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What is the status of the PIB Bill?
The status has not changed much as the PIB is still at the National Assembly. As you may be aware, it has gone through different phases from first hearing, second hearing to the public hearing phase and has now been sent to the Ad-hoc committee which we are working closely with to get the bill passed. The last of our discussions was to put the bill in a format to make it easy when they go to the floor to pass the bill on clause by clause basis which we have already done and forwarded to the ad-hoc committee.
There are two or three critical areas of serious concern that came up during the public hearing. One was the Frontier Exploration Services and another was the Host Community Fund and the third one raised by the IOCs was the tenure or life of gas fields or acreages that have gas. So we as part of the PIB Technical Committee took time after the public hearing to review those sections and we realized that, one, under the host community, the definition as it is in the PIB is a bit skewed and short which was actually not the intention. The intention was to come up with a host community fund that covers the upstream and downstream side of the oil sector. It will take care of the entire country anywhere there is hydrocarbon impact. Everywhere there are pipelines to all the 22 depots in this country, Everywhere there is hydrocarbon, whether crude oil or refined product, you are entitled to. So the pipeline right of way, the communities in that right of way, the depots all the way to Gombe, the refinery in the North, all of them are entitled to this community fund. You might argue whether one location would take exactly the same amount of funds as another but that is a different issue. It is designed in such a way that everybody will get a piece of the action. So, we have taken the initiative to capture the broader scope and redefined it not as host community fund but as what you call the Pan Nigerian Social Impact Fund. So, all those areas we believe hydrocarbon will be impacted are part of the host community fund. Now on the Frontier Exploration, there is a strong drive mostly from the North trying to establish the frontier exploration as a parastatal. At the end of the day, we looked at it and said look, if that is the case we don’t have an issue, we redefined the Host Community Fund to stand as a Parastatal National Frontier Exploration Services, with a well established board membership to be appointed by the President. On the Acreage lease life for gas, we see that as one of the critical enablers for gas development, in the sense that gas development takes a longer time compared to oil. So, if you limit both oil and gas development to a 20 year tenure before they even finish developing the gas facility, you’ll find that the tenure is as good as over. Plus the fact that gas contracts are minimum 15 -20 year life. So, if you don’t have the lease to cover that, you won’t be able to sign the GSA to cover your gas supplies. So, we decided to extend that to 30 years more or less giving 10 years for the development and 20 years for recovery of funds and commercialization of the gas. So, these are the 3 critical areas which we have looked at, made some modifications and it is going to go through a process before we pass it to the National Assembly as a contribution from the technical committee. Also on the Host Community or the Social Impact Fund, it is tax deductible which will not make it an additional tax burden to the investor.
It is taking almost forever to get to this point. What would you say is responsible for this? Is it the politics, the economics or technical issues involved?
It is a combination of many things which involves politics, the state of the country and economy and other things. In the Senate also, there was a slight twist if you recall there was a separate bill isolating the frontier exploration services from the PIB but at the end of the day what we are doing is we are arriving at the same point. Besides what we are doing, the rest relies on the speed of National Assembly. We as the technical committee are working very hard and thoroughly to see this through and we are always ready where and when the National Assembly needs our input to see it through. But it really depends on the National Assembly.
There are concerns that the long delay over the passage of the PIB has deffered a lot of investments in the oil and gas sector. So, to what extent is your team working together with oil companies and other stakeholders to ensure the passage of the bill as quickly as possible?
There is no doubt that investors require a stable environment to put their money in and you can’t deny that. A lot of companies are still watching the PIB but what we have always advocated is that with or without the PIB, the Petroleum Act suffices. All the fiscal terms will still be in place until the PIB is passed. Our view is (especially on the JV side) that there is not much difference between what the PIB will be and what the current fiscal terms are. So, it should not deter investments, especially on the JV side. Where there is a claw back is on the deep water and we expect that what is being clawed back is not so significant to deter investment. Hopefully, there are one or two projects currently on stream. You are aware of EGINA, the FID has been taken and it is under the construction and exhibition stage, engineering is going on in-country with Delta-Afrique and a consortium of other engineering companies. The other aspects of the projects will be followed up bit by bit. As I speak, also we are progressing on Bonga South West. Tender is going on the Bonga South West which is another major deepwater development. Hopefully, all things being equal, by first half of next year we would complete the Bonga South West. The other deepwater development project is a matter of size and cost. Those ones that are at the brink of going through FID type processes are being looked at.
