1. Fiscal aspects of the Nigerian Oil and Gas Industry by
Kayode Adebiyi Manager Taxes, Nigerian Petroleum Development
Company Ltd Benin-City
2. OUTLINE E & P sector basics Petroleum regime framework
Petroleum fiscal regimes Fiscal terms, revenues and cash flows PIB
fiscal incentives
3. Figure 1. The Project Cycle . Leas e Exploratio n Developme
nt Production Closure Post- Closure Recover y End of Production
Lease is returned Start of Production
4. E & P Sector Characteristics (1) Long and costly
exploration and development High geological and technical risk
Mega-size uncertainty Volatility and uncertainty of prices Resource
exhaustion Difficulty in acquiring information and expertise on the
extractive industry
5. E & P Sector Characteristics (2) Significant
environmental and social impacts Prominent political profile
Technologically demanding Limited host country funding Foreign
investment incentive
6. E & P BUSINESS INVESTMENT PROCESSES Investment
Identification of Opportunities Evaluation (Economics) Planning
Work Process Capital Spending Plan Budget Plan Action Plan FEED
(Conceptual Design) Pre-qualification ITT (Investment to Tender)
Technical Evaluation Commercial Evaluation Approval Contract
Execution EPIC
7. Petroleum Regime Framework PETROLEUM LAWS/ REGULATIONS
CONSTITUTION E & P BUSINESS REGIMES Legislativ e/Regulato ry
CONCESSION JOINT VENTURE SERVICE CONTRACT HYBRID & SAs PSC
8. Legal/Contractual framework The constitution The Law E.g tax
law Petroleum Law and Legislation Not all countries have a separate
petroleum law. If that is the case the contract has to cover all
aspects Production sharing contract Concessionary agreement in
countries using that system Joint Operating Agreements Between
partners in a field (can also be the state company)
9. Key Elements of Successful Petroleum Legal Frameworks Area
key components Government authority Ownership of natural resources;
powers granted to government officers; enforcement; penalties and
fines; the authority to negotiate contracts; the taxing authority
and approvals authorities Access to the acreage Qualifications for
authorization to explore, develop, produce and process; area closed
to mineral activities; areas subject to special controls or
conditions; right of ingress and egress; resolution of conflicting
land disputes; and the relation between surface and subsurface
right holders. Exploration and production Extent of the exploration
and production area; rights and obligations duration of term for
exploration and production rights, renewal of exploration and
production rights, utilization; cancellation or terminated of a
right; area relinquishment; minimum work programs; security of
tenure; reporting; transferability of rights and mortgage ability;
surface fees. Protection of the environment Environmental impact
assessment ; environmental impact mitigation; social or community
impact; monitoring and reporting; abandonment liability;
reclamation; and environment sureties . Fiscal Terms State
participation; royalties; production sharing rate and base; custom
duties ; income duties; income tax rate and base; special petroleum
taxes; other levies and taxes; gas production incentives and other
incentives; ring fencing; and stability clauses
10. 10 Rentals / Fees Royalty Volume-based Production Sharing
Vat Tax Government Profit Split Income Tax Surtax Additional
Profits Tax Return on Investment After-tax Profit Margin Gross
Production Value Rent/State Take Investment and Operating Costs Red
Text -- Pre-tax Take Blue Text -- Profit-based Take Investor
Company Cost Recovery Tax Depreciation (Equity) Cost Recovery
Volumes (Psc) Cost or Revenue-based Government Take Profit-based
Government Take Divisible Income Divisible Income & Economic
Rent Schematic Investor Take
11. Petroleum Fiscal Regime Licensing Regime FISCAL REGIME
Fiscal Features Bid Process Legislatio n Market Environment
Competition (markets) Price Low/High Social Local content Energy
needs Education Ecological Climate changes Carbon Trading
Technology Availability Research & Development Political
Environme nt Stability Confidence Risk Technica l Financial Others
Oil $ Gas Reserves Availability Acreage Emerging industry Mature
Industry
12. What is a fiscal regime? Fiscal Regime is defined as the
sum of all impositions on an investor by the state via legislation
or otherwise Oil economies are based on the efficient sharing of
shareable surplus derived from the winning of oil and gas by
investing companies The fiscal arrangement is the Government's most
