Petroleum Industry Fiscal Framework: Nigerian Fiscal Regimes

PIA Immersion Chapter Four Petroleum Industry Fiscal Framework Dr . Timothy Okon PIA Immersion Petroleum Industry Fiscal Framework: Evolution of Nigerian Fiscal Regimes – 1958 to 1977 Tax Rates: 50% Royalty Rate (Onshore):12.5% Royalty Rate (Offshore):Four shillings per ton of crude oil Tax Ra...

PIA Immersion Chapter Four Petroleum Industry Fiscal Framework Dr . Timothy Okon PIA Immersion Petroleum Industry Fiscal Framework: Evolution of Nigerian Fiscal Regimes – 1958 to 1977 Tax Rates: 50% Royalty Rate (Onshore):12.5% Royalty Rate (Offshore):Four shillings per ton of crude oil Tax Rates: 55% Tax Rates: 55% Royalty Rate (Onshore):12.5% Royalty Rate (Offshore):10% Royalty Rate (Onshore):14.5% Royalty Rate (Offshore):14.5% 1960 1950s July-1974 March-1974 Sept-1974 Tax Rates: 50% Tax Rates: 55% Royalty Rate (Onshore):12.5% Royalty Rate (Offshore):10% Royalty Rate (Onshore):14.5% Royalty Rate (Offshore):14.5% 2 PIA Immersion Petroleum Industry Fiscal Framework: Evolution of Nigerian Fiscal Regimes – 1974 to 1977 Tax Rates: 60.78% Tax Rates: 55% Royalty Rate (Onshore):20% Royalty Rate (Offshore):20% Royalty Rate (Onshore):12.5% Royalty Rate (Offshore):10% Dec-1974 Oct-1974 Tax Rates: 85% Royalty Rate (Onshore):20% Royalty Rate (Offshore):16.67% up to 200m water depth April-1975 March-1974 April-1977 Tax Rates: 85% Tax Rates: 65.75% Royalty Rate (Onshore):20% Royalty Rate (Offshore):20% Royalty Rate (Onshore):20% Royalty Rate (Offshore):18.5% up to 100m water depth 3 PIA Immersion Petroleum Industry Fiscal Framework: Evolution of Nigerian Fiscal Regimes – 1993 to 1997 NLNG Incentive modified decree 113.Ed. Tax 2%, VAT 5% PITA Decree 31 changed ITC to ITA 1994 1993 Duties exemption for gas utilization decree 16 1996 1997 1995 Dividend WHT reduced from 15% to10% CITA rate reduced from 35% to 30% Decree 32 4 PIA Immersion Petroleum Industry Fiscal Framework: Evolution of Nigerian Fiscal Regimes – 1986 to 2021 Tax Rates: 50% deep offshore Lower effective Tax MOU Tax credit Lower effective royalty rates PIA (Royalty) Royalty Rate (Onshore):10% Inland basins Royalty Rate (Offshore) Minimum of 8% in water depth beyond 1000m Dec-1998 1986-2004 PIA (NH,CITA and EDU Taxes) 2019 2005 Tax Rates: 50% deep offshore Royalty Rate (Onshore):10% Inland basins Royalty Rate (Offshore) 12% up to 200m to 400m water depth 8% up to 400m to 800m water depth 4% up to 800m to 1000m water depth 0% above 1000m water depth 2021 Deep Offshore Amendment Act 5 PIA Immersion Petroleum Industry Fiscal Framework: Graduated Royalty Rate Scheme Petroleum (Drilling & Production) Amendment Regulations (1979) Deepwater fiscal terms (1993) 20% ONSHORE 18.5% 0 - 100m 16.67% Decreasing Royalty Rate (%) 100 - 200m 12% 200 - 500m 8% Production Charge 7.5% (PIA 2021 ) 4-8%-2005 PSC 500 - 800m 4% 800 - 1000m 0% Increasing Water Depth (metres) 1000m+ 6 PIA Immersion Petroleum Industry Fiscal Framework: Nigerian Tax & Royalty Rates Historical Trends % TAX(ON/OFF) ROY/SHW TAX(DPWTR) ROY/DPWTR 85 85 65.75 60.78 55 50 12.5 50 12.5 14.5 16.67 20 18.5 12 0 1959 - 1971 1971 - 1974 1974 1974 - 1975 1975 1993 - DATE 7 PIA Immersion Petroleum Industry Fiscal Framework: Graduated Investment Tax Credit/Allowance Rates Old Fiscal Regime Current Trend % Increasing ITC Rates (%) Post July 1998, ITC became ITA for Deepwater PSCs 50% 1993 Deepwater Incentives) 20% 1977 Incentives 5% ONSHORE 10% 0 - 100m 15% 100 - 200m Over 200m Increasing Water Depth (metres) 8 PIA Immersion Petroleum Industry Fiscal Framework: Important Differences; PIA 2021 vs Old Fiscal Regime Items Old Fiscal Regime PIA 2021 Royalty Flat rate royalty per OML for Onshore, Shallow Offshore and Deep Offshore. Flat rate royalty per field and per tranches