Petroleum bill: The law that could cost Nigeria billions06/09/2011
Author: Bassey Udo
Date: 28th August 2011
Every day that goes without the Petroleum Industry Bill (PIB) being passed into law means huge loss to Nigeria. Over five decades since the discovery of oil in commercial quantity, the laws regulating its operations are hinged on the provisions of the 1969 Petroleum Act and over a dozen and half of other outdated official circulars.
The PIB was conceived by government to repeal these laws and establish a single, up to date and comprehensive legal and regulatory framework that would entrench good governance, transparency and accountability, with particular emphasis on fresh operational and fiscal terms for revenue management, and to remove confidentiality clauses in licenses, leases and contracts to enable government earn more revenue from petroleum industry operations.
The objective principles that underlines the proposals are varied: create an attractive environment for increased oil and gas production and national reserves for higher revenues; boost domestic gas utilization and exports; raise government revenue haul from deepwater operations; create a stable fiscal regime, and help resolve the perennial Niger Delta crisis.
“The quantum of losses as a result of the long delay in passing the PIB into law can only be imagined,” said an industry operator. He said the multinational oil companies may be deliberately frustrating the passage of the bill as it would eliminate some of the lapses on which they currently thrive.”
Apart from almost N500 million said to have been spent by the Nigerian National Petroleum Corporation (NNPC) in preparing the draft bill, government says almost $300 million is lost monthly as additional revenues that could have been earned from the three existing Production Sharing Contracts (PSCs) operated by Shell, ExxonMobil and Chevron joint ventures.
A major thrust of the bill as prepared by government is to help establish an independent commercially oriented self-financing national oil company; create a transparent and non-discriminatory arrangement for contracts and award of oil acreages, and establish an industry that respects international best practices on health, safety and environment.
From the standpoint of the major international oil companies (IOCs), some provisions of the bill are investor-unfriendly, uneconomic and unattractive, and that, if passed into law, would deter growth, as a result of potential losses of a minimum of $50 billion annually in fresh investments.
The companies are concerned about the introduction of new taxes, including the Nigerian Hydrocarbon Tax (NHT), Company Income Tax (CIT), Niger Delta Development Commission levy, rent on assigned acreages, education tax and penalty for flared gas from where government hopes to earn an average of $10 million daily at the current average oil production capacity of about 2.3 million barrels per day (bpd).
However, the Nigerian Extractive Industries Transparency Initiative (NEITI) says nothing could be worse than having a new law with inappropriate and unfavourable fiscal provisions deliberately designed to reduce government earnings to tune of an average of $3.6 billion annually.
Chairman, NEITI National Stakeholders Working Group (NSWG), Assisi Asobie, said some fiscal terms proposed in the law currently pending approval were deliberately designed to reduce government revenue from petroleum operations.
He noted that what is proposed will set government’s share of oil revenues below internationally competitive levels, while the proposed fiscal structure is designed to ensure a rapid erosion of government earnings from the petroleum sector within the next five years.
What is proposed in the House of Representative Report, NEITI said, is a maximum of 45 percent share in oil revenues under PSC and 60 percent in JV, warning that “this is dangerous to our already fragile economy that is oil-revenue dependent,” he said.
Whereas the current fiscal structure give the government 48 percent share of all oil revenues under the production sharing contract (PSC) and 82 percent under the joint venture agreement (JOA) terms, international rates of host government’s being promoted by multinationals put same between 56 and 90 percent.
According to him, the content of the document before the National Assembly is designed to bend the bill to serve foreign rather than national interest.
Proposed government fiscal provisions
Contrary to the fiscal arrangement under the existing joint ventures between the NNPC and the IOCs, where government revenue take is on the basis of royalties and taxes only, the terms proposed in the PIB shifts emphasis from taxes to payment of rents and royalties.
This reduces the tax nature of the petroleum profit tax (PPT) by splitting it into the NHT and CIT, to be paid by all companies involved in the operations of the petroleum industry, with the former not deductible for the latter. The new tax rate will be reduced from 85 percent to 80 percent in the ration of 30 percent for CIT and 50 percent for NHT.
If the PIB is passed, government stands to reap benefits in increased revenue. Based on 2008 figures, total revenue from tax returns from the three PSCs was $5.856 billion, made up of royalties ($143.32 million), profit oil ($1.299 billion), profit oil ($4.414 billion). However, based on the proposed fiscal terms in the PIB, government should earn a total of $9.311 billion, made up of royalties $4.769 billion; profit oil, $1.325 billion; Nigerian Hydrocarbon Tax (NHT), $1.476 billion, and company income tax (CIT), $1.476 billion).
If the revenues from the three JVs are based on actual tax returns due to increased royalties based on value, government would earn about $10.044 billion, made up of royalties, $4.959 billion; NHT, $3.342 billion, and CIT, $1.743 billion as against the corresponding figures of $3.247 billion, $6.132 billion and zero CIT that would been earned from the current fiscal terms.
On revenue from royalty, profit oil and other payments, NEITI noted that though the federal government proposed earnings of about $9.3 billion in the pending PIB, as against current terms, which fetched only $5.9 billion as oil production increases, the fiscal terms contained in the Senate Committee’s report took it further down to $5.8 billion.
“If the NASS (National Assembly) passes the bill as it is now, the Nigerian oil and gas sector will be in serious danger of not achieving the desired national goal of promoting greater indigenous participation and increased revenue generation for national development.”
Mr Asobie warned that the country should be mindful of the long term implication of such venture. “In view of the fact that oil is the mainstay of the Nigeria economy, the National Assembly owes all Nigerians a responsibility to promote Nigeria’s interest in the bill, protect our corporate sovereignty and secure the future of generations yet unborn.”