important tool for managing petroleum resources There are more
fiscal regimes in the world than there are countries due to: -
Negotiation of terms - Numerous vintages
13. Basic Components of a Fiscal Regime CONTRACTUAL LEGISLATIVE
FISCAL INSTRUMENTS FRAMEWORK FRAMEWORK Tax/ Royalty systems
Production sharing contracts Service Contracts Ownership of the
resources Governing Petroleum Laws Tax Legislations Environmental
Laws Local Content policies or Laws Incentives Capital Allowances
Uplifts Royalty & Tax Rates Profit Splits Consolidation or Ring
fenced Windfall Profit Features Cost Recovery Limit Financial
Obligations Domestic Market Obligations
14. Objectives of Fiscal Regime: Govt. (1) Attracts Investments
Asserts ownership of resources Predictable Revenues Offers greater
flexibility to capture increasing rent as profitability increases
Supports Macroeconomic Stability Encourages economic efficiency
Promotes diversification
15. Objective of Fiscal Regime: Govt.(2) Maximize the value of
the revenues from oil and gas resources for Governments
Increase/replace reserves and production Attract foreign investment
Ensure transfer of technology Development of local infrastructure
Create jobs
16. Ideal Government Objectives Provide a fair return to the
state and the industry Avoid undue speculation Limit undue
administration Provide flexibility Create healthy competition
Create a market efficiency
17. Value of National resources Determining factors The
resources base The market oil price Terms and regulations
18. ROLE OF GOVERNMENT Definition of policy Setting of terms
Promotion Licensing Monitoring and supervision Adjustment of terms
as required Managing the impact
19. Objectives of fiscal Regime : Investor (1) Adequate Rate of
Return Ability to repatriate profits Economic/Fiscal Stability
Internationally recognised standards Transparency and clearly
defined processes & systems To attain maximum net present value
of the present value of the petroleum resources
20. Objectives of fiscal Regime : Investor (2) Increase/Replace
Reserves Competitive return on investment Incentives for activity
with low oil price and marginal discoveries Build equity
21. Fiscal terms act as the contractual balance between the
financial objectives of the host government and the investor
company 21 Realization of Countrys Economic Potential Development
of National Expertise Broad Control of Overall Activity Balanced
Risk / Reward Relationship Stable Political and Fiscal Environment
Management of Operations on Sound Commercial Basis Government
Investor Company Maximum Economic Development of Hydrocarbon
Resources Fiscal Terms Fiscal Terms: Balance of Objectives
22. Why JVs, Partnerships, Sharing contracts and alliances?
Better to own half of a cow than the whole of a rat Anonymous
Behind an Able Man There Are Always Other Able Men. Chinese
Proverb
23. . PETROLEUM LEGAL ARRANGEMENTS CONCESSIONARY CONTRACTUAL
SERVICE CONTRACTS The contract paid a service fee, typically in
cash PRODUCTION SHARING CONTRACTS The production in kind is shared
between the investor and the host government Pure service Risk
service contracts The service fee is linked to the profit
24.
25. BALANCE SHEET
26. Concession Contractor has exclusive rights to explore,
develop, sell, and export oil/gas from a specified area for a fixed
period of time Equity or Royalty & Tax structure Maximum
control to Contractor Oldest & most widely used
27. Joint Venture Private/Foreign Companies and NOC form a
Joint Venture Each JV partner pays/receives its share in proportion
to its Participating Interest. JV pays royalty, income tax and
usually some form of Petroleum Profit Tax (PPT) Low success rate,
less commonly used
28. Service Contract Contractor pays all exploration and
development costs Contractor works under governments mandate and is
paid for its work Government maintains ownership and title of
minerals Most suitable for Contractor for risk-free operations and
for States having Producing Assets
29. Hybrids Combinations of Concession/JV/PSC, royalty, tax,
cost oil/profit oil shares and fees etc. Efforts to develop a world
model Hybrid agreement have been unsuccessful because structures
are becoming more diverse Host governments seeking structures that
suit their particular needs
30. Production Sharing Contract State enters into a PSC with
Contractor for a specified period Contractor finances exploration
and development If successful, Contractor will recover its costs
and earn a profit by receiving a share of production Royalty &
