PwC points to 20 changes PIB unleashes on Nigeria’s hydrocarbon industry
But industry experts say, it’s still early for blind enthusiasms
PRICEWA TERHOUSECOO PERS (PwC), the global assurance, advisory and tax services company, has released what it perceives as 20 changes in the recently passed Petroleum Industry Bill (PIB) that Nigeria’s oil and gas industry will witness and which operators and investors ought to know.
Prepared by Taiwo Oyedele, PwC’s Africa tax leader, the global consultancy starts with a background explanation: “The PIB seeks to provide legal, governance, regulatory and fiscal framework for the Nigerian Petroleum Industry and development of host communities. It contains five chapters, 319 sections, and eight schedules dealing with Rights of Pre-emption; Incorporated Joint Ventures; Domestic Base Price and Pricing Framework; Pricing Formula for Gas Price for the Gas Based Industries; Capital Allowances; Production Allowances and Cost Price Ratio Limit; Petroleum Fees, Rents and Royalty; and Creation of the Ministry of Petroleum Incorporated”.
However, since the enactment of the bill by both chambers of the National Assembly, mixed reactions have been trailing it. Many have hailed it as a milestone, yet others have expressed shock at the inclusion of certain controversial sections such as 30% frontier exploration fund, and designation of host communities from impacted communities.
Governance and Institutions: Upstream to downstream regulation; NNPC’s end
According to PwC, the first chapter would ensure good governance and accountability, creation of a commercially-oriented national petroleum company, and fostering a conducive business environment for petroleum operations. This would be seen in: creation of the Nigerian Upstream Regulatory Commission responsible for the technical and commercial regulation of the upstream petroleum operations; and the Nigerian Midstream and Downstream Petroleum Regulatory Authority responsible for the technical and commercial regulation of the midstream and downstream operations in Nigeria. The Commission and Authority are exempted from the provisions of any enactment relating to the taxation of companies or Trust Funds.
There would also be imposition of up to 1% levy on the wholesale price of petroleum products sold in the country (0.5% each for the Authority Fund and Midstream Gas Infrastructure Fund); incorporation of a commercial and profit focused NNPC Limited under CAMA within 6 months from commencement of the new law with ownership vested in the Ministry of Finance Incorporated (and Ministry of Petroleum Incorporated) on behalf of the Federation to take over assets, interests and liabilities of NNPC. This structure is expected to pave the way for eventually sale of shares to Nigerians. Any assets, interest and liabilities not transferred to NNPC Limited will remain with NNPC until extinguished or transferred to the government after which the Corporation shall cease to exist. There will be transfer and sale of the shares subject to approval by the government and endorsement by the National Economic Council. Finally, NNPC Limited will earn 10% of proceeds of the sale of profit oil and profit gas as management fee while 30% will be remitted to Frontier Exploration Fund for the development of frontier acreages in addition to 10% of rents on petroleum prospecting licences and mining leases.
So far, however, the 30 percent fund to be remitted to Frontier Exploration Fund is generating misgivings, especially from the oil-bearing Niger Delta, who feel robbed with no development of their communities for over 50 years – amid environmental degradation – but never received such a huge fund. The oil communities see the frontier exploration fund as “free cash to spend” to mainly the northern regions where the federal government has ceaselessly been pursuing oil search without much result.
Administration: End to subsidies
This chapter’s main aim is to promote the exploration and exploitation of petroleum resources in Nigeria for the benefit of the Nigerian people, and promote sustainable development of the industry, ensure safe, efficient transportation and distribution infrastructure, and transparency and accountability in the administration of petroleum resources in Nigeria. It would avoid economic distortions and ensure a competitive market for the sale and distribution of petroleum products and natural gas in Nigeria; and avoid cross-subsidies among different categories of consumers. The regulatory commission would develop a model licence and model lease to include a carried interest provision giving NNPC Limited the right to participate up to 60% in a contract.
Host communities development: Still in contention over designation
This third chapter aims to foster sustainable prosperity within oil host communities, provide direct social and economic benefits and enhance harmonious co-existence. It instructed any company granted an oil prospecting licence (OPL) or mining lease (OML) or an operating company (OC) on behalf of joint venture partners (settlor) is required to contribute 3% -5% (upstream companies) and 2% (other companies) of its actual operating expenditure in the immediately preceding calendar year to the host communities development trust fund. This is in addition to the existing contribution of 3% to the NDDC. The Fund is tax exempt, and any contributions by a settlor is tax deductible. The board of trustees and executive members of the management committee may include persons of high integrity and professional standing who may not necessarily come from any of the host communities. Also, available funds are to be allocated 75% for capital projects, 20% as reserve and 5% for administrative expenses. However, a community will forfeit the cost of repairs in the event of vandalism, sabotage and other civil unrest causing damage to petroleum facilities or disruption of production activities.
