Nigeria’s Petroleum Industry Bill: An Analysis

For several years, government officials, civil society and Nigeria's legislature have been debating the revision and passage of the country's comprehensive Petroleum Industry Bill (PIB), which has the stated goal of transforming the country's oil industry into a means for sustainable development. A new policy brief from Aaron Sayne of the Facility for Oil Sector Transparency in Nigeria (FOSTER), with an appendix on selected bill provisions by RWI Governance Advisor Alexandra Gillies, argues that if the final bill contains strong transparency and accountability provisions, the nation's oil sector performance has real opportunity to improve.

The potential for a stronger, better managed oil sector is substantial. Transparency encourages competition, discourages illicit behavior and attracts investment. Accountable government and oversight institutions reassure investors, improve regulation and revenue collection and result in higher production and earnings.

Although Nigeria has significant oil wealth, corruption and inefficient management have hampered its abilty to ensure resource revenues are used for the public good. Given oil's prominent role in the country's economy, Nigeria will struggle to break in to the top 20 economies without the reforms of a robust PIB.

Past drafts of the bill contain strong language serving these objectives that now need protection.

In this policy brief and appendix, the authors examine and underline provisions in the original 2008 presidency submission (HB 159); the final 2010 submission by the federal Inter-Agency Team (IAT); and the much-weakened 2011 Senate version (SB 236). Laws from other countries and international standards provide added guidance. All of the relevant provisions from the different drafts are compared in the appendix...Published by the Revenue Watch Institute.

For the entier brief and appendix-

A Note on Production Sharing Contracts in Nigeria

Generally, petroleum exploration/production contracts attempt to find a satisfactory middle ground in negotiations between investors i.e. the State, National Oil Company, Local Oil Companies or Foreign investors. The objective of the State is mainly to maximize wealth from its natural resources by encouraging appropriate levels of exploration and development activity, while the objectives of the oil companies are to build equity and maximize wealth by finding and producing oil and gas reserves at the lowest possible cost and highest possible profit margin. These negotiations take place in a multi-country legal environment beset by erratic economic behaviour, especially as regards oil prices.

Further to the enactment of the Deep Offshore and Inland Basin Production Sharing Contracts Act, (1999) as amended in Nigeria, the Production Sharing Contract (PSC) arrangement governs the understanding between the NNPC and all entrants and participants in the Inland, Shallow, Deep amd ultra deep-water acreages. Its main features are:

§ The contractor bears all costs of exploration and production without such costs being reimbursable if no find is made in the acreage.

§ Cost is recoverable with crude oil in the event of commercial find, with provisions made for:

a. Tax Oil: This is to offset actual Petroleum Profit Tax, Royalty and Concession Rentals due and payable or deductible within an accounting period or year

              b. Cost Oil: To reimburse the contractor for capital investments and operating costs.

c. Profit Oil: The balance after deduction of Tax Oil and Cost Oil, which is to be shared between the NNPC and the contractor in predetermined proportions.

Some of the Companies operating PSCs in Nigeria are Statoil, SNEPCO, ExxonMobil, Esso, Elf, Nigerian Agip Exploration Limited, Addax, Conoco and Petrobas, Star Deep Water, Chevron, Oranto Philips. The royalty rates under the PSCs vary depending on the area of the concession and are graduated on a sliding scale depending not on production, but on water depth as shown below

Onshore	Inland Basin[1]	Swamp/Shallow Waters	Shallow Offshore	Deep Offshore
20%	10%	0 - 100m: 18.5%	100 - 200m: 16.67%	201 - 500m: 12%
				501 - 800m: 8%
				801 - 1000m: 4%
				Over 1000m: 0%

---

[1] means any of the following Basins, namely, Anambra, Benin, Benue, Chad, Gongola, Sokoto and such other basins as may be determined, from time to time, by the Minister

An International Low Carbon Economy and the Nigerian Petroleum Industry

......Creating an Efficient Legal Framework for the Nigerian Petroleum Industry in a Low-Carbon Economy

The Nigerian Petroleum industry needs a regulatory and institutional framework that will guarantee its efficiency in the attainment of established policy objectives, especially in a decarbonised global economy where environmental considerations and GHG emissions reduction must be factored into operations like never before. Also, conventional petroleum products will compete with other cleaner alternatives in the same global energy market.

