PIB will foster investments, enhance revenues
One thing the President Goodluck Jonathan’s administration is very optimistic about is the passage of the Petroleum Industry Bill. In this interview, a member of the lead PIB team, Mr Abiye Membere, also the Group Executive Director, Nigerian National Petroleum Corporation, NNPC, argues that various interests were taken into consideration in drafting the bill. Excerpt.
The PIB has just passed through the second reading at the National Assembly, do you think the Bill will survive this legislative tenure, in view of what happened to the last bill?
Yes, most definitely. You’ll see that we’ve done things a bit differently, and one of the key areas of improvement is the strategy to ensure that there are no other versions. There is a single version of the bill. Everybody has to rely on that. If you want to make changes, you have to go through the process to include them in the original document.
That alone has solved a lot of the problems that the previous bill had going through the National Assembly. Secondly, the strategy to engage the different stakeholders has changed since the failed attempt to pass the last bill. What we have done is to create a core team, made up of various industry experts and some knowledgeable private sector people. This team has been engaged in advocacy and is trying to educate the general public on what this bill stands for.
It is designed, essentially, to ensure that: 1. A fair share of revenues derived from natural resources goes to the people who own them. 2. To foster investments in the country.
You are a member of the Technical Committee that put the bill together, and looking at some of the fiscal terms, there are still a whole lot of issues surrounding them. Why is this so, especially as the IOCs insist they were not carried along in the drafting of the bill?
I guess they use this complaint about not being carried along to buy sympathy. But this is an executive bill. It is not a bill between NNPC and the IOCs.
Historically, these oil majors have been consulted several times over a period of many years. We even hosted two workshop sessions in Lagos, to address any concerns they might have; And I recall that the first time we met, they argued that there were disparities between our fiscal model and theirs, in terms of predictions about what the government’s take would be. But, to tell you the truth, the actual difference was less than one percent.
The main difference between the industry fiscals and the fiscals submitted by the government was linked to cost assumptions. The IOCs still assume high costs because when you do government take, the cost is the same denominator. If the cost is high, it means government take will be high because the denominator is reduced. So if you reduce that cost, you will find out that government take will be lower.
As much as they agree that there is the need for a review of the existing or operating laws, they are also saying that since the government is asking for a higher take, some considerations should also be given to them. They cited examples where they had to pay even higher costs on account of security issues, vandalism issues, policy swings, and these cannot help them in planning?
Yes, we understand that no Nation is static, that no particular criminal activity is sustainable for a long time; and this is a clarion call for the oil majors to join government in supporting the Host Community Fund, which we believe is the solution to the Niger Delta security problem. If that is done, the high cost of security will be completely eliminated. Today, all the FPSOs and marine vessels move from one location to the other fully loaded with security escorts.
If even a small portion of the huge sum that is currently being spent on security can be transferred to Host Community Funding, we will be able to guarantee a conducive environment for the majors to operate in.
With respect to joint venture financials, the existing petroleum act’s provisions and the proposals contained in the PIB basically neutralise each other in the sense that there is an increase in royalties and a decrease in tax. The two are compensating for each other and the overall percentage the government will take if PIB is passed, will, I can assure you, wind up being almost the same as the overall percentage the government is taking now.
With respect to the Production Sharing Contract (PSC), this is the 20th year since the passage of 1993 PSC Act; and it is in this area that the good people of Nigeria – who are the real owners of the oil – have suffered the greatest losses.
There have been a lot of developments in the past two decades, in terms of deep water production statistics, tax/royalty figures and the profits that IOCs and successive governments have shared. We will soon explain such complexities in detail in a booklet called “The citizens’ guide to the PIB”.
In the meantime, suffice it to say that the Nigerian government is being magnanimous because it wants to work with foreign investors, not stifle or cheat them; and if you look at what is happening in other hydrocarbon provinces like Angola, you’ll see that we aren’t making unreasonable demands. We just want Nigerians to get a fair share.
But even the indigenous operators too are complaining. They claim the new PIB will hike their operating costs, how come?
