Nigeria Petroleum Industry Bill 2012

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Nigeria PetroleumIndustry Bill 2012


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ContentsIntroduction.............................................................................................................4

Commentary on the PIB 2012Pedro van Meurs...............................................................................................................6

Annex ADetailed review of the bill......................................................................................10

Annex BFiscal analysis of the bill........................................................................................22

How Ernst & Youngcan help.....................................................................................................................26


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4 Nigeria Petroleum Industry Bill 2012

Introduction

Introduction


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Nigeria Petroleum Industry Bill 2012 5

The purpose of this report is to contribute to the discussions

on the draft Petroleum Industry Bill (PIB) now before theNigeria National Assembly (NA) for consideration and passing

into law. If passed into law, the short title of the law will be the

Petroleum Industry Act, 2012. The PIB was presented as an

executive bill by the President of the Federal Republic of Nigeria

on 18 July 2012 to the National Assembly. The PIB has received

The PIB has the following objectives:

a. To create a conducive business environment for petroleum

operations;

b. To enhance exploration and exploitation of petroleum

c. Optimize domestic gas supplies, particularly for power

generation and industrial developments;

further investment in the petroleum industry while optimising

revenues accruing to the Government;

entities;

f. Deregulate and liberalise the downstream petroleum sector;

h. Promote transparency and openness in the administrationof the petroleum resources of Nigeria;

i. Promote the development of Nigerian content in the

petroleum industry;

j. Protect health, safety and the environment in the course of

petroleum operations;

sustainable industry in Nigeria.

Ernst & Young Nigeria has reviewed the draft PIB and clearly

presently account for about 78% of total revenues to government

and contributes about 14.27% to the gross domestic product

(GDP) of the country.

in a structured and balanced manner, to ensure the continuous

sector to the Nigerian economy, and to contribute to a healthy and

constructive debate on the institutional, regulatory, commercial

several analysts to review the bill, including Dr. Pedro van Meurs,

The attached commentary along with a detailed review of the

he developed PETROCASH, which is the most comprehensive

integrated database and computer model for World Fiscal Systems

Gas Terms 2011.

The opinions expressed in the commentary and annexures are

those of Dr. Pedro van Meurs. Although we are in agreement

with a number of comments made, the opinions do not represent

Ernst & Young. His views arise from his close association with and

version and generally consulting for governments worldwide.


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Commentary

Commentary on

the PIB 2012Pedro van Meurs25 October 2012


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Summary

The following is a commentary on the Petroleum Industry Bill

2012 (PIB 2012) made at the request of various parties. With

respect to some items, comparisons will be made with the

previous House Bill 159 and with the Government Memorandum

(September 2010). The Government Memorandum represented

relates to being consultant to host governments on petroleum

matters and I will therefore review the PIB 2012 from this

perspective. Annex A contains a detailed analysis of the Bill.

as a result of the PIB 2012.

Institutions (Part II)

The PIB 2012 creates two regulatory entities. The Upstream

Petroleum Inspectorate incorporates responsibilities with respect

to technical and commercial matters related to the upstream.

The Downstream Petroleum Regulatory Agency combines

technical and commercial responsibilities with respect to the

downstream. The entities are organized as a body corporate.

PIB 2012 would permit the two entities to be effective regulators

because both technical and commercial functions are united in

the same regulatory entity as recommended in the GovernmentMemorandum.

The PIB 2012 creates a Petroleum Host Communities Fund.

enhanced if people in the region believe that they share fairly

credited by the companies against other payments to government,

and shallow water are to be distributed to the communities.

However, rather than distributing revenues directly from the

operators to the communities, as was proposed in the Government

distributed and leaves this to future regulation. This could result

Another concern of the PHC Fund would be that the amount of

to plan their affairs. It was for this reason that the Government

Memorandum provided for stable payments. Also 10% of the

petroleum producing littoral States without any transparency as

to how these funds will be used.

National Petroleum Company (NNPC) along the lines of, for

instance, Petrobras. This can be best achieved by incorporatingNNPC under the Companies and Allied Matters Act and

subsequently privatizing NNPC partially.

other major international petroleum company with minimum

political interference. Both the House Bill 159 and the Government

Memorandum contained this concept.

only two entities. This leaves major government assets and

continue to be subject to heavy political interference.

Upstream (Part III)

The PIB 2012 dealing has excellent upstream provisions related

step forward for Nigeria. From a legislative point of view these

Nigeria a leader in Africa in this respect.

Generally, the provisions related to the upstream license and lease

plan approval, unitization and production adhere to best

international practices.


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Penalties for not paying Nigerian Hydrocarbon Tax are severely

reduced in the PIB 2012.In summary, the petroleum revenue provisions of the PIB 2012

without encouraging investment in new production. Annex B

illustrates that depending on the interpretation of the various

clauses of the PIB 2012, revenue losses with respect to existing

production from onshore and shallow water may be 22% for leases

in which NNPC does not participate and 6% for leases in which

NNPC participates. For deepwater PSCs the revenue losses with

respect to existing production could be as much as 50% depending

on the interpretation of the various clauses of the PIB 2012.

