Nigeria: Oil Production at Risk? Operators Exploiting Loopholes in PIA.
In the aftermath of the Petroleum Industry Act (PIA) in Nigeria, operators are capitalising on significant loopholes to under-declare crude oil production.
The existing gap in the PIA has wittingly and unwittingly provided opportunities for some operators to resist change and continue with anti-industry practices with attendant economic consequences for the country.
The Petroleum Industry Act, 2021, was signed into law in August 2021, introducing significant changes with the aim of revamping the legal and governance framework, administrative processes, regulatory and fiscal terms, and host community engagements in the oil and gas industry.
However, LEADERSHIP checks reveal that the Act has inadvertently created opportunities for operators to exploit unsanctioned deep-water projects crucial for Nigeria’s production growth.
Experts have warned that these projects, if not sanctioned, could lead to a decline in overall production by the end of the decade.
The future of Nigeria’s oil and gas production heavily relies on how effectively the PIA is implemented and whether common ground can be found between the government and international oil companies on key projects.
As of January 2024, Nigeria’s crude oil production was reported at 1,419.000 barrels per day, showing a slight decrease from the previous month
Despite efforts to increase production, Nigeria has faced challenges in meeting its targets due to years of declining output and disruptions in the oil-producing Delta region. The country currently produces 1.3 million barrels per day of crude oil, with expectations to rise to 1.5 million barrels per day in the near future under certain scenarios
Disruptions, such as oil theft and sabotage to export infrastructure, continue to be major concerns affecting production levels and revenue generation
Barely three years down the line, there are calls for a review of certain sections of the law to achieve the purpose for which it was enacted. Besides amending some sections of the Act, stakeholders are calling for the repeal of Section 257(2) from the Petroleum Industry Act (PIA). This specific section has been a point of contention, with stakeholders urging authorities and lawmakers to expunge it from the PIA.
This section stipulates that in cases of vandalisation, sabotage, or civil unrest, the host community would forfeit its entitlement to Host Community Development Trust (HCDT) funds, equivalent to three per cent of the oil company’s operating cost, for any operating expenditure incurred during production shutdown, or the value of lost oil, gas, condensate, or natural gas liquids.
Stakeholders argue that this provision creates power imbalances between petroleum corporations and host communities and lacks transparency in the nomination of community representatives on governing bodies.
For instance, the Independent Petroleum Producers Group (IPPG) argues that amending PIA, enhancing security and expediting divestments are key to ramping up Nigeria’s crude oil production.
The IPPG also said that priority should be given to the creation of a conducive and enabling business environment to ensure competitiveness in the industry.
Chairman of IPPG, Mr Abdulrazaq Isa, added that attracting the level of investment required to fully optimise the country’s production base will require focus on some key priorities in the short to medium term.
“The key priority areas include amending critical aspects of the Petroleum Industry Act (PIA) to strengthen the regulatory framework and competitiveness of the fiscal regime; enhancing security across the Niger Delta; expediting the conclusion of ongoing international oil companies’ (IOCs) divestments; sustaining the implementation of the “Decade of Gas” policy and holistically addressing inherent inefficiencies within our industry which has driven costs to astronomical levels,” Isa said.
Despite challenges, the IPPG chairman expressed optimism about the industry’s future, stressing the goal of achieving production targets by the turn of the decade. He called for collaboration with government and other stakeholders to optimise growth opportunities, emphasising the importance of sustained advocacy efforts in 2024.
Speaking with our correspondent on the PIA implementation, Akindeji Oyebode, energy expert with Banwo & Ighodalo, said the PIA is a good development as it cured the uncertainty that existed in the legal and regulatory regime in the Nigerian oil and gas industry for about two decades.
Oyebode, however, noted that the PIA, just like many laws, is not a perfect legislation as there are parts of it that may require amendments.
This, he said, is evident in the President’s intervention in the oil and gas sector through executive orders which have granted favourable fiscal terms for participants in the oil and gas sector that seek to benefit from the same.
President Bola Tinubu’s executive orders in the oil and gas sector are set to have a significant impact. These reforms aim to boost revenue, stabilise the economy, combat corruption, and enhance investment in Nigeria’s oil and gas industry.
Commenting on these, the special adviser to President Bola Tinubu on energy, Olu Verheijen, expressed support for the executive orders signed by the president aimed at revamping the oil and gas sector in Nigeria. Verheijen highlighted that these reforms are designed to boost revenue, stabilise the economy, and enhance the investment climate within the industry.
