On the 16th of August 2021, after almost 20 years of its conception, the long and highly anticipated Petroleum Industry Act (PIA) which seeks to provide legal, governance and fiscal framework to the Nigerian petroleum industry was finally signed into law by the President of the Federal Republic of Nigeria, Muhammadu Buhari.
Over the years, several attempts at passing the bill failed due to factors such as misalignment of interests between the National Assembly and the executive, pushback by investors on uncompetitive provisions of some of the versions of the bill and now still sparks off a lot of reviews, opinions and some opposition.
For a sector which contributes about 10 percent to the country’s GDP, 90 percent of its foreign exchange earnings and 60 percent of its total income, the Act is undisputedly, a big step in the right direction to replace and improve on the Petroleum Act (1969) and the subsequent petroleum profit tax act which had long needed reform to be in tune with the expansion that the industry has witnessed.
With 319 Clauses, the law comes with several provisions that seek among others, to bring the host communities, the oil and gas Exploration & Production organisations, the government and the government officials to a common ground, restructure institutions, attract investors and enhance governance accountability in the industry.
Unsurprisingly, several agitations are still being raised from different quarters. The most controversial being the allocation of an annual three percent of OPEX contribution (which was initially 5% as earlier passed at the House of representatives) to the host communities and the fund for the exploration of oil in frontier basins being allocated 30% of Nigerian National Petroleum Corporation (NNPC)’s operating profits according to the new law.
In addition, some argue that the provisions on environmental pollution and penalties against polluters (gas flaring and oil spillage) do not fully address the hitherto weak implementation of sanctions. Another major source of concern is that the law has not addressed the issue of energy transition from fossil fuel to clean energy, in an era where decarbonisation is a global imperative.
Possible implications for the capital market
The above challenges notwithstanding, the Act offers potential opportunity for the entire economy and the capital markets if successfully executed.
Firstly, the new law reduces the tax and royalty rates paid by the operators and this has the potential to attract more investments from both local and international investors.
It is also noteworthy that this law would see the transformation of the NNPC into a limited liability company, with 2 regulators: the Nigerian Upstream Regulatory Commission and the Nigerian Midstream and Downstream Regulatory Agency. With the NNPC being a limited liability company under the Company and Allied Matters Act (CAMA), this could enable the institution to take advantage of the capital market by listing and allowing Nigerians own shares in any of its potentially unbundled entities, which could significantly enhance the breadth of the equities capital market.
The Act shows much intentionality in the management and structure of the host funds by directing that 75% go towards infrastructural projects and 25% to reserves for the host communities. These reserve allocations, barring any constrictive clauses, could very well be managed through capital market institutions and invested in viable equity or debt instruments.
Lastly, as indigenous operators begin to seek more exploratory opportunities and ownership stake in some of the existing assets, it gives an opportunity not only for capital market advisory transactions such as project finance, M&A deals, divestitures etc, but also potential for these local investors to list their shares or raise monies by way of an Initial Public Offering (IPO) in the market.
In conclusion, the arrival of the law which is long overdue will hopefully ensure an expanded oil and gas sector with a vibrant local and foreign participation which in turn will generate more revenue for the country, all of which could enhance the government’s fiscal buffers and improve aspects of the macro economy.
But as with all policies, it always comes down to the efficiency and effectiveness of the implementation process and oftentimes, the flexibility to adapt to changing circumstances.