26 March 2013

Nigeria: PIB Fiscal Regime Still Very Competitive - Committee

DESPITE the controversies generated over the fiscal regime, in terms of tax and royalty being proposed in the Petroleum Industry Bill, PIB, currently undergoing legislative scrutiny at the National Assembly, the technical team that prepared the bill insists that proposals are still very highly competitive.

A presentation at the Editor's Forum in Lagos, weekend, the Lead team explained that the proposed fiscal framework is derived from a strategic national interest and incentives for attracting sustainable investment in the country. The team led by Mr. Abiye Membere, also argued that the fiscal terms are not only competitive compared to global climes, but also makes Nigeria one of the most attractive centres for oil and gas investments in the world.

Future investments

At every available opportunity international oil companies, IOCs, individually and as a group under the aegis of the Oil Producers Trade Section, OPTS, of the Lagos Chamber of Commerce and Industry, LCCI, have continued to criticize the fiscal proposals, describing them as huge disincentives to future investments in the petroleum industry. Even the indigenous marginal field operators, also complained that it would cripple their businesses if passed as proposed, as it would increase costs by almost 50 percent.

However, Membere, also the Group Executive Director, Exploration and Production, Nigerian National Petroleum Corporation, NNPC, noted that the new proposals are "predicated on production as opposed to terrain and investment respectively."

Benefits of new proposals: He identified numerous benefits attached to the new proposals in terms of production and pricing, saying that royalty on production:

•Captures the output of a company as opposed to its location

•Creates a fair balance between small and big producers operating in the same region

•Enables operators to continue to make fair returns during field decline

•Lower rates proposed for condensate for Non-Associated Gas, NAG fields

•Lower rates also proposed for frontier and ultra deepwater basins.

With regard to price, he maintained that the new fiscal terms are fair to all irrespective of terrain; self adjusting based on the prevailing price of crude at the international market. Specifically, Membere explained that the new tax regimes provide for the payment of minimum tax where incentives would have made the company liable to National Hydrocarbon Tax, NHT.

Though the Corporate Income Tax, CIT, is pegged at 30 percent irrespective of the geographical location of the asset, he argued that the new template "removes all the rigours and intricacies involved in the calculation of NHT.

Production bonuses

Furthermore, he said that Production Bonuses are now based on production as opposed to investment (which may not fully capture the essence of capital deployed), adding that this is equally fair to all, as NHT rate is proposed at 50 per cent in the case of onshore/swamp/shallow offshore, and 25% for deepwater operations.

Global trend: Contrary to insinuations that it is only in Nigeria that the government is seeking higher take from its oil and gas resources, Membere argued that "Nigeria remains one of the most attractive countries in terms of fiscal regimes (Government Take)." He further noted that "Nigeria is not alone in "tightening" of fiscal terms during successive bid rounds or adhoc awards," and compared Nigeria's fiscal proposals with the Angolan bid rounds, where the Government Take at the level of Nigeria's 2005 Production Sharing Contract, PSC terms.

According to him, "Proposed 2012 PIB actually lowers GT to 70% which is lower than the 76% GT based on current Angolan fiscal terms," adding that there is a "Marginal increase on percent Government Take (GT) in the JV Operations from 87% to 88% at $80/bbl crude price." He said the objective is with a view to achieving a fair balance between government and contractors share as well as to ensure risks do not outweigh reward. Overall, he maintained that the new PIB fiscal policy offered, "A generous Production Allowance, lower royalty rates and tax holidays are incentives designed to attract investments in gas sector."

Unbundling NNPC: Rather than the outright privatisation of the NNPC, Membere said that the Federal Government decided to set up an asset management company, as a holding company, for some of the corporation's subsidiaries, to be known as National Asset Management Corporation, NAMCORP.

The holding company will include all the assets of the corporation, excluding the National Petroleum Investment Management Services, NAPIMS; and the Nigerian Gas Company, NGC, 30 per cent of which will be given up for private equity to investors.

NAPIMS and NGC will then become separate entities to make up the three National Oil Companies, NOCs, instead of one, as being proposed in the Petroleum Industry Bill, PIB, currently undergoing scrutiny at the National Assembly. The development comes even as the Exploration and Production Directorate of the NNPC has put in place measures to address the high cost of operations in the nation's petroleum industry, one of the bones of contention with the International oil companies, IOCs, in the fiscal regime proposed in the PIB. Clarifying further on the development, Membere, told journalists that the new PIB was not the monster bill, being described by the IOCs.

Rationale for decision: He explained that rather, the bill merely seeks to enhance the Federal Government's take from petroleum resources in a very competitive and unambiguous manner, in line with global trends.

Other objectives of the PIB include: To enhance exploration and exploitation of petroleum resources; to significantly increase DomGas supplies especially for power and industry; create competitive business environment; to establish fiscal framework that is flexible, stable and competitively attractive; to create commercially viable national oil company'; to create efficient regulatory institutions; to engender transparency and accountability; to promote Nigerian content development; to promote and protect Health Safety and Environment

He disclosed that the government had to toe this line after considering all the issues involved in the privatisation of the NNPC assets, particularly the refineries, which he said were being priced as peanuts because of their current states. He noted that with the Joint Venture, JV, assets as well as those of the National Petroleum Development Company, NPDC, the value of the refineries would be shored up, once the 30 per cent equity is privatised.

He said the move was meant to "preserve the very profitable JV arrangement that contributes over 82 per cent of the total revenue from petroleum, ring fence so there is no divestment of the National Asset Company in addition to providing opportunities for IJV with the JV partners. Contrary to criticisms, he argued that the fiscal policy framework was "derived from a strategic national interest and incentives for attracting sustainable investment in the region."

Expatiating further, he said the holding company would require a seed loan for two years to prepare it for self funding, adding that this will also provide private participation as it is simil toar other NOCs like Petrobras of Brazil, Petronas of Malaysia and a host of others; promote cultural change to a fully accountable and commercial company; and provide adequate funding for the NOC.

He said all these were part of the presentations made by the National Working and Group Executive Committees of PENGASSAN and NUPENG, with a view to understanding the draft PIB better.

Cost reduction measures: With regard to the cost reduction measures, membere said there was an industry wide standardisation of processes and evaluation mechanism for estimation of drilling and drilling services costs, using a common template across all the IOCs. Part of the standardisation include personnel and common costs, while also benchmarking major projects costs in line with international best practices.

Furthermore, he said the NNPC also intended to rank projects and select proposals in accordance with well established project selection, particularly on life cycle costs, and unit technical cost. Other cost reduction measures include develop synergy among operators by pooling common services and resources to avoid duplication of costs; address security challenges in alliance with security agencies, and reducing management costs induced by lengthy contracting cycles.

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