The signing of the Petroleum Industry, PIA, Act in 2021 by late former President, Mohammadu Buhari, seemed to have positively changed the nation’s Oil and Gas sector for good. Perhaps, the joy was to be short-lived. However, before going further, perhaps the new Executive Order issued by the President and Commander-in-Chief of the Armed Forces of Nigeria, President Bola Ahmed Tinubu, needs some clarifications. And that clarification has to do with some misinformation being conveyed to the Nigerian public by the Order and those who ‘convinced’ the President to tow that line.

The Executive Order is clearly sending a very wrong signal to the investing community. It is a discouraging factor for investment in the deep-water frontiers of the Nigerian Oil and Gas industry. What we are saying clearly to the international community is that we can use Executive Orders to change any aspect of our laws without even any notice. The long absence of a governing law for the oil industry is the major reason why investment in our deep-water frontiers shrank. Things have begun to change since the PIA was promulgated in 2021. But this singular act of using an Executive Order to change the provisions of the law is clear signal to the investing public that Nigeria is unsafe for deep-water investment.

Nigeria is not a lawless nation. So, it is hard to believe that governance at the highest level can be reduced to such an executive convenience. An Executive Order is not a weapon to repeal, suspend or override laws duly passed by the National Assembly. That path undermines constitutional democracy and weakens institutional integrity. If a law requires amendment, the proper route is through legislative review; not executive overreach. The rule of law is not optional; it is the backbone of our republic.

Without mincing words, the Executive Order 9 will impact negatively on the lives of ordinary Nigerians in a number of ways. First, it will hamper NNPC’s ability to carry out its energy security mandate as a national oil company, as enshrined in the PIA. This includes servicing domestic product demand in case of shortages and being the energy provider of the last resort. Secondly, the EO9 will affect the ability of NNPC to assume obligations and liabilities for government, especially in situations where Royalty and Tax oil barrels are used by Government to access loans from international lenders. In this case NNPC usually assumes the role of sponsor/borrower on behalf of government. Thirdly, the EO9 may render the administration of existing PSC Gas Development Agreements (GDAs), Gas Sales and Purchase Agreements (GSPAs) and other auxiliary agreements ineffective. This will have a direct negative impact on our power sector and national revenue derived from gas sales.Largely, the spread of wrong information orchestrated by this order may threaten oil industry stability, investor confidence, and badly affect investment and development of Nigeria.

So, we set out to clarify the following:

Direct remittance of Royalty and Taxes from Production Sharing Contract (PSC) to FAAC

The Executive Order directs that Royalty and Taxes from PSC should be paid directly to FAAC. The truth is that Royalty and Taxes from the PSCs are already being remitted directly to FAAC. This is already the existing practice. One point to note is that Royalty and Taxes from the PSCs are lifted as barrels of oil. They are NEVER in raw cash. Nigerians should note that the underlying Commercial Contracts governing the PSCs are designed in such a way that Royalties and Taxes are lifted as barrels of oil by the Concessionaire. NNPC Limited is designated as the concessionaire in the governing agreements, as well as in the PIA. The way the Oil and Gas industry works, NNPC Limited as the Concessionaire has the responsibility to lift and commercialize (sell) these barrels. On monthly basis, NNPC Limited remits all value realized from sales of Royalty and Tax barrels to the FAAC. Another clarification that Nigerians need to know is that Government had borrowed money from international lenders and pledged these barrels from PSC Royalty and Tax for the repayment of interest and principal. These loans were contracted with NNPC Limited as the sponsor/borrower on behalf of the Government. So, what NNPC Limited does on monthly basis is to settle the lenders from the value realized from the PSC Royalty and tax liftings and then remit the balance to the FAAC. Sometimes, the value from Royalty and Taxes cannot cover the amount needed to settle lenders in a given month. In this circumstance, often times, NNPC Limited goes to their own share of Profit Oil (the Management Fee) to settle this obligation.

30% PSC Profit Oil/Gas given to NNPC as Management Fee by Section 64 of the PIA

Under the current PIA framework (Section 64), NNPC Limited does NOT retain 30% of the Federation’s oil revenues as is being WRONGLY ‘propagandised’. 30% of Profit Oil/Gas is not the same as 30% of the Federation’s oil revenues derived from Production Sharing Contracts.