The PIB 2012 should therefore be revised by clarifying and

amending the tax provisions and by including royalty provisions ina manner that would strongly encourage investment in production

from new mining leases and other new production. A clear and

higher levels of oil and gas production.

in the onshore, shallow water and deepwater should be from

should be lower for gas.

Repeals, transitional and savingsprovisions (Part IX)

The PIB 2012 does not repeal a number of Acts that were

repealed under the Government Memorandum and the House Bill

159. A legal analysis is required of the various implications.

Part IX also includes what was considered Part X under the House

upstream and downstream are confusing and unclear. There is a

that are not used in the PIB.


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Annex A

Detailed review of the bill


We provide our comments in Annex A, a detailed review of the Bill. Dr. Pedro van Meurs

has made reference to earlier PIB versions. In our comments, we provide additional

information on PIB 2012 provisions where this may assist investor understanding.


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Part I Objectives

This part is an appropriately structured introduction setting out

the general objectives.

EY comment

We agree with Dr. Pedro van Meurs that the objectives are

elaborate, as already highlighted above.

Part II Institutions

A. The Minister

The provisions of this part contain improved provisions with

regulations, compared to the Government Memorandum andHouse Bill 159. Systematic input of all stakeholders in the

development of regulations is an important issue contained in

the PIB 2012.

EY comment

The Ministers powers under the PIB are very extensive, although

in many instances this has to be exercised under an enabling

Regulation to be made after the Bill is enacted. It is therefore

correct as stated by van Meurs that the development of the

Regulations will depend on systematic inputs of all stakeholders.

This, in our view, introduces another layer of activity and

uncertainty that will require strict monitoring. Moreover, leaving

such important matters as rental and royalty rates to a future

sector, with adverse effects for investment.

B. Petroleum Technical Bureau

The Petroleum Technical Bureau is a relatively modest unit in the

Ministry to give some technical advice where required.

The powers are not comparable with the National Petroleum

Directorate proposed in the Government Memorandum or the

National Petroleum Commission proposed in House Bill 159. The

proposals for the Directorate and Commission envisioned that a

strong coordinating role was required for the management and

guidance of the Nigerian petroleum industry.

EY comment

In addition to the above observations by van Meurs, an important

role of the Petroleum Technical Bureau (PTB) is to assist the

Minister of Petroleum Resources in formulating and developing

strategies to implement government policy. As successor to the

former Frontier Exploration Services of the Nigeria National

Petroleum Corporation (NNPC), the PTB is required to identify

opportunities in the frontier acreages, develop explorationstrategies and portfolio management programs for the exploration

of unassigned frontier acreages, and generally stimulate investor

interest in the frontier acreages.

C. Upstream Petroleum Inspectorate

The Inspectorate has both technical and commercial functions,

as can be highly recommended. Only if technical and commercial

issues are considered simultaneously will the appropriate

or for other infrastructure projects. An important provision is that

terminals and gas pipelines to gas processing plants.

In principle, this will create the possibility for the smaller

up by corresponding provisions in Part III of the Bill, which is a

considerable concern.

The Inspectorate is also in charge of ensuring the payment of

royalties, rentals and fees. This is normal power for such an entity.

The Inspectorate will also liaise with the FIRS on cost deductions,

which is welcome assistance to the FIRS.

However, there is no coordination with the FIRS on determining

oil and gas prices for royalties and tax purposes.This is anunfortunate gap in the functions, since, as will be discussed under

Part VIII, the matter of transfer pricing is a serious concern.

EY comment

Although there is no mention in the PIB of coordination between

prices from the Department of Petroleum Resources (DPR) and

should continue to do so with UPI under the PIB.

Apart from the commercial and technical functions of the

Upstream Petroleum Inspectorate (UPI), its other functions

include:

The UPI will, subject to the approval of the Minister ofPetroleum Resources, conduct bid rounds for all licenses (PPLs)

and leases (PMLs).

It will also issue authorizations for seismic activities, drilling,

design and construction of upstream facilities.

It will enforce health and safety standards for the upstream

petroleum industry, as well as take necessary steps to monitor

activities of grant holders, publish tariffs, and ensure accurate

measures.


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transparency as to how these funds will be used.

EY comment

Clarity is required with respect to the confusion on the

contributions that can be credited against payments to

government, which could be in the nature of royalty or tax,

as against the treatment of the contributions as allowable

deductions against the new Nigeria Hydrocarbon Tax.

General comments

The National Petroleum Assets Management Corporation

The National Oil Company

The National Gas Company Plc

The two companies and a Management Company under the

Corporation would be incorporated under the Companies and

Allied Matters Act.

