Professional Services

Key elements of the 2017 national petroleum policy

by Banwo & Ighodalo

August 31, 2017 | 12:16 am
  |     |     |   Start Conversation

At its weekly meeting, held on July 19, 2017, the Federal Executive Council (“FEC”) approved a new National Petroleum Policy (“NPP”) for the country. The NPP sets a long-term agenda for Nigeria “to become a nation where hydrocarbons are used as a fuel for national economic growth and not simply as a source of income”, and sets strategic policy objectives for each part of the petroleum industry and the entire value chain. This long-term vision had previously been articulated in the Ministry of Petroleum Resources’ (“MPR”) 7 Big Wins Initiative and the Federal Government of Nigeria’s (“FGN”) Economic Recovery & Growth Plan (ERGP 2017 – 2020). 

The NPP, which is expected to be implemented alongside a complementary National Gas Policy (issued one month earlier) and a National Petroleum Fiscal Policy (soon to be finalized), specifically provides for the legal & regulatory, institutional, commercial, fiscal and operational framework for developing a stable and enabling oil and gas landscape in which there will be improved transparency, efficiency, cost effectiveness, attractive investment climate, and a well-protected and sustainable environment. 

Set out below are some of the key elements of the NPP:

Primary Objectives

The primary objectives of the NPP are strategically set with a view to achieving the following:

Creation of a market-driven oil and gas industry through effective funding of the National Oil Company, encouragement of private investment across the upstream, midstream and downstream segments of the value chain, as well as the separation and clarification of the roles of the state as a policy maker, regulator and investor;   

Maximization of the production and processing of hydrocarbons;

A departure from the concept of oil as a source of income to oil as a fuel for economic growth;

Value creation through processing of oil into significant end products for industries, by employing diversification and backward integration strategies to achieve competitive supply of petroleum products, active refining, value added extraction and industrialization;

Following the hydrocarbon molecule from extraction to destination markets (this will be facilitated by securing primary and secondary markets outside Nigeria through collaborative ventures with third parties);

Incentivizing investments in cost-efficient storage, transportation and distribution system for petroleum products in Nigeria (through effective management of supply and distribution interruptions as well as ending discriminatory practices in regulation and access to midstream infrastructure);

Promotion of competition in the petroleum industry;

Minimizing the environmental footprint of oil exploration in Nigeria (through strict enforcement of environmental laws); and

Managing the balance between depleting oil resources and renewable energy.

Policy Initiatives

The above policy objectives of the NPP are addressed under a number of policy areas, including:

GOVERNANCE

This covers the legal and regulatory, institutional, commercial, fiscal and sector financing framework for the petroleum industry, as well as provisions for sovereign wealth fund and Niger Delta development. The critical reforms expected to be driven by the whole governance architecture are hereunder highlighted:

Promotion of new legislation, unbundling of the NNPC and establishment of new entities

The FGN intends to promote the enactment of new legislation, including the Petroleum Industry Reform Bill (“PIRB”), which will form the legal and regulatory framework for addressing a broad range of issues, including sector governance, fiscal regime, transparency and accountability, and environmental sustainability among others.

Also, new entities are proposed to be established, pursuant to the PIRB, including:

National Petroleum Policy Directorate (“Directorate”) within the MPR – to act as a technical ‘Back Office’ for assisting the Minister of Petroleum Resources (“Minister”) in the formulation, monitoring and ensuring implementation of petroleum policies;

Nigerian Petroleum Regulatory Commission (“Commission”) – which will be a new, independent, single regulatory body responsible for the technical and economic regulation of the entire petroleum sector;

National Oil Company of Nigeria (“NOCN”) – an incorporated public entity to replace the Nigerian National Petroleum Corporation (“NNPC”) which will manage certain petroleum assets of the FGN, with equity to be listed on local and international markets;

National Petroleum Asset Management Corporation (“NPAMC”), which will manage other petroleum assets of the FGN which are not allocated to the NOCN;

Investment Promotion Office (“IPO”), which will be one of the divisions within the MPR and which will work in conjunction with the Nigeria Investment Promotion Council (“NIPC”) in order to facilitate investments in the Nigerian petroleum industry.

