Ijeoma Nwogwugwu: Time to stop toying with the PIB (Part 2)

by Ijeoma Nwogwugwu

Oil-industry

As it stands, badly needed reforms for the industry have been conveniently put on hold over the divisions created by the fiscal terms. The impact of this is that the inefficiency, mismanagement and corruption that have stunted Nigeria’s oil and gas sector, and particularly NNPC, will continue to fester.

[READ: Ijeoma Nwogwugwu: Time to stop toying with the PIB (1)]

Last week, this column summarised the concerns of the international oil companies over the proposed oil and gas industry legislation, better known as the Petroleum Industry Bill (PIB). It is essential to point out that their displeasure over the new fiscal terms as contained in the PIB arose from their own internal assessment of the new terms, supported by industry modelling undertaken by a firm of consultants.

One of such firms, Wood Mackenzie (Woodmac), an energy, mining and metals advisory headquartered in the United Kingdom, did the number crunching to arrive at the discounted cash flows for oil and gas projects employing pre and post-PIB fiscals. In finance, discounted cash flow analysis is used to value a project, company or asset using the concept of time value of money. It is widely used to arrive at the net present value of a project to determine its viability. Curiously, the same Woodmac was used by the Nigerian National Petroleum Corporation (NNPC), using similar assumptions, to arrive at projections that are variance with the figures presented by the IOCs on what the government’s take will be post-PIB.

But before delving into the conflict, which the IOCs and NNPC have not convincingly been able to explain to this columnist, it is necessary to review the government’s position on the PIB. Having studied NNPC’s presentations and held several conversations with the corporation’s Group Executive Director, Exploration and Production, Mr. Abiye Membere, who doubles as the government’s Implementation Team Leader on the PIB, the government insists that the proposed fiscal regime under the proposed legislations is predicated on the production of hydrocarbons as opposed to terrain and investment respectively.

Royalties to be paid by oil companies, Membere explains, will be calculated based on production or output as opposed to location, which is what currently obtains. This, he says, will create a fair balance between small and big producers operating in the same terrain and would enable operators make fair returns during field decline. He supports this assertion by stating that under the PIB, a lower royalty rate is being proposed for condensates produced from non-associated gas fields as well as frontier and ultra deep water basins. Membere, who was once an employee of ExxonMobil before transferring his services to NNPC over eight years ago, adds that royalties would also be determined by the price of oil and gas, based on a self-adjusting rate when the price of oil is higher than $50 per barrel and the price of natural gas exceeds $2 per mmBtu.

For the tax regime, Membere says the Companies Income Tax Act (CITA) would become applicable for upstream companies under the PIB, as it would place all operating companies on the same pedestal at the tax rate of 30 per cent, irrespective of geographical location. Currently, it is the Petroleum Profit Tax (PPT) that is applied to upstream operations while midstream and downstream operators pay the same companies income tax.

CITA will also provide for the minimum tax rate where incentives would otherwise not have made the company liable to the Nigerian Hydrocarbon Tax (NHT), and would eliminate all the rigours and intricacies involved in the calculation of NHT. The NHT rate is 50 per cent for onshore/swamp/shallow offshore production and 25 per cent for deep water operations. Where the oil company is entitled to a production bonus, Membere says the tax regime will be based on output and no longer investment, which may not fully capture the essence of capital deployed, and would be fairer to both small and large producers.
The government further contends that Nigeria is not alone in “tightening” its fiscal terms during successive bid rounds or ad hoc awards. The objective, according to Membere, has always been to achieve a fair balance between government and contractors’ share. “This is to ensure that risks do not outweigh rewards,” he says.

To reinforce its position, NNPC is of the view that Nigeria remains one of the most attractive countries in terms of the fiscal regimes. As proof of its competitiveness, it pointed to the recent Angola bid round for deep water acreages, which showed a government, take of 76 per cent. Post-PIB, the Nigerian government’s take, the corporation states, will be 65 to 70 per cent, averaging 72 per cent. Pre-PIB, the government’s take for deep water blocks was projected at 64 per cent but the highest actually attained by government was 49 per cent, which NNPC says is the lowest among peer countries.

