The oil and gas industry is a major contributor to the Nigerian economy and government revenue. Nigeria, with the largest oil and gas reserves in Africa, has huge untapped potential to achieve its economic development goals including gas-to-power ambitions. However, despite having the largest reserves in Africa, Nigeria only received 4% ($3 billion) of $75 billion invested in the continent between 2015-19. This underscores the need to create a competitive environment to attract investment to the oil and gas sector.
The fundamental shift in global energy markets driven by advances in unlocking unconventional petroleum resources and increasing traction for cleaner energy sources has resulted in a global oversupply of crude oil, putting pressure on prices. This has been further worsened by the COVID-19 pandemic, potentially putting at risk the viability of ongoing and future projects and driving fierce competition for scarce investments around the world. Further to the above, Nigeria’s petroleum industry faces many country-specific challenges including Joint Venture Funding and Arrears, regulatory overlaps, insecurity and inadequate infrastructure for domestic gas development.
The Lagos Chamber of Commerce & Industry is fully supportive of the Government’s efforts to drive industry reform through a new Petroleum Industry Bill. The key objectives of the PIB 2020, amongst many others, include:
- reforming the institutional and fiscal framework
- developing Nigeria’s gas sector further
- creating a framework to support the development of host communities and foster sustainable prosperity, and further
- bringing in new investments to grow the country’s production capacity
The current Bill marks positive steps toward achieving its stated goals. The Bill mandates that ministries, departments, and agencies to consult with the Commission prior to introducing overlapping legislation which will impact the oil and gas industry. It also allows for consultation with industry stakeholders before making regulations. The commercialisation of NNPC aims to improve business efficiency and effectiveness, especially in relation to Joint Venture activities.
However, some of these improvements appear insufficient to deliver the true value to Nigeria, which the Bill aims to achieve. Some provisions in the bill could adversely affect the growth of the industry and the overall economy. We firmly believe that based on constructive co-operation between the Nigerian Government and other stakeholders, Host Communities and Industry, the objectives of reform can be successfully met.
The PIB should seek to protect existing investments from value erosion. The assets and operations from these investments are the foundation upon which new projects can be built. It is therefore crucial that projects already underway be able to maintain the conditions under which they were designed and approved. Doing so will incentivise the launch of new projects, grow production and revenue for government and stakeholders, thereby guaranteeing long term sustainability of our oil and gas industry.
Six key areas are highlighted below:
- Preservation of base business & rights (Sections 92.3, 92.4, 93, 302.3, 311.9.c, 317.4, Third Schedule): Preservation of existing business provides a base from which to encourage future growth of production. As currently drafted, there are several issues threatening existing projects which the Bill does not resolve:
- While the PIB enables companies to elect to either convert to the PIB or remain on existing terms, it does not provide clear assurances that projects whose leases will be renewed in the coming years will be able to retain the rights and benefits they have earned since the start of their operations. In addition, the PIB provisions expects lease holders to relinquish (upon conversion or renewal) lease areas and zones, thereby potentially jeopardizing future exploration/development and long-term contractual gas supply obligations.
- To ensure the stability of projects, Operators should be able to maintain the structure of gas contracts and pricing agreed between parties prior to PIB becoming law. The Bill should clarify acreage relinquishment requirements upon conversion.
- Lastly, the PIB opens the possibility of separating liabilities from assets against which those liabilities can be settled (per existing Joint Operating Agreements), which created a significant risk to NNPC’s JV partners of non-payment of pre-existing commitments. We believe that both the assets and liabilities of NNPC should be transferred to the same entity.
To address these risks, companies should retain their right to contractual dispute resolution, stabilisation of historical legislative and regulatory changes, PSC/PSA tax benefits earned but not utilised by conversion date and AGFA based investments retain earned allowances in Upstream.
- Deepwater (Section 267, Seventh Schedule): Deepwater assets are important contributors to Nigeria’s oil production and have tremendous potential which can be unlocked by more favourable investment terms. Unfortunately, the Deepwater provisions in the PIB do not provide a favourable environment for future investments and initiation of new projects.
- To ensure investors are encouraged to finance Deepwater projects, the PIB should grant new Deepwater oil projects a full royalty relief during the first 5 years of production and should remove HT since companies will still be subject to CITA. Deepwater non-associated gas resource development is particularly challenging and requires targeted measures to get projects off the ground. A full royalty relief during the first 5 years of production and a 1% royalty for natural gas, natural gas liquids as well as the condensate/ liquids from such development would encourage investment in Deepwater gas projects.
- Segregation of Upstream and Midstream deemed assets (Sections 302.2 and 317.4): The PIB requires that companies operating consolidated upstream and midstream assets separate and incorporate their midstream assets as distinct legal entities. The assets, however, were commercially and technically designed to function as one. This framework may be applicable for new projects, however the Bill has omitted the inclusion of a grandfathering framework to ensure that assets developed based on integrated economics complete their lifecycle. The inclusion of a savings provision should be considered to allow post conversion continuity of activities undertaken by a single legal entity (instead of segregated as independent Companies). A provision for the specific exemption of associated taxes where assets are required to be segregated should also be considered.
- Capital allowances and deductions (263, Fifth Schedule): The PIB currently prohibits deductions of Capital Allowance pre-production for Hydrocarbon Tax (HT) purposes, which is not consistent under Companies Income Tax (CIT) provisions. The PIB should seek to harmonize tax practices and ensure capital allowance and allowable deductions are consistent with existing tax legislations, Companies Income Tax Act (CITA). Indeed, deductions of Capital Allowance for assets under construction for HT should have the same treatment as under CITA for all terrains and deductions for HT should follow WREN (Wholly Reasonably Exclusively Necessary) Lastly, since royalties are not cost incurred by a company in the course of its operations, they should be explicitly excluded in the cost calculation of the cost price ratio.
- Domestic Gas (Sections 110, 167, 168): As drafted, the PIB prohibits export gas, without exemptions, until Domestic gas obligation is met, thereby creating the potential for breach of existing long-term contractual supply obligations. To ensure companies do not end up in breach of contract, the PIB should include an exemption for existing export gas supply contracts and obligations.
- Administrative burden of compliance: Finally, the PIB significantly increases the administrative burden of compliance (e.g., dual tax system, multiple terrains, deconsolidated tax filings). The Bill should seek to simplify the administrative burden of compliance, minimising ambiguity and the extent of overlapping regulation. This would lead to fewer disputes and avoid increasing the cost of doing business in Nigeria. This can be done by further clarifying the conversion process, setting out a clear process for dispute resolution between operators and the Commission or Authority, and clarifying which regulator will be responsible for integrated operations.
The Lagos Chamber urges the National Assembly to put in place a law that will promote a more effective and efficient governance, administration, host community development and fiscal framework for the petroleum industry. A competitive Bill would help preserve the integrity of the existing projects, whilst also encourage future growth of production and make Nigeria an investment destination of choice.
DR MUDA YUSUF