Nigeria’s gas sector and the role of tax incentives in stimulating economic growth

The rising demand globally for cleaner energy resources is a platform for Nigeria to harness its gas resources for the development of the nation’s economy. Nigeria’s gas sector has become a key player in the country’s economic progress, offering exciting opportunities for both local and international investors.

This transition is part of a larger plan to expand the economy and decrease reliance on crude oil exports. With a rising population and increasing energy demands, the sector presents a pathway for sustainable economic growth, catering to the changing needs of the nation.

At the Nigerian Association for Energy Economics 16th Annual International Conference, with the theme, ‘Energy evolution, transition, and reform: Prospects for African Economies’, the Chief Executive Officer of the Nigerian Upstream Petroleum Regulatory Commission disclosed that Nigeria currently accounts for 33 per cent of the total gas reserves in Africa, estimated at 209 trillion cubic feet.

This vast resource encompasses natural gas, liquefied natural gas, compressed natural gas, and liquefied petroleum gas, presenting diverse applications in power generation, industrial use, residential and commercial consumption. The adoption of natural gas as a cleaner energy alternative to traditional fossil fuels has also gained traction in promoting environmental sustainability and reducing the nation’s carbon footprint which is the way to go considering the potential challenges associated with global warming.

Strategic tax incentives in the gas sector are vital for economic growth, attracting local and foreign investments. Focused on reducing crude oil reliance, government initiatives such as the Nigerian Gas Master Plan and the National Gas Policy foster an environment conducive to investment, promoting sustainable growth, and enhancing the country’s energy infrastructure.

In line with its commitment to bolster the gas sector, the Nigerian government introduced a series of tax incentives tailored to attract both local and foreign investors. These incentives have fostered a business-friendly environment, encouraged innovation, and stimulated investment across the gas value chain. Notably, the Petroleum Industry Act (PIA) and recent amendments to the Company Income Tax Act by the Finance Act have laid the foundation for a more favourable fiscal regime for companies operating within the gas sector.

Strategic tax incentives in the gas sector are vital for economic growth, attracting local and foreign investments.

Eligible companies engaged in gas utilisation are entitled to a tax-free period for up to five years, accelerated capital allowance after the tax-free period, and tax-free dividends during the tax-free period. To encourage investment in domestic gas operations and large-scale gas utilisation industries, the PIA extends the gas utilisation incentives to cover these industries. Further, it grants an additional tax-free period of five years for investors in gas pipelines.

Also geared toward promoting investment in the sector through tax incentives is the fiscal framework of the gas sector as also introduced in the PIA. These incentives include the exemption of hydrocarbon tax, reduced royalties payable to the government on gas exploration, specifically gas produced for domestic use and the exclusion of price-based royalties for gas production.

There is also the exemption from payment of value added tax (VAT) on the importation of equipment and machinery for all gas-related activities. This exemption plays a crucial role in reducing the cost burden for investors, enhancing operational efficiency and overall profitability making it more attractive for both local and international investors.

The government’s recent approval of import duty and VAT exemptions on LPG aims to align energy and fiscal policies, boosting domestic supply to meet demand. These incentives create a direct path to financial gains for investors, fostering an environment conducive to substantial investments in the LPG sector with potential mechanisms for strategic alignment.

These incentives are expected to create a conducive environment for increased investment and expansion translating into significant tax savings for businesses and fostering a more vibrant and competitive landscape for market players.

Simultaneously, fostering public-private partnerships serves as an integral enhancement to a collaborative framework. Actively encouraging collaboration between public and private entities facilitates the optimal utilisation of private sector expertise and resources, particularly in critical areas such as infrastructure development.

The government’s commitment to bolstering the nation’s gas transmission and distribution network creates a lucrative investment opportunity. To sustain private sector involvement in pipeline and facility construction, deliberate measures are vital. This infrastructure forms the bedrock for efficient nationwide gas transportation, guaranteeing a steady energy supply for diverse industries and users.

The strategic focus of the PIA on the promotion of gas-fired power generation addresses the critical need for such expanded energy access. It also presents an opportunity for investors to direct their resources into cutting-edge gas-fired power plants, thereby diversifying the energy mix and laying the foundation for sustainable economic growth.

As the demand for cleaner fuels grows, Nigeria’s CNG and LPG industries gain momentum. The PIA promotes investment, offering affordable, eco-friendly alternatives. This sets the stage for a thriving market, providing opportunities for investors to tap into the rising demand for sustainable energy solutions.

Despite tax incentives and investment opportunities in the gas sector, companies must prioritise tax compliance. The Nigerian government enforces stringent measures to ensure obligations are met, fostering socio-economic development. Strict compliance demonstrates commitment to ethics, promoting transparency and accountability in the gas sector for overall industry enhancement.

Navigating the global energy market complexities, Nigeria relies on abundant gas reserves to assert itself globally. Aiming to reduce crude oil dependence and broaden energy horizons, the gas sector, buoyed by tax incentives, offers hope and opportunity. The success of these incentives hinges on meticulous design, implementation, and monitoring for optimal utility and effectiveness.

Oluwatumininu Familusi, Associate Director, Business Tax Services, Ernst & Young Nigeria.