Oil and gas sector: 2019 in retrospect

Introduction

Stakeholders were delighted after the passage of the Petroleum Industry Governance Bill (PIGB) in 2017 by the National Assembly, but their delight was cut short when President Muhammadu Buhari declined assent in August 28 due to ‘constitutional and legal’ matters. Such matters included permitting the Petroleum Regulatory Commission to retain as much as 10 per cent of the revenue generated unduly increases the funds accruing to the commission to the detriment of the revenue available to the Federal, States and Local governments as well as the Federal Capital Territory, amongst others.

But to satisfy the yearnings and aspirations of the stakeholders for a modern law that addresses the present challenges confronting effective management of the oil and gas sector, the Senate reconsidered and passed the PIGB in March while the House of Representatives passed the PIGB in May 23, 2019. Unfortunately, the PIGB was not signed into law in 2019 as expected.

Deep Offshore and Inland Basin PSC (Amendment) Act, 2019

On Monday, November 4, 2019, President Muhammadu Buhari assented to the Deep Offshore and Inland Basin Production Sharing Contract (Amendment) Act, 2019, following its passage by the National Assembly in October, 2019. The amendment is in line with the provisions of section 16 of the Deep Offshore and Inland Basin Production Sharing Contracts Act, Cap D3, Laws of the Federation of Nigeria, 2004 (DOIBPSCA or “the Act”) which requires the federal government of Nigeria to review the provisions of the Act when the price of crude oil exceeds $20 per barrel in real terms, or within a fixed number of years (15 years from commencement of the Act and 5 years thereafter).

The amendment has been hailed as a historic milestone, and indeed it is, for many reasons. But the amendment has also been dismissed by some, even if in muffled tones, as desperate, unrealistic, badly-timed, and short-sighted. But given that the original PSC law categorically included unambiguous conditions that should have necessitated review(s) of the terms of the PSCs, first in 2004, then in 2008, and in 2013 and 2018.If the 2008 review had taken place, it is clearly unrealistic to expect that the incentives frontloaded to oil companies for taking major risks at a period of uncertainties would be in perpetuity.

A March 2019 report by Nigeria Extractive Industries Transparency Initiative (NEITI) and Open Oil, stated that failure to review the PSCs terms, as demanded by the law, cost the country between $16.03billion and $28.61billion within ten years (2008 and 2017). That is a loss of between $1.6billion and $2.86billion, on the average, per year within that period.

Nigeria loses over $130bn as pipeline vandalism continues unabated

In 2019, Nigeria may have lost over $130billion to pipeline vandalism. As the sole importer of premium motor spirit (PMS), otherwise called petrol, NNPC recorded an average of 1920 breaking points on its pipeline network across the country. Moreover, the all-important Nembe Creek Trunk Line (NCTL) was shut down for 61 days in 2019. The operator of the NCTL, Aiteo Eastern Exploration and Development Company Limited, decried the continued loss of oil revenue attributable to the vandalism of the pipelines.

The NCTL is 100kmlong and has a capacity of 150,000 bpd at Nembe Creek and it evacuates crude to the Bonny Crude Oil Terminal. The Group Managing Director of AITEO Group, Victor Okoronkwo, said, “One of the biggest challenges we face in our operations is the security of our pipelines and oil facilities. Our pipelines and flowlines are constantly vandalised by unscrupulous elements tagged ‘crude oil thieves’ attempting to cause economic sabotage to our company and the people of this great country.

“Despite our efforts in raising NCTL uptime from 60 per cent to over 80 per cent since acquisition, we have recorded more shutdown days in operations due to third party infractions for over 2 months this year, compared to previous years. This has resulted in loss of revenue and deferments estimated at about four million barrels so far this year.” Aiteo was not alone; Shell Petroleum Development Company (SPDC) also recorded 39 cases of vandalism and oil theft between January to April, 2019. Chevron also recorded a fire outbreak at the Ojumole Well No. 1, an idle and plugged well with no flowline connected to it. A Joint Investigation Visit (JIV) to the site revealed that the fire incident was caused by third-party interference (suspected vandals).

Fuel subsidy hits N780bn in 2019

Federal Government spent over N780billion as subsidy on petrol between January and December 2019, surpassing the N305billion provision for it, in the 2019 budget. According to the Monthly Financial Report by the NNPC, the sum of N104.4billion was spent as subsidy in January, N102.3billion in February, N30.6billion in March, N89.2billion in April, N42.9billion in May, N31.4billion in June.

Others were N93.7billion in July, N89.7billion in August, N31.41billion in September, N51.15billion in October, N60.37billion in November and N61.004billion in December. Stakeholders have been calling for the removal of fuel subsidy as panacea for private sector investment in the downstream sector.

A former Minister of Interior and the Chairman/CEO of Integrated Oil and Gas Limited, Captain Emmanuel Iheanacho, asked “Who are we subsidising?” He said the intention of the subsidy is to cushion the effect of transportation cost of poor people.

“But when you really look at it, the real beneficiaries of the subsidy are the middle class who own cars and buses and not the poor people who ride the buses. It allows the owners to make bumper profits. They are middle class people who can afford to buy fuel at deregulated price. “If you observe, whenever we have fuel crises across the nation, people are able to pay N300 as transport fares. So why are we subsidising it when people can afford to pay for it? You can see that all the countries around us are selling fuel at the correct price. “The government recently shut down the borders, but there would have been no need to shut down the borders if we are selling fuel at the correct price because there would be no incentives for people to smuggle fuel across the border to sell it for a big profit. “We appreciate the government’s concern for the plight of the people but if we really look at it, there is no need to continue to subsidise for anyone.

The government is denying itself the opportunity for accruing huge revenue it requires for infrastructure development. Government should have a second look at the policy and strategy and decide to remove it, then all that monies used as subsidy will be used for development,” he  said.

NLNG shareholders take FID on Train7

The federal government ended the year on a high note when its representative on the board of Nigeria LNG Limited, the NNPC and other shareholders signed the much-anticipated Final Investment Decision (FID) on Train 7. The decision gave the go ahead order for the construction of Train 7. It will increase NLNG production capacity by 35 per cent from current 22Million Tonnes Per Annum (MTPA) to 30MTPA and increase its competitiveness in the global LNG market. During construction, it will generate over 10,000 direct jobs and 40,000 indirect jobs.

Conclusion

Suffice it to say that the oil and gas sector in 2019 performed better than it did in 2018, but until the PIB is passed, downstream sector is deregulated and more FIDs are taken on, not just LNG trains but on new explorations and new discoveries, Nigeria may not achieve optimal efficiency in the oil and gas sector in near future.