Income Tax are paid as applicable Significant control to
Contractors, but State has contractual controls
31. Production Sharing Contract Attributes (1) Contract term
Relinquishment Management Committee Discovery, Development &
Production Unit Development
32. Production Sharing Contract Attributes (2) Cost Recovery
& Production Sharing Taxes, Royalties & Rentals Domestic
sourcing & supply obligations Employment & training Title
to assets
33. MAIN DIFFERENCES BETWEEN CONCESSIONARY SYSTEMS AND
PRODUCTION SHARING CONTRACTS Concessionary systems Production
sharing contracts Ownership of nations Held by sovereign state Held
by sovereign state mineral resources Title transfer point At the
wellhead At the export point Company entitlement Gross production
less royalty Cost oil/gas + profit oil/gas Entitlement percentage
Typically 90% typically 50 60 % Ownership of facilities Held by
company Held by state Management and control Typically less
government control More direct government control and participation
Government participation Less likely More likely (carried working
interest) Ring fencing Less likely More likely
34. Comparison of Royalty/Tax & PSC Regimes Primary
Components of Govt. Take Bonus Payments Royalties Income/Dividend
Withholding Taxes Special Oil & Gas Taxes (PPT, SPT, PRT) Other
taxes/Levies (NDDC, Social etc) State Participation/ Carry
(Alternative Funding) Primary Components of Govt. Take Bonus
Payments Royalties Income/Dividend Withholding Taxes Special Oil
& Gas Taxes (PPT, SPT, PRT) Other taxes/Levies (NDDC, Social
etc) Profit Sharing Terms State Participation/ Carry (NPDC) 34
Royalty/Tax Regimes PSC Regimes Primary Advantages of R/T Systems
Transparency of terms Rights to resources owned by Investor (IOC)
Higher % of resource can be booked Net reserves/production
independent of costs and price Investor is more likely to share in
high side value More control over decisions? De jure but not de
facto? Primary Advantages of PSC Systems Stability of Terms (PSC
Decree, 1999 contains re- openers) Terms can be tailored to
specific needs of a project Investor risk can be mitigated in some
low side scenarios. (So also the MOU which is an R/T system) Total
level of Government Take is driven more by the specifics of the
terms than by the type of regime Terms generally consistent with
prospectively of the country/block relative to other world-wide
opportunities Conventional R/T system structures have been more
likely to create an equitable sharing of risk/reward between the
contractor and the government Many R/T systems have recently
incorporated features that make them behave more like PSC regimes
Sliding scale royalties tied to production rates, project IRR, or
R-factors (e.g. Venezuela, Kazakhstan, proposed in Nigeria-JDZ)
Income/Other tax rates tied to R-factors and or oil prices (e.g.
Chad (Income tax), Russia (export duty), Nigeria) Whatever systems
Governments impose, agreements can be structured to meet all partys
requirements
35. Strategic Alliances Informal or formal decisions or
agreements to cooperate in some form of relationship between two or
more firms Represent forms of relationships that are uncertain and
ambiguous Nightmare or goldmine, it depends
36. Characteristics of Strategic Alliances (Non JV Alliances)
Usually non-equity relationship between the parties No contribution
of capital by either party No creation of new legal entity
Relationship of the parties governed by contract Generally, less
formal documentation
37. Characteristics of Strategic Alliances (Non JV Alliances)
Each party retains its independence Each party responsible for
certain agreed upon costs/expenses (e.g. Marketing; Sales;
Inventory, etc.) Fairly straight forward process to terminate the
alliance (e.g. defined term of alliance)
38. 38 Government Take Government Take = Royalty (based on the
value of oil and gas recovered + Tax (a percentage of taxable
income) Taxable income = Revenues Fiscal costs Fiscal cost =
Royalty + OPEX + Fiscal depreciation (for CAPEX)
39. Fiscal Control of Petroleum Companies (1) . NAPIMS
FIRSDPR
40. Fiscal Control of Petroleum Companies (2) NAPIMS
responsible for the control and monitoring of costs of companies
DPR for royalty administration and fiscal procedures linked with
reserve addition FIRS administration of PPT and other direct taxes
to oil companies, and also for VAT
41. PETROLEUM FISCAL POLICIES: MAIN FACTORS Cost of operations
Rate of explorations Oil price
44. Activities and cash flowIncom e Costs Time C o n tr a c t
si g n i n g O D P AbandonmentProductio n Rehab.
