FG, states, LGs lose $billions in revenue as NNPCL captures PIA

• Policy think-tank seeks urgent review of Act
• PIA’s implementation working against federation
• Revenue drops from $12bn to $1.8bn in 2 yrs
• NNPCL interpret PIA to own advantage

PHILLIP ISAKPA

A major lacuna in the implementation of Nigeria’s three-years-old Petroleum Industry Act (PIA) signed into law by former President Muhammadu Buhari in August 2021 and touted as a cure of the ills of the country’s oil and gas industry, has been found to be shortchanging federal, states and local governments, otherwise known as the federation, of the all-important revenue the law was envisaged to help increase.

The policy think-tank, Agora Policy, in a new policy note it is releasing today, discovered huge drops in revenue accrual to the federation following an extensive review of data and insights and submitted that an urgent review of the 3-year-old PIA has become necessary as major implementation flaws have led to more revenues being retained by the NNPCL to the disadvantage of Nigeria’s federating units. 

The policy note, authored by Babajide Fowowe, a professor of economics and a senior fellow with Agora Policy, observed that “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.”

According to the Agora Policy note, the PIA was hailed both nationally and internationally as the missing link and a panacea for stemming Nigeria’s apparent manifestations of the natural resource curse, which, in principle would attract investment into the petroleum sector, enhance regulatory and business framework, and increase revenue accruing to the federation.

“In reality, however, none of these aims have been achieved. For revenue, the Federation has not received more revenue, as petroleum revenue to the Federation has fallen drastically after implementation of the PIA, and this is not due to just fall in oil production or prices,” the policy paper stated.

Agora said there was a need to address the issue of revenue, noting that “after two years of implementing the PIA, evidence shows that the Federation has received significantly lower revenues from the petroleum sector, compared to the period before the law.”

The policy paper focused on the interpretation of two aspects of the PIA where implementation has increased the share of petroleum revenue withheld by the NNPCL, thereby reducing the petroleum revenue accruing to the Federation.

The Agora Policy paper explained thus: “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. This is a drastic revenue reduction which clearly shows that the Federation has not materially benefited from the new arrangement with its JV assets after the PIA.”

Explaining the issue of revenue further, Agora stated that with the implementation of the PIA, NNPCL has been deducting 60 percent of profit in oil and gas from Production Sharing Contracts (PSCs), noting that NNPCL’s interpretation of subsections 9 (4) and 64 (c) of the PIA has resulted in the company deducting 30 percent for management fee, and an additional 30 percent for the frontier exploration fund, while the Federation gets the balance of 40 percent. 

“Again, similar to JV dividends, there were many months when the NNPCL did not remit the 40% balance. It is also questionable why the owner of an asset, the Federation, will receive only 40% of the profits from such assets, and even sometimes receive nothing,” the  Agora paper wondered. 

It also drew attention to the fact that the federation had 23 revenue streams from the petroleum sector before the implementation of the PIA in 2021, adding that in same 2021, the NNPC accounted for eight revenue streams, which fetched $10.284 billion, or 44.63 percent of total Federation petroleum revenue of $23.046 billion. 

NNPC accounted for the largest proportion of petroleum revenue inflows to the Federation before the PIA, it noted, but that this has changed drastically after the PIA. 

“Despite the increase in total number of revenue streams to 30, NNPCL’s contribution has [been] reduced from eight to three streams. In 2023, NNPCL’s three revenue streams brought in $5.01 billion, or 16.23% 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,” the paper stated.

The reality for the federation, Agora Policy noted, is that it has received less oil and gas revenue after the PIA, adding that the two situations it has highlighted arising from the implementation of the PIA have affected government revenue from both JVs and PSCs.

According to the Policy Note, these situations have, on one hand, reduced government revenue from the petroleum sector, while on the other hand, increased revenue to the NNPCL. 

“Specifically, the revenue streams affected are 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 NNPC was $11.308 billion, or 74.43% 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% 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 (68.91%) went to NNPCL. Thus, despite the fact that the value of crude oil sold by NNPCL in 2023 ($16.467 billion) was 8.39% higher than the value of crude oil sold in 2021 ($15.192 billion), the Federation’s entitlement in 2023 ($2.328 billion) fell by 79% from its entitlement in 2021 ($11.308 billion),” Agora Policy wrote.

It also noticed that upon the implementation of the PIA and the change from NNPC to NNPCL, the national oil company took over ownership of Federation JV assets, adding that this was based on the interpretation of sub-section 54 (1) of the PIA.

“This interpretation of the PIA suggests that because the Joint Operating Agreements (JV partnerships) were signed between NNPC and IOCs, then, NNPC owned the assets. Two years after taking ownership of these assets, NNPCL has been left better off, while the Federation has been left worse off, as revenue from JV assets to the Federation has plummeted. Considering that a key objective of the PIA was to increase the fiscal position of the Federation, it is clear that implementation of this aspect of the PIA has not achieved this key objective. There are a number of reasons why this transfer of JV assets to NNPCL needs to be revisited,” it stated.

