Presentation on Petroleum Industry Bill to Nigeria Transition Committee May 13 2015

OVERVIEW OF THE PETROLEUM INDUSTRY BILL: PERSPECTIVES ON THE GAS SECTOR

Presented To

GEN MOHAMMADU BUHARI TRANSITION

COMMITTEE (SUB COMMITTEE ON FINANCE & ECONOMY)

May 7,2015

by Benjamin Ogbalor

EverlinkSourcing Ltd #45 NNPC Housing Complex Road

Ekpan – Warri Delta State.

[email protected],[email protected] Mobile :08036681396

Presentation on PIB to Transition Committee 1

mailto:[email protected],[email protected]

At the end of this session, participants should be able to: Have an Overview of the PIB Understand Some of the Critical Issues in the PIB Key Short Comings of the PIB & Recommendations Have an Overview and State of the Gas Sector in

Nigerian Economy Appreciate the Issues and Reforms in the Gas Sector Understand the Context for Gas in the PIB Understand the significance of the PIB and Gas

Sector to the Nigeria Economy

OBJECTIVE OF PRESENTATION


CONTENT

OVERVIEW OF THE PIB

• Goals and vision

• Objectives

• Institutions Establishment in the PIB

• Regulatory and Licensing Issues in Upstream and Downstream

• Key findings and Recommendations

OVERVIEW OF NIGERIAN THE GAS SECTOR

OIL vs. Gas Revenue Stream Projection

• Growing Market for Natural Gas & State of Infrastructure

• Available Domestic Market for Gas & Global Fiscals

ISSUES AND CHALLENGES IN THE GAS SECTOR

• Issues and Challenges in the Gas Sector & Consequence of Inaction

STRATEGY/MECHANISMS IN PLACE TO SHORE UP THE GAS SECTOR

• Response Strategy and Mechanisms

GAS SECTOR IN THE PIB 2012

• DGSO Price Capping

• Nigeria GDP Growth Rate in Sellected Sectors

• Recommended Price Mechanism

• Gas Sector in Petroleum Industry Bill 2011

Way Forward & Recommended Price Regime

CONCLUSION AND NEXT STEPS

OVERVIEW OF PIB GOAL AND VISION Deregulated Petroleum Sector with Privatize and or Commercialized Institutions ,Reduced Government Expenditure ,Enhance Private Sector Investment and get Ample Return to both Government and the Private Sector STRATEGY I. Repeal 16 Existing Legislation to ONE II. Create NEW Institutions and Governance Structure III. Enact New Regulatory, Fiscal & Legal Regimes for The Sector EXPECTED OUTCOMES I. Increase Competition and Commercialization II. Privatized Upstream and Downstream ---E & P , refining ,gas

processing, transportation,pipelines ,marketing etc III. Increase Revenue for Government


a. Objectives

a. Create a conducive business environment for petroleum operations

b. Enhance exploration & exploitation of petroleum resources in Nigeria

c. Establish commercially oriented and profit driven oil & gas entities

d. Create efficient and effective regulatory agencies

e. Establish a progressive investor friendly fiscal framework

f. Utilize petroleum resources to stimulate economic development

g. Optimize domestic Gas supplies (power generation and Industrial development)

h. Establish commercially oriented and profit driven oil and gas entities

i. Deregulate and liberalize the downstream sector

j. Promote transparency and openness

k. Protect health, safety and environment in the course of pet. Operation

l. Attain such other obj. to promote a viable & sustainable pet ind. In Nigeria.

OVERVIEW OF PIB

1. Institutions Established by The PIB

a. Petroleum Technical Bureau

b. Upstream Petroleum Inspectorate

c. Downstream Petroleum Regulatory Agency

d. Petroleum Technology Development Fund

e. Petroleum Equalisation Fund

f. Petroleum Host Community Fund

g. Nigeria Petroleum Assets Management Company

Limited

h. National Oil Company

i. National Gas Company

j. Frontier Exploration Services

k. Petroleum Training Institute (extant)

l. Nigerian Content Development and Monitoring

Board (extant)

OVERVIEW OF PIB

OVERVIEW OF THE PIB

2.Regulatory and Licencing Issues in Upstream and

Downstream Petroleum Sector

a. Petroleum Exploration Licence

b. Petroleum Prospecting Licence

c. Petroleum Mining Leases Marginal Fields

e. Transportation Pipeline Owner Licence

f. Transportation Network Operator Licence

g. Gas Supply Licence

h. Gas Distribution Licence

i. Oil Prospecting Licence (extant)

j. Oil Mining Licence (extant)

k. Production Sharing Contracts (extant)

