Oil, gas fiscal strategy: Growing vs. redistributing the pie
Only a few weeks ago, there was a rare flicker of hope for the oil and gas industry when the senate announced the passage of the Petroleum Industry Governance Bill (PIGB), part of a larger industry document that has lingered in its chambers for about 17 years. The action of the senate was greeted with mixed reactions among stakeholders. While some welcomed it as a positive sign for the industry, others thought the partial passage of the PIGB without the PIB is wasteful and only suggests the National Assembly is not sincere about reforms in the sector.
Signals from the regulatory landscape have been quite unclear given government’s inability or unwillingness to make bold reforms. Amidst the volatility of oil prices and political uncertainties, the continued delay in straightening out key policy areas in the oil and gas sector has to a large extent delayed foreign direct investment. Experts believe that government’s desire for growth of the oil and gas sector may remain a dream for a long time considering the delays in passing all the parts of the petroleum industry bill.
At the fiscal level, recent moves by the government has rekindled hope in the possibility of at least short term sustainability in the oil and gas operations. The renewed effort by the Ministry of Petroleum Resources at reforming the oil and gas industry has included the launching of a roadmap tagged “7 Big Wins” for the petroleum industry in 2016.
The roadmap according to the Minister of Petroleum Resources, Dr. Emmanuel Ibe Kachikwu is aimed at addressing specific issues of policy and regulation, business environment, investment, security, transparency and efficiency in the oil and gas sector.
Other initiatives by the government to boost growth in the industry include the renaming of the Petroleum Industry Bill (PIB) to Petroleum Industry Reform Bill (PIRB). The PIRB was further broken into two to reduce its bulkiness and enable quick passage.
The Federal Ministry of Petroleum Resources in its bid to strengthen the fiscal aspects of the industry recently released the draft National Petroleum Fiscal Policy (NPFP) a document many believe if sanctioned and well implemented could spur growth in the sector.
The Policy according to energy analysts covers all sectors of the petroleum industry – upstream, midstream and downstream, and includes oil and gas products.
Economic and energy experts believe that putting in place the right policies (regulatory and fiscal) for the industry would serve as a catalyst for growth. According to Johnson Chukwu, an economic expert, “Today we have had a long period of low investment in the oil and gas because of the absence of a fiscal legal framework. So when government comes up with a fiscal legal framework, it will catalyze the whole system. Good a thing the senate has passed the PIGB. When the whole bill is passed, it will create a level of certainty for investors,” he said.
However, those familiar with the PIB believe the NPFP and the PIB are similar in many aspects. According to PricewaterCoopers, (PwC) a tax and audit consulting firm “The previous version of the PIB introduced a resource tax called the Nigerian Hydrocarbon Tax, (NHT), which was to be levied on the chargeable profits of upstream companies at the rate of 50 percent for onshore and shallow waters, and 25 percent for bitumen, frontier acreages and deep water areas. While the (NPFP) retains the NHT, it has tweaked the rates by amending it to 40 percent for onshore areas, 30 percent for shallow waters and 20 percent for deep water areas. Like the PIB, all upstream companies will also be liable to Companies Income Tax (CIT). For both regimes (PIB and NPFP), the Petroleum Profits Tax (PPT) currently in existence will be no more. Meaning from a current maximum tax rate of 85percent, the revised maximum tax rate will now be 70% (40% NHT plus 30% CIT) of chargeable profits”, it stated.
In addition, the proposed new legislation also seeks to increase the capital gains tax (CGT) in respect of asset based transactions from 10 percent to 30 percent.
Analysts have noted that when compared to the Petroleum Profit Tax Act (PPTA), which allows exploration and production companies who have not fully expense their pre-production expenditure to be taxed at 65.75 percent for the first 5 years of commencement of commercial sales of crude oil, the NPFP does not provide for such lower or preferential tax rate, suggesting that the tax burden may be relatively higher for upstream companies.
Extractive policy
Most analysts believe the draft bill is placing too much emphasis on increasing government revenue without paying attention to the interest of investors. According to PwC the motive of the policy is to increase government revenue especially in deep water. The firm however said there was need for government to strike a balance between more revenue for government and attracting or retaining investment in the sector. Experts believe while the NPFP seeks to remove or reduce existing incentives, there must equally be deliberate effort to tackle current disincentives in the sector. This balance is paramount given a shrinking economy and growing need for foreign direct investment.
The multiplicity of taxes and other operational issues have forced players to cut back on their investment. However, despite the unstable policy environment, some IOCs have continued to make significant investments in the sector.
Last year, ExxonMobil announced a massive oil find in Owowo field, a significant morale booster for the industry especially as Nigeria’s reserve replacement ratio has been going down. The field, which is projected to hold over 1billion barrels of crude oil reserves, has the capacity to generate over $50 billion potential revenue for Nigeria, according to the oil firm.
Similarly, Erha North Phase II project has delivered additional 165 million barrels per day of crude to Nigeria with a peak production of 65,000 barrels per day. There appears to be a consensus in the industry that if given the right fiscal and regulatory environment oil firms could do more.
Similarly, Total E&P Nigeria Limited has demonstrated its commitment to developing not only the Nigerian economy but also safeguarding its environment. The completion of the Ofon II gas flare-out project has enhanced gas utilization. On the other hand, with its zero gas flare, the project has made considerable contribution towards a cleaner environment. These are investments that have significantly improved lives as well as government revenue.
Analysts believe that heavy taxation of oil companies has its own demerits. It is capable of dissuading potential investors from the sector. On the other hand, existing players who are weighed down by the tax burden would seek for ways to cut cost to stay in business. One of such ways is reduction of the workforce. Alternatively oil firms may also decide to cut corners with severe consequences on lives and the environment.
However, according to the provisions of the policy, payment of royalties will be on the same basis as taxes. According to the new policy, payment of royalty based on acreage depth will be replaced with royalty payments based on volume and price of crude oil. In its analysis, Deloitte, a tax consultancy firm, believes that “This will nearly eliminate the payment of a minor fraction of revenue as royalty by companies operating deep offshore”. Interestingly, the draft policy provides for royalty to be paid in kind or cash. According to analysts the draft policy could be a catalyst to the development of the oil and gas sector if well implemented as it seeks to streamline hitherto contentious issues in the sector. Industry experts believe a quick passage of relevant legislation would enhance the effectiveness of the policy.
FRANK UZUEGBUNAM