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Nigeria's oil sector reforms on hold again

President Buhari’s decision to delay passage of a petroleum industry bill won’t help investment sentiment, but shouldn’t affect offshore activity in the near term

Nigeria's latest effort to reform governance of its oil and gas industry seemed to be going unusually well. The Petroleum Industry Governance Bill (PIGB)—the first and possibly most important of four related pieces of legislation—passed through both houses of the legislature earlier this year, raising hopes that the whole bundle could be on the statute books before next February's presidential elections.

All that was needed was presidential assent and there was optimism among the legislation's backers that-whatever its shortcomings-Muhammadu Buhari would see it as better than nothing and give it the nod. Those hopes were dashed, when Buhari declined this week to sign off on the PIGB, demanding further changes.

Assuming he doesn't change his mind, this would seem to remove any chance of implementing the PIGB before the elections, as well as laying it open to further review once the new parliamentary session is under way. This could mean further delays, given that efforts to pass new petroleum industry legislation were mired in political wrangling for most of the previous decade.

According to the Buhari camp, the president baulked at, among other things, the amount of oil revenues being allocated to the industry's new regulator and the continuing role of the country's Petroleum Equalisation Fund, which subsidises elements of domestic petroleum marketing.

"These are legitimate concerns, but are they showstoppers? I think these are things that could be have been addressed sooner, if the will was there," said Gail Anderson, research director at consultancy Wood MacKenzie.

The draft bill's terms allow the Petroleum Regulatory Commission (PRC) to retain up to 10% of the revenues from the industry-a figure Buhari considers too high.

That's perhaps unsurprising, given the oil industry provides around 80% of total government revenues. State-run institutions such as the Nigerian National Petroleum Corporation (NNPC) have consistently been used as cash cows to support other struggling areas of the government—as well as being the focus of corruption allegations.

NNPC's inability to meet funding commitments for projects has been a long-running bugbear for oil companies-one that the new revenue allocation to the revamped bodies running the industry was, in part, intended to address.

There has been much media speculation over recent months that the president was also concerned that the PIGB would unduly reduce his power over the industry—he also acts as oil minister—by giving more control to the independent regulator. Buhari is not a natural delegator, preferring to keep a firm hand on the tiller of state, though Ita Enang, a senator and close presidential aide, has denied that maintaining control was a motivation.

Investment uncertainty

This further hiatus in the protracted process of updating the laws and structures governing the oil and gas industry is hardly likely to encourage new investors to plough money into complex offshore developments in the country.

However, the rising oil price is likely to act as a salve for the small group of incumbent international oil companies that dominate the sector. They have decades of experience working in the country and are well accustomed to the above-ground risks.

In terms of gas projects, they may benefit financially if new industry legislation is stalled, as the planned regulations would remove some fiscal incentives designed to encourage gas developments in the past.

However, there are more serious constraints to growth in gas production, especially domestically, not least because a lack of electricity transmission infrastructure to cater for gas from planned power projects.

"The growth in the domestic gas market has really been constrained, but it's not because the companies can't supply the gas, it's because there are few places for it to go," said Anderson.

Even if industry reforms are introduced, any fiscal changes are unlikely to have a direct impact on them in the short term, given the financial terms for their current production sharing contracts (PSCs) are pretty well entrenched. However, they may feel more trepidation about renewal negotiations for current deepwater licences, several of which expire in the early-to-mid 2020s.

"The government will try to renegotiate the terms of the PSCs when they expire and that's probably the time when the government has the most leverage over the IOCs," said Anderson.

Offshore activity

In the meantime, there are signs that a modest uptick in offshore activity could be on the way. Total may expand the scope of its Egina deepwater project, whose floating production storage and offloading facility (FPSO) is due to start operations in late 2018. The FPSO is set to produce 200,000 b/d of oil from the Egina Main field, whose reserves are estimated at 570m barrels. Total is now considering tying back its nearby Preowei discovery to the Egina FPSO, after a third appraisal well was successfully drilled there in late 2017.

Shell's delayed expansion of the Bonga deepwater oil field may also be making progress. The $10bn Bonga Southwest project could add as much as 175,000 b/d to the field's output, but it has been held up by a legal dispute over PSC terms.

In early September, Shell Nigeria's managing director Bayo Ojulari said a schedule for a final investment decision would be announced after commercial talks with the government ended.

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