December 17, 2019
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.
On the other hand, the policy and fiscal changes being witnessed in Nigeria are largely driven by the government’s dire need for revenue to fund its ever-increasing budget. More so, certain policy makers seem to view the oil and gas sector, especially the upstream segment, as the go-to sector that can always be raided to make up for the government’s fiscal deficits. It is also not impossible that some policy makers hold the view that the sector is now of age and that withdrawal of certain fiscal incentives will not result in a corresponding withdrawal of existing private investments therefrom.
In this article, we analyse recent changes to some fiscal terms in the Nigerian oil and gas sector with a focus on the proposed taxation of dividends from petroleum operations and the potential implications for the sector.
The case for private sector participation in the sector
Even though the country enacted the Nigerian Oil and Gas Industry Content Development Act to increase local participation in the sector in 2010, the sector still relies largely on both direct and indirect foreign human, material and financial resources for global competitiveness. This is evidenced by data from the Department of Petroleum Resources (DPR). For example, the Nigerian Petroleum Development Company [a subsidiary of the Nigerian National Petroleum Corporation (NNPC)] only has 100% ownership and oversight of 6 of the 111 Oil Mining Leases (OMLs) in Nigeria1. Thus, most other productive licences held by NNPC are operated in collaboration with capable private sector players mainly under Joint Venture (JV) and Production Sharing Contracts (PSC) arrangements.
Under these arrangements, the investment capital from the private sector has proven very instrumental to funding the development and operations of the oil fields, whilst ensuring that the Nigerian State is not 100% encumbered with the underlying operational and financial risks from such ventures. Although the funding arrangement may appear skewed in favour of the government from a cash flow perspective, some have argued that certain international oil companies were able to secure very favourable fiscal terms to achieve “super profits”.
Understandably, the Federal Government of Nigeria (FGN) needed to provide favourable terms to encourage investments especially for the PSCs during their nascent years. Neighbouring African countries with proven reserves are currently adopting a similar approach to encourage investor participation in the development of their economies. Could this be the moment when Nigerian policy makers consider the sector mature enough to withstand any drastic policy changes? Answers to this question would depend on the nature and scope of the engagements that led to the review of the royalty rates for PSCs in frontier, inland basins and deep offshore oil fields and other proposed changes in the Finance Bill, 2019.