To clarify, 30% of Profit Oil/Gas is the residual value left after:

– ROYALTY has been deducted and paid to the Government,

– COST (CAPEX and OPEX) of production has been deducted by operating companies (usually IOCs). This is to recover the cost of development and production which the operating companies have borne. It is good to note that the operating companies bears 100% of the cost of development and production.

– TAXES have been deducted and paid to the Government. The tax rate is 50% for most PSCs in Nigeria.

To arrive at what the oil industry call profit oil, you must deduct Royalty, Cost, and Tax. These are the three major fiscal sharing metrics in a PSC. These three take about 90% of the gross PSC revenue. The remaining 10% is the Profit Oil. The Concessionaire share of PSC Profit oil is about 35% of the 10%. In line with section 64 of the PIA, the Management fee which NNPC takes is only 30% of (35% of 10% of gross revenue). This will give you about 1.05% of the gross PSC revenue. It is wrong and mischievous to give the Nigerian masses the impression that NNPC Limited is taking 30% of PSC revenue. Clearly, 30% of the PSC Profit Oil translates to about 1.05% of the PSC revenue.

Perhaps, it is good to explain the role of NNPC in the management of the PSCs in the Nigerian oil and gas industry. NNPC has no fewer than 500 staff who are dedicated to PSC lines of activity and whose daily engagements are focused on operating the PSCs. These are professionals working on the rigs, production platforms, maintenance operations, seismic operations, crude oil trading, planning and budget administration, and cost monitoring and reviewing process. These are trained personnel who work across 39 PSC blocks in Nigeria, out of which 14 blocks are currently producing. It is the activities of these professionals that make profit oil possible. On daily basis, they work with the Operating companies from conception of oil and gas project to development and to production. All they do is to ensure that the operations are profitable and value adding to Nigeria. Suffice it to say that this is the role that NNPC needs to play as the national oil company. Stripping the NNPC of the Management fee could affect their viability as a company and negatively impact their ability to fund critical aspects of Oil and Gas development in Nigeria.

Selective Enforcement of 162(1) of the 1999 Constitution.

It’s understandable that pronouncement of EO9 is hinged on the doctrine of gross remittance of all revenue to the federation account, a doctrine established by Section 162(1) of the 1999 Constitution (as amended). That is to say no “at source” deduction. However, we are also aware that there are many other “at source” deductions which the government has approved. Let’s check some of these “at source” deductions:

The Federal Inland Revenue Service, FIRS, does what is called Cost of Collection and the legal basis for that is the FIRS Establishment Act and the agency takes FOUR PER CENT of all non-oil taxes they collect. In the same vain, the Custom Services takes SEVEN PER CENT of all duties. The Deepwater Tax stands at $3 per barrel reduction on production sharing cost, PSC. The legal basis for this is the Tax Incentive Order of 2024. The Non-Associated Gas, NAG, Tax Credits, which gets its legal basis from the Tax Incentives Order 2024, has an impact of $1 per mscf. The Dispute Settlement Agreement has its legal basis within various dispute settlement agreements and these cover recovery of billion-dollar legacy debts which are deducted directly from NNPC profit oil.

As can be seen from the table above, the question is why the Executive Order did not stop all “at source” deductions? As the purveyors of EO9 claim, the Executive Order was meant to “restore the Constitution” by stopping all “at source” deductions. But the same government is allowing billions to go out through other “at source” deduction mechanisms. If you claim that those are the cost of operation for those agencies, then why do government think that NNPC should not recover their cost of operations for managing the PSC on behalf of the Federation. Government should quickly roll out executive order 10 to stop these deductions.

Finally, looking at the issues raised in this thesis, it is advisable that Federal Government should look at section 44(3) of the 1999 Constitution of Nigeria, which states that “notwithstanding the foregoing provisions of this section, the entire property in and control of all minerals, mineral oils and natural gas in, under or upon any land in Nigeria or in, under or upon the territorial waters and the Exclusive Economic Zone of Nigeria shall vest in the Government of the Federation and shall be managed in such manner as may be prescribed by the National Assembly”.

The PIA is a creation of the National Assembly that prescribes how the oil and gas industry in Nigeria should be managed. It is absolutely wrong to overlook this fact and use a mere executive fiat to amend an Act of parliament. Nigeria is not a banana republic.

Credit: thisdaylive.com