Developments in the Nigerian Oil Industry – comments by Lex Africa’s Nigerian member, Giwa Osagie & Co – August 2012

Nigeria, home to the world’s seventh-largest gas reserves and with more proven oil in the ground than the rest of sub-Saharan Africa combined, has been experiencing increased regulatory uncertainty ahead of implementation of the landmark energy Bill (Petroleum Industry Bill), which has been stuck in parliament for more than five years.

Recent media reports have stated that the Bill could revive Africa’s biggest oil industry, which produces 80% of government revenues, but has been plagued by corruption and mismanagement for decades. However, it is currently facing a number of challenges ahead of implementation and the Lex Africa Nigerian member firm, Giwa-Osagie & Co, has developed the following statement relating to the importance of the Bill, and outlining the current challenges faced.

“Once passed the Bill will codify the major laws currently regulating the industry, thereby removing the element of uncertainty in the legal framework which has been a major issue and has in the past negatively affected foreign direct investment. In addition the Bill will ensure that the granting of Petroleum Prospecting licences, or Petroleum Mining Leases, shall be open, transparent and be subject to a competitive bidding process conducted by the Upstream Petroleum Inspectorate (Inspectorate) – thus reducing the instances of fraudulent and corrupt activities within the industry.”

“Investment in natural gas will assist in ending the chronic power shortages experienced by the country, however, in the past gas development as an energy source has suffered a setback due to the absence of an enabling legal framework. This will be rectified through the introduction of the Bill as it makes elaborate provisions for gas, and its utilisation. In addition it imposes a penalty for any gas flared – which will be the value of the gas lost through flaring. Implementation of a Domestic Gas Supply Obligation will also ensure that gas is available for power generation and industrial development.”

“Environmental protection is becoming of increasing importance worldwide and Nigeria is no different–the Bill’s introduction will see every licensee or lessee engaged in the upstream submitting an Environmental Management Plan to the Inspectorate; the plan must comply with relevant laws and guidelines showing the ability of the applicant to manage and protect the environment. In order to ensure compliance with the Bill’s provisions, stricter penalties for violation will also be implemented.”

“In addition to the above a Host Communities Fund will be set up to contribute to the development of economic and social infrastructure of the Communities in petroleum producing areas. This Fund will receive 10% of the net profit from every company, which will be formed through the Bill’s implementation.”

“Currently challenges being faced in the signing of the Bill to law is the approval of the National Assembly, as well as resistance from international oil companies. The oil companies believe that the fiscal regime, as provided in the Bill, will increase aggregate tax and extend the application of the Companies Income Tax to them – thus reducing their income. In addition, although environmental protection has been allowed for in the Bill, the Host Communities believe that there should be stiffer penalties for environmental pollution within their Communities. It would appear there is also a risk of conflict of interest from the Government should this Bill be passed into law – this is because although autonomy of the companies created under the Bill is proposed, there is doubt as to whether this is realistic as Government will still own majority of the shares in these entities.”