3. Pricing, Tax Regime and Fiscals

4. Legal Issues 5. Staffing


Key Findings a) Objectives and Guiding Principles Well Articulated to Support

and Sustain the growth of the Sector and Nigerian Economy b) Sections of the Text Not Consistent With The Underlying Principles Of The PIB 2012(Powers & functions of the Minister, structure, powers, functions and management of the Institutions, the licences, pricing and the fiscals). c) Powers and Functions of the Minister & Regulatory

Institutions are not clarified and conflicting d) Appointment of Board Members and Management Team of

Institutions Subjective. e) No clauses to ensure Efficiency & Abate Delays


Key Findings f) Except for the Frontier Service,3Nos Institutions Created: Regulatory Funds Administration and Management and Commercial Companies. g) Petroleum Host Community Fund is Undeveloped h) Too Many and Idle Licenses (GAS) i) The Gas Master Plan (GMP) Poorly Articulated j) Inbuilt Price Fixing Mechanism k) Aggregator potentially may impede investment and growth of the gas sector. l) The Fiscals & Domestic Gas Obligations may impede the ability of Nigeria to harness the gas resources optimally.


Key Findings m) Mechanism to stimulate development of petroleum

resources in the hinterland absence. n) Fiscal Regime is harsher than pre-PIB. o) Subjection of Royalties and Fees Regime to the Minister

may deter the Investments and Growth p) Presidential Discretionary Powers to Grant PPL & PML

Diminishes Accountability. q) Repetition of Several Sections


Key Recommendations

1. Clarification and Streamlining of the powers and functions of

the Minister and the Regulatory Institutions: The Minister

should

i. Give Policy Direction & Development of Regulations and

Guidelines for the Sector

ii. Oversight ,Compliance Enforcement ,Sanction & Reward

iii. Refrain from serving in Boards of the Institutions

iv. Refrain from Policy and Project Implementation

v.Recommend for Appointment the Chairman and Members

Board Except the Chief Executive Officer (CEO) and

Management of the Institutions.

2. The Inspectorate and Agency shall

i. Be the Sole Organs to Implement and Enforce Government

Policies and Guidelines and shall Refrain from making

Policies and Guidelines. Presentation on PIB to Transition Committee 11

ii. Be sacked based on the recommendation of the President and approval by the Senate.

iii. Appoint through a merit based process The Chief Executive

Officers and Management members of the Institution. iv. Should have one term of 5 years only. v. Appoint the Chief Executive Officers and Management Staff

one term of 6 years only.

vi. Hire, discipline and fire the management team, including the CEO, with at least 75% vote of members.


3. In light of the role of the Recommended Role of the Minister the Petroleum Technical Bureau be deleted entirely from the PIB.

4. The Frontier service is not consistence with deregulation and

private sector led development of the petroleum sector as envisaged by the PIB so should not be considered in the Bill.

5. The Petroleum Host Community Fund is to provide content for the effective utilization of the resources that will be made available to the fund. 6. There should be Streamlining of Licenses and optimisation of the development of the downstream sector:


Key Recommendations

I. The guidelines, terms, conditions and requirements for Licenses shall be established by the Minister. ii.The Agency and the Inspectorate shall be the bodies to grant, award and revoke licenses following the directives established by the Minister iii.The Petroleum Mining License should give a person a right to sell the gas and develop the market, so a gas producer shall invest and do business along the gas value market chain. iv.The following Licenses may be allowed o Transportation Pipeline Owner Licence o Gas Supply Licence


7. The Gas Master Plan (GMP) shall be a 20 year plan with 5 years mid-term strategic plans drawn from it to give effect to articulating and actualization of the domestic gas obligation regime.

8. The Aggregator is deleted to allow the operators to fix

prices within the context of the benchmarks and the domestic gas obligations of the various gas producers to promote investment, increase access to gas for consumers and promote the growth of the gas sector.

9. The fiscal regime for gas improved to ensure that investors

can provide financing to prospect for gas and also develop the domestic gas market and ultimately grow the economy and increase government review revenue plus attendant job creation.