Policy, legal and regulatory instruments in a low-carbon economy

In considering Canadian policies for GHG reductions, it was advised that, the most effective and economically efficient policy approaches are, those which prohibit or financially penalize technologies and activities that emit GHGs. Furthermore, to guarantee effective reductions in a market economy, the atmosphere must be valued and not treated as a free waste dump.^[1] The highlighted policy approaches are- GHG taxation or market-oriented regulation on emissions and technologies or processes that force reductions in emitting activities.^[2] Overall, policy analysis requires assessing the merits of stated objectives, while regulatory interventions should take account of cultural, institutional and political-economy factors.^[3]  Compared to setting of standards in a command and control approach or targets in a co-regulatory framework, economic instruments are more appropriate in situations where there is a competitive market and the regulator has inadequate information on costs e.t.c.^[4]

Carbon Taxes and Market Oriented Regulations

Decarbonisation requires the internalisation of the ‘environmental costs’ of economic growth by appropriate pricing of goods and services.^[5] This can be achieved by using economic and/or policy instruments, such as taxes on the production or consumption of carbon-intensive goods or fugitive emissions and a Cap and Trade (CAT) system.^[6] A CAT system enables companies to buy and sell permits, after allowances equal to their emissions are distributed to cover a given period.^[7] The price for emission allowances is determined by demand and supply in the carbon market.^[8] The system can take two forms, i.e. upstream cap-and-trade (UCT) or downstream cap-and-trade (DCT) models. The UCT applies a cap on the carbon content in fuels produced from upstream operations, hence the costs of constraining carbon is passed down through the economy and all emitters are simultaneously affected.^[9] The challenge is that it leads to increase in the price of petroleum products (just as they would with a carbon tax) and political acceptability. The UCT can be environmentally efficient, minimize costs on the economy, manageable administratively, and linked easily to domestic and international offset programs.^[10] A DCT program applies to downstream sources of GHG emissions, like refineries and processing plants. It requires them to pay for allowances equal to their emissions.  This portends difficulties in monitoring emissions from small sources and potentially high transaction costs involved, thus the system would have to be coupled with other programs encompassing other sectors to become fully effective.^[11] 

On the other hand, Carbon Taxes (CT) will require emitters to pay a fixed fee per unit of GHG released into the atmosphere. The emitter’s response to CT is to either pay the fee or reduce emissions to avoid payment.^[12] Ideally, emitters should reduce emissions up to the point where the marginal abatement cost is equal to the tax. Since every emitter covered by the tax faces a uniform fee, CT  should result in the lowest cost on the economy. Furthermore:

1. CT does not guarantee a particular level of emissions, because emitters have flexibility to pay the tax or to reduce emissions. As a result, it may be necessary to adjust the level of the tax to meet a given target;
2. CT can be applied on upstream or downstream operations; and
3. CTs will raise revenue for the government.^[13]

Also, CTs may lead to carbon leakage and reduce income associated with carbon-intensive products when emitters transfer investments to ‘pollution havens’.^[14] But this can be addressed by compensating operators for the harmful effects of the policies if necessary.^[15]

Another option is the Obligation and Certificate Trading (OCT), which sets an aggregate obligation for a sector of the economy to produce a minimum amount of some desirable low-carbon goods or technology.^[16] Tradable and bankable certificates are allocated for units of the decarbonised goods or technology in each period. An OCT system requires production of a minimum amount of a desired product or process, unlike a CAT which curtails undesired products.^[17] For market-based economies, CTs seems to be the best policy for environmental effectiveness and economic efficiency, however like in all other economies it is prone to face opposition from industry operators and for socio-political challenges.^[18] A Carbon Management System that incorporates the merits of the UCT and OCT systems can been adopted in other to ensure operators deal with emissions appropriately and cost-effectively.^[19]

