The existing fiscal terms and other fiscal laws in Nigeria may not necessarily attract investors, except the ongoing reforms in the sector are completed and passed into law expeditiously with flexible royalty, effective optical tax rates, and output expansion incentives.
Speaking on the theme Competivieness of Fiscal Regimes in Nigeria,
Balancing Geologic Prospectivity with Progressive, Flexible and Stable Fiscal Regimes, Omowumi Iledare, Professor Emeritus, LSU Energy Studies, Baton Rouge, Louisiana, USA; who is also the Executive Director, Emmanuel Egbogah Foundation Abuja, Nigeria and Director, Africa Region and Society of Petroleum Engineers International, Dallas, to mention but a few stated this during the Facility for Oil Sector Transparency and Reform, FOSTER, Petroleum Dialogue Series on Fiscal Regulation Webinar in partnership with Energy Institute, EI, Nigeria branch.
“The existing fiscal terms and other fiscal laws in Nigeria may not necessarily attract investors, except the ongoing reforms in the sector are completed and passed into law expeditiously with flexible royalty, effective optical tax rates, and output expansion incentives”, he said.
He pointed out that it is observed that globally, fiscal systems are designed to encourage substantial and progressive investment in the industry, while balancing rewards with risk and enhancing revenues to the host government, based on mutuality of interests.
According to him, “the existing tax rate in Nigeria is perceived to be one of the highest in the world and policy perception may matter as much, if not, more than geologic prospectivity”.
“Regrettably though, when it comes to contractor’s perception with respect to the earning power of investment, the performance of deep-water projects in Nigeria under the fiscal elements in DOA19, PIFB, & NPFP is sub-optima”, he added.
“It would seem that the important fiscal regime levers, such as royalty, profit split, cost recovery limit and taxation mechanism in existing fiscal regime must be revisited to improve the current low ranking of the investment earning power performance. Finally, a vital component of reforms to promote competitiveness and attractiveness for Nigeria’s fiscal regime would be to establish strong institutions, policy, commercial and regulatory. Facilitate a good understanding of the general fiscal elements of fiscal regimes and economic rent extraction mechanism, keeping in perspective the mutuality of interests of stakeholders”, Iledare stressed.
Fiscal system instruments and terms determines the equitability of investment cost recovery and the degree of return on investment or at least a fair profit or earning distribution and government access to revenue from oil and gas.
The host government exhibits great influence and considerable leeway to avoid terms and conditions that could easily dampen E&P investments, yet have optima access to gross revenue.
Over the years, operators and petroleum-producing countries’ host governments have negotiated their interests using two basic fiscal systems—concessionary or contractual
“Exploration & Production E&P firms or investors bidding for the right to explore and develop petroleum in a host country desire to receive a fair and satisfactory return on investment in a quick and orderly manner.
“Investors tend to view host countries’ fiscal regimes critically on the basis of their financial objectives. To attract investors to a petroleum region, an area must not only be highly prospective in the geologic sense, the area must also have a dynamic, efficient, and stable fiscal arrangement.
“Key determinants of FDI for exploration and production activities is the competitiveness and attractiveness of the petroleum fiscal system underlying oil and gas development in the country.
He further stated that Fiscal regimes describe all legislative, taxation policy, contractual, and fiscal elements under which petroleum operations are conducted in petroleum provinces or nations.
“Usually, the primary objective of the host government in petroleum-producing nation is to ensure maximum economic benefits for the country. It is more of how to get the best for the economy. Other objectives may, however, be pursued, including efficient resource development, access to technology, skilled national manpower, investment funding for local E&P activity, and sustainable economic growth (Iledare, 2008’
“Govern by seemingly obsolete laws such as the Petroleum Act (PA) of 1969 and its amendments, the Petroleum Profit Tax (PPT) Act of 1958 and its amendments, and the Deep Offshore & Inland Basin Production Sharing Contract (DOIBPSC) Act of 1999 and its amendments.
Several attempts to reform the petroleum sector in the last two decades to promote governance stability, reduce uncertainty, and attract investors have been elusive”, he stressed.
The ineffectuality, of reforms, perhaps, according to him has led to some ambiguity, huge uncertainty and lack of focus on both the government and the investors alike.
“Hence, the need to quickly bring closure to the current petroleum reforms efforts”.
Also speaking Nigeria’s oil investment climate under existing market conditions the Crystol Energy Energy Institute Nigeria, CEO, Carole Nakhle said, Nigeria is on the right path in terms of moving with the long-awaited reforms of its petroleum fiscal regime.
She however stated that the delays over the year and related intense debates and controversies have heightened the fiscal and political risk and negatively affected investors’ confidence in government policies.
“Any new fiscal changes, should take into consideration not only immediate government needs for more revenues but also the prevailing conditions in global oil markets and what other competing provinces are offering. It is a delicate act and Nigeria needs to get that balance right if it wants to monetise its significantly remaining potential particularly in deep and ultradeep water before such assets start to lose their value”, she maintained.
Nakhle stated that careful consideration should be given to revisions to the cost recovery ceiling as the rate should not be seen in isolation from the entirety of the regime, particularly Royalty since both instruments achieve the same aim.
“Reforming the previously ineffective and costly investment allowances/credits is a welcome move. However, targeted allowances risk complicating the regime. More importantly, investment is best encouraged by certainty and predictability, with or without such allowances. When carrying out international comparisons, a cherry-picking analysis should be avoided. Angola has a low-cost recovery ceiling but does not apply Royalty on its PSCs. The US applies high Royalty rates by international standards (though still lower than those found in Nigeria) but it does not apply any windfall tax and its CT rate is among the lowest compared to similar jurisdictions”, she stressed.
She revealed that Nigeria’s fiscal regime is a tapestry of different structures and rates, with special focus on Royalty, which, in turn, varies with terrains, water depths, oil price and oil and gas production.
“A starting point in reviewing the regime would be to aim for simplification. No shortage of examples of simple yet robust fiscal regimes that have been able to address differences in projects, whether by location, type or cost, and different market conditions, while safeguarding the delicate balance between government revenues and maintaining the attractiveness of the province to international investors”, she added.
“High royalty rates, DOIBPSCA (2019) significantly simplify the existing structure, which is a welcome move, they impose higher rates except for shallow water that benefited from a decrease in the rate, which, in terms of principle, is rather unusual as deepwater activities tend to be costlier than those carried out in shallow water”.
“The frequency of the fiscal changes proposed and/or implemented strongly suggests a structural weakness in the fiscal regime that prohibits it from adapting to evolving oil industry related conditions, both domestically and internationally. This is largely because the regime has lacked progressivity. A progressive regime can stand the test of time, cope with volatile oil and gas prices. Lack of progressivity with the heavy focus on Royalty and its relatively high rates well above what is typically found elsewhere and in addition to instruments such as signature and production bonus, the regime is overall regressive”.
She said the only way Royalty can be made progressive is by linking it to a profitability measure ((e.g. ROR or IRR): the most profitable projects pay the highest Royalty and vice versa.
“A tax system subject to continuous tinkering tends to undermine investor confidence. Fiscal stability provides some level of predictability and reliability that assists with reliable expenditure forecasting and budgeting. Simplicity, a tax regime that is simple to understand, implement and administer, is levied on a well-defined tax base. It increases transparency and reduces the administrative burden, for both administrations and the taxpaying businesses. Progressivity, the government take increases (decreases) as profitability increases (decreases). Neutrality, a neutral tax should not distort investment decisions; it neither deters exploitation of a full range of field sizes nor alters project rankings, nor interferes with production decisions”, she maintained.