What’s the outlook for Nigeria with newly enacted petroleum law?
President Muhammadu Buhari signed the long-anticipated 2020 Petroleum Industry Bill into law yesterday (16 August). The legislation states that a new Nigerian National Petroleum Company (NNPC) must be created as a limited liability company within the next six months as the successor of the old NNPC, a parastatal formed in 1977. The old NNPC’s regulatory functions have also been reassigned to two new regulators.[1] Meanwhile, upstream and midstream oil firms are now required to form trusts for the development of their host communities. In this note, we describe the outlook for the country’s oil sector and political economy based on our on-the-ground analyses on this legislation over the last 10 months.
1. Who benefits?
Royal Dutch Shell was the latest oil major to announce its impending exit from Nigeria this year. Petroleum Minister of State Timipre Sylva said in May that the government and the company were negotiating the terms of a divestment that would transfer Shell’s assets in its Nigerian unit either to another major or a local firm. Local firms have been the primary recipients in similar divestments over the past decade. Now, here are some who would benefit from this new law as majors retreat in favour of cleaner energy and markets fitting their risk appetite.
2. Corruption
The old NNPC was a frequent focal point in investigations of sectoral corruption, and this was partly because its corporate governance was structured in a way that undermined independence, promoted patronage and aided political interference. The Petroleum Industry Act fundamentally preserves this structure even though it sets NNPC Limited on a potential path to privatisation. The federal government will still own 100% of NNPC Limited despite the change in corporate status, and the president of the country remains solely empowered to appoint and remove the NNPC board (including the CEO). Proposed privatisation to improve corporate governance and cut government control is unlikely to occur in the medium term with 2023 elections in view.
3. Economic risk
Further, the Petroleum Industry Act may continue to limit the Nigerian government’s oil revenue inflows. The new Nigerian Upstream Regulatory Commission is empowered to withhold 30% of oil rents and royalties to be put in a frontier exploration fund[2], which it would manage at its discretion.
A similar arrangement weakened revenue performance under the old regime, and now such losses could be even more consequential considering debt servicing costs were equivalent to 97% of government revenue under the 2020 budget.[3] In the previous system, the NNPC had the right to freely withhold revenue from crude oil sales to cover its operating expenses rather than remit to the federation account. This was often discretionary and related to political objectives such as subsidising petrol – meaning a significant amount of Nigeria’s petrodollar inflows did not reach the government. For example, NNPC told the government in April this year that it would remit no money to the federation account in the following month because its fuel subsidy payments had wiped off its earnings.[4]
Indeed, the parastatal’s remittances from crude oil sales have declined in the past decade as a percentage of total oil revenue. Crude oil sales were close to 50% of gross oil revenue in the fourth quarter of 2011, but that figure was only 16% in the same period of 2019.[5][6]
4. Niger Delta unrest
Nigeria established the Niger Delta Development Commission (NDDC) in 2000 to solve host community problems in the oil-producing region, but NDDC has since struggled to fulfil its mandate due to corruption and local power struggles. The commission was put into sole administration in December 2020 after four interim heads were sacked for alleged corruption within two years as rivals fought for control. The last head Kemebradikumo Pondei collapsed during a parliamentary probe. Now, this new law features another attempt to ease local unrest, but there are pitfalls.
Within the next 12 months, oil firms are required to establish a trust for every community where they operate and manage each trust using 3% of their operating expenses in the applicable community. It is not yet clear how this will this work in practice. However, key local stakeholders are unhappy with the arrangement and view it as being inadequate. Federal, state and local government authorities will have to play an important mediator role to smooth the adoption of these trusts. The effectiveness of that mediation will determine the extent to which tensions subside in host communities.
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[1] Nigerian Upstream Regulatory Commission and Nigerian Midstream and Downstream Petroleum
Regulatory Authority.
[2] The stated purpose of the Frontier Exploration Fund is to enable the government invest in exploring ‘frontier basins’ in the country for new oil discovery.
[3] 2020 fourth quarter budget implementation report (March 2021). Nigeria Budget Office.
[4] More trouble for Nigeria as fuel subsidy wipes off oil revenue (April 2021). Premium Times.
[5] 2011 fourth quarter budget implementation report (March 2012). Nigeria Budget Office.
[6] 2020 fourth quarter budget implementation report (March 2021). Nigeria Budget Office.
*Photo credit: Forcados offshore Nigeria, shell oil field. Chief Charles, CC BY-SA 4.0
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