Carbon Offsets and Credit Mechanisms

To develop an integrated global carbon market and lowering climate-change mitigation costs, credits can be earned within an Emissions Trading Scheme (ETS) framework, from emission reductions in countries outside the framework.^[20] An environmental and cost efficient way for this is, through mechanisms such as the CDM. Carbon offsets and credits in form of CERs can be obtained from projects in renewable energy and energy efficiency (like gas utilisation) hosted by developingcountries such as Nigeria. Relevant processes that could use identified CDM methodologies includes- gas turbine power-plants; fuels for industry production through flared gas recovery, waste gases in crude oil refinery operations e.t.c.^[21] Generally, Risks facing CDM project participants, includes: political and economic risks of emerging markets; new risks from implementation of the Kyoto Protocol (KP); obtaining necessary approvals; and ineffective domestic legal regimes.^[22] Apart from ratifying the UNFCCC and KP, domestic laws should adequately define and protect property rights of participants in CDM projects such as GHG reductions and CERs.^[23] This will enhance investor confidence, that project outputs are secure. Other relevant domestic regulations are technology transfer laws, taxation and financial services regulations and environmental laws.^[24] Domestic laws relating to technology transfer and commercial contracts should recognise goods and rights created under instruments such as: the Emission Reduction Purchase Agreements (ERPA), and such recognitions should be realigned to suite the CDM framework.^[25] To develop interests, awareness and ability of CDM project participants, in securing start-up finance necessary for projects in Brazil, Vietnam, South Africa and India, a line of policies have been introduced, such as  CDM Support Programs; investment credit funds; environmental credit lines to support project feasibility studies; fiscal concessions e.g. exemptions from land use rents and levies; price subsidies for CDM project outputs; tax concessions; waiver of unnecessary administrative bottlenecks and feed-in tariffs e.t.c.^[26]

Nigerian petroleum industry in a low-carbon economy

Gladly, the Nigerian petroleum industry continues to build domestic capacity, e.g. the Port Harcourt refinery has re-streamed and all three refineries are operating simultaneously.^[27] Also, liberalization of the downstream oil subsector and opening-up of the domestic gas market have reached advanced stages. However, failure to adequately and effectively curtail the plausible impacts of planned projects could mean locking-in GHG emissions without efficiently internalising their negative climatic impacts. Therefore, current levels of low-energy utilisation in Nigeria or uncertainties cannot justify ignoring climate-change and environmental pollution.^[28]

In the light of all the above, one can conclude that-

1. The ongoing reforms in the industry depicts inclination towards enhancing industry efficiency in a liberalised environment;
2.  The need to address the challenges of funding, regulatory capture, information asymmetry, bureaucratic bottlenecks, technology acquisition and transfer still persist as long as the enabling law for addressing past regulatory problems remains a bill in the national assembly; and
3. The industry has not and cannot properly take advantage of international carbon finance and offsetting mechanisms, because of the identified regulatory and institutional incapacities.

Currently, there is no enabling law that incorporates the UNFCCC or Kyoto Protocol regime into the Nigerian law as required by the Constitution. The National Climate-Change Commission Bill, (NCCCB) 2008^[29] is yet to become law.

The NCCB earmarks the minister in charge of energy (power and steel, gas and petroleum) as a member of the established Commission. Its Technical Advisory Council shall include representatives from the FME, ECN and NNPC.^[30] The commission shall be responsible for strategic planning and co-ordination of national policies on climate-change and energy, including advising the FGN on the International climate-change regime.^[31] Furthermore, the NCCC will be the Designated National Authority (DNA) in Nigeria. It will undertake the implementation and ensure compliance with commitments under the UNFCCC, KP, Marrakesh Accords and all international agreements on climate change.^[32] The three UNFCCC registered CDM projects in Nigeria, are-

a.      The recovery of associated gas at Kwale oil-gas processing plant. The project start up date was April, 2005, while the crediting period is from 9^th November 2006 – 8^th November 2016;^[33]

b.     Pan Ocean Oil Corporation Nigeria (POOCN) Gas Utilization Project to eliminate gas flaring.^[34] The crediting period is to last ten years from the beginning of project operations, which was estimated to be 1^st January 2010;^[35]

c.      Efficient Fuel Wood Stoves and heat retaining polypropylene boxes in the Guinea-Savannah Zone of Nigeria.^[36]

Until NCCCB becomes law, there is no domestic legislation that accords full recognition to the interests, rights and obligations created under these laudable projects and future projects in this regard. Although, solace may be found in the relevant Nigerian law of contract and commercial transactions, ‘ratified’ international law, relevant policies and existing bits and pieces of regulations in affected sectors.