Despite the increase in the government’s take, NNPC insists that projects will remain profitable and the notion that the PIB would drive away investment is an illusion and farce, adding that there are no deep water oil fields in Angola that Shell can leave the 200,000 barrels per day Bonga oil field to.

With respect to the government’s take for the shallow water and onshore joint venture operations, NNPC says this will increase marginally from 87 to 88 per cent, based on a price of $80 per barrel. However, at a low crude oil price of between $40 to $50/bbl, the government’s take will be marginally reduced to 86 per cent.

On gas development, NNPC also points out that the PIB is proposing a generous production allowance, lower royalty rates and tax holidays as incentives designed to attract investment in the gas sub-sector. It says the high production allowance would encourage robust economics for small operators with an output of 2,500b/d and would enable those with more than one marginal field consolidate their fields.

The generous production allowances, lower royalties and tax holidays, notwithstanding, the government’s take on gas projects will increase from 63 to 71 per cent. NNPC contends that government will no longer hand out cheques to support gas investments under the PIB, but is confident that gas projects will remain viable and attractive under the new terms.

Having studied the presentations from the IOCs and government, it is obvious there is something amiss. As stated earlier, I find it difficult to fathom how both sides arrived at significantly different projections on the government’s take, using the same consultant and similar assumptions. Enquiries from both sides – the IOCs and NNPC – have been met with accusations and counter-accusations with each side alleging that other party must have conjured their figures from the air.

What is worse is that none of the parties is willing to budge from its position. The oil companies are adamant that they cannot and will not make further investments in Nigeria’s oil and gas sector under the proposed terms. The Nigerian government, likewise, wants to maximise the economic rent accruable to the country from oil and gas production.

Obviously, something would have to give so that both parties could join forces to put pressure on the National Assembly to get the PIB passed into law. As it stands, badly needed reforms for the industry have been conveniently put on hold over the divisions created by the fiscal terms. The impact of this is that the inefficiency, mismanagement and corruption that have stunted Nigeria’s oil and gas sector, and particularly NNPC, will continue to fester.

In the concluding part of this series next week, this column will write an introspective on the industry’s cost structure, contracting processes and industry collusion, which have conspired to stall the PIB.

Politics and Corruption
If one of the demands of the Group of Seven Governors who along with their sympathisers have elected to break away from the Peoples Democratic Party (PDP) is that they should not be investigated for corruption by the law enforcement agencies, then that demand should not be met.

Even political gamesmanship must have its limits and should never, ever be used to turn the laws of the federation on their head. Anyone, be it at the federal, state or local government level, past or present office holders, elected or unelected officials, should be investigated insofar as they have a case to answer. Where a bona fide case exists, then they should be prosecuted and compelled to prove their innocence or lack of it at the law courts.

No one should be exempted just because they think President Goodluck Jonathan is desperate to contest the presidential election in 2015. Should the president concede to their request, Nigerians should not stand for it as no single individual is above the law.

If I recall, some of these governors were in the vanguard of calling for the prosecution of oil marketers who had defrauded the system between 2010 and 2011. One of them, the Rivers State Governor, Chibuike Amaechi, even went on to counsel the World Bank not to grant Nigeria new loans on the grounds that it had frittered away N2 trillion to subsidy thieves who should be investigated, prosecuted, and the stolen money recovered from them to execute projects.
What has changed since then? Or should there be a different set of rules for the governors? Is it not ironic that the All Progressives Congress (APC) and its so-called “progressive governors”, who have consistently upbraided this administration for not doing enough to stem corruption, have suddenly kept quiet in the face of this ridiculous demand? Did it not just make the fight against corruption one of its cardinal selling points? Or has it suddenly become politically expedient for APC to look the other way?

The constitution only shields the governors from criminal prosecution while in office. But once they step down and are found wanting in the management of resources of their states, they should be made to face the full wrath of the law. Enough of this impunity!

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Op-ed pieces and contributions are the opinions of the writers only and do not represent the opinions of Y!/YNaija.

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