Expert Lists PIB’s Grey Areas

Discretionary powers prescribed for the President in the granting of licenses and leases, restrictions on reconnaissance survey, inadequate financial guarantees for work commitments on return of acreage and the power of incumbent minister to set rentals and royalties by regulations were some of the gray areas identified in the drafted copy of the Petroleum Industry Bill (PIB), currently before the National Assembly.

Presenting a paper on the commercial and fiscal assessment of the 2012 PIB organised by Ernest & Young in Lagos recently, Dr. Pedro Van Meurs commenting on discretionary allocation said the provision would leave the door wide open to political favouritism and corruption in a manner that has been practiced in the past.

Meurs who is an international oil and gas fiscal policy expert pointed out that the call for the complete removal of confidentiality on all contracts, information and documents was an extremely good clause and added that it would be the most modern clause in Africa if passed into law.

He recommended the removal  of power to grant licenses and leases from the President, and the establishment of credible financial guarantees for work to be committed.

He also recommended a reasonable return of current acreage and the establishment of rentals and royalties in the PIB.

His words: “The PIB 2012 has adequate downstream provisions related to tarrif methodology and network codes, license conditions for pipelines, pipeline networks, gas suppliers and gas distributors as well as oil product consumer protection mechanisms.

“In general, Part V enshrines the desirable goal of creating a fully competitive gas market for Nigeria. However, with open access to transportation severely limited for the smaller companies, this may be difficult to achieve.”

On gas flaring, he said the current drafted copy of the PIB has strong provisions to limit gas flaring.

He however, pointed out that “open access provision are severely limited; no tarrif or open access provisions for gas processing plants and in fact franchise areas are set up; no definition of any policy on refining, and domestic supply obligation is severely weakened, and no initial gas pricing framework is defined. “

Meurs therefore, recommended putting in place a procedure for major project approval and strong open access provisions for all oil and gas pipelines and gas processing plants.

He also said there should be a defined policy for refining, and refiners should get fair market value for all products to be produced stressing that they should not pay more than fair market value for the crude oil.

On taxation Meurs said the section was limited to taxation alone and not with the total fiscal package noting that Nigeria needs to increase investment in oil and gas which can only be achieved through comprehensive total fiscal package that would encourage companies to make necessary investments.

According to him, “The PIB 2012 does not deal with rentals, royalties and production sharing. Therefore, it is not possible to obtain a complete view of the new fiscal conditions.

“Royalties should be determined upon production at the measurement point. This is international practice. It will make stealing of oil more difficult since production volumes are known.

“The fair market value concept for the value of oil and gas should be established. In particular, the PIB leaves the door wide open for transfer pricing on exported LNG. Of concern is that the Deep Offshore and Inland Basin Production Sharing Act is being repealed.

“This means that also the royalties are eliminated. The PIB does not deal with production sharing. Yet, this is an area that needs improvement if new production is to be stimulated.”

To be competitive and encourage production from new leases, he said the country should aim for an overall income for oil of 60 per cent for the small and high cost of fields to 75 per cent for the large and low cost fields under current price conditions and noted that government income take does not include the government take because of NNPC participation.