Nigeria’s New Energy Bill Hints at Wider Reforms to Come

 

Forecast

  • The Nigerian National Assembly could pass the first piece of the Petroleum Industry Bill as early as 2016, though it will more likely take a year or two.
  • Political resistance from the country’s oil and natural gas workers will slow the bill’s passage but not derail it entirely.
  • Nigeria will be able to reduce corruption at the highest levels of the energy sector, but it will have difficulty achieving the same success in day-to-day operations.
  • Splitting up and partially privatizing the Nigerian National Petroleum Corp. will make it more efficient and profitable, but it will remain Nigeria’s biggest company and a vital source of patronage. 

Analysis

After being stalled in parliament for eight years, Nigeria’s controversial Petroleum Industry Bill has been revived, albeit in a more limited form. This month, the Nigerian Cabinet plans to review an abridged version of the full bill, which President Muhammadu Buhari has broken into smaller, more manageable pieces in the hope of making each component easier to push through the National Assembly. If passed, the first piece of the reform would aim to do two things: tame corruption in the energy sector and overhaul the Nigerian National Petroleum Corporation (NNPC).

In its original form, the Petroleum Industry Bill was intended to be a comprehensive solution to the many problems plaguing Nigeria’s energy sector. However, its broad scope proved to be its undoing as its more controversial aspects, including details on how oil revenues should be distributed among the country’s regions, created an impasse in the National Assembly. The bill’s latest iteration, the Petroleum Industry Governance and Institutional Framework Bill, sets these questions aside for now, improving its chances of being passed as early as 2016, though it will more likely take closer to a year or two. But passing reform through parliament is not the same thing as fully implementing it or as achieving its intended goals — something Abuja will struggle with once the bill becomes law. Nevertheless, any progress the Buhari government makes with energy sector reforms, however incremental, will boost foreign investors’ confidence in Nigeria.

Cleaning up the Energy Sector

Since taking office in May, Buhari has been exploring his options for addressing the Nigerian energy sector’s problems. To that end, he named himself petroleum minister to personally oversee energy reform efforts, though their key architect and executor is Ibe Kachikwu, an oil industry veteran and the former executive vice chairman of ExxonMobil’s Africa unit. (Buhari had originally chosen Kachikwu to head the NNPC before tapping him to become the Cabinet’s petroleum minister as well.) Under their lead, a clear strategy has emerged to address the sector’s two biggest issues. The first is rampant corruption; the Nigerian oil industry is notoriously opaque, and shady business dealings and missing funds are commonplace. The second is the sector’s structure, which is currently engulfed by the country’s vast national oil company.

Tackling Corruption

Some of Buhari’s plans for reducing corruption have already begun to change how the NNPC is doing business. As part of a wider initiative to encourage transparency and reporting, Abuja has required all of its public agencies — including the state-owned oil company — to pay revenues directly to a Treasury account in the Central Bank of Nigeria. The bank, in turn, has improved its financial reporting and has submitted to more extensive audits to ensure that the agencies are complying with the new mandate. In addition, Kachikwu has issued a new ruling that forces the NNPC to publish detailed financial reports each month summarizing key figures such as revenue, oil sales and costs.

But corruption is still rife throughout the company’s crude oil and products trading, sales and marketing processes. Because of its limited refining capabilities, the NNPC often swaps crude oil for more refined products that it then sells to fuel distributors. However, these activities are rarely transparent to the public and often entail price inflation and kickbacks. They are also a key source of political patronage that creates a tremendous incentive to block the development of any real domestic refining capacity. Kachikwu has attempted to address this problem by closing refineries that cannot operate at a capacity of at least 60 percent and by promising to introduce transparency into import/export contracts in the future. But the sector still has a long way to go.

The new bill may help tackle the issue of corruption in both direct and indirect ways. When PricewaterhouseCoopers audited the NNPC earlier this year, it recommended that the company be split up to allow for better transparency and internal records keeping — a suggestion expected to be implemented with the coming reform. In addition to dividing the corporation into two smaller companies, the bill will also likely partially privatize it. Both changes, when combined with transparency measures, may begin to diminish corruption by reducing the company’s sheer size and lack of internal visibility, two characteristics that have made it difficult to track the movement of NNPC funds in the past.

These changes will no doubt disrupt the patronage networks of several powerful oligarchs operating within the company, and Buhari will have to ride out the backlash that will inevitably follow. Here, and within his broader anti-corruption efforts more generally, Buhari will doggedly pursue and prosecute any accusations of corruption among former officials and business elite, many of whom have long been considered too powerful to touch. He will likely erect a special anti-corruption court to handle these cases or empower Nigeria’s existing Economic and Financial Crimes Commission. Buhari has already permitted the commission to continue its investigation into the activities of Rotimi Amaechi, a member of his own Cabinet.

In the long run, Nigeria will be able to make concrete progress in curbing the scope of corruption at the highest levels of the energy sector. However, eradicating the corrupt practices and bureaucratic red tape that make day-to-day operations more costly and difficult will prove to be a much bigger challenge.

