• Saturday, June 15, 2024
businessday logo

BusinessDay

Downturn in the Nigerian Petroleum Industry: Considerations for ameliorating fiscal burden

Price differentials define sale of petrol in Akwa Ibom

In recent years, the global oil and gas industry has generally been characterized by price volatility. Oil prices have fallen more than sixty percent since the beginning of 2020, owing significantly to the impact of the Covid-19 pandemic and the refusal to cut global production cuts leading to an oil price war between the world’s largest producers.

With the emergence of the Covid-19 pandemic, the landscape for most oil producing companies globally has been severely impacted. Demand for oil and gas products was significantly reduced owing to lockdowns imposed by governments all over the world and resulting in a significant decline in the usage of these products. Given the decline in demand, products were traded at a discount to rapidly get off takers, stay competitive and ultimately ease the pressure placed on storage facilities.

As global economies began to ease the lockdown and OPEC’S agreement with other producers to cut production, the sector experienced a gradual increase in oil prices, though they are still generally at an all-time low.

The Nigerian economy, which is significantly driven by revenue from oil and gas, has also been significantly impacted by the emergence of the Covid-19 pandemic. Companies operating within the upstream sector of the industry continue to see a significant decline in their revenue base.

Read also: OPEC+ production cut might be extended as Nigeria struggle to meet quota

The impact is especially seen with Nigeran Independents operating in the sector, who are also experiencing a double whamming effect resulting from a drop in crude oil price and a shortage of foreign exchange.

This decrease in the purchasing power of the Naira significantly impacts the unit cost of production given the difference in exchange rate used in production and that recovered for the sale of their products.

Despite falling oil prices, difficulties in navigating the landscape, and the impact of exchange shortage suffered by companies operating in this sector, they are still obligated to remit the royalties, taxes and levies imposed by the government without being offered any form of palliative to cushion the downturn.

For instance, in the Nigerian oil and gas industry, the Nigerian Independents were not considered in the government’s draft fiscal economic stimulus bill in response to the Covid-19 pandemic despite its huge contribution to the revenue earning capacity of the government. These Nigerian Independents account for about 20 percent of the total oil production in the country and are the largest supplier of domestic gas to the Nigerian economy.

Further, the passage of the Finance Act, 2019 introduced changes to several tax legislations, including the Petroleum Profits Tax Act (PPTA), which provides the legal basis for the imposition of taxes on the income of companies engaged in the exploration and production of crude oil in Nigeria.

Section 24 of the Finance Act repealed the provisions of Section 60 of the PPTA that provided for the Withholding Tax ( WHT) exemption on income or dividends paid out of after-tax petroleum profits. This section had always been an incentive for investment in the upstream sector of the industry, given that oil producers are already heavily taxed at 85% of their profit for Joint Venture operations and 50% for Production Sharing Contract operations. The repeal of this section, therefore, constitutes a significant tax impact on the upstream operators and ultimately a decrease in returns on investment to their shareholders.

The recent amendments to the Deep Offshore and Inland Basin Production Sharing Contract Act, which effectively increases the royalty rate for deep offshore projects from as low as 0% to as high as 17% is also a factor that significantly increases the cost of production for companies operating in this sector.

For businesses, the increased costs from the fiscal amendments referenced above, and the significant decline in revenue, ultimately translates to lower profits which may significantly impact the going concern of some these independents.

The Federal Government recently announced its intention to conduct bid rounds for the acquisition of Marginal fields in Nigeria which are operated by independents. These operators generally find it difficult to attract financing at a competitive interest rate and are often exposed to interest rate risk on their investment. The industry acknowledges that the decision to conduct these bids is a step in the right direction. The government is however encouraged to provide fiscal considerations for participation, and grant incentives for the sustainability of these companies. These considerations should continue to support and enhance local capacity and content within the industry.

In year 2006, the Department of Petroleum Resources (DPR), in its bid to support the Marginal Field regime conveyed an amended fiscal term of Petroleum Profit Tax at the rate of 55% as against the traditional 85% and an Investment Tax Credit at 20 percent. These fiscal incentives are not backed by any legislation.

A review of some of the legislation by the government in the light of the impact of the Covid-19 pandemic on the operations of oil companies can greatly cushion the downturn being experienced by the industry.

There is no doubt that the industry needs comprehensive reform and a policy direction specifically in the light of the Covid-19 pandemic impacting economies across the globe. These reforms should be aimed at ensuring the survival of the industry with specific emphasis on the need to continue to drive local content in the industry.

For instance, to encourage participation in the bid process for Marginal fields, there should be intentional efforts by the government to consider a gazette into law, the tax concessions conveyed by the DPR in 2006.

In all of this, the muchawaited Petroleum Industry Bill is already a solution in this regard and more than ever before, the 9th National Assembly needs to ensure that this is passed without any further delay. Stakeholders within the industry will need to converge to ensure that controversies and potential disputes that may arise from the passage of the Bill is addressed as quickly as possible.