Home Environment The Petroleum Industry Bill; a short-sighted fiscal proposal

The Petroleum Industry Bill; a short-sighted fiscal proposal

The yet-to-be passed Petroleum Industry Bill (PIB) proposes a new fiscal regime for Nigeria’s oil industry which would governs the economic benefits derived from petroleum exploration and production. The fiscal regime is a critical element of any oil industry which aims to balance Government tax-take with incentives to invest in oil exploration and production. In addition, robust legislation provides the foundations of relationships between operators, Government and communities.

This article considers the implications of the fiscal regime currently proposed by the PIB; arguing that the bill will provide short-term gains for government revenue, while deterring long-term prospects for increased investment in deep-water exploration.

Fiscal Regime

The fiscal regime relates to the overall tax and cost implication imposed by the Federal Government of Nigeria on the oil industry. These relate mainly to Nigerian Hydrocarbon Tax (NHT), Companies Income Tax (CIT) & Royalties.

Nigerian Hydrocarbon Tax (NHT)

The PIB proposes that a NHT will replace the Petroleum Profits Tax. This will stand at 50% for onshore & shallow water exploration and 25% for deep-water activities.

New regulations on tax deductions will provide a disincentive for deep-water investment. Initial capital employed in production sharing contracts (signed between a government and a resource extraction company concerning how much of the resource extracted from the country each will receive) will not be deductible.

This is a major source of concern to the oil operators because most production sharing contracts are in deep-water and have high capital costs.

There are also long-term ramifications to be considered. The majority of proven Nigerian reserves yet to be developed are held in deep-water offshore fields representing a significant opportunity for oil exploration and investment in the near to medium future. Therefore, if the PIB’s aim of increase production is to be achieved then the new fiscal regime must promote investment in these offshore reserves.

Companies Income Tax (CIT)

The major change is that CIT is now payable on upstream operations. Companies involved in both upstream (exploration and production) and downstream (refining and distributing) will have to compute CIT separately on each operation. Various tax incentives are offered for greater involvement in downstream oil investment. This is a great step towards incentivising the gas market and improving Nigeria’s refining capacity.

Royalties

Royalties are not specifically mentioned in the bill, but it gives the minister the right to change the system. A new system currently under examination makes the calculation of the royalty more complex. Prior to the bill, royalties were calculated to encourage deep-water exploration and the royalty rate was based simply only the position of the activity:

Onshore: 20%
Shallow: 18.5%
200 metres: 16.67%
200-500 metres: 12%
501-800 metres: 8%
800-1000 metres: 4%
Above 1000 metres: 0%

The scheme now under consideration combines location with both volumes and price, meaning that with higher rates of production per day, will warrant higher rates of taxation. This is a drastic change to the royalty regime that will lead to Nigeria being perceived as one of the least profitable regions to export oil and therefore globally uncompetitive.

So what will be the overall impact on oil revenues?

According to our independent analysis, the changes in the royalty and taxation regime will increase income to the Federal Government by approximately 7% per annum in the short term. The two new taxes – NHT and CIT combined – produce less revenue than the old Petroleum Profits Tax. It is the royalty provision that will increase the level of revenue if the PIB is passed. However, at current production levels, the bill will reduce incentives for deep-water production companies since these will be exposed to a harsher royalty regime than currently.

The key question, is this short term 7% increase worth risking Nigeria’s future oil production?

To unlock the future potential of Nigerian exploration and production, there will therefore need to be a renewed thrust towards sustained investment in offshore fields. The PIB currently fails to do this and without negotiation in this area it risks alienating investments significant enough to support the future petroleum industry. The bill in its current state puts short-term gains ahead of long-term productivity.

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