This section is still generating serious opposition from stakeholders over designation of ‘host community’ and ‘impacted community.’ Besides, the Niger Delta region people criticize the 3% - 5% trust fund as “too little” compared to the 30% which would benefit mainly the northern states going forward.
Fiscal framework: Little to cheer with IOCs offshore preference, low gas incentives
This chapter seeks to establish a progressive fiscal framework that encourages investment in the Nigerian petroleum industry, provides clarity, enhances revenues for the government, while ensuring a fair return for investors. The federal inland revenue service (FIRS) under this section would collect Hydrocarbon Tax of 15% -30% on profits from crude oil production, CIT at 30% and Education Tax at 2% which will no longer be tax deductible. The Commission will collect rents, royalties, and production shares as applicable while the Authority will collect gas flare penalty from midstream operations. Late filing of tax returns will attract N10 million on the first day and N2 million for each subsequent day the failure continues. A N20 million fine is applicable to an offense where no penalty is prescribed. Generally, expenses must be wholly, reasonably, exclusively and necessarily incurred to be tax deductible. However, a cost price ratio limit of 65% of gross revenue is imposed for hydrocarbon tax deduction purposes, any excess cost incurred may be carried forward. No tax deduction for head office costs while tax deduction of interest on monies borrowed is subject to the satisfaction of the commission that the fund was employed for upstream operations and the interest rates reflect market conditions. Royalties would be payable at the rates of 15% for onshore areas, 12.5% for shallow water, and 7.5% for deep offshore and frontier basins, 2.5% -5% for natural gas. In addition, a price-based royalty ranging from 0% -10% is payable to be credited to the Nigerian Sovereign Investment Authority.
But petroleum experts like Chijioke Nwaozuzu, a professor of petroleum downstream economics and director of Emerald Energy Institute, University of Port Harcourt, opine that Nigeria may have little to cheer from royalties, with the IOCs offshore preference, as well as low gas incentives yet. Today, most or all the international oil companies (IOCs) have moved deep offshore, citing that onshore areas and shallow water facilities are vulnerable to vandalism leading to shut-ins. Nigeria presents a clear example: Shell Petroleum only in June (2021) announced it is divesting from all its onshore and shallow water interests in Nigeria. Other IOCs, TotalEnergies, ExxonMobil, Eni, Chevron had since established their FPSOs – an indication of their deep offshore concentration.
The chapter also deals with gas utilisation incentives that will apply to midstream petroleum operations and largescale gas utilisation industries. An additional 5-years tax holiday will be granted to investors in gas pipelines.
But gas value-chain experts like Friday Udoh believe that Nigeria has yet to scratch the surface of its gas resources where it is currently discovered to have comparative advantage. There is a need to develop credible infrastructure for gas production and utilisation. A significant challenge before the Nigerian federal government is the Gas Master Plan (GMP), aimed at significantly improving the level of gas utilization in Nigeria and to provide stimulus for development and production of natural gas in-country. It is noteworthy that about 63 per cent of the associated gas produced during crude oil production in Nigeria, is flared.
Miscellaneous provisions:
The PIB repeals about 10 laws including the Associated Gas Reinjection Act; Hydrocarbon Oil Refineries Act; Motor Spirit Act; NNPC (Projects) Act; NNPC Act (when NNPC ceases to exist); PPPRA Act; Petroleum Equalisation Fund Act; PPTA; and Deep Offshore and Inland Basin PSC Act. It amends the Pre-Shipment Inspection of Oil Exports Act, while the provisions of certain laws are saved until termination or expiration of the relevant oil prospecting licenses and mining leases including the Petroleum Act, PPTA, Oil Pipelines Act, Deep Offshore and Inland Basin PSC Act.
It’s early engaging in blind enthusiasm
To be sure, petroleum industry experts say PIB’s expected gain is highly dependent on what other competing oil producing nations offer with their own PIB. According to these experts, it is early in the day for National Assembly members and the federal government to engage in blind enthusiasm over PIB passage or later ascent, without weighing it against what other competing oil producing countries in Africa offer. According to Statista.com, 11 countries in Africa today produce oil. Investopedia. com said African continent is home to five of the top 30 oil-producing countries in the world. It accounted for more than 7.9 million barrels of crude oil per day in 2019, which is about 9.6 percent of world output. It stands to the effect that PIB is not a Nigerian monopoly.