Nigeria: Petroleum Law and Competitive Markets | The Guardian Nigeria News

The Petroleum Industry Act (PIA) 2021 is the existing legal framework that regulates the legal, governance and fiscal setup of the Nigerian petroleum industry. This crosses exploration, drilling, pipeline transport and otherwise, plus commercial compacts. The intention of the PIA is to consolidate various ordinances and laws in the Oil and Gas Province into a cohesive whole. Thus, the law repeals and integrates, among others, the: law of 1965 on petroleum and hydrocarbon refineries; Petroleum Equalization Fund (Management Board) Act 1975; Law of 1979 on the reinjection of associated gases; Nigerian National Petroleum Corporation (Projects) Act 1993; Petroleum Products Price Regulation (Establishment) Act 2003; Petroleum Profits Tax Act 2004; Deep Offshore and Inland Basins Production Sharing Contracts Act 2019.

Section 318 of the PIA defines petroleum as hydrocarbons and associated substances as they occur naturally in strata. It includes crude oil, natural gas, condensate and any mixture of these, except bitumen and coal. Accordingly, the word “petroleum” is used in this broad sense in this treaty to include crude oil, natural gas and condensates.
Oil is the mainstay of the Nigerian economy and was, for several decades, the country’s main source of foreign exchange earnings. Between 2017 and 2021, according to OPEC, Nigeria earned more than $206 billion from crude oil exports; $37.9 billion in 2017, $54.5 billion in 2018 and $45.1 billion in 2019. 2020 was an outlier due to the COVID-19 pandemic and the country earned $27.3 billion of dollars. Again, this amount increased to $41.3 billion in 2021.
About nine-tenths of Nigeria’s foreign exchange earnings and two-thirds of government revenues come from petroleum exports. Yet crude oil exports account for less than a tenth of gross domestic product. Therefore, the criticality of oil to the national economy cannot be overstated.

It is in this context that the Nigerian economy is doubly described as largely “monocultural” and “petrodollar”! For global strategic leverage, Nigeria joined the Organization of the Petroleum Exporting Countries (OPEC) in 1971 and is not only a major player internationally, but is Africa’s top oil exporter. The other 12 members of OPEC are Algeria, Angola, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Saudi Arabia, United Arab Emirates and Venezuela.

So what? Given the vast foreign exchange earnings from crude oil sales, why does Nigeria continue to rank at the bottom of the global Multidimensional Poverty Index (MPI)? Do political choices hinder or have a positive impact on the necessary transformation of the oil industry? In the 21st century, should the government develop, own and/or manage refineries? Does this expertise reside inexorably in the government? What are the informed strategic choices of the contentious issues of diversion? From the perspective of import substitution, value creation and currency conservation, what are the practical and sustainable alternatives to refining Nigerian petroleum products overseas? What is the place of oil subsidies in a neo-capitalist Nigerian economy in a competitive world order?

These questions will be addressed simultaneously and contextually. The MPI, which measures acute poverty using objective quantitative measures of education, health and living standards, in more than 100 developing countries, ranks Nigeria as having 54% of people suffering from multidimensional poverty! The population of Nigeria is approximately 217 million (Worldometers 2022). So that’s about 117,118,000 people in poverty despite the country’s supposedly vast oil wealth. In the absence of a viable social safety net, this is clearly a recipe for crime, terrorism and banditry – as the country is already witnessing in territorial swaths.

In the first six months of 2022, Nigeria’s revenue was N1.63 trillion while expenditure was N1.94 trillion; a gaping deficit of 0.31 billion naira. This, at a time when oil prices are trading at around $106 a barrel per day, more than three times the 2020 value at the height of the COVID pandemic. Related to this, Nigeria’s OPEC quota over the past decade averaged around 2 million barrels of oil per day (mbpd). Nigeria has struggled to meet this quota and in the first 6 months of 2021 aspired to pump 1.6 mbd and in the same period in 2022 only managed 1.4 mbd. The challenges are, it has been conclusively established, attributed to the theft of crude oil on a commercial scale. The Nigerian Extractive Industries Transparency Initiative (NEITI), for example, claims that the country loses around $4 billion a year to oil theft and vandalism.

