Amid unending controversies that have continue to trail the Petroleum Industry Bill (PIB) passed earlier this month by the National Assembly, experts in leading consultancy firms have x-rayed the Bill, noting important changes and what it offers the country. The PIB 2020 awaits harmonisation by the legislature.
The efforts at passing the Petroleum Industry Bill (PIB) cannot be forgotten. This is, because, on three occasions, at the National Assembly, under various leaderships, it failed to see the light of day. This is why stakeholders insist that efforts of the Upper House leadership in passing the Bill is commendable.
But, since its July 1, passage, discordant tunes have continued to trail the document, as various interests groups have either criticised or rejected certain provisions in the Bill.
Experts and other stakeholders that have taken a critical look at the document are convinced that while the PIB 2020 may appear set to address all industry issues to the extent possible, it is imperative to ensure that the country does not just pass any law but one that is competitive, balanced, fair, reasonable and realistic.
For instance, a Partner & Head, Tax-Energy & Natural Resources and Managed Services, KPMG, in Nigeria, Adewale Ajayi, writing in his firm’s journal, noted that for the past 20 years, there have been various attempts at reforming the industry. However, none of the efforts, he contended, yielded result until the introduction of the PIB 2020.
“The PIB started as an omnibus bill and was later divided into four separate bills before emerging in 2020 as a consolidated bill. It is a fact that previous attempts at passing the PIB in 2009, 2012 and 2018 failed because of factors such as lack of ownership, misalignment of interests between the National Assembly and the Executive, perceived erosion of ministerial powers, stiff opposition by the petroleum host communities and push back by investors on the perceived uncompetitive provisions in those versions of the bill,” Ajayi wrote in the publication.
Can the PIB 2020 achieve these objectives?
For Ajayi, one thing is clear – the government has tried to strike a balance between immediate revenue demands and the need to attract long-term investment for the industry. This, he noted, has become extremely crucial when it is considered that only four per cent of the $70 billion investments made in Africa’s oil and gas industry between 2015 and 2019 was for Nigeria, though it is the biggest producer and has the largest reserves on the continent. Besides, the National Bureau of Statistics (NBS) reports that only $53.5 million or 0.55 per cent of total investment of $9.680 billion in the country last year was made in the industry.
Ajayi, therefore, maintains that if the country is to achieve her ambition of 40 billion barrels of oil in reserves and four million barrels of oil daily, there is the need to attract new investments into the sector.
“The oil in the ground is of no use to the country if it cannot monetise it. Therefore, the PIB must lead to a massive transformation of the industry and succeed in attracting the desired investment required to reposition the industry. Hopefully, the provisions of the PIB will be enough to stimulate the desired investment though it has not addressed the issue of energy transition from fossil fuel to clean energy,” Ajayi submitted.
What has changed?
Dissecting the PIB 2020, PriceWaterhouse Coopers (PWC), an accounting, tax and audit consultancy firm, broke it down to providing legal, governance, regulatory and fiscal framework for the Nigerian petroleum industry and development of host communities.
The PIB, it further noted, contains five chapters, 319 sections and eight schedules dealing with Rights of Preemption; Incorporated Joint Ventures; Domestic Base Price and Pricing Framework; Pricing Formula for Gas Price for the Gas Based Industries; Capital Allowances; Production Allowances and Cost Price Ratio Limit; Petroleum Fees, Rents and Royalty and Creation of the Ministry of Petroleum Incorporated.
In comparing notes from the previous efforts, PWC established 20 key changes to the PIB 2020, thus:
Chapter 1 – Governance and Institutions
The key objective is ensuring good governance and accountability, creation of a commercially oriented national petroleum company, and fostering a conducive business environment for petroleum operations.
Creation of the Nigerian Upstream Regulatory Commission responsible for the technical and commercial regulation of the upstream petroleum operations; and the Nigerian Midstream and Downstream Petroleum Regulatory Authority responsible for the technical and commercial regulation of the midstream and downstream operations in Nigeria. The Commission and Authority are exempted from the provisions of any enactment relating to the taxation of companies or Trust Funds
Imposition of up to one percent levy on the wholesale price of petroleum products sold in the country (0.5 percent each for the Authority Fund and Midstream Gas Infrastructure Fund)
Incorporation of a commercial and profit focused NNPC Limited under CAMA within six months from commencement of the new law with ownership vested in the Ministry of Finance Incorporated (and Ministry of Petroleum Incorporated) on behalf of the Federation to take over assets, interests and liabilities of NNPC. This structure is expected to pave the way for eventual sale of shares to Nigerians.
