Nigeria: Nobody’s business?

Regrettably, the Nigerian project has always been managed as nobody’s business. It is not surprising that this lackadaisical attitude usually exhibited by those who are supposed to be protecting the interests of this country has resulted in the loss of huge sums of revenue to international oil and gas companies (IOCs). This occurs as a result of poorly negotiated and crafted contracts and legislations put in place to govern the agreements between Nigeria and international partners.

We reported recently about the 10-year tax holidays and 90 percent capital allowance after the tax holidays given to the Nigeria Liquified Natural Gas Limited (NLNG). This made NLNG not to be in a tax paying position until this year.

According to Ngozi Okonjo-Iweala, the minister for finance and coordinating minister for the economy, “The effect of a ten-year holiday and capital allowance always results in an additional 5-year tax free period. In 2014, NLNG will be in a tax paying position, so we expect to see an initial tax payment by NLNG in 2014.

Experts are of the view that the arrangement that governs the operations of NLNG which gave it a 10 year tax holiday whilst good for a pioneering project should not be replicated in the future., as they believe that a 5-year tax holiday was sufficient.

The skill to negotiate such investment deals is what is cramping Nigeria’s ability to capture fair value from its oil wealth. Paul Collier, a professor at Oxford University, argues that asymmetric information between African host governments and international companies, plus a lack of supervision that encourages corruption, are crippling burdens.

Poorly negotiated legislations give the IOCs operatorship of oil and gas assets and the government does not have much insight into how they spend the budgets for the assets.

The legislations as regards the Joint Operating Agreement (JOA), Production Sharing Contract (PSC) and Service Contract, are usually skewed to the advantage of the international oil companies that allegedly draft the legislations and afterwards hand them over to the Nigeria government. Nigeria in most cases contributed little or nothing in the legislations that are governing the operations of the oil and gas industry. Most of these legislations were written during the military era, and were signed by military fiat.

Because of the undue advantage the legislations conferred on the operators, they are able to inflate costs of production at will and in some cases, use the money meant to drill  three wells  for one well and later go to the government to say they needed more money.

The IOCs, according to analysts, don’t observe budget discipline, hence their penchant to always go to the government for money.  Nobody supervises their operations, because of this, whatever claim they make is always difficult to verify by government.

We believe that this observed anomaly in the manner we craft operating agreements with IOCs and the consequent nature of legislations that create leeway for these IOCs at the expense of Nigerian interests should be reversed. And this can only be done if relevant parties on the Nigerian side approach their supervisory duties with utmost integrity, and overriding resolve to profitably manage the Nigerian project.