Norway shows Nigeria how to boost oil investment with tax relief

The decision of Norway to grant tax relief packages to Equinor and other companies hit by low crude prices is expected to increase oil and gas investment within the region, a development that holds lessons for Africa’s biggest oil-producing country.

Nigeria is an oil-producing country like Norway but that is where the similarity ends. Norway is a nation of five million people who have invested the revenues from its 1.64m barrels per day (bpd) production through its Sovereign Wealth Fund while Nigeria shares its own oil revenues.

The move by Norway to grant tax incentives to spur investment and safeguard jobs is expected to increase investment in oil and gas activity by at least 1.6 percent this year compared to 2019, the latest investment survey by Statistics Norway revealed.

The survey also revealed total investments in oil and gas activity in Norway in 2020, including pipeline transportation, is expected to hit $20.57 billion.

Following the oil price collapse, Norway, at the end of April, passed a package of measures to support the oil and gas industry and the supply chain, including introducing temporary changes to the tax system to help companies preserve liquidity and continue with their planned projects.

“To encourage activity and safeguard jobs in this difficult situation, we are proposing some temporary amendments. In practice, these will mean that tax bills are postponed and companies’ liquidity is improved. This will enable oil and gas companies to make more investments,” Norway’s Minister of Finance Jan Tore Sanner said at the time.

According to estimates from Rystad Energy, the temporary tax relief package for the petroleum industry is set to improve exploration and production companies’ short-term liquidity and reduce breakeven prices for future development projects by about 40 percent on average.

The support package will also help Norwegian harsh-environment floater demand rise in 2020 and maintain stable levels in the years to come.

Apart from Norway, other oil-producing countries like the United States, Brazil and the Organisation of Petroleum Producing Countries (OPEC) members have been launching salvos of fiscal relief to their upstream sector, while Nigeria have remained silent in this respect.

The pattern of intervention in many other oil-producing countries ensured that the upstream segments of their oil industries are alive and well. For instance, Russia permitted the delay in dividend payments for the state-controlled Gazprom and Rosneft.

Unlike their international counterparts with huge balance sheet, firms like Aiteo E & P Ltd, Seplat Petroleum Development Company and at least 50 small to mid-sized Nigerian producers pumping between 1,000 and 100,000 barrels each day faces an existential threat.

Most analysts and chief Financial risk officers (CFOS) have asked the federal government to play similar role like their global counterparts who have rolled out measures to protect companies deemed critical to national security.

Others recommend that loan contracts should be re-worded to reflect the impact of force majeure or attacks while there should also, be discussions on moratorium on principal repayments for a longer time period of say 2 to 3 years.

“With oil prices averaging at $40, it would become difficult for oil companies to service debts and meet contracted obligations except the government comes in,” Luqman Agbola, head of research at Sofidam capital said.

In Africa’s biggest oil-producing country, indigenous energy companies ability to service debts are extremely vital to Nigeria’s banking industry.

BusinessDay estimates that Banks’ exposure to the oil and gas sector was equivalent to N3.4 trillion, as at the end of 2019.

For most stakeholders, indigenous oil companies play a key role in the development of Nigeria’s upstream sector which remains a critical revenue provider and foreign exchange source to the government.

In April, BusinessDay reported four major oil and gas projects with a combined capacity of 1.4 billion barrels of oil equivalent (boe) scattered around Nigeria, may suffer delay in Final Investment Decision (FID) as a result of lower break-even oil price and the impact of the deadly coronavirus pandemic.

Nigeria’s oil and gas sector recorded a sharp reduction in real GDP by 6.6 percent, National Bureau of Statistics (NBS) said on Monday.