Any assets, interest and liabilities not transferred to NNPC Limited will remain with NNPC until extinguished or transferred to the government after which NNPC shall cease to exist. Transfer and sale of the shares are subject to approval by the government and endorsement by the National Economic Council.
NNPC Limited will earn 10 per cent of proceeds of the sale of profit oil and profit gas as management fee while 30 per cent will be remitted to Frontier Exploration Fund for the development of frontier acreages in addition to 10 per cent of rents on petroleum prospecting licences and mining leases.
Chapter 2 – Administration
The main objective is to promote the exploration and exploitation of petroleum resources in Nigeria for the benefit of the Nigerian people and promote sustainable development of the industry, ensure safe, efficient transportation and distribution infrastructure, and transparency and accountability in the administration of petroleum resources in Nigeria.
Avoid economic distortions and ensure a competitive market for the sale and distribution of petroleum products and natural gas in Nigeria; and avoid cross-subsidies among different categories of consumers.
The Commission is required to develop a model licence and model lease to include a carried interest provision giving NNPC Limited the right to participate up to 60 per cent in a contract.
Chapter 3 – Host communities development
The main objective is to foster sustainable prosperity within host communities, provide direct social and economic benefits and enhance harmonious co-existence.
Any company granted an oil prospecting licence or mining lease or an operating company on behalf of joint venture partners (settlor) is required to contribute three – five per cent (upstream Companies) and two percent (other companies) of its actual operating expenditure in the immediately preceding calendar year to the host communities development trust fund. This is in addition to the existing contribution of three percent to the NDDC. The Fund is tax exempt and any contributions by a settlor is tax deductible.
Board of trustees and executive members of the management committee may include persons of high integrity and professional standing who may not necessarily come from any of the host communities.
Available funds are to be allocated 75 per cent for capital projects, 20 per cent as reserve and five per cent for administrative expenses. However, a community will forfeit the cost of repairs in the event of vandalism, sabotage and other civil unrest causing damage to petroleum facilities or disruption of production activities.
Chapter 4 – Fiscal framework
The key objective is to establish a progressive fiscal framework that encourages investment in the Nigerian petroleum industry, provides clarity, enhances revenue for the government while ensuring a fair return for investors.
FIRS to collect Hydrocarbon Tax of 15percent – 30 percent on profits from crude oil production, CIT at 30 per cent and Education Tax at two per cent, which will no longer be tax deductible. The Commission will collect rents, royalties, and production shares as applicable while the Authority will collect gas flare penalty from midstream operations. Late filing of tax returns will attract N10million on the first day and N2million for each subsequent day the failure continues. A N20 million fine is applicable to an offense where no penalty is prescribed.
Generally, expenses must be wholly, reasonably, exclusively and necessarily incurred to be tax deductible. However, a cost price ratio limit of 65% of gross revenue is imposed for hydrocarbon tax deduction purposes, any excess cost incurred may be carried forward.
No tax deduction for head office costs while tax deduction of interest on monies borrowed is subject to the satisfaction of the commission that the fund was employed for upstream operations and the interest rates reflect market conditions.
Royalties are payable at the rates of 15 percent for onshore areas, 12.5 percent for shallow water, and 7.5 percent for deep offshore and frontier basins, 2.5 percent – 5 percent for natural gas. In addition, a price-based royalty ranging from zero to 10 percent is payable to be credited to the Nigerian Sovereign Investment Authority.
Gas utilisation incentive will apply to midstream petroleum operations and large-scale gas utilisation industries. An additional five-year tax holiday will be granted to investors in gas pipelines.
Chapter 5 – Miscellaneous provisions
The PIB repeals about 10 laws including the Associated Gas Reinjection Act; Hydrocarbon Oil Refineries Act; Motor Spirit Act; NNPC (Projects) Act; NNPC Act (when NNPC ceases to exist); PPPRA Act; Petroleum Equalisation Fund Act; PPTA; and Deep Offshore and Inland Basin PSC Act. It amends the Pre-Shipment Inspection of Oil Exports Act while the provisions of certain laws are saved until termination or expiration of the relevant oil prospecting licenses and mining leases including the Petroleum Act, PPTA, Oil Pipelines Act, Deep Offshore and Inland Basin PSC Act.
