Nigeria's Petroleum Industry Bill scales new heights of fiscal complexity

Nigeria's latest attempt to reform its petroleum sector isn't just about finishing a job that started over 12 years ago. The government now seeks to make Nigeria's upstream, midstream and downstream competitive in the face of significant threats to oil demand, including the impacts of coronavirus and the energy transition.

Complete the form to receive the full report. This report covers the key sections of the Petroleum Industry Bill:

• Governance & regulation
• NNPC Limited
• Licensing
• Upstream fiscal terms
• Gas pricing
• Host communities

The Minister of Petroleum Resources’ (currently the President) powers are reduced with the role largely restricted to policy. He will no longer have powers to grant, amend, revoke or renew licences. This will happen on the recommendation of the regulator. Unlike now, the minister will not sit on the board of NNPC’s successor.

The PIB proposes two regulators: the Nigerian Upstream Regulatory Commission (the Commission), and the Nigerian Midstream and Downstream Petroleum Regulatory Authority (the Authority). The Commission will replace the DPR and the Petroleum Inspectorate. The Authority will replace the Petroleum Products Pricing Regulatory Agency and the subsidy body, the Petroleum Equalisation Fund will cease to operate.

The Commission will be funded through the appropriation of an unspecified share its revenues. The Authority's funding while also via appropriation, will be based on a 1% charge on the wholesale price of petroleum products sold in Nigeria.

The Commission and the Authority will need to consult each other on any regulations or amendments. There are overlapping areas like domestic supply obligations, domestic demand requirements, gas pricing and hydrocarbon standards between upstream and midstream. A high degree of co-operation will be needed to function successfully.

The Authority will set tariffs for transportation, distribution and processing of petroleum; and ensure third party access to facilities and pipelines or non-discriminatory open access to transport networks. It will also have powers to regulate prices of gas and petroleum products. Licences will be issued across the value chain, meaning unbundling of upstream from midstream from downstream.

While this has been known for some time for gas (the Gas Transportation Network Code was launched in August), this will also impact trunk oil pipelines and terminals owned and operated by upstream companies. They currently set tariffs for transport and processing of crude from third parties. The PIB will introduce a network code, with network operators in defined areas. Tariffs will instead be set by the regulator, although it's not clear how existing crude handling agreements will be treated.

Within six months of enactment, the Nigerian National Petroleum Corporation (NNPC) shall be incorporated under the Companies and Allied Matters Act, 2004 into NNPC Limited, which will operate on a commercial basis without government funding. NNPC Limited must publish annual reports and audited accounts.

The government will own all shares in NNPC Limited, but reports of its future privatisation are speculation. The PIB only states that any sale will be at fair market value. Previous versions specified a timeline for the sale of 30% within 10 years.

The biggest concern for NNPC’s upstream partners is how NNPC’s current liabilities (e.g. cash call arrears) will be handled. Ministers will decide what assets, interests and liabilities are transferred to NNPC Limited and what remains with NNPC, but without further detail. The cost of winding down the assets, interests and liabilities of NNPC shall be borne by the government, but with no timelines.

The repayment of $5 billion of accumulated cash-call arrears was agreed between NNPC and the IOCs in 2016, and so the outstanding $2.5 billion will be carried over into NNPC Limited. Hence it is unclear on what happens to cash-call arears accrued since 2016.

Since 2016 it has been government policy to convert the upstream JVs into Incorporated JVs, but section 65 (1) is clear that any such restructuring is voluntary. NNPC Limited will be vested with:

• All rights to gas under PSCs signed before the effective date
• Working interests within the upstream JVs; and
• Act as an agent of the regulator in managing profit oil or profit gas share under PSCs.

The last two bullets effectively cover current role of NAPIMS within NNPC. NNPC Limited will also be involved in the development of renewables and gas-based industries.

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