New Oil Law Unlikely to Rescue Nigeria

Nigeria’s President Muhammadu Buhari appeared to set a milestone last week when he signed long-delayed legislation to reform the oil and gas sector into law. Will the new Petroleum Industry Act (PIA), which improves fiscal terms and provides for new institutions, be good for Nigeria and boost investment as the government claims? While it does some good things, it cannot address the energy transition that has made it harder to fund fossil fuel projects globally (PIW Apr.9'21). Nor can it protect the Act’s new regulatory institutions from a predatory elite that continually interferes in government business and treats the national oil company as a patronage tool. The Act provides for a new entity, Nigerian National Petroleum Corp. (NNPC) Ltd. to be created within six months but does not specifically provide for privatization. A clause calling for the sale of 30% of NNPC was removed in 2020. NNPC Ltd will be able to draw on numerous sources of finance, and vested interests will likely continue to fuel the expansion that has seen NNPC take control of federation assets without remuneration. The legislation provides few signs that the new Nigerian Upstream Regulatory Commission or the Nigerian Midstream and Downstream Petroleum Regulatory Authority will operate independently of government. “At the end of the day both regulators will do what they are told,” says one analyst. The Act is also vague on what assets and liabilities will be transferred to the new Nigerian National Petroleum Corp. (NNPC) Ltd., leaving international oil companies (IOCs) in a difficult position as they trying to divest equity in the joint ventures they operate with NNPC. “If the liabilities ended up shifting towards the government, they would have a lot less certainty as to how and when those liabilities would be paid back” says Wood Mackenzie Research Director Gail Anderson. Complicating matters, the timetable for assigning the assets and liabilities clashes with elections scheduled for early 2023 -- which suggest these complicated issues may not get the attention they need. NNPC’s arrears and “funding shortfalls” with all joint ventures date back long before 2016 and are estimated to tally $12 billion. The Act requires Nigeria’s petroleum and finance ministers to determine what should be transferred within 18 months and the rest will go to the government, which will develop a framework for payment. If the ministers and the attorney general don’t decide in good time, the IOCs could end up with a different set of ministers to deal with that will drag the process out for longer. The new tax regime significantly improves terms for the onshore shallow water blocks operated by the joint ventures. The catch is that Investors must control their costs more carefully due to lower cost ceilings, and those who convert to PIA terms must waive all outstanding arbitration as well as stability provisions and guarantees provided by NNPC. The legislation is academic for deepwater production because the production sharing contracts (PSCs) are renegotiated bilaterally with NNPC. Total tax on the onshore shallow-water blocks falls to 60% -- that’s 25% lower than the current regime and at least 12% lower than rates proposed last year (PIW Oct.9'20). The new Hydrocarbon Tax, which replaces the existing Petroleum Profits Tax, will be applied at 30% alongside a 30% rate for corporate income tax. However, the cost ceiling has been lowered to 60% and the old investment tax credit has been replaced with an allowance that is not as beneficial. The deepwater production sharing contracts (PSC) due for renegotiation are likely to follow Royal Dutch Shell’s new contract on OML 118, hosting the Bonga field. One big question is whether the ambiguities of the PIA and other factors will trap existing investors who want out -- and how sellers could surmount this. The test case is Royal Dutch Shell, which put its entire portfolio of onshore/shallow water oil and gas assets on the market in early August. Shell has tried to clear some decks for a sale, having paid $111 million to settle an old lawsuit this month, but as soon as it clears one legal problem another pops up (PIW Feb.26,21). Lack of clarity on who would handle NNPC’s liabilities to Shell will cause delays -- as would resolving the issue of how arrears would be repaid. Shell could opt to take NNPC or federal government crude in lieu of arrears payments though such a path would be risky, given the old NNPC’s track record on repayments.