Ignoring oil investors’ concerns may derail PIB

The Federal Government re-introduced a revised version of the Petroleum Industry Bill (PIB) last year. Unlike previous versions, the input of oil sector operators was not sought in drafting it, and now the operators are raising genuine concerns about proposed fiscal provisions that could imperil the bill.

Recall that BusinessDay in August 2020 reported that the government’s refusal to consult with sector operators may not augur well for the bill. On Monday, at the start of a public hearing, the oil sector operators began kicking against the bill.

Ramming through a law meant to grow the oil sector and attract investments without due regard to investors’ concerns may derail the goal of the exercise.

At the public hearing organised by the Joint Committee on Petroleum Upstream, Downstream and Gas, Mike Sangster, chairman of Oil Producing Trade Section (OPTS), a trade group of oil producers, said the deep-water provisions do not provide a favourable environment for future investments and for the launching of new projects.

The oil producers want the PIB to grant deep-water oil projects a full royalty relief during the first five years of production or a graduated royalty scheme. They also want the law to expunge the provision for a hydrocarbon tax, considering that companies will still be subject to Companies Income Tax.

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The group is also concerned that the bill does not address the major challenges facing gas development in Nigeria, such as inadequate midstream infrastructure, regulated gas pricing, huge debts, thereby potentially jeopardising the realisation of government’s aspirations for the domestic gas sector.

According to Sangster, the PIB should provide a clear path for transitioning to free market-based pricing, not add additional compliance conditions on domestic gas delivery obligations as a precondition for export gas supply and allow pre-existing contracts and agreements to run their course.

“OPTS recognises the government’s right to change laws. However, to maintain Nigeria’s reputation among investors, it is important for the PIB to explicitly preserve base businesses and rights for existing Joint Venture licences and leases and Production Sharing Contracts, which form the basis for future growth.

“Operators should be allowed to retain the entirety of their lease areas and new terms should apply only to new contracts, licences and leases,” he said.

Why oil sector operators’ views matter

In 2019, international oil major Royal Dutch Shell and its subsidiaries paid the Federal Government of Nigeria over $5.6 billion, which at exchange rate of N307/$1, comes to N1.7 trillion.

This amount represented about 20 percent of the 2019 budget, comprising payments for fees, royalties, production entitlements and taxes. It is also the highest payment to any government and represents about 9 percent of the global payments the company made to 28 countries.

Analysts say it is unwise to draft a law that would impact these kinds of companies without consulting them during the drafting. It is especially bad now that the sector is facing existential crises, where commodity prices are at the mercy of geo-political tensions and renewable energy.

The revised PIB restricts an oil company from operating in more than one major stream of oil production. For example, a company operating in the upstream sector has to open another company to sell liquefied gas.

It also introduced a hydrocarbon tax that will be applied to crude oil, condensates and natural gas liquids produced from associated gas. This is in addition to Company Income Tax and a new royalty rate that is constant regardless of the price of crude oil in the global market.

“I am of the view, that it is more ideal do have a progressive government take system than a neutral which is higher than the World’s average,” Ayodele Oni, an energy lawyer and partner at Bloomfield Law Firm, said.

According to Oni, a progressive system means the government will cream off some of the excess profits of oil and gas companies and correspondingly, government’s take reduces when profitability drops.

“Our government must take into consideration other factors that make upstream business significantly higher in Nigeria (because of issues such as host community issues and other peculiar Nigerian issues), than elsewhere in the world and correspondingly reduce taxes, royalties and bonuses due government,” Oni said.

A regressive tax system has the risk of scaring away investors

The revised PIB expunged the restrictions to capital allowance claimable in the a fiscal year under the Petroleum Profit Tax (PPT) Act and introduced a Cost Price Ratio (CPR), which restricts allowable deductions claimable in a given period to 65 percent of the gross revenue determined at the measurable points for determination of the Hydrocarbon tax.

“Although the objective of this provision may be to boost revenue collection by government, the cash flow implications for upstream companies may discourage investments, especially given the huge capital outlay required for new projects,” said Lanre Akinbolajo, and Olayinka Olaleye, analysts at Andersen Tax in their analysis of the revised PIB.

In response to virus-induced low oil demand, the world’s biggest oil companies have collectively slashed an estimated $35 billion in their capital expenditure for 2020, which is slowing growth for many countries including Nigeria.

Many countries are relaxing taxes to drive investments into their domain. For example, Algeria’s 2019 hydrocarbon law aimed at attracting foreign investment into its oil and gas sector was drafted in collaboration with five major international oil companies operating in the country and cut their total tax burden from 85 percent to around 60 – 65 percent.

Nigeria has a litany of oil projects awaiting investment decisions including projects like the 120,000bpd Zabazaba-Etan project; 140,000bpd Bosi project; 110,000bpd Uge project, and 100,000bpd Nsiko deepwater project; 1 billion barrel Owowo field development, all stalled in Nigeria. ExxonMobil has put brakes on its Mozambique LNG plant.

These projects would be further impacted if lawmakers do not enact a competitive bill.