Creating the new legal framework: efficiency, sustainability and flexibility

As present realities show in the Nigerian petroleum industry, a legal regime that goes against the grain of business culture risks irrelevance. A law or regulatory system that crushes normative systems, emerging naturally in business can destroy virtue and regulations that permits business norms to take it over can destroy its own virtues.^[37] It is through the ‘structural coupling’ of reflexively related economic systems or sub-systems, like in the petroleum industry, that the horns of the regulatory trilemma (bedevling the industry) can be resolved.^[38] Furthermore, abuse of power is best checked when there is separation of powers and semi-autonomous systems and subs-systems.^[39] As discussed in Chapter 3, this is what the Nigerian Petroleum Industry Bill (PIB) seeks to achieve in presenting an all-encompassing legal framework for the Nigerian petroleum industry. It highlights the fundamental objectives, lays down the main principles and rules of engaging an industry that is gradually moving towards full liberalization and integration with the international petroleum industry and market systems. Ineffectiveness in environmental regulation in Nigeria has been essentially due to- low awareness levels and technical expertise in relevant agencies; lack of qualified or unmotivated staffs; corruption; information asymmetry, regulatory capture; economic considerations by operators e.t.c.^[40]  As highlighted above, the PIB, lays down a comprehensive framework that clearly addresses these problems within a responsive and reflexive regulatory paradigm....excerpts from The Internatioinal Low-Carbon Economy and the Nigerian Petroleum Industry: Creating an efficient Legal Framework by Tade Oyewunmi

WRI CO₂ Emissions by Source: CO₂ emissions from gas flaring

Units: Thousand metric tons of CO₂

EarthTrends (http://earthtrends.wri.org) Searchable Database Results

Provided by the World Resources Institute (http://www.wri.org)

Date Retrieved: 22/7/2010

Units: Thousand metric tons of CO2

	ISO	2005
Country
China	CHN	0
India	IND	1,685
Nigeria	NGA	46,166
South Africa	ZAF	0
United States	USA	6,485

Source: Marland, G., T.A. Boden, and R.J. Andres. 2006

---

[1] Mark Jaccard and Nic Rivers, 'Canadian policies for deep greenhouse gas reductions ' in draft chapter (IRPP Canadian Priorities Agenda project, Canada, May 2007) 1-25 at 3-4,<www.irpp.org/cpa/archive/jaccard_rivers.pdf> at 12.

[2] Ibid. This will be the same position for any nation or industry aspiring to become or is liberalized and market driven.

[3] See. Cameron Hepburn, 'Carbon Taxes, Emissions Trading and Hybrid Schemes (Ch. 18)' in Dieter Helm and Cameron Hepburn (eds), The Economics and Politics of Climate Change (OUP, New York, 2009) 365-384 at 367, 378-380.

[4] Ibid at 367-368, 383-384.

[5] Karen Ellis, Bryn Baker, Alberto Lemma, Policies for Low Carbon Growth, (ODI, London, UK, 27^th November 2009), 1-66 at vi.

[6] Jaccard and Rivers at 6-7; Frédéric Forge and Tim Williams, 'Policy Options to Reduce Greenhouse Gas Emissions' Canadian Library of Parliament (PRB 08-19E, Canada) 1-10 at 1 <http://www2.parl.gc.ca/content/LOP/ResearchPublications/prb0819-e.pdf> accessed 22/6/2010

[7]Frédéric Forge and Tim Williams, 'Policy Options to Reduce Greenhouse Gas Emissions' Canadian Library of Parliament (PRB 08-19E, Canada) 1-10 at 1. The Kyoto Protocol' Emission Trading Scheme  adopts a CAT system in which industry is allocated GHG emission “allowances” (a tonne of CO₂), in form of tradable AAUs. It depicts pollution as a factor of production and by turning it into well-defined, transferable legal rights, the market becomes regulator. It does not by itself reduce emissions, but makes it profitable to do so.  

