Nigeria's Petroleum Industry Bill May Inhibit Investment

by Lorys Charalambous, Tax-News.com, Cyprus

31 July 2009

Nigeria's Petroleum Industry Bill (PIB) proposes a new legal framework for the country's oil industry. But some of the proposed fiscal and other terms in the PIB have raised comments, particularly within the oil and gas exploration sector, and have cast doubts on the industry’s potential for future substantial foreign investment.

The PIB aims to provide a legal and regulatory framework for the industry as a whole. However, the Nigerian Minister of Petroleum Resources, Dr. Rilwanu Lukman, when introducing the recent public hearings on the PIB, also confirmed that whilst the bill would simplify the collection of revenues, one of its main objectives was to achieve a greater tax take.

Dr. Lukman said that two of the government’s main objectives were “to cream off windfall profits in case of high oil prices” and “to collect more revenues from large profitable fields in the deep offshore waters.” This, he said, would be done primarily with two sliding scales of royalties – one relating to the daily production of the oil or gas field, and the other relating to the oil or gas price. Much higher levels of royalties would therefore be a basis, he said, for renegotiating the previous “bad deals” in deep-water operations.

Every company would be required to pay income tax, without exception. The Nigerian Hydrocarbon Tax would remain, but would become non-deductible for income tax purposes, and certain other allowances (e.g. for loan interest) would be abolished.

In addition, companies will have to return land from existing oil prospecting licenses and mining leases, except for that which is already in production or will be developed in the near future. The government hopes this will free up as much as 30% of the prospective petroleum area of Nigeria for new investors.

The state-owned Nigerian National Petroleum Corporation (to be renamed the National Oil Company) would be put on an economically viable footing. It would enter into joint ventures with foreign companies in new projects, each of which would be financed autonomously. Each project would also need a “Nigerian Content Plan,” including the purchase of local goods and services and the employment of Nigerian citizens.

The leading multinational oil companies are reported to be doubtful of the PIB’s effect on investment, particularly in their offshore deep-water operations. The increased royalties and other fiscal and non-fiscal regulations, if imposed harshly, could affect the industry’s willingness to expand capacity and production from both new and existing oil fields.

While there seems to be an understanding by the oil companies that the government needs to obtain increased revenues, they appear to be concerned that too high taxation would discourage the investment and growth in production necessary to provide those revenues.

Consequently, representatives of the oil companies currently operating in Nigeria have called into question the large investments their companies were due to make in coming years, if the PIB remains unchanged and as planned projects become uneconomical. One such report said that capital investment could fall by as much as 50% in the sector in the next decade.

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