and for production tranches. Royalty by Price for fields above $50/bbl Allowances Investment Tax Allowance Production Allowances Tax PPT for Oil and CITA for Gas NHT and CITA for Oil and CITA for Gas Cost Consolidation Gas CAPEX recoverable from Oil income through AGFA at the PPT rate. Cost Consolidation of only Integrated Strategic Projects as defined under section 302 of the PIA 2021 Intangible Drilling Cost Expensed Capitalized Royalty Waiver 0% Royalty under Deep Water Act for water depth more than 1000m abolished by November 2020 amendment to 10% flat royalty and royalty by price. General reduction in royalty rates. Royalty waiver granted to OML 130 for 5 years under section 303 of the PIA 2021 9 PIA Immersion Petroleum Industry Fiscal Framework: Options for Integrated Strategic Projects; Section 302 of PIA 2021 Upstream Storage Systems Pipeline Transportation LNG NGL Extraction Refinery Source: New York Times 10 PIA Immersion Petroleum Industry Fiscal Framework: What is a Fiscal System? (Balance of Objectives) Maximum Economic Development of Hydrocarbon Resources Realization of Country’s Economic Potential Balanced Risk / Reward Relationship Development of National Expertise Stable Political and Fiscal Environment Broad Control of Overall Activity Management of Operations on Sound Commercial Basis Government Investor Company Fiscal Terms Fiscal terms act as the contractual balance between the financial objectives of the host government and the investor company 11 PIA Immersion Petroleum Industry Fiscal Framework: What is a Fiscal System? (Balance of Incentives) Divisible Income & Economic Rent Schematic Rent/State Take Gross Production Value Investor Take Investment and Operating Costs • Rentals / Fees • Royalty • Volume-based Production Sharing • Vat Tax • Government Profit Split • Income Tax • Surtax • Additional Profits Tax Cost or Revenue-based Government Take Investor Company Cost Recovery Tax Depreciation (Equity) Cost Recovery Volumes (Psc) Profit-based Government Take Divisible Income Return on Investment After-tax Profit Margin 12 PIA Immersion Petroleum Industry Fiscal Framework: Fiscal Tools Regressive Fixed terms • Domestic obligations * Signature bonus * Production bonus • Fees • Rents Royalty • Royalties based on: • Flat Rates • Price based • R Factors • Water depth based •Other RoR based schemes • Domestic obligation • Deductible/ • Nondeductible Progressive Cost • Cost Recovery Limits • Cost Uplift • Accelerated Capital Allowance • Cost Consolidation/ Non consolidation Tax Based Incentives • Investment tax credit • Investment Tax Allowances based on W.D • Production Allowances based on W.D • Resource Tax • based on W.D • R-Factor • Price (MOU) • Corporate income tax Profit • Profit oil based on: •Production rate •Cumulative Production •R factor based •Water depth based. 13 PIA Immersion Petroleum Industry Fiscal Framework: Fiscal Objectives and Fiscal Tools Fiscal Objective Preferred Instruments Rent Capture/Progressivity Progressive taxes or production shares, ideally rate of return-based. Service fees. Fiscal Neutrality / broad-based incentives for development Profits-based taxes. No cross subsidy from oil to gas and vice-versa Robustness/adaptability Progressive taxes or production shares, ideally rate of return-based. Early, dependable revenue Royalties. Setting minimum percentage of profit oil, i.e., limiting annual share devoted to cost recovery Limited risk exposure Royalties International competitiveness/ Balance of Objectives Impact of overall mix of instruments is critical Simplicity/Transparency Royalty. Taxes or shares linked to easily observed indicators/Fiscal Rules that are published Cost Curtailment Cost Recovery Limits, Production Allowances instead of ITA, Lower Tax Rates 