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Petroleum Industry Bill: Game of Chicken or Chicken Little

Last Sunday, an article I wrote on Nigeria's controversial draft Petroleum Industry Bill appeared in NEXT newspaper. Rather than focus on the specificities of the proposed bill, which many commentators have already done, I approach the subject from the strategic dimension by looking at the international trends which have induced the Nigerian government to push it ahead.

It was never going to be easy sailing. As a rule, any legislation intended to overhaul an industry used to having its way is bound to meet with a hailstorm of protest. It either goes too far for the industry’s supporters and beneficiaries or is too soft for its critics. Just ask Paul Volcker, the former US Federal Reserve chairman. He has been at the forefront of efforts to introduce sweeping reforms in the US banking sector. In the opinion of Wall Street executives, like Barry Zubrow, chief risk officer at JPMorgan Chase, these proposals would ‘likely come at the expense of economic growth.’ On the other side of the divide, Senator Chris Dodd, chairman of the US Senate Banking Committee, expressed his dismay that ‘the refusal of large financial firms to work constructively with Congress borders on insulting to citizens.’

These sentiments could well be applied to the Petroleum Industry Bill (PIB) which has sparked its own round of passioned debates. In the sling match that has ensued, both sides have accused each other of attempts to kill the goose that lays the golden eggs.

At 200 pages, the PIB has several flavours of bicker sauce on the menu for passengers in every coach on the stakeholder train. In her presentation, ‘Nigeria’s Position as a Key Player in Global Oil and Gas Markets,’ delivered at the 2010 edition Nigerian Oil & Gas Forum held this week, Ann Pickard, Shell Petroleum’s regional executive vice-president, Exploration & Production in Africa, condescendingly dismissed it as ‘a cumbersome document that lacks insight into the very basics of our industry.’ Levi Ajuonuma, group general manager, group public affairs at the Nigerian National Petroleum Company (NNPC) has risen in staunch defense of the bill arguing that ‘there is no country in the world that does not get value for its natural resources.’ Dora Akunyile, the minister of Information, says that the bill will ‘ensure a level playing field for all stakeholders’. Comrade Bayo Olowosile, general secretary of the Petroleum and Natural Gas Senior Staff Association (PENGASSAN), condemned the bill for the government’s failure ‘to address our concerns or assuage our fears.’ The Ijaw National Congress, a major ethnic association of the dominant group in the Niger Delta, does not mince words. It calls the bill ‘demonic.’ With all the name-calling, moving from rhetoric to the motivating ideas behind the bill can be quite tasking.

The main points of the bill, which Pickard describes as ‘simple, passionately stated priorities’, are well known: improve transparency associated with the various Memoranda of Understanding signed with the oil majors in 1986, atomization of the NNPC into seventeen separate companies to improve efficiency, the adoption of fair and unambiguous rules for all players across the entire industry value chain, creation of a self-funding national energy champion capable of meeting its joint venture cash-call obligations, higher government revenue derivation regime for deepwater projects, elimination of tax loopholes, development of the country’s gas reserves, and the return of acreage that oil companies have failed to explore.

A member of the Oil & Gas Implementation Committee (OGIC), Dr. Mohammed Ibrahim, puts it succinctly. The objective of the bill is to transform Nigeria from ‘a crude oil exporter to a crude oil exporter and processor’. His statement hits the nail on the head on what the bill is really about, which is, how the country can reclaim what its leaders believe rightfully belongs to Nigerians and move up the value production chain. The PIB is 1970s resource nationalism faintly disguised in new costumes for the 21^st century. All else are footnotes.

In this respect, Nigeria is not unique. Two identifiable trends have bolstered the country’s confidence to confront the oil majors namely, the pre-2008 oil boom and China. Here, it is important to recall that the bill’s conception dates back to the early days of the Yar’Adua presidency in 2007 when oil prices were at a peak. At the time, the government was resentful that contracts negotiated in the trough era of the eighties when oil sold for less than US$20 per barrel, now placed them at a huge disadvantage. Several oil producers around the globe demanded the renegotiation of terms.

The list is long. Hugo Chavez’s gauntlet in Venezuela’s Orinoco River basin, Vladimir Putin’s brinkmanship with Russia’s Sakhalin project, Evo Morales forceful takeover of Bolivia’s natural gas fields, Rafael Correa’s populist policies in Ecuador’s energy sector, and Luiz Inacio “Lula” da Silva’s new stricter tax framework for foreign companies exploring Brazil’s new-found offshore oil, all fall in this broad category.

During a January 2008 interview, Chakib Khelil, the Algerian minister of Energy & Mines, which has vigorously pursued its own energy sector reforms, explained the oil producer’s position on what he termed ‘these structural changes’:

We imposed tax on exceptional profits which is not considered to be resource nationalism. It just takes into account that when the contracts were signed in the 80’s the oil price was at $15/bbl, now the oil price is at $90/bbl. Some of these contracts didn’t include the mechanism by which the state would receive a fair share when the oil price would go that high. The state of Algeria has taken the decision that it would get a fair share and that is not specific to Algeria. Even Alberta has put tax on royalties and the US has put on taxes on offshore assets in the Gulf of Mexico.

It’s just a matter of tremendous changes in the market and to avoid upheavals. Our demands are based on logic: if you sign a contract based on $15/bbl you expect a certain return. But if you get $90/bbl you are getting more than what you expected. In any case it is the same company that is making very good returns. They have a choice not to come to Algeria: we are not forcing them. They are free to go to Libya and to any other country that offers them better conditions.

The message was clear. Put up or shut up.

The aggressive push by China National Petroleum Corporation (CNPC), China Petroleum & Chemical Corporation (Sinopec), and China National Offshore Oil Corporation (CNOOC) into the Gulf of Guinea has presented an irresistible alternative for the continent’s energy producers. In Angola, Gabon, Nigeria and Equatorial Guinea, the Chinese with their country’s voracious appetite for energy and commodities have elbowed their way in. With deep pockets and a willingness to work on the producers’ terms, the Chinese have gained ground where Western majors have slipped out of favour. This has further emboldened the producers to place more stringent demands on their traditional oil exploration partners. Arguably, the origins of new-found assertiveness can be traced back to Beijing’s door.

Whether the bill passes in its current form or admits more amendments, the glory days of exclusivity and privilege enjoyed by the oil majors in Nigeria are numbered. Yet the question remains: will the devil that Nigeria has known since crude oil was discovered in Oloibiri half a century ago be better than the angels it is yet to be fully acquainted with? The euphoria of self-determination can often hide the brutal uncertainties of sovereignty. In the final analysis, arm-twisting the oil companies is the easy part. The real measure of success will be how successful the PIB will be in delivering the goods from higher revenues to local citizens. Nigerians will be watching their leaders closely to see.

The original article may be read here on the NEXT website.

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