An Oil Sector Reform Agenda for the Buhari Administration -By Dauda Garuba

Dauda Garuba

…bad practices have prevented Nigeria’s oil industry from operating competitively. The industry has not only been denied the required environment for strict commercial and professional operations, but its regulatory agencies and the state-owned oil company, the Nigerian National Petroleum Corporation (NNPC) have remained weak and unaccountable.

Nigeria recently welcomed new governments at the federal and state levels after holding successful elections that were hailed as triumphs for democracy. After the intense competition for the affection of voters, this is the first time in Nigeria’s history that democratic power has been transferred by a ruling party to an opposition party at the federal level.

However, in the midst of the funfair and glamour that characterised the handover ceremony, one big question remained on peoples’ lips: how does the new administration of the presidential victor, Muhammadu Buhari, intend to deliver the critical changes for which his All Progressive Congress (APC) campaigned? The reform of the oil and gas sector is highly central to the electorate’s expectations. In the face of threats posed by low oil prices, the government will need to look far beyond cosmetic reforms, if it is to meaningfully address the rot in Nigeria’s oil sector.

Historically, bad practices have prevented Nigeria’s oil industry from operating competitively. The industry has not only been denied the required environment for strict commercial and professional operations, but its regulatory agencies and the state-owned oil company, the Nigerian National Petroleum Corporation (NNPC) have remained weak and unaccountable. Indeed, several commissioned and independent studies on the operations of the industry point to a colossal decay and opacity; the situation calls for highly concrete and practical reform measures to enable Nigeria’s oil sector function in accordance with best global practices and for the benefit of Nigerians.

All of the reports have exposed gaps and procedural infractions resulting in the loss of revenue to government at several points— during computations, payments, reconciliation and remittances of finances; during the sale and transportation of physical oil…

The Natural Resource Governance Institute’s (NRGI) Resource Governance Index benchmarks the quality of the governance of oil, gas and mining in 58 countries against key indicators, comprising institutional and legal setting, reporting practices, safeguards and quality controls, and enabling environment. The latest index ranked Nigeria 40th, with a weak overall composite score of 42, out of 100. This poor showing only confirms the findings of five different oil and gas audit reports by the Nigeria Extractive Industries Transparency Initiative (NEITI); the KPMG report on the NNPC; the House of Representatives Ad-Hoc Committee report on the fuel subsidy regime; the (two) Aig-Imoukhuede-led committee reports on fuel subsidy claims and payments; the Kalu Idika Kalu report on refineries; the Dotun Sulaiman Committee report on governance and global best practices in the NNPC; the report of the Nuhu Ribadu-led Petroleum Revenue Task Force; the Nigeria Natural Resource Charter benchmarking reports (2012 and 2014); and the PwC report on the alleged unremitted funds into the federation account by the NNPC.

All of the reports have exposed gaps and procedural infractions resulting in the loss of revenue to government at several points— during computations, payments, reconciliation and remittances of finances; during the sale and transportation of physical oil; and during decision-making processes around licensing bids, contracting and regulation.

The recent dissolution of the NNPC Board by President Muhammadu Buhari may well be the first step towards reforming it.

On the revenue assessment and collection side, there are issues of Petroleum Profit Tax (PPT) underassessment. In particular, the Nigerian government has been perennially unable to meet its cash-call obligations because of funds diversion and NNPC’s practice of signing agreements requiring joint venture partners to fund project field development or production improvement projects (PIP). The subsequent recovery of costs, together with interest, through capital allowances, investment tax allowances and additional production entitlements have often resulted in PPT underassessment. Also, companies often secure special cost considerations from the government, which amends the fiscal terms of the production sharing contracts (PSCs). This practice has culminated in the reduction of the PPT rate from 85 percent to a maximum of 60 percent in any given PSC contract(s).

Another issue of concern relates to the return of discretion and its associated problem of opacity in the oil block licensing after the 2005 and 2007 open bid exercises.

There are also unresolved issues of non-remittance by the Nigerian National Petroleum Corporation. The NNPC has, for too long, operated on the premise of a blank cheque purportedly granted it by its enabling Act. The recent dissolution of the NNPC Board by President Muhammadu Buhari may well be the first step towards reforming it. Financial flows (dividends) from one of the subsidiaries of the NNPC (Nigerian Liquefied Natural Gas, NLNG) and loan repayment totaling $8.8 billion, covering 2006 to 2011, are yet to be resolved. Also problematic is the absence of a commercial regime for gas profit sharing and a framework for commercial gas exploitation.