Providing the reasons, the Agora Policy note stated that the petroleum assets belong to the federation by virtue of Section 44 (3) of the 1999 Constitution and Section 1 of the Petroleum Act 1969, adding that essentially, the NNPCL is merely acting as an operational agent on behalf of the Federation.

Agora Policy equally noted that, it could be argued that NNPCL is managing the assets for the Federation, hence the payment of dividends, adding that this is in line with sub-sections 53 (7) and 63 (1) (r) of the PIA.

“However, the dividends paid by NNPCL are grossly inferior to the revenue generated by these 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,” the Agora Policy, the author noted.

The Policy Note also stated that with the high production of crude oil and gas from the JV assets, it should follow that revenue from them will also be high. But after the PIA, Federation revenue from JVs have fallen drastically, it further stated. 

According to the policy note, the drop in federation financial receipts from JV assets that is often attributed to drop in oil production, or shift in production from JVs to PSCs is not correct. In a detailed analysis, Agora Policy stated:

“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;

“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 was higher than from PSCs in seven years. Of particular note is 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.”

On the argument that NNPCL acquiring the JV assets and managing them would ensure enhanced revenue from the efficiencies of a private company, it stated that this has not been the case, adding that the Federation is not deriving maximum benefits from the company, unlike other revenue-collecting agencies. 

“Despite NNPCL’s transformation through the PIA to a limited liability company, standard corporate governance dictates that any company must provide maximum benefits to its shareholders. This would be in line with subsection 53 (7) of the PIA,” it stated. 

But this has not been the case, said Agora, explaining that the NNPCL has consistently remitted lower amounts to the Federation than other revenue collecting agencies. In the 25 months from June 2022 to June 2024, NNPCL did not actually deposit any funds into the Federation in 13 months, adding that when it finally started remitting funds to the Federation, its remittances constituted only a small fraction of total inflows into the CBN. 

“Between October 2023 and June 2024, NNPCL’s payments into CBN never exceeded 14% of total payments by revenue agencies. In May and June 2024, NNPCL contributed less than 1% to total payments by revenue agencies. Considering NNPCL’s remittances to the Federation has been grossly inferior to remittances by other revenue collection agencies, there can be no justification for the transfer of Federation JV assets to NNPCL and the subsequent loss of Federation revenue, which now accrues to NNPCL,” it added.

The paper noted that evidence shows that contrary to a key objective of the PIA, the Federation has received lower revenue from the petroleum sector and that this is attributable to the implementation of the PIA “where interpretation of certain sections of the Act have given the NNPCL a larger share of oil and gas revenue at the expense of the Federation. Thus, post-PIA, the Federation is not deriving maximum benefits from the petroleum sector,” it concluded.

In the light of its findings, the Agora policy note recommended the revisiting of two areas of the PIA in order to increase revenues to the federation. These are:

• The interpretation of sub-section 54 (1) which led to NNPCL acquiring Federation JV assets;
• The interpretation of sub-sections 9 (4) and 64 (c) which led to NNPCL withholding 30 percent from profit oil and gas for management fee, and 30 percent from profit oil and gas for frontier exploration fund.

In order to address the issues raised by these two areas, the policy think-tank recommended the following:

Revisit the Transfer of JV assets to the NNPCL: it is clear that the Federation is not getting maximum benefits from the post-PIA arrangement where JV assets are deemed owned by NNPCL. Sub-section 54 (1) of the PIA should be revisited to ensure the JV assets are returned to the Federation;

Reduce the PSC management fee for NNPCL from 30% to between 4% and 7%: in line with the collection fees of other revenue-generating agencies, sub-section 64 (c) of the PIA should be revisited to reduce the management or collection fee of NNPCL from PSCs from 30% to between 4% and 7%;

Revisit the Need for Committing Huge Resources to Frontier Basins Exploration: President Tinubu, in his role as the Minister of Petroleum Resources, 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;

Revisit sub-sections 64 (c) 9 (4) of the PIA, Frontier Exploration Fund Administration Regulations 2022, the Frontier Basins Exploration Administration Regulations 2023: following from the last recommendation, there will be the need to amend, revise, or completely overhaul these laws relating to the Frontier Exploration Fund;

Revisit the private or public status of NNPCL: there is the argument that an entity such as the NNPCL that manages Federation’s assets should be subject to appropriate oversight by relevant Federation entities. Converting NNPCL to a private company has created confusion at FAAC where oversight of NNPCL has become extremely difficult. NNPC had a history of opaqueness and secrecy, which has only been compounded by the change to a private company, and the illusion that NNPCL is not answerable to questions about its operations.