Oil and gas taxation in nigeria
Mondaq uses cookies on this website. By using our website you agree to our use of cookies as set out in our Privacy Policy. The Nigerian oil and gas sector has practically sustained the entire national economy since the discovery of crude oil in the country. Although some argue that the oil boom led to the stagnation of the non-oil sector, efforts to change the narrative by diversifying the nation's economy beyond oil leaves much to be desired. Worse still, financial resources garnered from activities in the oil and gas sector have not been sufficiently re-invested to deliver a self-sustaining oil and gas sector that can compare to its counterparts in other parts of the world like Saudi Arabia, Brazil etc. Although the global oil and gas industry is dynamic and complex, some of the important factors that have influenced policy making and planning include unstable oil prices and increasing discovery of oil and gas resources in several jurisdictions across the globe.
Energy: Oil and Gas 2019
If there is a sector of the Nigerian economy that has contributed significantly to revenue generation for the government, it is the oil and gas sector. Pockets of change introduced to the laws in the past were at best, cosmetic, as they neither addressed the fundamental flaws in those laws, nor the problems with the institutions set up under them. However, the first major attempt to craft a new, fully-fledged fiscal legislation around the taxation of gas as an independent resource was made in , with the drafting of the Gas Fiscal Reform Bill GFRB —which seeks to provide fiscal incentives for the taxation of natural gas as a stand-alone resource, as opposed to treating it as a by-product of oil operation.
Based on a clamor that the existing PPTA was out of tune with the realities of the time, the government sought to expand the remit of the GFRB to cover a new set of rules for the taxation of crude oil.
At about the same time, there were voices in support of a holistic overhaul of the state institutions charged with the responsibility of overseeing the activities of the oil and gas industry. Eventually, an omnibus bill, the Petroleum Industry Bill the PIB , was fashioned to cater to all the various facets of the industry—the institutions, the fiscal regime and community concerns, among others.
The PIB was an all-encompassing piece of legislation into which was put a set of new provisions in respect of about 16 pieces of existing legislation. The PIB, which was first introduced to the National Assembly in , has passed through several iterations and debates by successive law-making bodies since then. However, it has not been passed into law because of its size and the inability of various stakeholders to agree on all the fundamentals that the law was supposed to address.
Consequently, and to facilitate the passage of the legislation, the PIB was split into four parts:. The Petroleum Industry Governance Bill was passed by the Nigerian legislature in the second quarter of , and sent to the President for assent. Unfortunately, the President returned the Bill to the legislature, citing some constitutional and legal issues.
In essence, the current fiscal regime applicable to existing oil and gas arrangements will change. However, to manage the impact of the change, three transitional provisions in the PIFB have been introduced by the HoR as follows:. While the second and third transitional provisions are a welcome development for existing projects, they signal unintended consequences for new capital investment in the sector, especially in the two priority areas: deep-water water depth in excess of meters acreage development and development of natural gas reserves.
Substantial capital investments are required for the exploration, discovery and development of new oil and gas reserves—especially in the deep-water regions, and for development of current natural gas extraction, gathering and production capabilities, which is a key initiative for reducing gas flaring in Nigeria, and for facilitating the emergence of a viable power sector.
Instead, a graduated production allowance will be granted. The potential implications of these transitional provisions would be twofold, as detailed below. Typically, the impact of these incentives on the annual tax liabilities, and on deep-water project economics generally, is significant. Therefore, the removal of the incentives will likely discourage investment, in future, in deep-water oil projects.
However, over the life of the field, on the assumption that profit will continue to rise with reduction in capital expenditure outlay, the reduction in the tax rate may only be beneficial in the long run. The exemptions relate to new development to eliminate gas flaring and new gas field development from deep formations.
While the introduction of a production allowance is targeted at incentivizing increased production, restricting its application to companies that commence production after the passage of the Bill is counterproductive. Government must provide a level playing field for all operators, without discrimination.
The same goes for the claim of a production allowance. Investors must not be punished for the faith they had in the country, simply because government desires to incentivize new entrants. Unless this selective restriction is removed, it is unlikely that operators would commit additional resources to the development of much-needed oil and gas reserves.
This protective clause provides that if the existing laws applicable to the arrangement are amended, or a new law or regulation is passed that affects the rights, obligations or economic benefits of the contractor, the parties to the contract shall agree to a modification of the contract to compensate the contractor for the effect of such negative changes.
Where this is not done, the contractor has the right to take necessary legal steps to remedy the situation.
Unless the clause proposing the removal of ITAs and ITCs on capital investments in deep-water fields is properly managed by the government or removed, it may give rise to needless litigation by affected operators. Some of the incentives for companies involved in the utilization of natural gas both associated and non-associated gas , as currently provided for in the PPTA, include:. However, the incentives for upstream gas operations in the PIFB are not as incentivizing as those highlighted above.
The federal government had articulated a formal policy of promoting investment in gas exploration, infrastructure, and production, prior to the PIFB. Unfortunately, the PIFB does not seem to align with the intent of government in that policy, by deepening the fiscal incentives for gas investment and production. With a complete replacement of the PPTA by the PIFB, it remains to be seen how the government intends to attract foreign direct investment into the development of Nigerian gas resources, which is urgently needed to solve the problem in the power sector.
