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New PIB Resolves Controversy over Fiscal Regime, Gas Pricing

01 Jul 2012

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Minister of Petroleum Resources Mrs. Diezani Allison-Madueke


Chika Amanze-Nwachuku  and Ejiofor Alike

The much-awaited new version of the Petroleum Industry Bill (PIB) submitted to President Goodluck Jonathan on Friday may have resolved all the contentious issues on fiscal regimes and domestic gas pricing, probably ending years of opposition by local and foreign investors who had kicked against the original version of the reform bill.

THISDAY gathered that with the International Oil Companies (IOCs) getting better tax deal under the new bill, years of uncertainty in the operating environment, which robbed the country of massive investment, may have also ended.

New investment decisions have been put on hold for over five years, with foreign companies relocating their investments to Ghana, Angola and Libya pending the passage of the bill.

The new bill submitted to President Jonathan seeks to establish an omnibus legislation that will set transparent rules for the management of the oil and gas industry, as against the existing myriad of legislative instruments.

Minister of Petroleum Resources Mrs. Diezani Allison-Madueke submitted the bill to President Jonathan at the Presidential Villa in Abuja. The National Assembly may get the new bill within 14 days after the Federal Executive Council would have deliberated on it.
President Jonathan had in January mandated a task force to fast-track a new version of the bill.

Under the new PIB, the NNPC will be replaced by a new National Oil Company (NOC), which will within three years be partly listed in the Nigerian Stock Exchange (NSE) and other foreign exchanges to guarantee transparency.

However, the new bill also gives the minister of petroleum new supervisory powers over all industry institutions, a provision, which the National Assembly had rejected in the old bill.

The new bill has also resolved all the issues relating to corporate income tax, hydrocarbon tax and streamlined the number of regulators in the industry.
It also proposes some changes that will improve transparency in the sector and also provides for favourable royalties and company profit taxes.

Section 1 of the Third Schedule of the 207-page bill, which was exclusively obtained by THISDAY, provides for favourable fiscal regimes for local and foreign companies.
The new reform bill provides for a production allowance for crude oil production by a company to be determined appropriately.

“(a) For onshore – the lower of  $30 per barrel or 30 per cent of the official selling price, up to a cumulative maximum production of  10 million barrels and the lower of  $12 per barrel or 30 per cent of the official selling price for volumes exceeding 10 million barrels up to a cumulative maximum production of 75 million  barrels; (b) for shallow water areas – the lower of  $30 per barrel or 30 per cent of the official selling price, up to a cumulative maximum production of 20 million barrels and the lower of  $12 per barrel or 30 per cent of the official selling price for volumes exceeding 20 million barrels up to a cumulative maximum production of 150 million barrels; and (c) for deep water areas – the lower of  $15 per barrel or 30 per cent of the official selling price, up to a cumulative maximum production of  250  million barrels per PML,” states the new bill.

For gas fiscals, Section (2) (a) of the Third Schedule states that “there shall be a production allowance for natural gas fields of 50 per cent of the value of the natural gas production or $ 1 per million Btu, whichever is lower:”

“(i) For onshore, up to a cumulative maximum of 1000 billion standard cubic feet; (ii) for shallow water, up to a cumulative maximum of 2000 billion standard cubic feet; and (iii) for deep water, up to a cumulative maximum of 3000 billion standard cubic feet per PML. (b) there shall be a production allowance for the development of dry gas fields of 100per cent of the value of the natural gas production or $ 1 per million Btu, whichever is lower:  (i) for onshore, up to a cumulative maximum of 1000 billion standard cubic feet; (ii) for shallow water areas, up to a cumulative maximum of 2000 billion standard cubic feet; and (iii) for deep water areas, up to a cumulative maximum of 3000 billion standard cubic feet per PML,” the bill states.

Section (3) also provides for a production allowance for condensate production from gas fields of $ 20 per barrel or 30per cent of the official selling price, whichever value is lower.

