oil demand.
Outlook
The PIB has smoothly passed a first reading in the senate, and it appears to be on course for enactment next year with fewer opponents in parliament compared to the last attempt. Still, there may be some contention from stakeholders in the Niger Delta when the process is opened up to more public scrutiny next year.
The parts of the PIB dealing with host communities would benefit from wider stakeholder consultation. As it stands, the bill appears to put the local people in the backseat when it comes to the administration of community trusts. This issue will likely be a source of tension if unaddressed and the bill is unlikely to improve relations between communities and oil firms also.
The government seems to have set the NNPC on a path towards privatisation with this proposed piece of legislation. For instance, the part of the bill relating to corporate governance anticipates the involvement of private shareholders and lays out a mechanism for improved accountability.
However, the levers will mostly remain in the hands of the president with the current arrangement. For instance, the bill gives the head of state the power to unilaterally appoint all NNPC Limited board directors, including the chief executive.
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