By Norbert Pali
Before 1956 when oil was discovered in commercial quantity in the Nigeria’s Niger delta region, a Dutch oil exploration company Shell D’Arcy was granted a concessionary exploratory licence in 1938 to prospect for oil. This form of agreement (concessionary agreement) system was extended to other International Oil Companies (IOC’s) in the 1960s when Nigeria’s oil rich Niger delta started pouring oil to the global market. It could be said that this is the beginning of concessionary petroleum fiscal regime in Nigeria. Following her membership Organisation of Petroleum Exporting Countries (OPEC) in 1971, Nigeria incorporated her National oil company; the Nigerian National Oil Company (NNOC), which later metamorphosed to the present day Nigerian National Petroleum Corporation (NNPC) in 1977 .OPEC provided a resource nationalistic forum for her members which ignited the quest to take control of their oil industry . NNOC at its inception sort participation through Joint Ventures (JV’s) on carried interest basis. In that case, all the IOCs operating in Nigeria were made to establish a joint exploration and production venture with the NNOC. A Joint Operating Agreement (JOA) provides the framework of the joint ventures and specifies the respective stake of the government and the IOC’s. This is how joint venture system took over from the traditional concessionary system in Nigeria.
The need to develop and produce oil and gas from the deep offshore fields ushered in the ‘Production sharing contract’ (PSC) courtesy of Production Sharing Contract decree No.9 of 1999. In the Nigerian PSC arrangement, IOCs bears all the cost of investment at exploration and development, recovering all the cost after successful discovery and development of the field through cost oil .
Nigeria is not an exception in the current wave of resurgent nationalistic movement in oil producing countries; all of which are calling for evolvement of fair fiscal arrangement which will engender sustainable economic growth and development in the entire global energy industry. The Nigerian government on realising that there could be improvements on the two existing petroleum fiscal systems set out to address the issue by boldly calling for restructuring through the introduction of Petroleum Industry Bill (PIB) in 2008. Undoubtedly, the primary goal of the government of every oil-producing nation is to develop a fiscal regime which will be flexible and stable and at same time guarantee optimal government take from revenue accruable from oil and gas resources.
THE NATURE AND OPERATIONS TWO EXISTING FISCAL SYSTEMS IN NIGERIA.
The Joint Venture arrangement in the Nigerian upstream sector of the oil industry is a good case of unincorporated equity joint venture . Presently, the NNPC holds majority equity stake in all the joint ventures schemes, while partnering IOCs are usually the operators of the ventures, but the prerogative to assume operator-ship of any joint venture scheme in Nigeria resides with NNPC.
The fall out of the third oil shock led the Nigerian government to introduce Memorandum of Understanding (MOU) as a measure of fiscal incentive to IOCs in 1986 . It embodies guidelines and parameters that are designed to spur upstream development. The difference between the Joint Operating Agreement (JOA) and MOU lay in the fact that JOA sets the guidelines and modalities for running the operations of the Nigerian joint ventures; including equity holding and responsibilities of each party, but the MOU stipulate the guidelines for tax and royalty reduction impact and enhancing crude oil exports; leading to equitable industry margin, and encouraging investments in exploration and development activities .
Joint Venture bounds parties to contribute their equity share in the venture; fulfilling its cash call obligations . The operator drafts the venture’s operating budget to be approved by the operating partner at the beginning of every fiscal year. After the budget approval a cash call statement is issued by the operator to all partners for their monthly contribution use for the monthly running of the venture. The operator is obliged to borrow funds from the money market if any of the partners fail to meet up with its financial obligation within the given time, and the interest charge to the defaulting partner. If this is not possible, production is scaled down to a size accommodated by the available funds.
The greatest challenge faced by the JVs is the fact that some partners (especially NNPC) is always unable to meet up with their financial obligation. Each partner has the right to lift oil from the field in proportion to their respective equity holdings in a joint venture. For oil operations, every partner (including NNPC) pays tax at rate of 85% of the chargeable profits each fiscal year, while for gas operations; it is 40% . JOA always has a flat percentage rate for Royalty under gross revenue which the current MOU determines at any point in time . Tax, royalty and participatory share of oil constitute the government take in the JOA system.
The Nigerian PSC was designed to reflect fundamentals of Indonesia’s Production Sharing Agreement. Hence, the ownership of oil at the ‘wellheads’ exclusively belongs to the government who holds oil fields and other natural resources in trust for the people of Nigeria. As we have discussed earlier, the IOCs in the PSC arrangement are termed contractors. The Nigerian PSC is fashioned on a carried interest basis in which case, IOCs bears the sole responsibility of providing 100% of the risk capital and other technical requirement. They finance every stage of oil from exploration to production and only recoup their cost when production starts .
The Nigerian government pursued upstream policies that will sustain long-term development of the industry, but at the same time, they sought opportunities of minimal risk of exploration, hence, the PSC came on board as instrument to realise this goal. Oil produced under PSC arrangement is shared into; (i) royalty oil (ii) cost oil (iii) tax oil (iv) profit oil. Other features of the Nigerian model PSC include the following; No re-imbursement of exploration cost in the event that no finding is made during exploration. The exploration licence has a duration of 25-30 years. NNPC has the right to terminate the contract base on the failure of the IOCs to perform their obligations . For the PSC regime, the Government take is the sum of Royalty, share of profit oil, bonuses and, petroleum profit tax.
THE RESTRUCTURING OF INSTITUTIONS OF THE OIL INDUSTRY BY THE PIB.
The proposed PIB in Nigeria is at its final stage of metamorphosing into a substantive law after over three years of passing through legislative debate. The new bill will change the dynamics of the operations in the downstream and upstream sectors; thereby accelerating project development and overall investment attractiveness of the Nigeria’s oil industry. The bill which is designed to repeal 15 different existing legislation would be all-encompassing; such that it will address the core challenges of the current fiscal arrangement.
Among other things, the new bill will achieve four main objectives; first, it will facilitate smooth means of collecting all of government revenue from every sector of the petroleum industry, secondly, it will strengthen the means of capturing maximum economic rent taking into cognizance the possibility windfall profit as a result of higher prices. Third, it will broaden the scope of harnessing effectively the enormous potentials of the deep offshore and inland basin fields and finally, it will encourage investment in small, marginal, sub-marginal oil and gas fields.
The Nigerian Petroleum Inspectorate will have a subsidiary called National Assets Management Agency (NAPAMA) which manage all upstream costs, coordinate royalty and tax oil are monitored and approved all joint venture costs. The bill will also create an independent agency called National Petroleum Research Centre for petroleum Research and development.
Royalties, corporate income tax and Nigerian Hydrocarbon tax are the three fiscal tools to be used by the government to collect revenue. The PIB will change the Joint Venture structure to a new structure designated as ‘incorporated Joint Venture’ meaning that the NOC and the IOCs combine capital to form a corporate company in which both will have equity stake. In all, the intention of the bill is to woo more investors into Natural Gas development through fiscal incentives to encourage effective utilization of gas and complements the Gas Master Plan of 2008. The calculation methodology of economic benefits derivable from the reform by the PIB will be assessed in the next chapter.
Nutshell
This article analyzes the governments take in the existing fiscal system under the petroleum industry as against the projected intake expected from the restructuring aimed through the PIB. Norbert has made use of various methodologies to come to his conclusion. This is the first part of this interesting read. Comments, questions and suggestions are welcome on this issue.
conceptual framework!Very well organized and documented!Contractor Proposal Template
ReplyDelete