Why revised PIB is unsettling oil sector operators

While oil sector operators are happy with the possibility of passing the 20-year old Petroleum Industry Bill, they fear it introduced complexity in administering the sector, is focused on rents at the expense of investments, and did not clarify what happens to previous contracts and base businesses.

The proposed law also does not provide a clear dispute resolution mechanism, a risk heightened by the planned unbundling of the Nigerian National Petroleum Corporation (NNPC) raising questions about how to settle its liabilities and resolve obligations with joint venture partners.

The danger for a country where 90 percent of its foreign exchange income relies on crude sales is that it could dampen output, send investment dollars to rivals, and presents an existential threat for an oil-dependent country in a world moving away from oil.

The revised PIB does not ensure the preservation of base businesses and rights including earned tax benefits. It does not preserve base businesses on which new, primarily brownfield projects are built.

“OPTS recognises the government’s right to change laws. However, to maintain Nigeria’s reputation amongst investors, it is important for the PIB to explicitly preserve base businesses and rights for existing Joint Venture licenses 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, licenses and leases,” he said.

Some operators say the PIB does not provide a favourable environment for future investments and launching projects and could lead Nigeria to forego 30 percent of government take by 2030.

“The revised Bill contains many novel aspects such as production allowance, multi-tier tax structures, Nigerian hydrocarbon tax among others, but how investor-friendly is the total package, compared with other countries like Nigeria?,” asked analysts at the Centre for Petroleum Information.

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The revised PIB prescribes a royalty rate of 10 percent for deep offshore terrain greater than 200m, price royalty rates of 5 percent at $100 per barrel, and 10 percent if oil prices sell above $150 per barrel.

Operators are calling for a full royalty relief during the first five years of production or a graduated royalty scheme due to the huge capital outlay involved in developing deepwater projects.

The Nigerian government bears no risk and contributes no capital in the development of deepwater fields yet its take exceeds that of many peers for prolific deepwater basins.

Some oil sector operators also contend the PIB prohibits operators from fulfilling existing contract obligations. It does not also 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 the government’s aspirations for the domestic gas sector.

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 said Mike Sangster, chairman of the Oil Producers Trade Section (OPTS) during a presentation to lawmakers at the PIB public hearing.

Operators contend that recognised accounting principles in Nigeria such as capital allowances and deductions should also apply in the oil and gas sector and consistency across fiscal Acts is required to shore up investor confidence, decrease the risk of disputes and simplify implementation.

The revised PIB expunged the restrictions to capital allowance claimable in the 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.

Analysts say a progressive tax system is not only consistent across sectors, but government taxes also increase with excess profits and correspondingly, the government’s take reduces when profitability drops.

“Our government take 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.

The revised PIB also segregated the upstream and midstream deemed assets imposing different regulators but operators fear it could jeopardise the integrity of current investments.

They counselled that the PIB should include savings provision to allow post-conversion continuity of activities undertaken by a single legal entity and provide a specific exemption for all associated taxes where assets are to be segregated.