We are genuinely committed to supporting indigenous companies and I do not, in all humility, think that anyone can justifiably claim that the bill hikes operational costs. There is enough production allowance within the PIB to compensate the low producers. I have heard one or two concerns about that, and I ask, what is the issue? Some say that the government take is too high and shouldn’t be more than 50 percent. But the percentage has to be based on either a rate of return, or net present value on any investment. We have scrutinized the numbers and we strongly believe they Nigerians who want to participate in this industry will benefit.
But have they been made to understand these things you have just told me, because they also claim to have made their position known and are awaiting further response?
Yes, we have met with them before and they raised their concerns and submitted some documents. One of their major concerns revolved around lease administration. We agreed that their concern was legitimate and have amended that flawed aspect of the bill.
The other aspect that understandably worried them was this: if the bill is passed at a time when they are already developing a gas field, how do they move from the current fiscal regime to the new fiscal regime?
We made it very clear that if you have gained some benefits from the old regime, it will be difficult for you to acquire new benefits from the new regime. However, we do intend to look into this issue. Another point that the IOCs made regarding gas was their belief that gas acreages should have longer life spans to attract investments. This is a valid concern and the PIB team has taken note of it. During the public hearings, we will make such issues known to the National Assembly, to assist those who want to make gas projects more robust.
Still on the IOCs, part of their complaints is the issue of the dearth of infrastructure, and outstanding issues regarding gas pricing, which have not been resolved and which the PIB didn’t quite deal with?
The gas pricing regime has been in place for at least two years and IS almost the same as the hub at the international market.It was designed to go through a certain timescale before it becomes competitive within the context of the international market.
If what they are referring to is the deep water gas, there is no agreement yet, but PIB has already addressed this matter because gas fiscals are a part of the regulations that are going to the National Assembly for approval. I don’t see anything outstanding on the gas side that is not being addressed. The infrastructure issue is already being addressed. This is one area that we should give kudos to President Goodluck Jonathan’s administration.
We recognise that gas infrastructure has been one of the key areas that have made gas development more difficult. But the key infrastructure are currently at various stages of development. The Oben-Oben is a 42-inch gas line that is going to link gas supply between the eastern and western sides of the Niger Delta.
What we are hearing at the moment is that the demand for gas supply is highest in the west. But they don’t have that much gas development in the West, so what we have done is to ensure that the huge 42″ line is going to link the east and the west and create the flexibility for gas to be moved towards the western side.
The Lagos Escravos ipeline, which is one of the major trunk lines, is a 30-inch line that delivers one billion cubic feet of gas and the twinning of that line is at an advanced stage and will be completed in 2014. The Ajaokuta-Kano-Kastina line is another major trunk line designed to supply gas to the Northern axis. The tender process is actually on to ensure that the line is delivered and will be supplying gas to the northern axis soon.
Meanwhile, the feasibility studies and engineering designs for the Calabar-Ajaokuta gas pipeline are almost completed. This is one area in which we are looking to public-private-partnership. As soon as this is done, the eastern axis gas gathering trunk lines will be ready. From the Mobil side, it’s going to deliver gas all the way to Ajaokuta. And from the eastern and western sides there is continuity between gas supplies to Oben (Ob-Ob), all the way to Ajaokuta.
As soon as those two major trunk lines are constructed, gasdistribution / infrastructure headaches would become a thing of the past. By the way, while we are not saying that we don’t want gas to be exported, we believe that the needs of Nigerians should come first. We need gas for power, agriculture (fertilizer) and local industries that can grow our economy.
What about the links to the power plants because that is another major area of concern in view of gas to power policy?
Those are not major lines, those are feeder lines and it will also drive the location of gas plants. It is not going to be business as usual. You have to look at the economics, you have to look at the cost of moving that gas.
You spoke so much the about the PSCs, what about the JVs, because I recall that at one point, government was pushing for incorporated joint ventures, IJVs, what became of this plan?
What is the real objective of incorporated JV? The IJV is mostly designed to reduce costs. We now know that such a law will be like a forced marriage. No marriage can work if both parties to the marriage do not agree.
I asked because the issue of rising costs has caused growing concerns in the industry, and part of the IOCs’ arguments is that costs are not determined arbitrarily, as this is based on the exchange rate, price of oil at the international market, and high costs of contractors. How will these indices play out?
