Why Oil Reform is a Burning Issue

2009-10-18
THISDAY NEWSPAPER - Simon Live




Why Oil Reform is a Burning Issue

Permit me to declare my bias upfront – I am a Nigerian nationalist when it comes to the management and “enjoyment” of our resources. No, I’m not saying there should be no foreign investors or foreign companies here. That’s practically impossible. No country is an island. My campaign, rather, is: let’s systematically empower Nigerians with our oil so that they can in turn invest in our economy. Our biggest resource, at least for now, is oil. My argument, therefore, is that we must “sow” the oil by developing the greatest resource of all – the human resource. We must also build and empower Nigerian entrepreneurs so that we can eventually take charge of our destiny. Sow the oil in human and infrastructural development and Nigeria will become a better place to live in. That’s my belief, preached over the years on this page.
For decades, we have not been deriving maximum benefits from our oil. What we’ve always had is a situation where international oil companies (IOCs) and government officials collude to the detriment of our national purse. President Umaru Musa Yar’Adua’s attempt at reforming the sector through the Petroleum Industry Bill (PIB) is quite radical. The bill is a product of years of work done by the Oil and Gas Sector Reform Implementation Committee dating back to the Olusegun Obasanjo years. Several committees and several reviews thereafter and now we have the PIB waiting to be enacted by the National Assembly. When this is done, 16 laws on the petroleum industry will give way to one omnibus law. It promises to be a fundamental change.
Of the many proposed changes, three have particularly caught my attention. One, the Nigerian National Petroleum Corporation (NNPC) will be run like a proper business. Lest we forget, NNPC, Norway’s Statoil and Malaysia’s Petronas were all set up as state-owned oil companies about the same time in the 1970s. Today, the now renamed StatoilHydro is the biggest offshore oil and gas company in the world. Last year, it was ranked by Fortune magazine as the world's 11th largest oil and gas company by market capitalisation, and the 59th largest company in the world. Petronas is ranked by Fortune as the 95th largest company in the world. It is the 8th most profitable company in the world and the most profitable in Asia. Petronas now has business interests in 31 countries. Our own NNPC has nothing to offer, apart from being eternal Joint Venture partners to Shell, Chevron, ExxonMobil, Agip and Total. Also, NNPC has always operated like a secret cult and political party. It enjoys the sort of confidentiality that encourages corruption. PIB seeks to remove the confidentiality so that all procedures, contracts and payments are made known to the public.
The second interesting proposal is the aspect on community relations. Communities where oil is produced will be given equity, in addition to royalties. This is the closest thing to resource control that is feasible in the present circumstances. I have always liked the idea of promoting ownership. If the community has a stake in the company operating in its territory, it is very likely that they will see the success of the operations as theirs too. The propensity for sabotage should reduce considerably. Hostility should thaw significantly. Such an arrangement is bound to throw up new challenges – especially communities’ capacity to manage internal rivalries and divisions – but stakeholding looks to me as capable of defusing the tension between companies and communities.
The third proposal of interest – which has become the most contentious – is the fiscal regime. Federal Government wants Nigeria to enjoy more financial returns from its petroleum resources. Existing agreements are being redrawn to favour the Federation Account. That means more taxes and more royalties from some fields with a certain level of output. It’s heart-warming that smaller fields, where we can really talk of local participation, are intended to be more profitable for the investors. There is also some flexibility being proposed to allow for automatic response to significant price movements in the international crude market. Some agreements, the way they are, seem to be frozen in time to the disadvantage of the Federal Government. They will now be flexible. Another fiscal proposal which is NNPC-related is the incorporation of joint ventures so that they can run as proper businesses. Currently, NNPC’s contributions to the existing five JVs are financed through cash calls by the government. Under PIB, NNPC can raise its own funds from the banks. Away with cash calls and all the corruption that is in-built!
Having said this, however, I reckon that the IOCs are not very comfortable with some aspects of the reforms. We cannot dismiss their fears and claims, especially as the industry still needs billions of dollars of foreign investment to be able to attain its potential. The government is courting the Chinese who want a significant chunk of the oil reserves with their fantastic offers and fabulous promises. Their reported $30-$50 billion offer for 49 per cent in 23 oil blocks – 18 onshore and five offshore – whose leases are expiring, looks very intimidating. That is if we ignore the fact that enormous investments have been made in these fields and what the Chinese want is like buying a finished product. On the surface, the multibillion dollar offer looks like something from paradise.
What are the complaints of the IOCs? I will list a few. One, they are uncomfortable with the fiscal terms. According to them, government’s proposed share of the returns is extremely high, one of the highest in the world. For the smaller fields, the terms are generally regarded as good for business, but the terms for the deep offshore, where the IOCs hold sway, are seen by them as “uneconomic”. Under the 1993 production sharing contract (PSC), the terms really favoured the IOCs because they were in a virgin region where no one knew what lay ahead. They were allowed 100 per cent cost recovery before profit-sharing, in addition to zero royalties on 1000-meter deep fields. Under the proposed new terms, government share is considered “too high”. They say it will affect the flow of foreign investment – as tax incentives are being eroded. Government insists its fiscal terms are comparable to what obtains in many other countries. Whatever the case may be, the solution is somewhere in-between.
The issue of provision of infrastructure for the host community is also a thorny one. Personally, I think it is awkward for the government to legislate that oil companies should build schools and hospitals, etc. That is actually the responsibility of government. That is why government collects taxes and royalties. That is why government exists. Of course, the oil companies will build schools and hospitals and other social infrastructure as a matter of corporate social responsibility. That’s okay. But it would be tantamount to abdication of responsibility for the government to pass the buck to the oil companies. The IOCs also said some aspects of PIB are unclear and are subject to multiple interpretations that could eliminate the rights of operators, especially in the area of international arbitration. They also complain that there will be too many regulators in the sector. These issues should be sorted out in the interest of fairness and justice.
The IOCs’ reservations and complaints are many – I have only listed a few. Some are too technical for me to understand or write about here. But the shortcomings should not in any way detract from the fact that oil sector reforms are long overdue and the PIB is a step in the right direction. The IOCs themselves have said the bill is good, only that some aspects are objectionable. So there is a big room for negotiation and compromise by the feuding parties without compromising the fundamentals of the reform – that is, a more efficient and profitable oil industry. President Yar’Adua must do everything within reasonable limits to resolve the burning issues. And, may I add, time is of essence

 

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