14 PIA Immersion Petroleum Industry Fiscal Framework: Types of Fiscal Agreement • Forms of agreement vary depending upon whether or not an IOC may own equity • Non-Equity agreements vary by how the IOC is paid (in kind or in cash) • SEC rules preclude booking reserves in regular (non-risk) service contracts FISCAL FRAMEWORK EQUITY FORMS ( CONCESSION OR LICENSE ) NON-EQUITY FORMS ( CONTRACTS ) INVESTOR OWNERSHIP OF HYDROCARBONS & FACILITIES STATE OWNERSHIP OF HYDROCARBONS & FACILITIES PRODUCTION SHARING CONTRACT (PSC) RISK SERVICE CONTRACT (RSC) INVESTOR RETURN PAID IN KIND BASED ON RISKS ASSUMED AND SUCCESS ACHIEVED INVESTOR RETURN PAID IN CASH BASED ON RISKS ASSUMED AND SUCCESS ACHIEVED PIA Immersion Petroleum Industry Fiscal Framework: Primary Advantages of the Systems Primary Components of Govt. Take Comparison of Royalty/Tax & PSC Regimes 2/6/2023 Royalty/Tax Regimes • • • • • • • • • • 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) 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? PSC Regimes 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) 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) Whatever systems Governments impose, agreements can be structured to meet all party’s requirements PIA Immersion Petroleum Industry Fiscal Framework: Comparison of Royalty/Tax & PSC Regimes Whatever systems Governments impose, agreements can be structured to meet all party’s requirements • Total level of Government Take is driven more by the specifics of the terms than by the type of regime • • Terms generally consistent with prospectivity 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) • 2/6/2023 Income/Other tax rates tied to R-factors and or oil prices (e.g. Chad (Income tax), Russia (export duty), Nigeria) PIA Immersion Petroleum Industry Fiscal Framework: Fiscal Framework: Rationale • In order for the Nigerian oil industry to survive facing this challenging future, the PIB has to create an environment in which Nigerian oil companies will continue to invest and prosper. • This means that the fiscal terms for oil must be based on a conservative framework of the future. This framework is based on a long-term oil price of $ 50/bbl in real terms. • Fiscal terms for new development investments based on a 45% cost/price ratio, which means costing $ 22.50/bbl, need to be marginally economic, while lower cost projects should be economically attractive. This will ensure that under low prices at least relatively low-cost projects will continue to be attractive. • If future prices turn out to be higher, the benefits should be shared between the investors and the Federal Government. • Current revenues preserved for 18 months for stability and planning • Grandfathering AGFA & other fiscal incentives, section 39 of CITA • Three fiscal system for flexibility: Existing, Conversion and New • Voluntary Conversion provision with fiscal incentives • • Dual tax structure: NHT & CITA The story of future of oil : Current socio-economic and technological issues facing the industry • Dual royalty structure – Volume & Price • Less fiscal burden on frontier and inland basin acreages • Amended Deep offshore and inland basin preserved with redefinition • Reduced fiscal burden on marginal and small field producers 18 PIA Immersion Petroleum Industry Fiscal Framework: Why Dual Tax and Royalty by price Benefits of Dual Tax Royalty by Price • • Royalty by price trigger point $50/barrel 1% for every dollar increase in price up to $150 and a flat rate of 10% beyond $150. • • • • This is global best practice – Norway, Australia, UK and Canada are examples Helps improve Saving Index which increases from 15% to 70%. This is an incentive for cost curtailment. Simplified Resource Tax(NHT) which acts like a Severance Tax (no