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Cpanel

19July2018

Delay in passage of the Bill: An impediment to Investment inflows

The high uncertainty that pervades the oil industry about the outcome of the PIB with apparent divergent interest amongst various stakeholders is currently preventing investment inflow into the industry. One of the consequences of the delayed passage of the PIB is the combination of a lull in new investment in the sector and divestment from domestic oil assets (especially on-shore assets) by existing and potential investors as they await the outcome of the reform process. The Nigerian National Petroleum Corporation (NNPC) reported that Nigeria loses over US$287m from Production Sharing Contracts (PSC) monthly due to the non-passage of the PIB. On the aggregate, the sector may be losing an estimated US$18 billion in annual investment due to this constraint as International Oil Companies (IOCs) continue to divest from on-shore assets in favour of off-shore assets pending the outcome of the PIB among other factors. 

It is also believed that the delay in the passage of the Petroleum Industry Bill  has caused the IOCs operating in Nigeria to hold back on their proposed investment in the oil industry estimated at N17.2 trillion ($109 billion). Furthermore, planned investment estimated at $33 billion over the next five years by operators might be in jeopardy as the fiscal terms of the PIB are believed to be unfavourable. In other words, except the PIB is passed into law to reverse this trend, declining oil and gas investment would further worsen the nation’s FDI inflows, which declined from $8.9 billion in 2011 to $7.0 billion in 2012( due to national insecurity and a weak global economy).  

 

Local participation would increase when the PIB is passed into law 

Developing local capacity will ensure that indigenous companies benefit from the multi-billion dollar investments expected to flow into the country after the passage of the Petroleum Industry Bill. The PIB makes adequate provision for the sufficient localization of the servicing and manufacturing ends of the industry’s operations.

Nigerian companies are expected to benefit extensively from the reforms in the industry as they are to be given first priority in the award of oil blocks, oil field licences, oil lifting licences and in all project awards. Indigenous service sectors and companies in petroleum engineering and engineering support services, engineering designs, fabrication, manufacturing and installation, seismic data processing, drilling and exploration services, maintenance services, finance and insurance, health, safety and environment etc. would also be direct beneficiaries of the reforms in the oil industry via the Local Content Act. These provisions should ensure steady growth in Nigerians’ participation in the industry, increase local capacity and industry knowledge and expertise, and boost job creation. It has been estimated that over 3 million jobs could be delivered in the first 5 years of the implementation of the law.

Therefore, as concerted efforts are being made to entrench Nigerian content on the journey to a post-PIB oil industry for the benefit of the local economy, there is a need to launch a vehement campaign on human capacity building to forestall the challenges and opportunities that its implementation would throw up.

 

Diversification is the solution in the long run

While the long-run hedge against the impending oil market glut is the substantial diversification of the economy away from oil to non-oil sectors, particularly government finances and external trade positions, this is only achievable in the medium to long term. In the short term however, enacting a competitive, inward looking Petroleum Sector Act that factors in the evolving global oil scenario is the ideal solution.

While we note that the passage and implementation of the PIB will not eliminate the problem, it would expand investment in the sector while increasing indigenous companies’ participation. This is expected to result in the domestication of a significant portion of revenue, including taxes to government, on the oil and gas value chain. In this regard, we advocate for the conscious creation of a domestic market for crude oil as an extant action to the PIB to facilitate local trading in the commodity on different scales. It is also important to fully deregulate the refining subsector and allow multi-level participation provided the final end products meet the standards required by the government agency/regulator. This way, the existing illegal refineries in the country can be licenced to operate legally.

It is now very important that an investor-friendly Petroleum Industry Bill is passed into law in good time as its delay is holding back investment and is impacting negatively on the Nigerian Economy. Meanwhile, in the face of the comatose start of nations’ refineries in spite of previous efforts made by the Government to revive and maintain them, the PIB must provide an enabling environment to encourage investors to build and maintain new refineries in Nigeria. It is also imperative for Government to diversify the economy from being solely oil dependent, to other streams of income generation such as Agriculture and solid minerals, otherwise the ripple effect of our over-reliance on crude exports to the US, will be devastating to the economy.

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