By Edafe Mudiaga
The signing of the Petroleum Industry, PIA, Act in 2021 by the late former President, Muhammadu 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 Tinubu, needs some clarification. 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 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 law is a 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 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, Executive Order 9 will impact negatively on the lives of ordinary Nigerians in several 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 the government, especially in situations where royalty and tax oil barrels are used by the government to access loans from international lenders. In this case, NNPC usually assumes the role of sponsor/borrower on behalf of the government. Thirdly, the EO9 may render the administration of existing PSC Gas Development Agreements, Gas Sales and Purchase Agreements 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 the investment and development of Nigeria.
So, we set out to clarify the following:
Direct remittance of Royalty and Taxes from Production Sharing Contract to FAAC
The Executive Order directs that royalties and taxes from PSC should be paid directly to FAAC. The truth is that royalties and taxes from the PSCs are already being remitted directly to FAAC. This is already an existing practice. One point to note is that royalties 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 commercialise (sell) these barrels. Monthly, NNPC Limited remits all value realised from sales of royalty and tax barrels to the FAAC. Another clarification that Nigerians need to know is that the 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 NNPCL as the sponsor/borrower on behalf of the government. So, what NNPCL does monthly is to settle the lenders from the value realised from the PSC royalty and tax liftings and then remit the balance to the FAAC. Sometimes, the value from royalties and taxes cannot cover the amount needed to settle lenders each month. In this circumstance, oftentimes, NNPCL goes to its own share of profit oil (the management fee) to settle this obligation.
Under the current PIA framework (Section 64), NNPCL does not retain 30 per cent of the federation’s oil revenues as is being wrongly ‘propagandised’. Thirty per cent of profit oil/gas is not the same as 30 per cent of the federation’s oil revenues derived from production sharing contracts.
To clarify, 30 per cent of the 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 bear 100 per cent of the cost of development and production.
Taxes have been deducted and paid to the government. The tax rate is 50 per cent for most PSCs in Nigeria.
To arrive at what the oil industry calls 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 per cent of the gross PSC revenue. The remaining 10 per cent is the Profit Oil. The concessionaire’s share of PSC profit oil is about 35 per cent of the 10 per cent. In line with section 64 of the PIA, the Management fee which NNPC takes is only 30 per cent of (35 per cent of 10 per cent of gross revenue). This will give you about 1.05 per cent of the gross PSC revenue. It is wrong and mischievous to give the Nigerian masses the impression that NNPC Limited is taking 30 per cent of PSC revenue. Clearly, 30 per cent of the PSC profit oil translates to about 1.05 per cent 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. Daily, they work with the operating companies from the conception of an oil and gas project to development and 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 NNPCL needs to play as the national oil company.
Stripping the NNPCL of the management fee could affect its viability as a company and negatively impact its ability to fund critical aspects of oil and gas development in Nigeria.
Understandably, the 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 Nigeria Revenue Service (formerly Federal Inland Revenue Service) does what is called the 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 it collects. In the same vein, the customs service takes seven per cent of all duties. The deepwater tax stands at $3 per barrel reduction on the production sharing cost. The legal basis for this is the Tax Incentive Order of 2024. The non-associated gas 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 this covers recovery of billion-dollar legacy debts, which are deducted directly from NNPCL’s 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 costs of operation for those agencies, then why do government think that NNPCL should not recover its costs of operations for managing the PSC on behalf of the federation? The government should quickly roll out Executive Order 10 to stop these deductions.
Finally, looking at the issues raised in this article, 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.
Mudiaga, an oil and gas expert, writes in from Port Harcourt, Rivers State
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