[8] Ibid.

[9] Jaccard and Rivers at 12.

[10] Forge and Tim Williams at 2

[11] Ibid at 2-3.

[12] Jaccard and Rivers at 7.

[13] Ibid.

[14] Ellis, Baker & Lemma at vii.

[15] Larry Parker and John Blodgett, "Carbon Leakage" and Trade: Issues and Approaches, (USCRS, U.S.A, December 19, 2008), 44

[16] Jaccard and Rivers  at 6-7

[17] Ibid.

[18] Ibid at 13.

[19] Ibid. at 13-22.

[20] OECD, 'Greenhouse Gas Emissions and the Impact of Climate Change (Ch. 1)' in, The Economics of Climate Change Mitigation: Policies and Options for Global Action beyond 2012. (Complete Edition, OECD, September 2009) 1-305 at 17

[21] Christophe de Gouvello, Felix Dayo, and Massamba Thioye, 'Low-carbon Energy Projects for Development in Sub-Saharan Africa Unveiling the Potential, Addressing the Barriers' (IBRD/World Bank Study, U.S.A, 2008), 1-229 at xviii-xix. See. Appendix D.

[22] Paul Curnow and Glenn Hodes (eds), Implementing CDM Projects: Guidebook to Host Country Legal Issues, (UNEP Risoe Centre, Denmark August 2009) 7-88 at 7.

[23] Ibid at 12 and 44-48.

[24] Ibid at 13-14.

[25] Damilola S. Olawuyi, 'Achieving Sustainable Development in Africa through the Clean Development Mechanism: Legal and Institutional Issues Considered', (2009) 17(2) AJICL, 270 - 301 at 291-293.

[26] Curnow and Hodes at 30, 35 and 63.

[27] NNPC. 'Port Harcourt Refinery Commences Production...As NNPC, CBN Seek Deregulation' <http://www.nnpcgroup.com/index.php?option=com_content&view=article&id=362&catid=1&Itemid=96> accessed on 8/7/2010. The curent Minister of Petroleum has also stated that tree new refineries are been built, which will be operating by 2015.

[28]Ross Garnaut & 3 others,  'The Implications of Rapid Development for Emissions and Climate Change Mitigation (Ch. 5)' in Dieter Helm and Cameron Hepburn (eds), The Economics and Politics of Climate Change (OUP, New York, 2009) 538 at 84, 87,104-105.

[29] Available at <op.bna.com/cc.nsf/r?Open=rcle-7shqh5> accessed 2/7/2010.

[30] NCCCB, Section 3(2) i, m & p

[31] NCCCB, Section 7

[32] Ibid.

[33] UNFCCC, 'CDM (Project 0553): Recovery of associated gas that would otherwise be flared at Kwale oil-gas processing plant, Nigeria ' <http://cdm.unfccc.int/Projects/DB/DNV-CUK1155130395.3> accessed on 8/7/2010. PDD dated 15 May, 2006.

[34] UNFCCC, 'CDM (Project 2029): Pan Ocean Gas Utilization Project ' <http://cdm.unfccc.int/Projects/DB/DNV-CUK1218208551.22/view> accessed on 8/7/2010. PDD dated, 16 June 2008.

[35] Ibid.

[36] UNFCCC, 'CDM: Efficient Fuel Wood Stoves for Nigeria ' <http://cdm.unfccc.int/Projects/DB/RWTUV1245685309.5> accessed on 8/7/2010. PDD dated 8^th June 2009.

[37] John Braithwaite, 'Responsive regulation and developing economies' (2006) 34(5) World Dev., 884–898 at 885.

[38] Ibid.

[39] Ibid.

[40] Lawrence Atsegbua, Vincent Akpotaire and Folarin Dimowo, Environmental Law in Nigeria: Theory and Practice (Ababa Press, Lagos, Nigeria, 2004) 384 at 45.