The Petroleum Industry Act is a welcome development as it aims to streamline the complexity surrounding the industry’s regulatory and fiscal framework. The split of NNPC into a limited liability company, in accordance with Article 53 (1) of the PIA 2021, is great. The real test would be in demonstrable proof that it is in fact run as a truly commercial enterprise.
Nonetheless, the clear conclusion from the above is that the status quo, given these significant operational and strategic challenges in the Nigerian oil industry, is manifestly unsustainable.

It is on this basis that I will conclude with these practical recommendations.
First, Nigeria should urgently prioritize energy security. In other words, the country must urgently optimize its domestic refining capacity. The current war between Ukraine and Russia has jeopardized European energy supplies, as Russia has either cut off supplies entirely or reduced them significantly, and this offers a fundamental lesson in international energy geopolitics for Nigeria. . For example, given the current foreign exchange crisis in Nigeria, which has led a major international airline to signal its intention to abandon Nigerian air routes as of September 1, 2022, what does it mean that a similar conundrum will not occur with Nigerian oil importers who are more or less recipients of state aid?

After all, Nigeria spent $37.5 billion between 2015 and 2019 to import refined petroleum products despite being a major oil exporter. The opportunity cost is crucial to catalyzing the national economy, exponentially stimulating productivity and GDP.

Second, the arguments for political certainty and genuine competition are compelling. For decades, government-owned refineries in Kaduna, Warri and Port Harcourt have underperformed and consumed vast amounts of taxpayers’ money in so-called turnaround maintenance. Now what is rotation maintenance if it does not allow Nigerians from Amukpe, Buni Yadi, Kano, Okokomaiko, Oke-Ado, Owo, Jos, Obiaruku, Ohafia, etc. to access petroleum products on a timely basis, at an affordable and commercially viable price? Simply, the political offer here is that the government completely offloads the management of the refineries. It is not, never has been, and never will be the core competency of government.

In the developed economies of the United Kingdom and the United States of America, to name but two, the government does not operate refineries. The implication is simple. It is not the function of any government. The expertise resides in the private sector with the ideas, innovative means and financial muscle to maximize shareholder value within well-defined regulatory parameters properly set by government. What the government could consider doing is entering the midstream contractual model as a strategic investor. The reason is simply that oil is a strategic national asset. Attorney General of the Federation v. Attorney General of Abia State and Others (No 2) 2002 6 NWLR part 764 (542) illustrates this last point.

Third, innovative action and a definitive completion schedule, not rhetoric, are needed for renewables, including shale, solar and wind power. Environmental degradation, oil spills, pollution and detrimental effects on people’s health are all too real in the Niger Delta, the country’s breadbasket. Gas flaring is, perversely, still the norm.

Fourth, the rhetoric about Nigeria’s economic diversification is seductive and well-rehearsed. Now is the time to encourage proven companies with investment opportunities in the oil industry. Tax breaks may well be a pragmatic step forward.

Fifth, oil subsidies are unsustainable and should be abandoned. The logic is good. In 2021 alone, Nigeria spent N1.4 trillion on grants. This figure is expected to triple by the end of FY2022. This is capital, which could be properly redirected to education, health, defense and transportation priorities. .

The government should deliberately prioritize genuine market competition, which under the relevant policy objectives envisaged in the Petroleum Industry Act 2021 will drive innovation and efficiency, argumentendo, better prices for consumers and fair returns on investment for the market. The necessary flip side is that government, parliamentarians and other key stakeholders formulate effective pragmatic policies and legislation on social security programs for citizens to cushion the effects of competitive markets, which are inevitable on the econometric imperatives of Nigeria; and, to examine the economic justice arguments for oil diversion in view of the necessary constitutional revisions. Of course, all of this requires visionary leadership and strong political will.

Ojumu Esq is the senior partner of Balliol Myers LP, a law firm based in Lagos, Nigeria.