The “7 big wins”: repositioning Nigeria’s oil & gas sector

Nigeria’s black gold market is fast becoming unattractive both to local and international investors due to several factors such as the fall in global crude oil prices, increased insecurity and vandalism of pipelines. The delay in the passage of a robust legislation which governs exploration & production, bidding and contracting has cast a shadow of doubt over the Nigerian Federal Government’s commitment to attract foreign investments into the sector and has (rightly so) contributed to the reluctance of potential investors to invest in the Nigerian Oil & Gas Sector. Conscious of this, the Government has within a period of 2(two) weeks published both a RoadMap for the Nigerian Oil Industry as well as the new Bidding Rules. The goal of this paper is to review the above-mentioned road map.

Nigeria is Africa’s largest oil producer with a capacity to produce about 2.5 million barrels per day and the 6th (Sixth) largest oil producing country in the world. Nigeria’s crude oil has a gravity between 21o API and 45o API with its main export crudes being the Bonny Light (37o) and Forcados (31o). Also, about 65% of Nigeria’s oil is above 35o API with very low sulphuric content. This is the attraction to the Nigerian oil & gas market. On its gas reserves, a recent British Petroleum Statistical Energy Survey1 put the proved natural gas reserves at 5.29 trillion cubic metres, 2.82% of the world’s estimated reserve. These notwithstanding, Nigeria has recorded lower patronage of its oil in recent years and more so, increased divestment of oil assets by foreign investors. While some have argued that the drop in foreign investments has created opportunities for indigenous investors in the market, the truth is that, most of the indigenous investors still rely on foreign investors for financial and technical support.

On October 27, 2016, Nigeria’s President Mohammed Buhari, GCFR, who also doubles as the Hon’ble Minister of Petroleum in Nigeria, launched the Petroleum Industry Road Map (Otherwise known as “The 7 Big-Wins”). This Policy document establishes improved transparency, efficiency and a stable investment climate which is the panacea to a stable and profitable oil and gas market. The proposed reform is also expected to identify investment opportunities in infrastructure development of oil & gas facilities, operations, and maintenance across the oil & gas industry. Seven critical areas of reform has been identified by government via this policy document. They are:

Improved Policies and Regulations: While awaiting the passage of the historical Petroleum Industry Bill (“PIB”), the Nigerian government is taking proactive measures to carry out reforms in the oil & gas sector. To achieve this, a new Petroleum Bill is being proposed; the Petroleum Industry Governance and Institutional Framework Bill (“PIGIF). The PIGIF Bill has the following key objective (amongst others): establish a single independent regulator to be known as the Nigeria Petroleum Regulatory Commission; and restructure the State Entity (the NNPC) into two entities; the Nigerian Petroleum Assets Management Company and the Nigerian Petroleum Company. These reforms were designed with a view to improving transparency, efficiency, and government take from the industry. Furthermore, the National Oil Policy is expected to establish a Single Independent Industry Regulator, conduct new licensing rounds (the Guidelines for this were reported to have been published on October 31, 2016), timely lease renewals and the negotiation of new funding options for government. Government also intends to sponsor the passage of a Petroleum Fiscal Reform Bill, which is expected to change the Fiscal landscape of the industry.

Gas Revolution: The Nigerian Gas MasterPlan, a robust gas framework for doing business in the Nigerian gas sub-sector is yet to be to be fully implemented. This obviously has affected full implementation of her domestic obligation rule re-introduction, the introduction of its transitional pricing framework, full commerciality in Domestic gas prices (export parity), Infrastructure Investment progressing etc. Undoubtedly, with a gas revolution under this administration, it is anticipated that there will be improved Gas Infrastructure Development, Gas Revolution Projects, promotion of Domestic Utilization of LPG and CNG, Reduction of Gas Flaring, Gas Commercial Framework Implementation and improved Gas to Power;

Encourage Transparency and Efficiency: Government is committed to improving governance and transparency across the oil and gas value chain via increased collaboration with the Nigeria Extractive Industries Transparency Initiative. This would help strengthen governance and accountability in the industry. Under the new regime, oil companies may be required to disclose more details of their operations and financials. Government is also poised to improve operational efficiency and increase capacity building. This, it intends to achieve via continuous (or advocating thereof) training of staff in the oil and gas industry; both for public and private sectors. Finally, it is expected that there will be a review of the Establishment Acts of some of Petroleum Agencies to improve their various performance levels. This is in line with the reform of the Petroleum Institutional and Governance Framework of the Industry (the “PINGIF Bill”). To comply with global best practices, government is determined to introduce transparent licensing rounds, bidding information, fiscal obligations, improved Capacity Building, Institutional Strengthening and Governance Model, Information Communication Technology & Automation, and Performance Management. The Petroleum Training Institutions will similarly be re-structured to engage (albeit on an ad-hoc basis) to draw from the industry knowledge of practitioners.