Tell us how the passage of the PIB alters the face of the oil industry?
One of the key elements of the PIB is the new lease administration. We have currently very large OMLs. Often times, you can liken these OMLs to your cell phones in the sense that very few people use more than or up to 30 per cent – 40 per cent of the capacity of their cell phones. So, what we have currently in the system is that we have blocks that are almost as big as a village if not a town of 2,500 sq km. Only one or two fields have been discovered.
Those big ones, the majors, have put on production. The smaller ones cannot meet the criteria for it to be put on production. Now, the new lease administration is now wrapping the lease life around discovered fields. So, it creates enough room for new players to come in and begin to explore these vast areas of the OML that has been in the operators hands for 10, 20 or 50 years without being utilized or explored. Another thing is that we have seen globally the majors are now risk averse. They seldom go into exploration mode. What we have is the smaller companies doing the exploration and because of their deep pockets, they acquire the smaller companies. So, that way they minimize the risk of discovery. If you check globally, all recent discoveries in the world are by smaller companies. So, we want these smaller size acreages that are going to usher in a lot of small companies that are going to take bits and pieces, explore and put them back on production. You can also liken it to what we are doing in the marginal fields. If you leave the marginal fields for the next 50 years most of it will not be touched because if you look at the overhead and what it will take to develop those small fields, it does not meet the criteria for the majors. This is similar to what happened in the North Sea from 1999-2000 where all these smaller fields were taken over by smaller companies that now later grew to become bigger companies.
This is one of the key elements of the PIB. Then what follows closely is going to be the new regulatory agencies that are going to support the implementation of the PIB. Regulatory agencies need to be strengthened because there are lot of things we are doing here in Nigeria that are not done in other parts of the world because of the weakness and partial independence of the regulator. But now, the regulator will be fully independent to be able to take up their responsibility. Also putting the entire upstream, midstream and downstream regulatory agency under one umbrella is too big to manage. Now the separation of the upstream and downstream will make responsibilities more focused and then accountability will be ushered in.
From what you have said, it is likely that with the passage of the PIB, we are likely to increase our oil reserves?
Sure, because a large chunk of the Niger-Delta has not been explored at all. But nobody is looking at it because, whereby you have a large pool of reserves and all what you are thinking of is how I can bring out this reserves not how do I discover additional reserves. However, the smaller companies with smaller overheads will be so aggressive because they want to build and get bigger. So, because of this we would have robust production allowances for smaller producers to encourage them to be more aggressive, look for more reserves and produce more oil for us.
Is there truth to the speculations that the OICs are against the passage of the PIB because it will not advance their business interests?
To some extent it might affect their operations but it is because of the competition it will open up. Then the other aspect will be the new NAPIMS Company will be charged to drive down cost and benchmark against each of the companies, to drive down cost and increase profitability. Now, on the deepwater side, and I always use this as an example-it is like the difference between chocolate and sweet. If you have been used to chocolate and someone else substitutes your chocolate with sweets. Your reaction will be to say I am sorry this is not what I am used to. Not that it is bad but there is a difference. It has to be said with all sincerity that the entire essence of the PIB is not to deter or punish the majors. All what we try to do is a little bit of balancing. Today we produce almost 50 per cent PSP and JV but the revenue accruing to government is in the ratio of 25 per cent – 75 per cent which means the entire PSP oil for every one barrel we produce we only get probably 25 per cent going to the Federal Government. The worst part of it is the part on royalty where royalty is zero above 1000 metres. It was designed in 1993 to attract investors. But times and environment for which those incentives were given have changed significantly. For a big field like Bonga where you can talk of 2.1 billion barrels reserve having incentive with respect to royalty is actually unfair to this country.
In looking at the PIB, it is apparent that other than the regulatory agencies, the NNPC will undergo a major overhaul but there are no clear-cut transition arrangements. Why is that missing from the bill?
We thought it will not be necessary to put the transition arrangements in the bill because the bill is for Oil and Gas regulation, commercialization and other guidelines. Timeline for transition or partial privatization we think should not be part of the bill because after the transition period what else do you do with that clause. It will be completely redundant. However, there is an existing World Bank timeline that we worked with and that is why if you check the bill the only thing referring to the transition is that it will take us three years to transit from where we are to where we want to be but the timeline will only kick in after the bill has been passed into law and the implementation team, as ascribed by World Bank and the executive, will kick in to make sure that everything works smoothly.
