Nigeria closes in on oil reforms

May 20, 2010

Nigeria’s controversial oil reforms, long in the works, appear close to passage. The government hopes to shore up falling production and get a bigger share of oil profits. But IOCs doing business in the Delta are wary, as Russell McCulley reports.

The cost of doing business in Nigeria will likely go up for IOCs under Nigeria’s Petroleum Industry Bill, or PIB. How much, however, is unclear.

The legislation, which Nigerian oil minister Rilwanu Lukman has promised will be approved in the first half of 2010, has been snaking its way through the National Assembly for some time, with most of the work on the bill done under the administration of president Olosegun Obasanjo, who stepped down in 2007. The reforms would break up the state-run Nigerian National Petroleum Corporation (NNPC) to create a commercial national oil company and seven independent regulatory agencies, establish a new licensing and taxing regime for oil and gas exploration and production, and incorporate existing joint ventures as individual companies. The bill would also promote the domestic gas market and grow the local energy industry through local content directives and marginal field programs.

Supporters say the bill will make the national oil industry more transparent, encourage investment and help the country build its energy infrastructure. But IOCs have complained that the reforms do little to address issues of corruption and security, and in some cases have threatened to divert E&P;spending elsewhere if taxes and royalties are drastically increased. Executives from Total, Shell and Chevron have publicly aired concerns about the plan, which some say could steer billions of dollars of investment away from Nigeria’s growing deepwater industry.

That could cause serious upheavals in Nigeria’s economy, which depends in large part on oil revenues. The country’s output is already in decline: production of oil and condensates in 2009 was 2.1 million barrels, down from 2.5 million barrels in 2005, almost entirely due to militant attacks on industry installations by groups such as the Movement for the Emancipation of the Niger Delta, or MEND, says Eric Schmid, sub-Saharan Africa editor at IHS.

President Umaru Yar’Adua, who came to power in May 2007, helped broker a ceasefire with militants before illness sidelined him in November 2009. Acting president Goodluck Jonathan has continued Yar’Adua’s policies on both the security front and in pushing for the PIB’s passage.

‘Things have calmed down in the creeks since President Yar’Adua’s amnesty offer,’ Schmid says. But questions about where power lies in the capitol has ‘partially derailed’ the peace process, he notes. The lull was indeed broken 15 March, when MEND claimed responsibility for two car bombs outside government buildings in the southern oil city of Warri and threatened to ratchet up the violence against oil companies in the region.

Renewed fighting would be a major setback for Jonathan, who has made security in the Niger Delta a top priority. ‘The government appears to be genuinely committed to solve the Niger Delta crisis,’ Schmid says. But security concerns could further erode investment from supermajors. ‘My guess is that . . . all IOCs are considering a “plan B”. Shell’s Peter Voser did not try to hide that the company should reduce the weight of Nigeria in its global portfolio,’ he says.

The IOCs are also not hiding the fact that they feel left out of the PIB negotiations, says Sebastian Spio-Garbrah, sub-Saharan Africa, West & Central Africa analyst with the New York office of Eurasia Group, a global political risk research and consulting firm.

‘The problem is that they have no leverage,’ he says. Unlike their domestic counterparts, international companies are not allowed to lobby Nigerian lawmakers. ‘In the case of the PIB, you have an IOC industry that, basically, does not have a seat at the table.’

The reforms, at least on paper, promise to help indigenous companies expand their businesses. ‘Domestic Nigerian companies want to grow their business vertically upwards, so they want to be able to go into the upstream sector,’ Spio-Garbrah says. ‘The way they are going to be able to do that is if this bill goes through, and if some of the old concessions are taken away.’ Local companies have a political advantage over the IOCs, Spio-Garbrah points out. ‘They can lobby. They are Nigerian. They can bribe, they can do whatever they want to do to get their side of the table. So you basically have an [IOC] industry that is politically emasculated in Nigeria, and despised by the average common Nigerian because they feel like they don't get anything from the industry.'

The acting president has shown no inclination to reverse course on the PIB, despite the hopes of some IOCs, adds Spio-Garbrah. ‘It’s a structural thing. [Jonathan] will be more willing to listen to the industry, he will be a bit more consensual, but at the end of the day the local companies have a seat at the table. They are owned by some of the biggest oligarchs in the country, they are members of the ruling party, and their opponents are the IOCs, who don’t have a seat at the table.’

There is also a high degree of uncertainty about how the new rules would be implemented, Spio-Garbrah says. The reform process will leave Nigeria with ‘one big national oil company’ with oversight of existing arrangements with IOCs. But ‘it’s not quite clear how they’re going to run it,’ he says, whether ‘like a Saudi Aramco, one big huge organization, or if they’re going to run it with subsidiaries’.

Either way, he says, the PIB will result in ‘the government having more leverage on the private sector’.

Schmid suggests that IOC concerns, while genuine, are perhaps a bit overblown.

‘The PIB is certainly not going to kill the oil industry in Nigeria,’ he says. ‘IOCs will make slightly less, the state will make slightly more.’

As OE went to press, it was reported that Jonathan had dismissed his entire cabinet, including oil minister Lukman, in an attempt to consolidate power. It was not clear whether Lukman would return to the post or be replaced by junior oil minister Odein Ajumogobia, as some analysts thought likely. OE



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