FISCAL REGIMES IN THE UKCS & NIGERIA

By Mabel Imoh Gab-Umoden

WHAT FISCAL REGIMES APPLY IN THE UKCS?

From the figure 3 in my previous article (FISCAL REGIMES: Components and the Economic Rent), we observe that the UKCS (United Kingdom Continental Shelf) operates a concessionary fiscal regime which is a combination of royalties and taxes. According to Her Majesty’s (HM) Treasury 2007, the UKCS falls within three regimes – Petroleum Revenue Tax, Ring-Fence Corporation Tax and Supplementary Charge. The structure of the UKCS fiscal regime was created in 1975 and adjusted with a number of different taxes up until 1981 (Abdo, 2000).

The Petroleum Revenue Tax - is a special tax on the North Sea exploitation, levied on a field by field basis (Watkins, 2001). It is administered by the HM Revenue and Customs Large Business Service – Oil and Gas sector (LBSOG) and seeks to tax a large proportion of economic rent from the exploitation of UK’s Oil and Gas (HM Revenue and Customs, 2008). It is important to note that “major reforms in 1993 ended the PRT charge for any fields receiving development consent from the Secretary of State on or after 16 March 1993. Such fields are known as “non taxable fields”. They are not liable to PRT and cannot generate any reliefs or surrender reliefs or losses to those fields (taxable fields) remaining subject to PRT’’ (HM Treasury, 2007).

The Ring Fence Corporation Tax – This is a standard corporation tax that is applicable to all companies and the ring fence was established to ensure that corporation taxes on profit from oil extraction activities are fully paid as the profits accrue (HM Revenue and Customs, 2008). The current rate of corporation tax applicable within the North Sea ring fence is 30% (HM Treasury, 2007).

Supplementary Charge – the Finance Act 2002 introduced a Supplementary Charge of 10% on adjusted ring fence profits and was later increased to 20% in the Finance Act of 2006 (HM Treasury, 2007).

The UKCS fiscal regime ruled out royalties in 2003.

WHAT FISCAL REGIMES APPLY IN NIGERIA?

Oil was first found in Nigeria in 1956 by Shell-BP at Oloibiri town in the Niger Delta region of the country and later joined the Organisation of Petroleum Exporting Countries (OPEC) in 1971, thereafter establishing the Nigerian National Petroleum Corporation which is a state-owned and controlled company in 1977 (NNPC, 2010). The Nigerian fiscal regime is made up of three agreements: the Joint Operating Agreement (JOA), the Production Sharing Contract (PSC) and the Service Contract (SC) (NNPC, 2010).

The Joint Venture Agreement which is a concessionary arrangement is governed basically by royalty and taxation plus a government (NNPC) majority participation interest of which the rewards to the government in terms of revenue are in the form of bonuses, royalty payments, taxation of profit and equity interest participation (Iledare and Suberu, 2010).

The main features of the JOA are:

i)              One of the parties to the agreement is appointed the operator

ii)             NNPC also has the right to become an operator

iii)            Each party can decide to carry on sole risk operations

iv)           All parties share in the cost of operations

v)            Technical issues and policy decisions are made known at operating committees (NAPIMS, 2010)

With respect to the PSC, the International Oil Company provides the means for the exploration and development activities in offshore Nigeria (Iledare and Suberu, 2010). The first PSC was signed in 1973 with Ashland Oil (Iledare and Suberu, 2010).

The main features of the PSC are:

i)              The contractor bears all the costs and would not be reimbursed if no finding is made on the given area.

ii)             Cost is recoverable if there happens to be a commercial discovery and provisions are made for tax oil and cost oil.

iii)            Profits are shared as agreed subsequent to the recovery of approved company costs, subject to the specified cost recovery limit (Iledare and Suberu, 2010).

For Ashland Oil, the terms of the contract included a 40% cost recovery limit, a 55% petroleum profit tax and a 70/30 profit oil split which was in favour of the government (Iledare and Suberu, 2010). At the moment, Star Deep Water, Chevron, Oranto Philips, Statoil, Snepco, Esso, Elf, Nigerian Agip Exploration Limited, Addax, Conoco and Petrobas, are operating the PSC in the country (NAPIMS, 2010).

The Service Agreement is not so popular in Nigeria as only Agip Energy and Natural Resources (AENR) operates the SC in Nigeria (NAPIMS, 2010)

NUTSHELL:

In this article, Mabel seeks to shed more light on the make-ups of the Nigerian and UKCS fiscal regimes. This article does come in handy as a quick guide for clarification on some salient points usually missed out in discussions on fiscal regimes- particularly given the fact that both the UK and Nigerian Governments are currently undergoing high level exchanges of opinions with investors (Oil & Gas Exploration businesses) and stakeholders on adjustments which are obviously to the benefit of the respective Governments. Get your facts right, read this article before you hop into that meeting. For more information on this article and to view Mabel's professional profile, click here.-->