10.Improve the fiscals and policy for Frontier Acreages to

accelerate petroleum exploration and production in the Hinterland of Nigeria.

11.Restrict the power of the President to grant a licence or

lease under this Act only on the grounds of overriding national interest Subject to Senate Approval

12.A higher degree of certainty should be introduced in the PIB

for the fiscal regime for Royalties, Rents and Fees by stating in very clear terms the applicable volume, value and monetary thresholds and limits.

13.The sections on institutions be streamlined to reduce the

volume of the PIB by eliminating undue repetition of sections common to all institutions in the PIB.


Overview of Nigeria Gas Sector

• Gas reserves:183.5 Tct (600tcf potential)

• Produces:8.0 bcf/d (Export: 3.05 bcf/d) Reinj:2.9bcf/d

• Demand : 4 bcf/day (2013) .Flares 0.75bcf/d (AG)

• 2.7bcf/d Power Demand (DGSO: 1.3bcf/d)

• Domestic and Regional Market Undeveloped.

• Govt. fix prices & Control Market /DGSO

• Production(2016): 8.24 bcf/d: DGSO (3 Bcf/d).

• <$1-$2 per mcf till June 2014

• $2.5/mcf + ç80 for transport (June 2014)

• Export parity(2015)


OIL vs. GAS REVENUE STREAM PROJECTION

PARAMETERS OIL GAS

Reserves 36 billion barrels 180.5 trillion cubic feet

Postulated Reserves (in 2020)*

40 billion barrels 600 trillion cubic feet

Economics (Current) 36 billion barrels x 60 USD/barrel = USD 2.16Billion

180.5 trillion cubic feet x 2.5 USD/cf = USD 451.3Trillion

Economics (If Fiscals and Legal Framework for Gas is improved)

36 billion barrels x 100 USD/barrel = USD 3.6B

180.5 trillion cubic feet x 3.5 USD/cf = USD631.6Trillion

NIGERIA LOCKS IN GAS DEVELOPMENT FOR

ELECTRICITY GENERATION. 40,000MW <$80BILLION. *Source: BP Statistical Review of World Energy June 2012 Presentation on PIB to Transition Committee 18

OVERVIEW: GROWING MARKET FOR NATURAL GAS

OK & Brass LNG due since April 2010. EGTL Budget overrun from $1.7b ->$6.ob due since 2009. NLNG Asset :$9.0b & netted $10.0b in 2011. Govt take is unclear

Stalled

ready


STATE OF GAS INFRASTRUCTURE


OVERVIEW: AVAILABLE DOMESTIC MARKET FOR GAS


COMPARISON OF NIGERIAN AND GLOBAL FISCAL TERMS - GAS Nigeria capped gas prices and has the lowest gas price <$ 1/mcf $1/mcf was implemented in June 2012 . Nigeria’s Gas Master Plan expects a transition in gas prices, starting with an increase in the minimum gas price to US$1/mcf by 2012. Suppliers have reported payment recovery difficulties at above rate.


Lack of Effective Legal and Fiscal Regime

Fiscal and Legal Framework-Unclear.

Low Investment in The Gas Sector

Huge Loss of Revenue.

Inefficiency, Subsidies and Price Capping.

Lack of Effective Institutions and Programmes

Low Exploration Activities

Dearth of Pipeline and Transportation Architecture

Inadequate Gas Processing and Storage Facilities

GMP & PIB Deficient in two respects:

I. Disincentive: Low Private Sector Investment in

Infrastructure & Market Delivery Systems

II. Gas :Foreign Markets, Domestic Market Undersupplied.

ISSUES & CHALLENGES IN THE GAS SECTOR


Stunted Economy Growth –Industry, Agric, etc

Continuous Gas Flaring

Gas-fertilizer, power, cooking fuels.

Power consumption per capita <40 watts

<15% of the world average.

Nig. farmers use, on average, 10 kg of fertilizer

per ha. ( 5% of the recommended usage).

80,000 die each year from indoor air pollution.

Loss of Biodiversity & huge contribution to green

house gas emissions, global warming, and

climate change.

