Does the Petroleum Industry Bill give import licensing advantage to the Dangote Refinery and NNPC?

For the past 21 years, there have been various attempts to reform Nigeria’s oil and gas industry. As a matter of fact, the country hasn’t been able to translate its oil wealth into sufficient national development. This can be attributed to many reasons, including poor governance, weak sector regulation, and inefficiencies in operations in the oil sector.

However, none of these attempts has yielded any tangible result until the introduction of the Petroleum Industry Bill (PIB) in 2020. The PIB started as an omnibus bill and was later divided into 4 separate bills before emerging in 2020 as a consolidated bill.

The first Executive Bill on the PIB was sent to the sixth National Assembly in 2008 by the late President Umar Yar’Adua’s administration. However, the Bill’s passage suffered a hitch due to the disagreement over “10%” as a dedicated fund for the development of Host Communities and sharing of oil profit among the International Oil Companies. During the Goodluck Jonathan administration in July 2012, a revised draft was again presented to the seventh National Assembly, but the House of Representatives only passed it just a few days before the end of the administration.

The PIB was split into four parts — the Petroleum Industry Governance Bill (PIGB), Petroleum Industry Administration Bill (PIAB), Petroleum Industry Fiscal Bill (PIFB), and Petroleum Host and Impacted Community Development Bill. The eighth National Assembly passed the PIGB; however, President Muhammadu Buhari declined the Bill presidential assent.

On September 28 2020, President Muhammadu Buhari presented a consolidated PIB to the National Assembly for consideration, which the National Assembly finally passed. The Bill is now awaiting the presidential assent.

The State of Nigeria Refineries — a sneak-peek

Nigeria relies solely on imported petroleum products to meet its domestic energy needs as its three refineries have remained in a state of disrepair for so many years. Currently, the three refineries have been shut down for almost two years, for rehabilitation. The last time the refineries processed crude oil was in July 2019. This is a result of the obsolete state of the refineries.

With the country’s population expected to grow from 196 million to 410 million people by 2050, Nigeria’s government should expect a significant surge in local demand for petroleum products, including Jet fuels, PMS, DPK, and AGO. In this light, stakeholders must consider what frameworks will be necessary to ensure the country’s local refineries can meet current and future demands.

What has been done so far?

• Public Sector Intervention

NNPC has struggled to keep the poorly-maintained state-owned refineries operating profitably with little or no luck. According to a report in Business Day, the nation may have spent about $25bn on the refineries in the past 25 years. Whereas, in January 2020, the immediate past Group Managing Director of NNPC, late Maikanti Baru allegedly stated that the refineries have not undergone any Turn Around Maintenance for an aggregate of 42 years. In October 2020, NNPC declared that the refineries were damaged beyond the regular Turn Around Maintenance (TAM). In March 2021, the Federal Executive Council (FEC) approved $1.5bn to rehabilitate the Port Harcourt refinery (PHRC).

• Private Sector Intervention

The $19bn Dangote Refinery is an oil refinery owned by the Dangote Group under construction in Lekki, Nigeria. Once completed, it will have the capacity to process about 650,000 barrels of crude oil per day, making it the largest single-train refinery in the world. It is expected that the Dangote refinery will double Nigeria’s refining capacity and help in meeting the increasing demand for domestic fuel while generating foreign exchange through exports.

Recently, NNPC announced its interest to buy a 20% stake in the Dangote refinery for $2.76bn. According to NNPC, the move was in “with a Federal Government policy directive which stipulates the mandatory participation of the Corporation in any privately-owned refinery that exceeds 50,000 barrels per day capacity in keeping with its statutory role of safeguarding national energy security”.

Who gets the Advantage?

The National Assembly has finally passed the Petroleum Industry Bill (PIB). The Petroleum Industry Bill is an omnibus law meant to regulate the entire sphere of the industry and repeal all current existing oil and gas legislation. It is expected to provide a framework for the petroleum Industry’s fiscal, governance, and institutional aspects. The Bill is now awaiting assent by the President.

According to the PIB, only companies with active local refining licenses and proven track records of international crude oil and petroleum products trading will be permitted to import petroleum products into Nigeria. The PIB provides for suppliers and buyers to willingly agree on a price; nevertheless, the Authority will still regulate gas prices.

However, some of the clauses in the Bill will have implications regarding the availability of refined petroleum products in the Nigerian market. Taking into cognisance is Section 317(8)(1–3) of the PIB, which states that;

(1)The Authority shall apply the Backward Integration Policy in the downstream petroleum sector to encourage investment in local refining.

(2) Pursuant to subsection (1) of this section, licence to import any product shortfalls may be assigned only to companies with active local refining licences and proven track records of international crude oil and petroleum products trading.

(3) Import volume to be allocated between participants shall be based on criteria to be set by the Authority taking into account the respective refining output in the preceding quarter, share of active wholesale customers competitive pricing and prudent supply and distribution track records.

This clause will most likely exclude modular refinery license holders from importing refined petroleum products and other oil trading companies. This might make the Dangote refinery which has a 650,000-barrel per day refining capacity, the key license holder that would import any substantial amount of petrol. Subsection (3) already clarifies that import allocation will also be based on actual refining output. This is akin to creating a monopoly market for the importation of petroleum products in the long run if Nigeria faces shortfalls and NNPC refineries do not work.

The effect of this clause could suppress competition in the supply of petroleum products and impact the price of all petroleum products. While this provides an opportunity to encourage local refining of crude oil, petroleum products prices might be stifled and determined by only a few local refiners that can import products into the country.

Recently, the BUA Group announced that its 200,000 barrels per day refinery is expected to be completed by 2025. The liberalisation of the refining industry and provision of flexibility to ensure optimal pricing to the consumer should be the guiding principle of the Bill. The Nigerian government also needs to make up its mind on the deregulation policy of the downstream sector as the current outlook does not suggest that it intends to remove fuel subsidy, an expanding cost that it might not be able to afford as fiscal balances deteriorate.