By Felix Ayanruoh
The Petroleum Industry Bill before the National Assembly if passed will address the motley of problems facing the oil and gas industry. This bill which will serve as the grundnorm of the petroleum industry – legal and regulatory framework, among other things, will enhance petroleum development and production.
Also, it will establish a progressive fiscal framework that encourages further investment in the petroleum industry while optimizing accruable revenue to the government. Section 221 of the bill provides that the pricing of petroleum products in the downstream product sector is deregulated to ensure a market-related pricing; adequate supply of petroleum products; removal of economic distortions; and the creation of fair market value for petroleum product in the Nigerian economy.
Heuristic analyses of the petroleum sector show that its poor performance has been a significant barrier to private investment in the country and to overall development and economic growth. The sector's regulatory and market structure is dominated by Nigerian National Petroleum Corporation (NNPC), the state-owned oil and Natural Gas Company.
The dissatisfaction with the performance of NNPC – symptomized by corruption, decaying infrastructure, and inadequate refining capacity – has fuelled the debate on the theoretical and holistic overhaul of the oil and gas sector. With the exception of a few developing countries, insufficient domestic capital to fund projects in the petroleum industry has become a real challenge.
Faced with the problem of domestic financing in the petroleum industry, the Nigerian government, in drafting the PIB, conceded that private investments are needed to tackle the current shortages of refine product – can only be sourced in the international capital market.
Financing for the development or exploitation of a right, natural resources, or similar assets is a complex and cost-intensive undertaking in which lenders or other debt-holders look principally to the revenues generated by the project alone as the source of funds from which project debt will be repaid. In sum, the collateral for the debt is confined to the assets of the projects itself and, in particular, the project's revenue stream.
Project finance is, therefore, non-recourse or limited recourse financing predicated on the economic and technical merits of the project itself and not by any form of share capital. Because of the cost, complexity, and risks involved in financing energy projects, traditional sponsors are unwilling to go it alone. Project finance has, therefore, become a crucial financial tool used in attracting capital to these types of projects.
Notwithstanding its position as Africa's largest oil producer with four domestic refineries, secure and consistent supply of refined petroleum products to meet demand requirement remains a problem. It is axiomatic that under the present dispensation, NNPC – the gate keeper for securing stable supply – actually colludes with independent marketers to create scarcity, which in turn has resulted in the development of a thriving black market for petroleum products.
Under the current regime, investors are reluctant to commit to refinery projects because they are simply not cost-effective. The PIB by deregulating the downstream sector provides for a climate of investor confidence and more measurable (and reasonable) rates of return on investment.