First, the crude oil price is common to everywhere in the world as long as you are a producer, so that is a commonality. The crude oil price also has a way of increasing the cost of services. But the crude oil price more or less has stabilized, for almost four years, at above $80 per barrel, so services have more or less stabilised.
But, the key areas where cost goes up are security and the long tender process. So we’re going to ensure that NIPEX is working efficiently. We are not even waiting for PIB to achieve this objective. The journey has already started as I speak, to make sure that our tender processes are within the norm.
I am happy to say that the NNPC Board has visited NIPEX and made it known to its executives that big contracts need to be monitored for a maximum of nine months, while smaller contracts should be done in six months.
The issue of Host Community Fund keeps propping up, and government is also seeking the IOCs support, yet there are some sections of Nigeria that are not happy with it. Ironically, looking at some other countries like Mexico, the community fund is even as high as 30 percent and may go higher. How is government going to tie in all these issues?
Opposition to the Host Community Fund is understandable because oil producing communities are already receiving extra derivation funds that have not always been properly and transparently accounted for. So, obviously, there are concerns about giving them more money.
But our host community model is not unique. It exists in other countries and has worked well elsewhere. The ten percent we are recommending for this fund is nothing compared to the $7billion that is lost every year through sabotage of pipelines. By the way, pipeline sabotage does not only have financial implications, It also significantly contributes to environmental degradation. The choice is ours.
We can either continue with the old way of constantly repairing pipelines and deferring production or use a small part of the money we’re spending on damage remediation to ensure that such things don’t happen again. This policy is not peculiar to Nigeria and makes sense economically. It also makes sense morally because human beings deserve to benefit from a God-given resource that flows from their ancestral lands and waters. But it’s not just natives of oil producing areas in the Niger Delta region who will gain from the Host Communities Fund. There are pipelines, depots and refineries in all four corners of this country. Any community that is near such installations will become a beneficiary of the fund.
Will this community fund, help reduce some of the CSR costs, which the oil companies also complained adds to their costs?
We agree that the Corporate Social Responsibility (CSR) activities add to costs. But this should not be an excuse. If companies spend N10 or N100 on CSR projects, the government actually bears 85 percent of whatever they spend and the remaining 15 percent is shared between the investors. NNPC takes 60 percent of that, so why are the majors complaining? For every dollar spent on CSR, they spend less than five cents. Whatever they put in, they take back from tax, so there is no basis for them to make it look as if this is an additional cost.
Let us look at implementation, because part of the complaints is about the implementation of the PIB, and there is also the transition period as well as the difficulty in effecting changes at this point in time since the bill is already undergoing legislative scrutiny?
I recall that on the two occasions when we met with IOCs, we said – just for discussion’s sake – that the royalties we were proposing were 10 percent, that the tax we were proposing was 80% and that they should propose different numbers if they didn’t like our numbers. But they will never give you a number because what is good for one IOC is not necessarily good for another IOC, so all they will say is: “Your numbers will not attract investors.”
Meanwhile, transition is a short term thing, a process that will eventually end. Discussions have been going on between even the World Bank and the government on transition plans. The government’s view is that this is going to be a three-year transition. Various committees and teams will be set up to implement different aspects of the programme; and we strongly believe that within three years, the implementation will be completed. All we are seeking is the quick passage of this bill. Even the oil majors have recognised that not passing the bill is causing investors and the nation $4billion annually. It is time to stop this needless haemorraghing of money.
Finally, let us look at the issue of frontier exploration, analysts believe that the Federal Government have sunk in millions of dollars looking for oil in this regions, especially in the Chad Basin and the rest. Yet there is nothing to show for it. Are there really some prospects in this region?
Exploration is the name of the game. We have to continuously explore in the hope of increasing our reserve base. A lot of people don’t know that there is heavy oil in Okitipupa, in Ondo State. This heavy oil will be more costly to extract, but Canada is facing a similar challenge and we can do the same, not just in Ondo but in other areas.
We need to give a major focus to all of the inland basins, not only the inland basins because the country has been producing in less than 20,000 feet of depth. There is a lot of potentials below that depth. Other jurisdictions are going deeper so that is another aspect of frontier exploration.