We read that the petroleum industry bill last week passed its first reading in the Senate for the third time. It seems that both houses have harmonized their drafts of the renamed petroleum industry and governance bill (PIGB). We are not party to the detail in the bill, and also have concerns that the passage of the bill will be deflected by the pursuit of the legislature’s territorial agenda for the NNPC.
Before the slide in the oil price we argued that the bill should be passed, warts and all, so as to test investor appetite. A number of large industry players, some state-owned and Asian, had been knocking unsuccessfully at the door .The FGN could not hold a credible bidding round for new acreage without a new fiscal framework in place. As Nigeria dithered, other governments such as Angola and Uganda were attracting new investors to their own oil provinces.
These arguments carry less weight in the environment of low oil prices and slashed exploration budgets. In any event, the news from the Senate does not sit comfortably with the reported views of the FGN that the bill is cumbersome, and that the structural and fiscal elements should be treated separately. In the run-up to the elections last year, we were promised “some interesting developments at the NNPC” by the Buhari campaign team.
Since the elections, we have had a number of initiatives from Ibe Kachikwu, its group managing director and the minister of state for petroleum. As long as low oil prices persist, a piecemeal approach may be best. The corporation can push through a number of important reforms without changes in the law. It will have to go to the assembly for changes in the fiscal regime for the industry, for example.
One striking initiative has been the proposed experiment in joint venture (jv) financing which Kachikwu unveiled in October. The idea is that the reshaped jvs will be responsible for their own financing, and pay taxes, royalties and dividends like any “normal” company. They will therefore be detached from the federal budget, and not waiting patiently for the release of cash calls (the NNPC’s share of their investment budgets). The format will initially be tested on some of the smaller jvs between the corporation and indigenous producers, and could then be extended.
The initiative stems from the perennial backlog of cash call payments. One prominent Nigerian name in the industry estimated the arrears at US$10bn at a conference last month. (One of the more vociferous senators on the subject of the NNPC’s cash call failings last week produced a lower figure of US$6bn.) Whichever number we select, it is clear that underinvestment over many years has resulted in decreasing jv production. The decline over the past decade has been at least 30 per cent, and probably more.
The backlog rises as oil prices fall. Between February 2015 and this January, the corporation paid out US$4.25bn for cash calls but the backlog still increased by US$3bn according to its own figures. It has not been able to make any transfers to the federation account from its US dollar business since March last year. From its naira business (sales of domestic crude) it has paid N1.05trn to the account over the same 12-month period, including the monthly debt repayment of N6.3bn.
Among other proposals, the corporation wants to build at least 500 mega filling stations in partnership with state governments (over land), attract outside capital to its depots and pipelines, and divide itself into four autonomous units with their own chief executives. It has saved an estimated US$80m per month by replacing its offshore processing and crude swap arrangements, and persuaded some oil majors to draw upon “their” fx to import products in the present scarcity.
Some initiatives invite scepticism, an example being the latest 90-day review of the corporation’s four refineries. Others could be expanded upon: the corporation cannot be blamed for the surge in sabotage and vandalism, so agreements over pipelines could be modified to give a stake to local communities.
Another trend we welcome has been the volte-face in the corporation’s thinking on the release of information. We should not forget that until last year it believed that data existed for its own internal benefit, and was not to be shared under any circumstances. Kachikwu, in contrast, gives a good impression of enjoying the chance to speak in public and even to the media. The corporation is not an easy sell, given its flawed reputation, and the managing director has therefore decided to share his thinking and long-term vision. Since August it has published a monthly Financial and Operations Report. We accept that the financial data stop at the operational loss (profit) line but feel that some praise is due for the transformation in the corporation’s thinking on information sharing.
In conclusion, the low oil price has forced the NNPC (and, more broadly, the FGN) to embark upon reform. The corporation has started the job in earnest with changes which do not require the approval of the National Assembly. The industry bill has been with the legislature in different versions for eight years and we should not expect the rapid passage of the PIGB. The bill could be divided into smaller and more manageable segments such as a new fiscal regime.
Gregory Kronsten
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