deductions of interest charges and home office cost or activities not directly related to Petroleum operating expenses).Incidental income and incidental expenses not directly related to upstream petroleum operations. It ensures that there is no fiscal abuse. No high upstream cost recovery and consolidation of midstream/downstream assets for tax purposes. Regularizes Tax treatment of oil companies; Oil and Gas company tax remains the same as any other company paying corporate income tax. • Royalty windfall to be paid into the sovereign wealth fund as windfall savings. 19 PIA Immersion Petroleum Industry Fiscal Framework: Production Based Incentives and Cost Capping Production Based Incentives • All cost based incentives such as investment tax credit or investment tax allowances which are based on a percentage of capital investment will no longer apply under the new terms. • Production allowances shall be applicable when production commences. Cost Caping • In order to control excessive cost in the industry a cost capping mechanism referred to as the cost price ratio has been set at the maximum of 65% of annual revenues. This is to apply to both T1(production operating expenses) and T2 (capital allowance cost). • In PSCs cost recovery limits of 65% would also apply. 20 PIA Immersion Petroleum Industry Fiscal Framework: Fiscal Framework; New Terms The PIA offers three fiscal options to investors: 1. The maintenance of current terms based on PPTA and the Petroleum Act. 2. Conversion to new terms under the PIA in exchange for the relinquishment of acreages and renunciation of arbitration awards. 3. New terms for new acreages or relinquished acreages offered on a going forward basis. The table below illustrates this. Acreage Type Onshore Shallow Converted Acreages NHT: 30% NHT: 30% New Acreages NHT: 15% NHT: 15% 21 PIA Immersion Petroleum Industry Fiscal Framework: Fiscal Framework; Production Allowance Shore <=50MMbbls >50MMbbls >100MMbbls to 500MMbbls >500MMbbls Onshore $8/bbl $4/bbl $4/bbl $4/bbl Shallow Offshore $8/bbl $8/bbl $4/bbl $4/bbl Deep Offshore $8/bbl $8/bbl $8/bbl $4/bbl Shore For All Volumes of Associated Gas Onshore $1/kcf $1/kcf $1/kcf $1/kcf Shallow Offshore $1/kcf $1/kcf $1/kcf $1/kcf Deep Offshore $1/kcf $1/kcf $1/kcf $1/kcf 22 PIA Immersion Petroleum Industry Fiscal Framework: Royalty by Production and Price Royalty by Production - Oil Royalty by Production - Gas 20% 6% 15% 5% 15% 4% 12.5% 10% 7.5% 5% 5.00% 5% 5.0% 5.0% 3% 7.5% 2% 0% 2.5% 1% Onshore Shallow Water Deepwater Inland Basin 0% Onshore Royalty by Price Shallow Water Deepwater Inland Basin DomGas Royalty Rate % 12 10 8 6 4 2 0 $- $50 $100 $150 $200 23 PIA Immersion Petroleum Industry Fiscal Framework: Royalty for Small Fields (or Fields Approaching Economic Limits) Royalty Shallow Water Royalty - Oil Onshore 14.0% 16% 14% 12.0% 15.0% 12% 10.0% 10% 8.0% 8% 6.0% 7.5% 6% 4% 4.0% 5% 12.5% 7.5% 5.0% 2.0% 2% 0.0% <5kbd 0% <5kbd 5-10kbd >10kbd 5-10kbd >10kbd Deep Offshore Deep Offshore 8% For small fields or fields approaching economic limits a royalty regimes in trenches has be created as reflected in the charts 7% 6% 5% 4% 3% 2% 1% 0% <50kbd >50kbd 24 PIA Immersion Petroleum Industry Fiscal Framework: CPR $/bbl Revenue $/bbl % of Revenue % of D.I % of Revenue % of D.I $75 $75 100 100% Costs $22.50 $48.75 30% 65% Divisible Income (D.I) $52.50 $26.25 70% 100% 35% 100% Royalty (7.5%) $5.63 $5.63 7.5% 10.7% 8% 21% Royalty by Price (2.5%) $1.88 $1.88 2.5% 3.6% 3% 7% Profit Before Tax $45.00 $18.75 60% 86% 25% 71% Tax (50% Non convert, 30% Conversion) $22.50 $5.63 30% 43% 8% 21% Profit After Tax $22.50 $13.13 30% 43% 18% 50% Profit Share to Contractor (55%) $12.38 $7.22 16.5% 24% 10% 28% Profit Share to Concessionaire (45%) $10.13 $5.91 13.5% 19% 8% 