Improving Niger Delta and Security: It is no longer news that the Niger-Delta, Nigeria’s oil & gas hub, has recorded violence resulting in massive destruction of oil assets. Successive governments have in turn also attempted to reduce the impact of these vandalism on the Nation’s revenue stream by making palliative provisions to accommodate some of the vandal’s concerns. These include the Amnesty Programme, establishment of OMPADEC, additional Derivation Formula for Oil producing States, proposed Host Community Fund allocation etc. In addition to these, the Buhari administration has also adopted a two-way approach: the implementation of the Ogoni Report by cleaning-up of oil polluted areas and also improvement of the security of critical oil and gas infrastructure which is a prerequisite to achieving any of the National Oil and Gas policy targets. The government aims to improve security of oil and gas infrastructure via multi-level engagements with State Governors, the Ministry of Defense, the Nigeria Civil Defense Corps, Militant groups, opinion leaders and relevant stakeholders. Government also aims to complete the Phase 1 of Ogoni clean up within two years and reverse the production loss of 1 million barrels of oil per day. Government is also considering plan to review and extend the amnesty program for one additional year; a departure from the earlier position of terminating the programme. The Niger Delta is an important part of the Nigerian oil & gas sector, hence a strategic, tactful and coordinated diplomatic approach is required to deal with the restive youth in the Niger Delta. That said, Government must however be cautious with provisions such as the ‘Host Community Funds’ provision, as, this is not unsustainable.

Developing an active business environment: Government intends to reduce the contracting Cycle to 3 to 6 months and ensure that contract timelines and terms are strictly adhered to. The aim is to improve the oil and gas production capacity to about 3 million barrels per day. This is with the hope that an increase in investment and crude oil production will achieve an income stream of at least US$5 billion over and above current income to Federal government; and also close the income gap between planned or budgeted and actual remittances from Parastatals and NNPC to the federation account.

Development of refineries and local production capacity: Government is determined to transit from the status of a massive importer of petroleum products to a net exporter of petroleum products and value-added petrochemicals by 2019. Although these appear ambitious, a determined government will no doubt achieve it. Private Sector participation is therefore invited to inject about $1.4 to $1.8 billion dollars to rehabilitate existing refineries. The strategy is clear; a shift to a private sector-led mid to downstream industry with a market-based model. Today, Nigeria has 4 (four) NNPC-owned refineries with a combined installed capacity of 445,000 bpsd. There are 2 of these refineries in Port-Harcourt (the Port-Harcourt Refining Company) with a combined installed capacity of 210,000 barrels per stream day (bpsd); 1(One) in Kaduna (the Kaduna Refining and Petrochemical Company) with an installed capacity of 110,000 bpsd; 1 (one) in Warri (Warri Refining and Petrochemical Company) with an installed capacity of 125,000 bpsd. These refineries require a comprehensive overhaul with a view to expanding domestic refining capacity (Co-location, greenfield, modular);

Stakeholder Management and International Coordination. There is government’s determination to introduce improved Stakeholder engagement in the oil & gas sector. This, government intends to achieve by improving and institutionalizing communications co-ordination and structure across agencies and departments of the Ministry of Petroleum Resources; by providing a platform for periodic engagement and negotiation with stakeholders on the issues within the industry; and improved engagement and cooperation between the Ministry of Petroleum Resources and other Countries’ oil parastatals and agencies as well as improve Nigeria’s standing within international agencies such as OPEC.

Conclusion

Government must get the framework right if it intends to come out of this recession. Although, there has been sterling efforts at diversifying the Nigerian economy, it is clear that our budget will continue to be funded either by our receipts from the oil & gas sector or from external borrowings. Creating an enabling environment therefore commends itself to attracting both foreign and local investors. One can only hope that this RoadMap is not just not another well-intentioned Plan but one which will deliver the promises of a vibrant and robust oil & gas market. It is not new for the Buhari administration to take bold and decisive steps on many of its policies. For example, the liberalization and removal of petroleum subsidy in the downstream sector; the improvement of the operations of the NNPC; an attempt to review the existing industry contracts, Nigeria’s role on price stability in the international market and the appointment of Dr Sanusi Barkindo as Secretary-General of OPEC are clear indicators of what this new administration can do once it is determined to do it.

Tolu Aderemi is a Partner with Perchstone & Graeys, a commercial law firm with offices in Lagos, Abuja and Edo States, Nigeria.