Do you envisage any resistance from varied interests and personnel that work in the industry?
The labour issue is something we cannot afford to ignore. In every privatization or partial privatization, as it were, labour issues will always take centre stage and it is fully accounted for in the privatization timeline, process and expectations.
Tell us, how does this bill address environmental challenges that are present and ones that may arise?
That is one of the key elements of the PIB that I mentioned earlier. It is also designed in a way that the new regulatory agencies, especially for upstream, will now design strong environmental policies in line with global practices. Not only that, there is actually the aspect of enforcement. All of us know what happened in the North Sea, the Bonga spill and Chevron rig disaster last year. There is a serious difference between the serious reaction in the US and the reactions here. What did we do? We supplied bread, water and everyone has kept quiet about it. At the end of the day because there is no strong regulatory agency, the situation is treated as if it is a regular occurrence but we are aware of the penalties paid in respect to the North Sea incident. And it is still not yet over there because there are people studying the environment for the full extent of the impact and how it can be remedied. So with respect to the environment, yes, there will be more stringent laws and guidelines. In respect to security, that is another issue. We strongly believe that the security agencies will be able to help in carrying out their responsibilities but Oil and Gas companies would continue to look for opportunities using technology to enhance the security of facilities.
Under the modified carrier arrangements that we have that enables the JVs to fund the oil and gas fields that they operate on our behalf, we gathered they are allowed to take a certain percentage of crude oil first upfront before the revenue that accrues from our sale (NNPC’s Joint Venture) goes into the Federation Account. To what extent does that affect the revenue that goes into the Federation Account? This is because, technically, on average, we should be getting 57 per cent from the six Joint Ventures but because of the modified carrier arrangement, we are getting less than 57 per cent which amounts to 45 per cent.
I am not sure that is correct because the modified carrier agreement is another form of taking loan for you to do the business and you agree on the commercial terms for which you are going to pay back your loan and it is often time bound. What is done is that if you take a certain amount of money and then you use it to develop an asset. The asset of that project should be able to stand on its own to pay back the loan. As soon as the loan is paid back the entire project arrangement reverses back to its original equity arrangement. It is designed for projects that are robust enough to stand on their own. More or less the JV partner can go to borrow money for a project. However, the mix here is that the operator provides that fund and then there is a commercial arrangement sometimes for 3-4 years because for oil projects the profitability is high. So, it doesn’t take that much time to pay back and then you revert. As soon as you pay back you take the “carry oil” and as soon as you pay back the “carry oil” then we stop the clock and go back to our 60/40 or 55/45 joint venture. So it is actually a short term loan.
During the duration of the loan, to what extent is the Federal Government losing revenue?
The Federal Government is not losing revenue. Usually the case is that you invest and you recoup and make profit out of your investment. In the situation where you do not invest and somebody is investing on your behalf, the first thing you do is to give the person his investment and you go back to the normal equity share of profits. So, it is a short term loan and it is not a one-size-fits-all arrangement. It depends on the size and complexity of the project and the commercial terms of NNPC with the knowledge of the Federal Ministry of Finance that go into that commercial arrangement. Everybody is fully aware and there is a budgetary line item for it or MCA that says this year we are bringing out three billion or one billion depending on the case for MCA, which means the funding party or the loan will be for one billion to be able to supplement the project. Yes, it erodes part of what is going to come in especially at the beginning of the project but it is short term cushion, later on you will still get your full due. But it doesn’t stop your royalty which is a first line item. What it impacts mostly is your PPT.
What is the status of the Egina Oil Field?
Detailed engineering is going on with Delta Afrique. As a matter of fact I just asked my SPA to write for a kind of update review on EGINA. We are in full contact with the design companies and they have one or two challenges that we need to look at as other aspects of the project are going on. As I speak, the tender is in the last stage of completion
So when do you envisage this bill will finally see the light of the day?
Well, I will fully align myself with the House of Representatives and hope for the first quarter of 2014. Strictly speaking, what is left to be done on the bill is no major thing at all. It is just to ensure that clause by clause, the meaning for which a clause is set out is actually explicit enough and there is no ambiguity and referencing is ok.