In addition, the PIFB does not address some of the operational issues with regards to the tax treatment of commingled cost for associated gas production. This lacuna may give rise to subjective interpretations by various stakeholders, and may lead to chaos in its implementation. This will put to rest the current controversy regarding under which applicable tax regime upstream gas operations actually fall—PPTA or CITA—particularly regarding whether dividends earned from gas operations will not be subject to withholding tax.
Based on the potential adverse impact these transitional provisions may have on new capital investment, it is important that the National Assembly revisit the draft PIFB and make necessary amendments to it before it is passed into law. Rather than scrap the incentive completely, the National Assembly may consider allowing existing blocks to enjoy the incentive through the life of the blocks, while introducing a progressive rate scale to encourage increased investment for new blocks.
This should be done on a company by company basis. This will enhance reduction in gas flaring and serve as feedstock for the power sector. It is not sufficient to discourage gas flaring by increasing the penalty rates, as stipulated in the new Regulation on Flare Gas; adequate incentives must also be offered to encourage investment in gas utilization projects with the ultimate goal of making gas flaring option unattractive.
The authors can be contacted at: ayo. Log in to access all of your Bloomberg Law products. Single Sign-On. However, to manage the impact of the change, three transitional provisions in the PIFB have been introduced by the HoR as follows: The Department of Petroleum Resources, which currently oversees the industry, would continue to do so until the establishment of the Petroleum Regulatory Commission—its successor institution.
The current gas utilization incentives provided under the PPTA will continue to apply to upstream gas utilization projects which were approved by the relevant regulatory agency and which have witnessed significant investment prior to the commencement of the PIFB. These two transitional provisions are therefore the focus of this article. Going Forward Based on the potential adverse impact these transitional provisions may have on new capital investment, it is important that the National Assembly revisit the draft PIFB and make necessary amendments to it before it is passed into law.
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consult their local EY professionals for more information. EY's Global oil and gas tax guide is part of a suite of tax guides, including the Worldwide Corporate Tax. in the provision of compliance and advisory services, to companies operating in the upstream, midstream and downstream sector of the oil and gas industry.
The firm has a robust oil and gas practice, which cuts across start-ups, bids, asset acquisitions, financing and advisory support. The firm offers expertise in the power, infrastructure, finance, corporate and commercial, real estate, technology, IP, capital markets and private equity sectors. Petroleum in Nigeria is owned by the federal government. Petroleum activities in Nigeria are primarily regulated by the following ministries and agencies.
With a maximum crude oil production capacity of 2.
In a letter sent to the companies earlier this year via a debt-collection arm of the government, Nigerian National Petroleum Corp NNPC cited what it called outstanding royalties and taxes for oil and gas production. The charge came after the central Nigerian government and local states settled a dispute over the distribution of revenue from hydrocarbon production. The sides agreed last year that Abuja would pay the states several billion dollars, three company and government sources said.
Nigeria: Oil & Gas Regulation 2020
If there is a sector of the Nigerian economy that has contributed significantly to revenue generation for the government, it is the oil and gas sector. Pockets of change introduced to the laws in the past were at best, cosmetic, as they neither addressed the fundamental flaws in those laws, nor the problems with the institutions set up under them. However, the first major attempt to craft a new, fully-fledged fiscal legislation around the taxation of gas as an independent resource was made in , with the drafting of the Gas Fiscal Reform Bill GFRB —which seeks to provide fiscal incentives for the taxation of natural gas as a stand-alone resource, as opposed to treating it as a by-product of oil operation. Based on a clamor that the existing PPTA was out of tune with the realities of the time, the government sought to expand the remit of the GFRB to cover a new set of rules for the taxation of crude oil. At about the same time, there were voices in support of a holistic overhaul of the state institutions charged with the responsibility of overseeing the activities of the oil and gas industry.
INSIGHT: Nigerian Petroleum Industry Fiscal Bill—Encouraging Investment?
Although Nigeria is widely known for its crude oil production, it is often referred to as a gas province with pockets of oil. This is evidenced by the fact that Nigeria's current recoverable oil reserves are estimated at The industry is the major driver of the Nigerian economy, and the government of the Federal Republic of Nigeria regulates and actively participates in this industry through its national oil company, the Nigerian National Petroleum Corporation NNPC. The upstream sector, the most active sector of the Nigerian petroleum industry, is largely export-focused and until recently dominated exclusively by international oil companies. The Nigerian government's marginal fields licensing regime 3 and its content development drive 4 has led to increased participation of indigenous oil companies in the petroleum industry. The midstream and downstream sectors are dominated by indigenous players. Both sectors, excluding liquefied natural gas LNG , are significantly underdeveloped as Nigeria's refineries are currently producing approximately 10 million litres of petroleum products per day, which is remarkably low when compared with Nigeria's daily consumption of about 35 million litres per day. As a result, there is heavy reliance on the importation of petroleum products in the downstream sector, which, until May , were heavily subsidised by the government.