Transforming the National Oil Company 

As Nigeria’s national oil company and the government’s biggest source of revenue, the NNPC has evolved into a colossal institution riddled with inefficiencies and redundancies. Its operations are unclear, even to the president and petroleum minister who oversee it, and its problems have only grown worse since former President Goodluck Jonathan came to power. (Jonathan used the company to dole out patronage to his key supporters in the Nile Delta region.)

With Kachikwu in charge, some of that has begun to change. Upon taking his new role at the head of the company, Kachikwu began breaking the organization down by firing eight executive directors and streamlining operations. The new bill would build on his efforts by formally dividing the NNPC into two different entities: a national oil company and a holding company.

The new national oil company, in theory, would be designed to compete as a commercial company whose main goal is to turn a profit — not to line the government’s pockets. It would take on the NNPC’s joint venture obligations, which account for 32 percent of the company’s total oil production. The new company would also be partially privatized and given some level of fiscal autonomy, allowing its budget to remain at least somewhat separate from the government’s.

Meanwhile, the new holding company, Nigeria Petroleum Assets Management Co., would take on the NNPC’s responsibilities under its standing production-sharing agreements. Unlike the new national oil company, the holding company would not directly take part in petroleum operations.

In addition to splitting the current national oil company in two, the bill would create a regulatory body, the Nigeria Petroleum Regulatory Commission, which would oversee both the downstream (oil refining) and upstream (oil production) segments of Nigeria’s energy sector. Presently the NNPC assumes most of that role, which creates a conflict of interest as the company tries to simultaneously participate in and regulate the production of oil.

Some Success Is Likely, but Problems Will Persist 

The Nigerian government’s plans to reform the energy sector are similar to models other countries have used, often effectively. But Abuja faces a long and difficult path ahead if it hopes to create a profitable oil company, and several obstacles stand in the way of its success.

One of the things the NNPC has struggled with most is financing its own budget. Because it is closely linked to the government’s budget, the company’s funds historically have been tied to politics, and it frequently has not received the money it needs to carry out operations. The company currently owes $6 billion to its international partners because it has been unable to meet its funding obligations for various projects. This type of budgetary shortfall has often forced the company to get creative to finance its activities.

By giving the new national oil company greater budgetary freedom, the Petroleum Industry Governance and Institutional Framework Bill will enable it to reinvest profits more freely, whether into new projects or back into the company itself. This will be especially important if Nigeria hopes to create a company that is partially privatized and internationally competitive. As it stands, the NNPC lacks the proficiency, technology and efficiency of the typical international oil company.

Nigerian leaders will also have to contend with the fact the new national oil company will still be among the country’s largest companies and a vital source of patronage, meaning corruption and a lack of transparency could persist even in the face of reform efforts. In a country with a limited pool of skilled labor, the company will also compete with established foreign oil companies for engineers and skilled workers.

Abuja may find it even more difficult to establish an effective, independent regulatory body. Countries that have been able to do so, such as Brazil and Mexico, often have strong state institutions. But Nigeria’s state institutions are weak and have minimal resources at their disposal. Any new regulatory agency would likely be no different. Since it would also oversee the prices of downstream products — something that is inherently politicized and subject to pushback from the public — it would probably suffer from problems of politicization itself. And so, much like the current NNPC, the new oil company would likely have to assume many of the functions that would nominally be assigned to the new regulatory agency.

Political Challengers Will Slow the Process

The original Petroleum Industry Bill was met with staunch opposition and was ultimately shelved because it contained many controversial components, the most politically sensitive of which were changes to the price of petroleum products and the distribution of energy revenues. The first, which would have shifted fuel prices closer to market value, elicited angry protest from the Nigerian public, which has come to rely on the government’s generous fuel subsidies. The second pitted Nigeria’s oil-producing states against their non-producing counterparts, creating a stalemate among the country’s regions. While both issues remain priorities for Buhari’s administration, he will have to tread carefully in pursuing a solution for them, and neither will be addressed in the most recent version of the bill.

While the new bill does not face the many political roadblocks that the original version did, Buhari and Kachikwu will still have to watch for a few snags as it heads to parliament. The biggest will come in the form of Nigeria’s oil and natural gas workers’ unions. Because the bill will convert the NNPC into a smaller, more competitive company, the corporation will likely have to fire a number of workers. In the past, the unions proved capable of forcing the government to reconsider its plans where privatizing the refining sector was concerned, and the latest round of efforts will probably yield similar results.

Still, while the unions can likely delay the bill’s passage, they probably will not be able to shutter it completely. Sporadic strikes will force Abuja to walk a fine line in its negotiations with the unions on employment levels and wages, which will slow down the bill’s implementation. But Buhari and Kachikwu have shown that they are committed to substantially reforming the country’s oil and natural gas industry. With the original Petroleum Industry Bill broken into smaller bits of legislation, the latest bill will likely be only the first of many changes to take place in the Nigerian energy sector over the next few years.

CREDITS: http://www.stratfor.com

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