Still on the Petroleum Industry Bill (PIB) – Part 1

Once upon a time when the largest source of foreign exchange in China was the proceed of oil exports to Japan. The Chinese soon realised that oil is not the engine of any economy, it is only a lubricant, a means to a larger objective. The Chinese economic “invasion” is a story often told and well known yet can hardly be emphasized enough. China lifted over 600 million of its people above the poverty border and in the midst of the great recession in 2009, China surpassed the United States of America as the largest automobile market in the world, outpaced Japan as the second largest economy on planet earth and is today the fourth largest producer of crude oil globally after Saudi Arabia, Russian Federation and the US – an inspiring tale.

Sharing a similar development focused sentiment, the current Brazilian President, Dilma Rousseff, aptly said on the discovery of the super-giant presalt Tupi Field, (estimated recoverable reserves of between 5-12 billion barrels) that petroleum resources is a passport to the future if and only if its production creates a balanced synthesis of technological advances, social progress and environmental concern. Nigeria’s performance on all these developmental outcomes leaves much to be desired. 

Understandably, the debate on the Petroleum Industry Bill (PIB), currently holed up in the Nigerian National Assembly, is such a hot button issue in view of its dominant role in our economy – largest foreign exchange earner, 90% of government revenue, significant contribution to Gross Domestic Product (GDP) and not least its unusual capacity to change fortune. Therefore, central to the PIB debate, explicitly or implicitly and from whichever perspective, is how or how not to share the dollarized “crude wealth”. Far from being cynical, without due consideration to President Rousseff’s words, passage of the PIB in whatever form or shape portends neither salvation nor suicide for the Nigerian economy.

Much more important than the PIB is our ability and willingness, as individuals and collectively as a nation, to legislate and enforce temperance and discretion as a moral code with less emphasis on unbridled “consumerism” and share-the-money mentality. No one is left in doubt that petroleum resources, as it is today in Nigeria, have no semblance of wealth. The country is as enviably endowed with natural resources as it unenviably rich in poverty.    “Crude appropriation” and excessive “rent seeking” impoverish a people. Meanwhile, the current Nigerian Petroleum Minister’s successful effort in curbing excessive gold-platting in the industry has received little or no credit as much as the flacks for alleged “private-jetting”.  

That the bill is a step in the right direction is hard to dispute. It is perfectly legitimate and indeed long overdue to overhaul, simplify and harmonise some of our discrepant and decrepit petroleum laws severely weakened by old age. But reliance on petroleum revenue (especially in jurisdictions where it is highly susceptible to capture by narrow interests) in the quest for the elusive sustainable economic development is a road that leads to poverty. 

But, if indeed petroleum resources could constitute wealth to be appropriated for the common good, government owes present and future generations of Nigerian the duty to create an enabling environment for sustainable investment in the sector as to create an adaptable balance between government objective of optimizing public revenue on the one hand and reasonable returns on investors’ risk capital on the other, if there is ever such a thing as “reasonable returns” in the global oil industry. 

Anywhere in the world, the design of petroleum fiscal regimes is far from being an exact science, the process far from simple and usually contentious, as the PIB experience clearly shows. As a result, there is almost always a constant search for a balanced fiscal regime that could modulate the often difficult to reconcile objectives of host countries and investors. 

Oil and gas is a global industry and because capital is mobile, competitiveness of petroleum systems impacts significantly on capital flow for exploration and production (E&P) activities. Not infrequently, companies make investment decisions based substantially on the international competitiveness of petroleum fiscal systems. The uncertainty surrounding the bill perhaps partly explains why Nigerian crude proved reserve estimates have remained stagnant at 37.2 billion barrels since 2006 in spite of high oil price in the international market. 

Aside from fiscal terms, investors consider other equally important factors, including political risk (arguably), geological potential of petroleum acreage, and governments’ policies such as local content requirement that impact on overall company take and ultimately shareholders’ value. Governments, on the other hand, seek to balance the tax burden they impose with their desire to attract investment. This implies that a government with prime petroleum acreage such as Saudi Arabia and other gulf countries would want to impose a higher level of taxes than a government with lesser quality acreage as it is in the UK North Sea. 

But how does the proposed fiscal package in the PIB fare – how does it compare with the fiscal regimes currently in place, is it globally competitive or is it a significant northerly deviation from the world average, does it measure up to other oil provinces and petroleum basins with similar geological and geophysical characteristics as Nigeria and are there other supervening considerations in designing the fiscal terms in the PIB? A clearer picture, in terms of international comparison, is essential in appreciating and enriching the ongoing debate surrounding the bill.

Therefore, the objective of this article are twofold; to gauge the international competitiveness of the fiscal terms in the PIB compared with that of Angola, Venezuela, Russia, Mexico, the United Arab Emirates (UAE) and Ghana (not a perfect peer but a potential competitor) on the one hand and also to highlight significant differences with the current fiscal frameworks such as the Deep Offshore and Inland Basin Production Sharing Contracts and Joint Venture operations, both onshore and offshore at different water depths.

In an attempt to answer the aforementioned questions, a simple “back of the envelope” calculation suffices but to allow for a better understanding of the functioning and interplay of the different tax instruments in the fiscal regime and other variables, Discounted Cashflow analytical technique was equally employed to further validate the result. Albeit a comprehensive economic analysis of the PIB is beyond the scope of this write-up, a summary of the findings will nonetheless provide sufficient insight.  

The PIB seeks to replace the existing Petroleum Profit Tax (PPT) with Nigerian Hydrocarbon Tax (NHT) and Company Income Tax (CIT). The tax instruments in the PIB 2012 comprises three main elements: Royalty, Nigerian Hydrocarbon Tax (NHT) and Company Income Tax (CIT) hitherto not applicable to upstream petroleum companies . 

Ubohmhe Glenn Olowojaiye