Streamlining of policies and full legal separation of operations across the value chain

The NPP also provides for a robust institutional framework for ensuring smooth and seamless operations along the petroleum industry value chain. First, the NPP proposes the establishment of the Commission as a single regulator for the whole petroleum sector (thereby replacing all existing regulatory entities) in order to address challenges of information gaps among multifarious regulatory entities, over-regulation, regulatory overlaps and lacunae. Specific regulatory issues proposed to be within the Commission’s remit include: (i) upstream oil and gas licensing (ii) midstream licensing and economic regulation (iii) downstream petroleum products licensing and regulation (iv) downstream gas licensing and regulation (v) health and safety compliance (vi) environmental compliance (vii) consumer protection (viii) metering and measurement (ix) cost monitoring & control (x) inspection, investigation and compliance monitoring, and (ix) developing technical standards working with industry stakeholders. Although the Commission is proposed to exist independently of the MPR, its operations are expected to be in line with the MPR’s policy directions.

Also, it is expected that clear and distinct regimes for different operations across the value chain will be promoted, such that there is full legal separation between the upstream, midstream and downstream segments of the petroleum industry.

Full legal separation of infrastructure ownership and operations, and trading 

The NPP proposes a commercial framework for opening up access to pipelines and networks as well as setting pricing principles and regulations for the petroleum industry.

First, this initiative is to ensure that the different activities of infrastructure ownership, operations, and trading in the petroleum industry are carried out by separate companies. Whilst asset owners in one segment of the value chain may own and operate assets in different segments of the value chain if they wish to do, they will only be able to do this via separate corporate vehicles. In other words, a group of companies may comprise of a holding company having interests in different legal entities operating in the upstream, midstream and downstream segments.

Second, the initiative promotes the introduction of a suitable and effective network code to govern open access to all pipelines and other essential midstream infrastructure, located either offshore or onshore.

Third, the initiative will promote the adoption of “cost-of-service approach” in the sector, using average, standard or benchmark costs. Essentially, a regulated tariff regime will be introduced for the monopoly infrastructure areas of the industry, in a manner that will provide investors the opportunity to recover all eligible costs with reasonable return on investment. 

Separate fiscal regime each for Oil and Gas

The NPP envisions a new fiscal framework that will separate oil from gas. In essence, gas projects will be developed based on their economics and not dependent on, or consolidated against, oil taxation.

Currently, it is permissible under the Associated Gas Framework Agreement (“AGFA”), for Associated Gas (AG) and Non-Associated Gas (NAG) costs to be recovered from oil income through cross-subsidizing of oil projects to gas projects. This new fiscal framework seeks to eradicate the distortions in the AGFA by emplacing a corrective and optimum fiscal regime tagged Fiscal Rules of General Application (“FRGA”). Whilst the FRGA is good for the development of the gas sector and the overall petroleum industry, we note that the AGFA (which it seeks to repeal) is codified in sections 11 and 12 of the Petroleum Profits Tax Act. Consequently, the NPP-birthed FRGA may not become effective in enforcing the desired separate oil and gas tax regimes until the PIRB or any other legislation is passed into law in order to implement the FRGA.

Financing mechanisms for the petroleum sector

The NPP is expected to encourage sector financing, in a manner that will encourage all types of project financing mechanisms with minimal role for the Government in the future. In essence, project financing in the sector will be done through one or more of several finance sources including government budget; equity funding by private sector companies or government owned corporations; loans from Nigerian and international commercial banks; and International Financial Institutions (IFIs) including the World Bank, International Financial Corporation and African Development Bank.   

The Grey Matter Concept is an initiative of the law firm, Banwo & Ighodalo

DISCLAIMER: This article is only intended to provide general information on the subject matter and does not by itself create a client/attorney relationship between readers and our Law Firm. Specialist legal advice should be sought about the readers’ specific circumstances when they arise.


by Banwo & Ighodalo

August 31, 2017 | 12:16 am
  |     |     |   Start Conversation

Big Read |  

Analysis

What Nigeria must do before signing AfCFTA

Nigeria’s President Muhammadu Buhari last Wednesday gave a hint that he would sign the African Continental Free Trade Area (AfCFTA)...


MTN Banner ADS 2


WSE

Newsletter Fixed income