ProductionDevelopmentExplorationPre-license Government
45. DIVISION OF REVENUES
46. Cash Flows Under PSC Regime Production value Cost Petroleum
Profit Petroleum Contractors share Governments share Development
Exploration Production Royalty Income tax Governments take
Contractors take
47. 47 LEGAL FRAMEWORK Concessionary System Royalty/Tax system.
Operator owns part Interest or all of license/Lease Multinationals
in JVs 55-60% NNPC Equity interest Governed by the MOU and the JOA
Multinational operators have minority interests ~95% of Nigeria oil
production Risk Service Contracts Agip Energy 1979 & 2001 NNPC
holds the lease. Contractor bears all costs & recovers same
from production Contractor has first option to buy fixed amount of
crude from contract area Production Sharing Contract Contract type
of choice in the 1990s (1st in 1973 with Ashland) NNPC holds the
License. Contractor bears all cost & recovers same from
production Profit Oil split after Royalty, Cost recovery and Tax
Shallow Water For W.D. 200M) Sliding royalty rate based on water
depth Lower tax rate - 50%/Flat ITC rate- 50% for PSC signed 1993,
Post 1993 ITA Sliding profit oil share to contractor based on cum
production Contractual System Operator is contractor to the
License/Lease holder (NNPC). Contractor : CITA Leaseholder - PPTA
Royalty 16.67-20% Tax 65.75/85% Capital Recovery 5 years ITA 5 -
15% Royalty: 16.67% - 20% Tax Rate: 65.75/85% Capital Recovery: 5
years ITA: 5 -15% Royalty: 16.67% - 20% Tax Rate: 65.75/85% Capital
Recovery: 5 years ITA: 5-15% Nigerian Fiscal Terms Indigenous
Producers 60% or more Equity held by Indigenous company 40% or less
Interest held by technical partners who, in some cases, carry
Indigenous Co.s cost and recover from production NNPC -50% back-in
to Ind. Prod Equity ~5% of Nigeria oil production PA &
PPTA
48. OBJECTIVES OF THE PIB To Enhance Exploration and
Exploitation of Petroleum Resources To Significantly increase
domestic gas supplies especially for power and Industry Create
Competitive Business environment To Establish fiscal framework that
is flexible, stable and competitively attractive To create
Commercially viable National Oil Company To deregulate downstream
petroleum business To Create efficient regulatory institutions To
Engender Transparency and accountability To Promote Nigerian
Content To Promote and protect Health Safety and Environment
48
49. FISCAL INCENTIVES . 49 Fiscal regime (Royalty andTax)
predicated on production as opposed to terrain and investment
respectively. o Royalty by Production Captures the output of a
company as opposed to its location. Creates a fair balance between
small and big producers operating in the same terrain. Enables
operators to continue to make fair returns during field decline.
Lower rates proposed for condensate from NAG fields. Lower rates
also proposed for frontier and ultra deepwater basins o Royalty by
Price Trigger mechanism is fair to all irrespective of the terrain
Self adjusting rate based on the price of crude oil (> $50/bbl)
and natural gas price (> $2.0/Mmbtu).
50. FISCAL INCENTIVES . 50 Tax Regimes o CITA Puts all
operating companies on the same pedestal Provides for the payment
of minimum tax where incentives would otherwise not have made the
company liable to NHT Removes all the rigours and intricacies
involved in the calculation of NHT. CIT rate is 30% regardless of
geographical location o NHT and Production Bonus (PB) PB based on
production as opposed to investment (which may not fully capture
the essence of capital deployed) Field size dependent, therefore,
fair to both small and large producers NHT rate is 50% in the case
of onshore/swamp/shallow offshore and 25% for deepwater
operations.
51. PIB, in a nutshell The new PIB allows for A totally
liberalized private sector led industry operating on principles of
international best practices An open and transparent framework for
petroleum sector businesses An attractive investment environment
that cuts across sectors A flexible fiscal and taxation model that
allows for commensurate returns on investment A sustainable
environment for petroleum industry business 51
52. Effective and efficient fiscal regimes To design effective
and efficient fiscal regimes requires continuous review of our
environments, so as to ensure, among other things: 1. Global
competitiveness in the constantly changing environment 2. In
designing fiscal systems, it is important to create an alignment
between the contractors' and host government's interests as well as
make adjustments as the field moves through its life cycle. 3.
Maximization of this countrys revenue streams, and 4. A fair
distribution of the economic rents between governments and
companies.