Another issue of concern relates to the return of discretion and its associated problem of opacity in the oil block licensing after the 2005 and 2007 open bid exercises. The domestic crude allocation practice by which the NNPC gets oil priced in US dollars under a 90-day credit line, but paid in Nigerian naira after a delay, exposes institutional weakness. Beyond giving undue advantage to the NNPC over other buyers of Nigerian crude, the practice also condons delayed payment which, together with accruals from exchange rate disparity, has shown consistently higher prices than the per-barrel revenue it has subsequently remitted to the government.

Perhaps one of the biggest challenges that has remained unaddressed since the very first NEITI audit report — and which has kept re-appearing in subsequent ones — is the absence of metering infrastructure for measuring the quantity of crude flows from wellheads to export terminals.

Further concerns are reflected in NNPC’s receipt of 445,000 barrels of daily crude oil allocated for domestic use, whereas local refineries utilise only about 22 percent of that. NNPC’s swapping of the unutilised balance through product exchange and offshore processing agreement has remained inefficient and non-cost effective, and has resulted in revenue losses to the government.

Perhaps one of the biggest challenges that has remained unaddressed since the very first NEITI audit report — and which has kept re-appearing in subsequent ones — is the absence of metering infrastructure for measuring the quantity of crude flows from wellheads to export terminals. The Nigerian government’s apparent lack of demonstrable interest in accepting Norwegian technical assistance on this front raises suspicion. And without metering at both ends of the pipeline no one can say how much oil the country is producing, let alone what it is losing through theft and vandalism.

The reform issues can be grouped into three clusters: the legal-institutional-process cluster, the technological-capacity cluster, and the regulatory-transparency-accountability cluster.

Equally problematic is a lack of effective control in the fuel subsidy payments that has gulped 7.19 trillion naira ($36.3 billion at current exchange rates) in the last 10 years. This colossal spending derived partly from abuses of the guidelines of the Petroleum Support Fund (PSF) established by government to stabilise domestic prices of petroleum products against volatility in international crude and products prices. While contemporary low oil prices have been seen as a good opportunity to abolish the subsidy, the situation has not stopped the debate about whether subsidy, corruption, or both, are to blame for the present scarcity of petroleum products in the country.

Also needed is the publication of contracts, restraint from undue political interference in NNPC affairs, and agreement on mechanisms for funding the corporation’s operations.

The gamut of issues highlighted above demands urgent reforms of the sector. The reform issues can be grouped into three clusters: the legal-institutional-process cluster, the technological-capacity cluster, and the regulatory-transparency-accountability cluster.

…the key action point is automation and improved connections between the IT systems of relevant government agencies (e.g. Central Bank of Nigeria, Federal Inland Revenue Service, Nigeria Customs Service, the Office of the Accountant General, the Petroleum Products Price Regulatory Agency) and the adoption of an effective strategy to study and automate national export processing forms.

The first cluster includes the long-awaited passage of the Petroleum Industry Bill (PIB), which Buhari’s party has promised to effect within one year of assuming power. Equally additive would be the passage of the pending amendment to the NEITI Act 2007, which would allow access to data on oil company payments, costs and earnings, so that the government can more accurately project revenue earnings and improve regularity of NEITI audit reports. Also needed is the publication of contracts, restraint from undue political interference in NNPC affairs, and agreement on mechanisms for funding the corporation’s operations. The government must also put a stop to NNPC’s use of alternative finance arrangements, which could be accomplished through a ban on cash calls for non-joint venture operations.

…if a subsidy regime must be retained, the government should de-link NNPC from subsidy payments.

Among technology and capacity development reforms, the key action point is automation and improved connections between the IT systems of relevant government agencies (e.g. Central Bank of Nigeria, Federal Inland Revenue Service, Nigeria Customs Service, the Office of the Accountant General, the Petroleum Products Price Regulatory Agency) and the adoption of an effective strategy to study and automate national export processing forms. Other critical reforms required are the deployment of metering infrastructure and capacity building for independent tracking of oil and gas production and sales data; the installation of surveillance technology for pipeline monitoring; and oil fingerprinting to deter and prosecute vandals and thieves.

The reform focus of the regulatory, transparency and accountability cluster should cover preparation and issuance of regular policy statements on companies’ conduct of self-assessment of their Petroleum Profit Tax (PPT) liabilities. The government should also review the eligibility criteria for licensing oil marketing and trading companies to close identified gaps in the operation of the Petroleum Support Fund (PSF). And if a subsidy regime must be retained, the government should de-link NNPC from subsidy payments. Other key reforms should be the introduction and implementation of modern financial management systems, and a matching of domestic crude oil allocation to the absorptive capacity of domestic refineries.

While it will take serious commitment and strong will to push through these reforms, a deliberate policy aimed at engaging the citizens from the beginning of the process will deliver the desired support that President Buhari needs to realise the change promised by his party.

Dauda Garuba is the Natural Resource Governance Institute’s Nigeria officer.