Also, an industry source who preferred anonymity, said continuous Executive Orders is a panacea to addressing the lacuna observed in the law.
The source said the president’s Executive Order and other interventions had offered investors hope of repositioning the industry for investment.
He said the PIA has not fully addressed oil theft which is still on the large scale, but would have been more bizarre if the country’s production had been scaled up.
According to him, though the Host Community Fund is gradually halting community agitations, crude oil theft is heavily spearheaded by operators who are hiding under gaps in the PIA to under-declare volume of production.
“What is happening is that because of royalty payment considered high by producers, they withhold accurate volume output, sometimes with knowledge of regulators, and the undeclared volume is shipped out.
“If we want to stem this, the wellhead should have a device channelled to the dashboard to determine real time production. With this the security agencies who have access to the device would be able to monitor volume of production and devise other strategies to pin down the oil thieves,” he explained.
Speaking to LEADERSHIP on the issue, Bekeme Olowola, the chief executive, CSR-in-Action Consulting Limited, considers the Act as a tool reforming Nigeria’s petroleum industry and a significant milestone after nearly two decades of deliberation.
She is of the opinion that the successful implementation of the PIA will largely depend on various factors, including regulatory efficiency, industry cooperation, and government commitment. Stakeholder engagement and collaboration between government agencies, industry players, and local communities have also proven crucial for the effective execution of the Act.
“In 2023, our advisory firm, CSR-in-Action – we led the charge in introducing sustainability as a discipline in Nigeria – was commissioned to conduct a study on the Implementation of the PIA. This research looked at the level of implementation of the Act in general in oil-producing locales in the Niger Delta region, and specifically the effect of the PIA implementation activities on women, if any.
“So far, oil companies have started making progress and have made significant contributions towards addressing the situation in the host communities and improving their social licence. Speaking of inclusion, while the Act emphasises that the membership of the management committee of the Host Communities’ Development Trust (HCDT) is required to include one representative of each host community, according to our research, only 8.0 per cent of the overall respondents surveyed indicated being members of committees in their communities.”
One of the main criticisms, she noted, is the lack of transparency and accountability in the allocation and management of oil revenues and the PIA also falls short in ensuring equitable distribution of benefits to host communities and addressing environmental concerns related to oil exploration and production.
PIA community development initiatives should be appropriately implemented and the implementation of the PIA in oil-producing states should be clearly monitored and evaluated periodically, she said.
Additionally, she argued that the Act’s provisions on regulatory oversight and fiscal management have been deemed inadequate in promoting sustainable development and maximising the socio-economic benefits of Nigeria’s petroleum resources.
“As a result, there are concerns that the PIA may not fully serve the interests of all stakeholders, including the Nigerian people, local communities, and investors. Typically, legislation often requires amendments based on practical experiences and emerging issues. Hence the need for continuous dialogue between policymakers, industry experts, and other stakeholders which can help identify areas that may need revision. Another key area for improvement dear to me is the intentional inclusion of women in governance and a viable economy around its operations. Stakeholders at various levels would have to work together to positively change the situation, women inclusive.” she said.
LEADERSHIP reports that in keeping with his dedicated efforts to remove obstacles to investments in Nigeria, harness the nation’s resources, and diversify the economy for the benefit of all Nigerians, President Bola Ahmed Tinubu has executed policy directives to improve the investment climate and position Nigeria as the preferred investment destination for the Oil & Gas sector in Africa.
Following extensive engagements, analyses, and benchmarking with other jurisdictions, the President has initiated the amendment of primary legislation to introduce fiscal incentives for Oil & Gas projects, reduce contracting costs and timelines, and promote cost efficiency in local content requirements.
The president also introduced new measures aimed at revamping investment in the country’s oil and natural gas sector following executive orders introducing tax credits for some onshore and shallow-water locations and streamlining contract approvals.
The measures also include some local-content requirements.
Experts had lamented that investments in the country’s oil and gas industry had been declining with oil majors divesting from onshore and shallow waters where operations have been plagued by theft, vandalism and litigations related to environmental damage that have slowed production.
The incentives announced last week are meant to address holes in a landmark 2021 petroleum law. They include a 25 per cent gas utilisation investment allowance in new and ongoing projects in the midstream sector, and measures to increase oil and gas investment in deep water. The government also plans to raise the approval thresholds for production-sharing and joint ventures to a minimum $10 million.
Nigeria through the reforms is trying to halt a flight of investment capital from its onshore fields by oil majors fleeing assets prone to spills caused by attacks including sabotage and vandalisation.