23% State Take (Government Take + Conc Take) $40.13 $19.03 53.5% 76% 25% 73% Government Take (Royalty + Tax) $30.00 $13.13 40% 57% 18% 50% 25 PIA Immersion Petroleum Industry Fiscal Framework: Midstream Fiscal Incentives Refineries Midstream Funding for Gas Pipelines Flare Elimination 5+5 year Tax holiday Now covered by section Infrastructure Fund 39 of CITA and project Equity funding for Open access rules Financial Guarantee With 3+2 year tax private sector holiday May be consolidated projects towards dewith upstream in May be consolidated risking and integrated strategic with upstream if part of incentivizing project an integrated strategic projects completion project 26 PIA Immersion Petroleum Industry Fiscal Framework: Redefine National Resource Optimization Strategy UPSTREAM PRODUCTION PLATFORMS DOWNSTREAM FERTILIZER PLANTS LNG/LPG GAS FOREIGN MARKET OIL Nigeria predominantly focus on production and export of crude oil and gas MIDSTREAM Cooking Gas GAS LINES CPFs PIPELINES REFINERIES CRUDE TANKERS PRODUCTS TANKERS LPG GAS PETROCHEMICALS FILLING STATIONS Significant focus on midstream & downstream required to maximize value creation to the economy 27 PIA Immersion Petroleum Industry Fiscal Framework: Benefits of Gas Based Industrialization 28 PIA Immersion Petroleum Industry Fiscal Framework: Global Feedstock Competitiveness • Feedgas cost has varying impact on the economics of different petrochemicals. E.g polypropylene has the highest feedstock cost of most of the petrochemicals. 29 PIA Immersion Petroleum Industry Fiscal Framework: Resource Diversification - Fuels To Non-fuels Economic Benefits Of Downstream Non-fuels Industrial Developments February 6, 2023 30 PIA Immersion Petroleum Industry Fiscal Framework: The Nature of Hydrocarbons Aliphatic Hydrocarbons Aromatic Hydrocarbons Aliphatic compounds are composed of carbon and hydrogen atoms arranged in straight chains, branched or non-aromatic ring structures Aromatic hydrocarbons are organic compounds composed of carbon and hydrogen atoms arranged in ring structures. Do not have a pleasant odour Have pleasant odour Carbon to hydrogen ratio is high Carbon to hydrogen ratio is low Burn with non-sooty flames Born with sooty flames Some are saturated while others are unsaturated All are unsaturated Include Alkanes (methane, ethane, propane, etc), Alkenes and Alkynes Include Benzene, Toluene, Purines and Pyrimidines PIA Immersion Petroleum Industry Fiscal Framework: General Provisions of Section 303 of PIA 2021 Source: Ogj.com Source: Equator Exploration Limited 2006 Section 303 disables the provisions of the PIA with respect to royalty in particular with OMLs 130 and OPL 321/323, all 32 of which have Total Interest. PIA Immersion Petroleum Industry Fiscal Framework: Key Takeaways • The PIA offers three fiscal options to investors: 1. Maintenance of current terms based on PPTA till license expires 2. Conversion to new PIA terms 3. New terms for new acreages or relinquished acreages • Cost based incentives based on percentage of capital investments does not apply under new terms • A cost capping mechanism referred as CPR has been set at a 65% maximum Acreage Type Onshore Shallow Converted Acreages NHT: 30% NHT: 30% New Acreages NHT: 15% NHT: 15% 33 PIA Immersion Petroleum Industry Fiscal Framework: Key Takeaways Refineries Midstream Funding for Gas Pipelines Flare Elimination 5+5 year Tax holiday Now covered by section Infrastructure Fund 39 of CITA and project Equity funding for Open access rules Financial Guarantee With 3+2 year tax private sector holiday May be consolidated projects towards dewith upstream in May be consolidated risking and integrated strategic with upstream if part of incentivizing project an integrated strategic projects completion project 34