The Nigerian federation is earning less revenue from the petroleum sector due to lopsidedness in certain provisions of the Petroleum Industry Act (PIA), 2021.
A think tank, Agora Policy, in a detailed report obtained by The Nation, called for amendment of the PIA to address incongruous provisions that reduce revenue accruable to the federating units, contrary to the key objective of the PIA.
In a report anchored by Professor Babajide Fowowe, a Professor of Economics and Fellow at Agora Policy, the think-tank concluded that the implementation of the PIA has given the Nigerian National Petroleum Company Limited (NNPCL) a larger share of oil and gas revenue at the expense of the federation.
According to the report, with the current state of the PIA, the federation is not deriving maximum benefits from the petroleum sector.
“The implementation of Nigeria’s landmark petroleum law has translated to an odd situation: NNPCL is better off in terms of revenues while the federation is significantly worse off. This needs to be urgently addressed,” the report stated.
The report identified two areas of the PIA that need to be revisited to increase federation revenue to include the interpretation of Sub-section 54 (1) which led to NNPCL acquiring Federation Joint Venture (JV) assets and the interpretation of sub-sections 9 (4) and 64 (c) which led to NNPCL withholding 30 per cent from profit oil and gas for management fee, and 30 per cent from profit oil and gas for frontier exploration fund.
The report called for a return of JV assets to the federation while reducing production sharing contracts (PSC) management fee for NNPCL from 30 per cent to between 4.0 per cent and 7.0 per cent, in line with the collection fees of other revenue-generating agencies.
“President Tinubu (Bola Ahmed Tinubu) should revisit the huge capital expenditure on frontier basins exploration, and decide if explorations in the frontier basins are a priority for the country at the moment,” the report stated.
Agora Policy highlighted the need to amend, revise, or completely overhaul all laws relating to the Frontier Exploration Fund including Sub-sections 64 (c) 9 (4) of the PIA, Frontier Exploration Fund Administration Regulations 2022 and Frontier Basins Exploration Administration Regulations 2023.
“Our central argument is that the PIA should enhance maximum financial benefits to the federation. After two years of implementation of the law, evidence suggests that the federation is not deriving maximum benefits from its petroleum assets. Thus, it is essential that relevant sections of the PIA be re-examined and appropriate revisions made to channel more petroleum revenue to the federation. Only then can the government realise the extra revenue urgently needed for critical expenditure needs,” Fowowe stated.
For context, in 2021, the last full year before the implementation of the PIA, the federation received $10.65 billion from sales of JV crude oil and $1.252 billion from sales of JV equity gas and feedstock, amounting to a total revenue of $11.902 billion from crude oil and gas sales from JV assets. By contrast, in 2023, the first full year of the PIA implementation, the federation received $399,000 from sales of JV crude oil, $701.287 million from sales of JV equity gas, and $1.13 billion as dividends from NNPCL, a total revenue figure of $1.833 billion.
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The federation had 23 revenue streams from the petroleum sector before the implementation of the PIA in 2021. In 2021, the NNPC accounted for eight revenue streams, which fetched $10.284 billion, or 44.63 per cent of total federation petroleum revenue of $23.046 billion. Thus, NNPCL accounted for the largest proportion of petroleum revenue inflows to the federation before the PIA.
“This has changed drastically after the PIA. Despite the increase in total number of revenue streams to 30, NNPCL’s contribution has reduced from eight to three streams. In 2023, NNPCL’s three revenue streams brought in $5.01 billion, or 16.23 per cent of total federation petroleum revenue of $30.862 billion. It is important to note that the reduction in revenue from NNPCL is as a result of NNPCL retaining most of the petroleum revenue, rather than lower gross petroleum revenue,” Fowowe stated.
He noted that the situations arising from the implementation of the PIA have affected government revenue from both JVs and PSCs, and have, on one hand, reduced government revenue from the petroleum sector, while on the other hand, increased revenue to the NNPCL.
According to the report, in specific terms, the revenue streams affected included crude oil and gas sales through the NNPCL. In 2021, before the PIA, the total value of the federation’s entitlement from crude oil sales through NNPCL was $11.308 billion, or 74.43 per cent of the total sales value of $15.192 billion. In 2023, after the PIA, the total value of the federation’s entitlement from crude oil sales through the NNPCL was $2.328 billion, or 14.14 per cent of the total sales value of $16.467 billion.
Following the implementation of the PIA, in 2023, the largest entitlement of crude oil sales of $11.348 billion or 68.91 per cent went to NNPCL. Thus, despite the fact that the value of crude oil sold by NNPCL in 2023 at $16.467 billion was 8.39 per cent higher than the value of crude oil sold in 2021 at $15.192 billion, the federation’s entitlement in 2023 of $2.328 billion represented a decrease of 79 per cent from its $11.308 billion entitlement in 2021.
The report also highlighted that where the case is made of NNPCL as asset manager for the government, the dividends being paid by NNPCL are grossly inferior to the revenue generated by the assets.
“In 2023, NNPCL paid dividends totalling $1.13 billion. It is not clear how the amount for these dividends was arrived at. In addition, these dividends are tiny when compared to revenue previously accruing to the federation from the totality of the JV assets. 45 JV assets are in production. Production from the JV assets is quite substantial, with the federation’s share averaging about 180 million barrels per year between 2017 and 2019. Even though production subsequently fell, the federation’s share of JV production was still high at 158 million barrels in 2020 and averaged about 130 million barrels in 2021 and 2022, before rising to about 150 million barrels in 2023. Federation’s share of JV gas production is also substantial. For each year between 2018 and 2020, the federation was entitled to about 1.2 billion standard cubic feet. While the federation’s share fell to about 0.86 billion standard cubic feet in 2021, it increased above 0.9 billion standard cubic feet in 2022 and 2023.
“With the high production of crude oil and gas from the JV assets, it follows that revenue from them will also be high. After the PIA, federation revenue from JVs have fallen drastically. In 2021, federation financial receipts from JV crude oil and gas sales were $11.902 billion. After the PIA in 2023, federation financial receipts from JV crude oil and gas sales were $1.833 billion. This drastic fall in federation revenue from JV assets indicates that this arrangement where NNPCL takes ownership of the JV assets is not beneficial to the federation, and should be revisited,” the report stated.
Agora Policy pointed out that the fall in federation financial receipts from JV assets was not as a result of the oft-touted drop in oil production, or shift in production from JVs to PSCs, but rather the lopsidedness of certain interpretations and provisions.
For context, total oil production from JVs increased from 225.2 million barrels in 2021 to 257 million barrels in 2023. In addition, oil prices increased from a yearly average of $69.89 per barrel in 2021 to a yearly average of $82.95 per barrel in 2023. After accounting for the sharing of crude oil between the federation and oil companies, it would be expected that total revenue from JVs would have increased between 2021 and 2023. The drastic fall in federation financial receipts from JVs cannot thus be explained by lower crude oil production from JVs.
Also, for the 10-year period between 2014 and 2023, oil production from PSCs surpassed JVs in only three years- 2016, 2019, 2021). However, oil production from JVs were higher than from PSCs in seven years. Of particular note was that in 2021, oil production was 225.2 million barrels from JVs and 242.9 million barrels from PSCs; however, in 2023, JV production was 257 million barrels and PSC production was 207.2 million barrels. Thus, JV production was higher than PSC production in 2023, and the drastic fall in federation financial receipts can also not be explained by lower JV production compared to PSCs.