CONSEQUENCES OF LACK OF ACTION


GOVT. RESPONSE STRATEGY & MECHANISMS

Downstream Gas Bill 2005

National Gas Master Plan 2008

National Domestic Gas Supply and Pricing Regulations 2008

National domestic Gas Supply and Pricing Policy 2008

National Infrastructure Blueprint

Gas Flaring (Prohibition and Punishment) Bill 2009

Petroleum Industry Bill 2008, Inter-Agency Memorandum 2009

Petroleum Industry Bill 2012


(RESPONSE MECHANISM cont,,,)THE GAS MASTER-PLAN

Feb 2008

Jan 2011

Jan 2013

Jan 2014


Relevant Objectives to the Gas sector (Section 1):

• Create a conducive business environment for petroleum operations

• Establish a progressive investor friendly fiscal framework

• Utilize petroleum resources to stimulate economic development

• Optimize domestic Gas supplies (power generation and

Industrial development

• Establish commercially oriented and profit driven oil and gas

entities

• Deregulate and liberalize the downstream sector

• Promote transparency and openness

• Protect health, safety and environment

GAS SECTOR IN PETROLEUM INDUSTRY BILL 2012


PIB :DGSO CAPPING OF GAS PRICES

Proposed Government’s Role in GMP


Table 3: GDP Growth in Selected Sectors : 2011 – 2013 (New Estimates)

A Comparison of Newly Re-Based and Older GDP Estimates by World Bank 2014

2011 2012 2013

Total 5.3 4.2 5.5

Non-Oil GDP 5.8 5.8 8.4

Agriculture 2.9 6.7 2.9

Crude Oil and Gas 2.3 -4.9 -13.1

Manufacturing 17.8 13.5 21.8

Including food, beverages, tobacco 7.3 6.6 11.8

Electricity, Gas, and Utilities 39.5 14.6 14.6

Construction 15.7 9.4 14.2

Trade 7.2 2.2 6.6

Transportation 6.0 -3.4 3.8

Telecommunication and Info services 1.2 3.7 4.7

Entertainment, Broadcasting, Movies, Music

10.5 1.9 24.1

Real Estate 0.4 5.6 12.0

RESPONSE MECHANISM: RECOMMENDED

IMPROVE & DEPLOY PIB:

Effective Legal and Fiscal Regime

Effective Institutions and Programmes

Leading To

Huge Investments & Capital Inflow

Gas Infrastructure & Market

WAY FORWARD :IMPROVE & DEPLOY PIB

Ensure Decontrol and Deregulate--graduated Less Tariffs and licensing Incentives for investments in infrastructure: import

duties/tax waivers, insurance, guarantees, Downstream Operations -Develop Commercial, Open

Market Efficiencies. Contractual Agreements- Supply and Sales Agreements Gas sector – Create Competitive Environment Transmission and Distribution Separate from power sector inefficiencies

Deregulated Gas prices & Remove caps

Appropriate funds for Power Utilities /Provide Subsidies Delete Gas Aggregator & Review DGSO Regime Inclusive Long Term Gas Development Plan

PRICING REGIME RECOMMENDED

Suggested Government’s Role in GMP


CONCLUSION AND NEXT STEPS Nigeria is a Gas Country with Little Oil. Capital Flight & Low Investment in the Gas Sector Unable to Unlock $451.3 Gas Revenue Stream Inappropriate & Unclear Fiscal & Legal Framework & GMP prog. Tie Power and Gas Strategy & Impede Gas Devt. Increasing Govt. TAKE & Diminish Investments( Poor Fiscals) REVISE,IMPROVE & ROLE OUT PIB Deregulate the Petroleum Sector Maximize returns for Private Sector through Incentives & Fiscals Increase Development value of Gas, THRU Processed and Local

Marketing

Deregulate Power Sector and Separate from Gas Economics Delicense the Gas Sector & Stop Fixing Prices. Create Incentives to unlock potential of gas and Hinterland

Acreages Ensure supply of gas to strategic sectors & Create attractive terms for

both supply and demand. Consider the balance between the domestic rate of gas and the rate

sold to power producers as a Tax Write Off For Gas Producers


PIB CAN BE PRESENTED TO NASS BY THE BUHARI ADMIN IN

90 DAYS

Thank You Presentation on PIB to Transition Committee 34

Table 2: Sectoral shares in Nigeria GDP: 2012

A Comparison of Newly Re-Based and Older GDP Estimates

New Old

Agriculture 22.1 33.1

Crude Oil and Gas 15.8 37

Trade 16.5 15.5

Manufacturing 7.4 1.9

Of which food and tobacco 4.4 -

Construction 3.1 1.3

Transportation 1.3 1.6

Telecommunications 8.3 0.8

Electricity and Gas 0.5 0.2

Finance and Insurance 2.8 1.6

Real Estate 7.7 4.5

Entertainment, Broadcasting, Motion pictures, music

2.0 -

Public Administration 3.1 -

Prof., Scientific, and tech. services 3.7 -

Other 5.7 2.5

Table 3: GDP Growth in Selected Sectors : 2011 – 2013 (New Estimates)