“(a) For onshore, up to a cumulative maximum of 100 million barrels; (b) for shallow water areas, up to a cumulative maximum of 200 million barrels; and (c) for frontier acreages and deep water areas, up to a cumulative maximum of 300 million barrels per OML,” the bill added.

The reform bill also states that allowances provided in this Schedule shall be allocated to companies on the basis of the entitlement of the relevant barrels.

On the issue of gas pricing, which was also contentious in the old bill, the new PIB provides under Section 229 (b) that the prices of gas to be “charged for each licensed activity shall reflect the costs incurred for the efficient provision of that activity; (c) prices charged shall permit a reasonable return for licensees on their investments; and (d) prices shall not discriminate between customers with similar characteristics, such as similar size or a similar consumption profile”.
However, Section 232 provides for transitional pricing arrangements that allow for a gradual transition towards pricing arrangements that comply with the pricing principles outlined in Section 229.

On the gas flare, Section 253 (2) provides that “any licensee or lessee who flares or vents gas without the permission of the minister in the circumstances mentioned in subsection (1) (b) of this section shall be liable to pay a fine which shall not be less than the value of gas”.

The new bill outlaws all forms of discretionary award procedure in the allocation of oil and gas blocks as it provides that as it recommended that “there shall be no grant of discretionary awards.”

Also, as part of the steps being taken to address the problem of inadequate domestic gas supply, the new bill empowers Nigerian Petroleum Inspectorate to impose gas supply quantities on oil companies for domestic consumption.But the fiscal regimes contained in the old bill had been the main bone of contention as operators insisted that they could hinder long term investment in the upstream oil industry.

Clause 421 (2) iii of the old version of the reform bill provided for a royalty rate of 25 per cent as against 20 per cent for production that exceeds 20,000 barrels per day for deep water operations.

In the case of gas produced in deep water, the bill proposed 25 per cent as against seven per cent royalty for production that exceeds 120 million standard cubic feet per day. The controversial bill also provided additional royalties for the government for crude oil sales exceeding $40 per barrel, while providing for company income tax of 30 per cent and 70 per cent tax on hydrocarbons.

However, the bill reduces assessable tax for onshore and shallow water from 85 per cent to 70 per cent.

The operators view the tax regime as unfriendly to investors and also argued that the multiplicity of taxes in the bill could make investment in Nigeria’s oil and gas globally less- competitive.

The old bill contained multiplicity of 11 different forms of taxes.
Some of the taxes included the payment of three per cent of each oil company’s budget to Niger Delta Development Commission (NDDC); and two per cent fee payable to Nigerian Maritime Administration and Safety Agency (NIMASA).

It also provided for the payment of the Petroleum Profit Tax (PPT), which is to be split into Nigerian Hydrocarbon Tax (NHT) and three per cent Company Income Tax (CITA).
The bill also increased royalties to 50 per cent; while gas flare penalty was increased to $3 per 1000standard cubic feet per day of gas.

It provided for two per cent education tax;  payment of two per cent gross profit on infrastructure and payment to the Nigerian Petroleum Exchange (NiPeX).
The bill was also said to have provided for too many regulators, which foreign operators said could hinder international arbitrations.

The new bill seeks to check crude oil theft by providing for the establishment of a Special Investigation Unit (SIU) to maintain surveillance on critical oil and gas installations, premises and vessels.

Under the new bill, the SIU, to be created by the Nigerian Petroleum Inspectorate (NPI), will have the power to seize any item or substance reasonably believed to have been used in the commission of an offence.

Submitting the new bill to President Jonathan, Allison-Madueke had expressed confidence that the new team that worked on the document did a good job, which would address local supply as well as strengthen NNPC to stand as a viable and globally competitive outfit.

She had said it took the committee over six months to come out with what she considers a perfect document in the interest of the country given the enormity of the revision they undertook, which spanned fiscal regime and reconfiguring of NNPC.

Tags: News, Nigeria, Featured, Gas Pricing, Fiscal Regime

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