Reviewing the Draft National Petroleum Fiscal Policy

The draft National Petroleum Fiscal Policy (“the Fiscal Policy”) dated 20th September, 2016 and issued recently by the Ministry of Petroleum Resources forms part of the Nigerian Government’s on-going attempt to overhaul the legal, fiscal and regulatory framework of the Nigerian oil and gas industry (“Industry”).

Specifically, the Fiscal Policy is concerned with the development of a more consolidated Industry fiscal framework which also delineates clearly, the fiscal rules and principles that should be applicable to the various sub-sectors of the Industry.

Generally, it is based on the fiscal provisions contained in the various versions of the Petroleum Industry Bill that went through several stages of review and deliberations and has now been split into four bills namely: the Fiscal Regime Bill; the Upstream and Midstream Administration Bill; the Petroleum Revenue Bill; and the Petroleum Industry Governance Bill (which is the only one   currently   in   circulation). 

With   its   scope covering   exploration,   exploitation,   production, processing, transportation, distribution and marketing of petroleum (i.e. upstream, midstream and downstream petroleum operations), the Fiscal Policy defines ‘Petroleum’ to cover all petroleum related products, including crude oil, natural gas, LPG and various gas liquids and condensates. The objectives it sets out to achieve include:

Reducing Government take in onshore and shallow areas (where the burden is too high and is impeding  development  of  smaller  new  fields  –  particularly  for  small   companies),  while increasing the government take in deep water, in consonance with both Section 16 of the Deep Offshore and Inland Basin Production Sharing Contracts Act (“DIPSA”)1 and with current global trends;

•  Reducing Government take through taxes and increasing its take through royalties;

• Limiting Government participation to post exploration and reducing its risk of expenditure on dry wells;

• Improving   public   revenue   collection   through   a   governance   framework   and   information management   system   and   aligning   the   taxation   and   collection   system   with   international standards;

• Eliminating Petroleum Profits Tax (“PPT”), introducing Nigerian Hydrocarbon Tax (“NHT”) and subjecting all upstream operators to both NHT and Company Income Tax (“CIT”), with neither being deductible for assessing the other; and

• Reducing the list of deductible items in assessing NHT2 and eliminating Tax Offsets and Investment Tax Allowances in the Upstream sector of the Industry. In this regard, the Fiscal Policy proposes the removal of: (a) deductibility of acquisition costs under qualifying capital expenditure;   and (b)   gas   flare penalties from   qualifying deductions permitted under the Petroleum Profit Tax Act.

Laudably, the Fiscal Policy gives consideration to matters not dealt with under the current fiscal framework such as the Government’s ability to benefit from windfall profits accruing as a result of increase in oil prices, and incentives for mid-stream projects including crude oil, product transportation   systems   and refineries,   LPG   projects   and LPG   infrastructure.   For   instance,   it proposes   that   existing   depth-based   royalties   be   replaced   with   production   volume-based   and price-based royalties which would place the Government in a more beneficial position in terms of the revenue that would accrue to it where oil prices rise.

Also, by proposing that Section 39 of the Companies Income Tax Act (which contains incentives for the gas industry) be amended to include mid-stream projects such as crude oil and product transportation systems and refineries, LPG projects and LPG infrastructure, the Fiscal Policy seeks to make gas economically viable to exploit as a standalone   product (separate   from   oil). 

The intention of the Fiscal Policy with respect to exploitation   of   gas   is that   gas   projects would   be   developed based on their own economics and will not be dependent on or consolidated against oil income. Upstream, gas, downstream and midstream projects will, therefore, no longer be allowed to lean on each other or be tax deductible for each other; instead they would be accounted for separately even where such projects are carried out by the same operator on the same field.

Without prejudice to the above, it would appear that the Fiscal Policy overlooked certain other aspects of operations within the Industry. Firstly, it seems to give little thought to marginal field operations as it does not contain any specific provisions or incentives in respect of the same.

While the Fiscal Policy proposes incentives to encourage the development of small fields, it does not define what areas will be considered as “small fields”. This uncertainty should be resolved either by clarifying whether the term “small fields” is used in the Fiscal Policy in reference to marginal fields and marginal fields alone, or by providing a conclusive definition of the term “small fields”.

Secondly, the Fiscal Policy proposes a shift from the 0% royalty rates currently applicable to gas development and utilisation projects to rates ranging from 5% to 20%. In doing so, it would seem that the Fiscal Policy does not take into consideration the need to promote gas development and    utilization projects in the Industry despite the current dearth of adequate gas processing, storage and transportation infrastructure. The proposed fiscal regime for gas may, therefore, have the effect of reducing the incentives for gas production whilst increasing the tax exposure of gas companies.

Overall, this may prove to be both a disincentive and a step backwards for the gas sub-sector of the Industry. Furthermore, the proposed increase in capital gains tax from 10% to 30% would significantly change the landscape for asset divestment in the Industry and may indeed turn out to be.

On a separate note, and in relation to the potential impact of the Fiscal Policy on the operations of companies within the Industry, even though the Fiscal Policy seeks to encourage reduction in the   costs   of   production   in   Nigeria,   companies   which   make   commercial   discoveries   may eventually encounter a regime that is more intent on taking a bigger slice of oil proceeds through volume and value based royalties particularly in deep water areas.

Whilst this may serve the purpose of   increasing government revenue,   it   also   presents   the   possibility   of   constituting   a potentially inhospitable fiscal regime for companies operating in the Industry. In view of this, more discussions among stakeholders may be required for the purpose of determining whether a more even-handed and mutually satisfactory commercial environment can be created through the Fiscal Policy.

From a foreign investment standpoint, the Fiscal Policy can be seen as a step by the Government in the right direction because it recognizes the need to establish the country as an attractive investment destination in what has become a more competitive global market; it also takes into account what may be considered international best practices.

However, it is arguable whether the Fiscal Policy provides sufficient incentive to induce the much-needed Foreign Direct Investment (FDI) into the Industry. The considerable impact of low oil prices and diminishing FDI on the Industry may require a fiscal policy with a structure that places more emphasis on attracting local and foreign investment than on increasing Government take.

Invariably, a   fiscal policy that effectively increases FDI, which in turn triggers a boost in production will lead to more revenue for the Government through volume based royalties. Therefore, in assessing the efficacy of the Fiscal Policy, primary consideration should be given to how well it is able to cater to the interests of all stakeholders in the Industry if implemented. It then becomes important for participants in the Industry who are well-placed to analyze the potential impact of the Fiscal Policy on the overall output of the Industry to do so  and – where necessary – engage the Government in discussions   aimed   at   ensuring   that   the   Fiscal   Policy   is   positioned   to   achieve   only   the   best possible outcomes for all Industry stakeholders.

In terms of its enforceability, to the extent that the Fiscal Policy proposes changes to fiscal terms which are set out in legislation, the implementation of such changes will require the amendment of corresponding legislation. In this regard, changes to terms contained in the PA, the PPTA, the CITA or the DIBPSA (including tax and incentive provisions and royalties applicable in the deep offshore region) will require the applicable provisions in the respective laws to be amended through an act of the National Assembly, while changes to terms contained in the Petroleum (Drilling and Productions) Regulations – including non-deep offshore royalty terms – may be amended by a regulation issued by the Minister of Petroleum Resources.

Clearly, the Fiscal Policy takes this into consideration as it contemplates a Petroleum (Fiscal Reform) Bill aimed at reforming the fiscal regulatory framework of the Industry. Successfully enacting this bill into law will therefore give any changes contemplated by it binding effect.