Rethinking Nigeria’s fiscal terms in a bearish oil market

Nigeria’s proposed oil sector fiscal regime has introduced a hydrocarbon tax to maximise government tax-take at the same time minimising allowable costs for operators which could de-incentivise investments, stakeholders fear.

A recent roundtable stakeholder’s conference organised by Aspen Energy Limited where local oil companies spoke unanimously on the need for radical fiscal policy that is deliberately aimed at courting new investments.

Segun Olujobi, managing director of Vertex Energy, said that the shift in the oil sector is real. China is making deliberate efforts to move away from internal combustion engine because, there are concerns about the environment and their lack of oil.”

Olujobi said people once scoffed at shale producers saying they will never achieve scale but today, they have emerged a big threat.

“So we must ensure that we make our fiscal framework very competitive, even if you put money on the table it is far more important to keep independents growing to create jobs, peace in the Niger Delta and create the volumes needed to grow our economy.

“The focus should not be on rent for government, the focus should be on investments, on jobs even if we have to leave some money on the table. We should focus on incentivising investments,” said Olujobi.

While the proposed fiscal terms contained in the Petroleum Industry Reform Bill (PIRB), seeks to make royalty a major source of government earnings, it may not achieve the balance between short term revenue uptick and long term guarantee of income from taxation needed to catalyse other sectors of the economy.

The fiscal aspect of the PIRB sponsored by the ministry of petroleum resources, termed the National Petroleum Fiscal Policy (NPFP), proposes a multi-tiered tax system where operators pay a Nigerian Hydrocarbon Tax (NHT) at graduating rates of 40 percent (onshore operations), 30 percent (shallow water operations) and 20 percent (deep water operations).

Companies operating in the upstream sector will also be subjected to Company Income Tax (CIT) at 30 percent and Education Tax at 2 percent on taxable profits. This brings the aggregate tax rate for both NHT and CIT up to 70 percent when compared to 85 percent per petroleum profit tax (PPT).

But this is where it gets tricky. “Unlike the Petroleum Profit Tax Act (PPTA), which allows exploration and production operators who are yet to 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 Policy does not provide for such lower or preferential tax rate. This suggests that the tax burden may be relatively higher for upstream companies,” said analysts at Deliotte led by Seye Arowolo, partner, Tax & Regulatory Service in a note.

Nigeria’s Petroleum Profit Tax (PPT) has come under heavy criticism for granting too generous concessions for exploration and production companies gifting them zero royalty rates in water depths of 1,000 meters where the bulk of Nigeria’s deepwater finds have been located.

In a bid to correct this anomaly, stakeholders fear the ministry of petroleum resources may convince the Federal Executive Council to approve a policy that accounts very little for the current realities in the sector where prices have struggled to leave $40/bbl floor.

However practitioners say a progressive tax regime is more likely to attract investments compared to a regressive tax regime which the current proposals tend to promote.

“Nigeria needs to completely rethink its oil and gas industry, what use do we want for oil and gas, do we need to refocus it for domestic utilisation or what? This should guide the fiscal framework for the country,” says Isreal Aye, oil and gas lawyer.

Aye further said, “The philosophy for setting a fiscal framework for Nigeria historically has been rent and there’s a history, it is similar to the agricultural practice of the day which is why we have a concept of farm-in, farm-out.”

Rents are paid in the form of tax and royalties and Nigeria relies on direct sale of crude to run its economy. However, a sea change is ongoing in the sector. The depositional environment for hydrocarbon commonly found in Deltiac regions has now included inland basins and countries like Rwanda, Kenya, Ghana and Tanzania are avid producers of oil and gas.

The technology for drilling oil is also improving such that shale producers now lay ambush on oil prices as they prove more prolific in reducing production costs and ramp up speed to market advantages.

To compound matters, the dynamics of distribution has changed too such that traditional buyers of oil and gas are now net exporters, with many closer to markets where they are needed.

“With the expansion of the Panama Canal, the US can get gas faster to the Asian market than Nigeria and all these should inform how set our fiscal terms. Our revenue streams are now under severe pressure so we need to rethink the entire philosophy of how set our fiscal framework and move it away from rent to value,” said Aye.

This is even more worrisome as major oil producers like Saudi Arabia are tweaking their oil sector fiscal frameworks, reviewing downwards royalty and tax rates to attract investments in an environment where new projects have been too few and far between.

“The government should conduct independent assessments of investor returns and government take from the current proposals and benchmark it with returns from other countries,” says an indigenous oil and gas producer who did not want to be named.

He added, “Also the government should consider tweaking the thresholds of critical parameters under existing fiscals rather than creating new elements that might require lots of training and multiple interpretations.”

ISAAC ANYAOGU