• Saturday, May 25, 2024
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BusinessDay

Nigeria’s lagging oil, gas reforms continue to shut-out potential investors

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Foreign investors recognise the potential in Nigeria, Africa’s biggest oil producer but are staying away because clarity still eludes them as to how to recoup investments into the country’s oil and gas sector.

At the weekend, a United States of America’s official said the country could attract more investments from U.S. firms if the oil and gas sector becomes less opaque and a petrol price peg is removed. A reduction in opacity means clearer and more competitive fiscal terms. Unpegging retail pump price frees up the downstream oil and gas sector making it more attractive for investors and taking out a subsidy regime that costs the Nigerian National Petroleum Corporation close to $1 billion annually, since 2017.

“Nigeria needs to think strategically about what is going to make it a more attractive destination,” Brent Omdahl, the commercial counsellor at the U.S. Department of Commerce, said in an interview in Lagos. “Our investors are willing to compete on fair terms for new investments if there is a transparent process to try to win new oil opportunities.”

Industry watchers have said the existing fiscal terms in Nigeria’s oil and gas sector are not strong enough to attract investors into the country. The petroleum fiscal regime of a country is a set of laws, regulations and agreements which governs the economic benefits derived from petroleum exploration and production. The regime regulates transactions between the political entity and the legal entities involved.

“On fiscal terms, the regime is not strong enough to attract investors, as compared with other African countries especially in the area of deep-sea exploration. The fiscal regime in the sector is not flexible enough to respond to dynamic levels of production and profitability,” Tengi George-Ikoli, the programme coordinator, Nigerian Natural Resource Charter (NNRC) had said in 2017.

In a report of July 8, BusinessDay showed how failure to review the fiscal policies governing the exploration of oil in deep, offshore waters is costing the country enormous losses in oil revenue amounting to trillions of Naira.

Nigeria’s royalty rates are typically set as a percentage of the value of oil produced and the size of the licensed area of production. Royalty rates range from zero percent to 20 percent in onshore areas under Joint Venture (JV) arrangements while under Production Sharing Arrangements (PSCs) ranges from zero to 12 percent. Royalty rates for gas production range from 5 percent for operations in offshore areas to seven percent for operations in onshore areas.

The situation is not the same for other big oil-producing countries such as Saudi Arabia that collects 85 percent royalty on commercial oil production and 30 percent on natural gas.

The United Arab Emirates have no fixed royalty rate as taxes are currently imposed at the Emirate level on companies based on actual oil production in accordance with specific (but confidential) concession agreements while Kuwait collects 50 percent royalty on commercial oil production.

In Russia, Mineral extraction tax also known as royalty is charged on a fixed amount of $11 per ton, multiplied by coefficients that vary by depletion of reserves and other factors.

Adeola Adenikinju, director, Centre for Petroleum Energy Economics and member of Nigeria Monetary Policy Committee believes the current oil contractual agreement most especially the offshore production arrangement is not in favour of Nigeria.

“In the past when the oil price was very low a memorandum of understanding (MOU) was signed to encourage International Oil Companies (IOCs). But this is supposed to have been revised over 20 years ago to encourage investment into offshore production since oil prices are now higher. Otherwise, Nigeria is being short-changed,” Adenikinju told BusinessDay.

Controls on energy prices are also reducing investments, according to Omdahl, who is leaving Nigeria this month. The country’s state-owned NNPC imports most of the country’s premium motor spirit (PMS) under a swap programme and has capped the pump price at N145 ($0.40) per litre – one of the lowest prices worldwide.

Yet that system cost the government almost $2 billion in subsidies last year, according to the International Monetary Fund, which has called for the cap to be lifted.

The controls “perpetuate a system where only certain people benefit,” Omdahl said. “Why not open it up and let everybody benefit from it. That is money that can be used in making investments in refineries and all of a sudden you are paying less for imported fuel and your price goes down.”

Sixteen years ago, Nigeria had begun a perpetual motion without movement to reform its oil and gas sector through the Petroleum Industry Bill (PIB), which is one of its most comprehensive bills ever to be, contemplated in the country’s petroleum exploration and production history. The bill is still meandering through legislation after passing through four presidents, five presidential terms and five national legislative tenures.