November 2020 – Nigeria 

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Last month, Bargate’s advisory board chairman, Dr Ekpen Omonbude, attended a budgIT webinar and discussed the 2020 Nigerian Petroleum Industry Bill with fellow industry professionals. Below are some of our initial thoughts and observations regarding the fiscal framework of the Nigerian 2020 Petroleum Industry Bill.  

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Backdrop 

The global oil and gas industry is experiencing interesting times. Oil prices are no longer climbing the exciting heights once reached before the collapse of 2014-2016. There is talk of a new normal, in which prices are expected to hover around US$45-50 per barrel for the foreseeable future. This has in turn affected capital expenditures from the international oil companies (IOCs) who are in stiff competition to outwardly demonstrate who is more green/sustainable. Fossil fuel is simply no longer an attractive proposition in so far as climate change is concerned and this is demonstrated in the ongoing energy transition being experienced. Any oil producing country considering this kind of backdrop would seriously have to reimagine the manner in which it would continue attracting investment into it, and the manner in which it would continue relying on the sector for revenues. This is a context that the Nigerian Government’s 2020 Petroleum Industry Bill ought to reflect, given its main challenges, namely its need for funds and its need to keep the industry attractive.  

Good intentions 

The stated objectives of the Bill appear well intentioned. They are listed as:  

• A progressive fiscal framework that encourages investment  

• A forward-looking framework based on core principles of clarity, dynamism, & fiscal rules of general application 

• A framework that expands the revenue base of the Federal Government while ensuring a fair return for investors 

• Simplification of the administration of petroleum tax 

• Promotion of equity and transparency in the fiscal regime 

It is always helpful to test such objectives against actual results, where possible, and/or against core oil and gas taxation principles such as simplicity, reasonable state take, assurance of fiscal receipts, international competitiveness, neutrality, transparency, and prevention of leakage.  

The meat of it 

The petroleum royalty system as envisaged by the Bill could be a lot simpler. It has the standard fare of lower royalty rates for higher risk fields (such as marginal fields, frontier basins and deep offshore), and higher royalty rates for lower risk fields (such as onshore or shallow water). It also has a very low and very competitive suite of royalty rates for natural gas (the highest rate being 7.5% for onshore areas). It is fairly obvious that the Government is keen on gas. Where it gets unnecessarily complicated is in the addition of a price-based royalty calculation, charging up to 10% additional royalty in circumstances where the oil price gets to US$150 per barrel. This, in the context of the new normal highlighted earlier, might prove a redundant instrument. And it is particularly interesting to note that this added component is earmarked for the benefit of the Nigerian Sovereign Investment Authority (NSIA).  

The introduction and applicability of a Hydrocarbon Tax appears clear. It will apply to onshore, shallow water, deep offshore, crude oil, condensates and natural gas liquids (NGLs) from associated gas. It will not apply to associated and non-associated gas, condensates and NGLs, and frontier acreage. Our understanding is that this Hydrocarbon Tax would eventually replace the Petroleum Profits Tax. The deep offshore tax rate is the lowest at 5%, and a distinction is made between rates for new licences and rates for existing licences converted to then be subject to this new law. The highest Hydrocarbon tax rate is 42.5%, for existing onshore operations converted under this new law.  

The fiscal system also introduces an additional chargeable tax, which appears confusing. It provides for an additional chargeable tax to be payable in certain circumstances, but the conditions for calculating the tax liability can be better framed.  

The Bill includes a production sharing system, which is straightforward. There are two cost recovery ceilings (70% for new licences and 60% for existing contracts converted under this new law) and six different profit-sharing thresholds based on cumulative oil production per field. The production shares apportioned to the Government based on these thresholds range from 5% if cumulative production is less than or up to 50 million barrels, to 45% if cumulative production is beyond 1.5 billion barrels.  

On initial analysis, the level of fiscal burden imposed by these new instruments can be as high as 90% in the case of converted licences operating onshore, and as low as 22% in the case of converted licences operating deep offshore. For new licences, however, the level of fiscal burden is much lower for onshore operations at around 61% but comparatively higher for deep water operations at about 32%.  

It is important to note that the only significant dedicated fiscal instrument itemised in the Bill for natural gas operations is the royalty. This further underscores what appears to be a clear policy push for expanding natural gas investments.  

The envisaged fiscal framework somewhat achieves its goal of progressivity, but it does not do so through the additional chargeable tax nor does it do so in periods of sustained low oil prices. Instead, it relies on increments from the royalty by price component in order to raise the level of fiscal burden if prices change. That said, the system as envisaged by the Bill provides an incentive to keep costs down: state take reduces when project costs reduce. This is an important reward for achieving cost efficiency.  

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Good intentions, but likely poor outcomes 

All said, the objectives of the Bill as envisaged do not score well on simplicity, a reasonable state take, international competitiveness, neutrality, and prevention of leakage. They do, however, score well on assurance of fiscal receipts, progressiveness (albeit based on the imposition of a heavier pre-tax burden), predictability and transparency.  

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Contact us @BargateAdvisory to learn more

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