A Comparison of Newly Re-Based and Older GDP Estimates by World Bank 2014

2011 2012 2013

Total 5.3 4.2 5.5

Non-Oil GDP 5.8 5.8 8.4

Agriculture 2.9 6.7 2.9

Crude Oil and Gas 2.3 -4.9 -13.1

Manufacturing 17.8 13.5 21.8

Including food, beverages, tobacco 7.3 6.6 11.8

Electricity, Gas, and Utilities 39.5 14.6 14.6

Construction 15.7 9.4 14.2

Trade 7.2 2.2 6.6

Transportation 6.0 -3.4 3.8

Telecommunication and Info services 1.2 3.7 4.7

Entertainment, Broadcasting, Movies, Music

10.5 1.9 24.1

Real Estate 0.4 5.6 12.0

Current Power Generation-Gas Supply Details

Average Daily Generation in early September 2013 3,233MW/d.

Egbin PHCN: 4 of 6 turbines in operation. Average generation ~544MW/d. Gas constraints.

Ughelli PHCN: 4 of 18 turbines in operation. Average generation ~191MW/d. Gas constraints.

Olorunsogo PHCN: 2 of 5 available turbines in operation due to low gas pressure. Average generation ~40MW/d.

Olorunsogo NIPP: 1 of 4 available turbines. Low gas pressure. Average generation ~110MW/d.

Omotosho PHCN: 2 of 8 turbines in operation. Average generation ~ 51MW/d.

Current Power Generation-Gas Supply Details

Omotosho NIPP: 1 of 4 turbines in operation. Average generation ~110MW/d due to gas supply constraints.

Sapele PHCN: 1 of 3 functioning turbine in operation due to turbine faults. Average generation ~34MW/d

Sapele NIPP: 1of 3 available turbine in operation. Average generation ~93MW/d.

Geregu PHCN: 1 of 2 available turbine in operation. Average generation ~ 113MW/d.

Geregu NIPP: 1 of 3 available turbines in operation due to gas supply constraint. Average generation ~ 118MW/d.

Ihovbor NIPP: 1 of 2 available turbines in operation. Average generation ~116MW/d

Ongoing Gas Projects Oben/Sapele Expansion

-Seplat/NPDC To Increase 130MMscf/d To 250MMScf/d By 2015

“We have no gas for any company other than the contracts we have signed”

Uquo Scalability

100MMscf/d Plant by Frontier/SevenEnergy, scalable to 200MMscf/d. Contracts in hand: 173MMscf/d

Utorogu Expansion? 300MMscf/d, 450MMscf/d

Escravos Gas Projects (EGP Series: 300MMscf/d, to what?). Not clear if Chevron will take FID on Agura IPP

Obite(TOTAL) Qua Iboe(ExxonMobil)-2018?

Shell Eastern Cluster, including Assa North/Ohaji South- 2020?

Shell leaves “pure oil play”, to big domestic player?

JV Gas – Overview of main fiscal terms

Existing PIB Gazetted PIB Probable Rate

PPT/NHT 30% 45% 50%

CIT 0% 0% 30%

Dividend Tax 10% 10% 10%

Royalties 5 – 7% Royalty schedules omitted

5-7 (5 years exemption)

Funding levy 0 2% -

Tax deductibility of cost (not allowable)

None, all expenses incurred wholly, exclusively and necessarily for petroleum operations are deductable

Non-BVA cost 80 % of non – Nigerian costs

80% of Non-Nigeria overhead cost

Investment incentives

PIA & cost consolidation PIA Unknown Uncapped gas allowance & tax consolidated.

Basis for tax & royalty

Volumes lifted and sold / Actual sales prices

Production Netback value

Depreciation When capex is incurred When capex is incurred

Documents

Presentation on Petroleum Industry Bill to Nigeria Transition Committee May 13 2015