The Corporation would receive the NNPC interests in the current

unincorporated joint ventures. The National Oil Company and

National Gas Company Plc would split the remaining assets. Both

the National Oil Company and the National Gas Company Plc will

be partially privatized.

The apparent goal is to create Nigerian companies similar to, for

instance, Petronas or Petrobras. It is puzzling to understand how

Also splitting activities in oil and gas would not lead to a strong

up in a similar manner. Petronas and Petrobras have extensive

operations in both oil and gas.

NNPC as a whole under the Companies and Allied Matters Act

and then partially privatize it. This was contemplated in both the

Government Memorandum and the House Bill 159. Such a partial

privatization, similar to Petrobras or Statoil, would create an entity

company and with, hopefully, a minimum of political interference.

strategy. Deciding which assets go to which company and splitting

up NNPC will be a complicated process. Why go through such a

much simpler? It may be that there remains a strong desire for

political interference with NNPC matters.

EY comment

It is also important to state that to create an effective, well-

time frame and that a ceiling is placed on the level of public

(government) and privately held shares. It would be recommended

that a scheme should be put in place for the shares to be held by

interested Nigerians.

Sections 129(3), 157(3) and 168(2). Most favored company

clauses.The tax provision under these subsections would leave

EY comment

We wish to state that it would be perfectly in order to seek to grant

such companies protection or exemption from other taxes outside

of the two principal taxes of Nigerian Hydrocarbon Tax (NHT) and

Companies Income Tax (CIT), which they would normally be subject

to and liable to be assessed.

Part III Upstream petroleum

Subsection 172(3). Unnecessary restrictions on exploration.

Petroleum exploration licenses do not give any right to petroleum

It is an unnecessary obstacle to restrict such information

leases. This in turn will hamper the bid process for such

open acreage.


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EY comment

We agree that the conferment of the powers to grant licensesand leases without a competitive process negates the stated PIB

objective of transparency and may indeed be open to abuse.

Section 193(3)(c). Return of acreage severely diminished.

The inclusion of paragraph (c) of Subsection (3) as drafted

defeats the entire purpose of Section 193. Currently, companies

concept of Section 193 was to enforce either the drilling of

unexplored acreage or to have companies drop this acreage so it

can be subject to a bidding round for other interested companies.

period, this whole concept is no longer of use and the purpose of

most the Section 193 been made useless.

The PIB

2012 leaves the entire determination of royalties to the Minister

under regulations. Since royalties are not provided for in the Act

and since the Acts containing royalty provisions will be repealed

under the PIB 2012, royalties will be set based on regulations.

Determining royalties through regulations rather than in the PIB

itself will lead to constant pressure on the Minister in the future to

lower royalties for a wide variety of reasons. Also it can certainly

not be recommended that such an important revenue source is

determined after the Bill has passed and the matter of royalty

levels can become a matter of political manipulation.

EY comment

This provision, which defers the setting of royalty, fees and rental

rates to the enactment of Regulation by the Minister of Petroleum

Resouces, along with the fact that the PIB proposes the repeal

introduces a high degree of uncertainty, which apart from being

open to abuse may also affect investment decisions as investors

are unable to plan accurately.

Section 200 (4)(a).

and should be Subsection (3).

EY comment

We agree that it is established international practice thatgeophysical surveys can be carried out anywhere, including over

existing leases and licenses; however, we would observe that it

would encourage investment in prospecting and exploration if

operators are granted exclusive right to data and information

obtained through the exercise of the license and oil mining

lease rights.

A very good provision of the PIB 2012 is that the provisions

maintained as per the Government Memorandum. This is a very

good step forward for Nigeria. From a legislative point of view

these provisions are now among the most advanced in the world

Sections 178 and 179. Bank guarantee removed.In general,

plan approval process of the Government Memorandum were

commitment and a development plan.

Section 181(6).The reference to a competitive bid process is in

error, since the license area from which further lease parcels will

be selected already belongs to the licensee.

Section 190 (6). Public bid opening removed.The provision that

bids have to be opened in public was removed.

Section 191. President has the power to grant licenses and

leases.A very negative provision of the PIB 2012 is that the

President has the power to grant licenses and leases without

competitive process or any other process. This leaves the door

wide open to political favoritism and corruption in a manner that

has been practiced in Nigeria in the past. It should be noted that

the President of the United States or of South Africa do not have

similar powers.

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Part IV Downstream licensing

General comments

Part IV is a very broad procedural part that permits licensing with

any type of conditions attached for any downstream project. Part

IV also permits any type of corresponding regulations to be made.

In general the procedures are simpler than those proposed in the

Government Memorandum. This is an advantage.

However, it is unclear what process the Agency would follow to

approve and grant a license for a project or what type of license is

required for what type of activity.

For instance, if an investor would want to invest in a gas project

facility and gas pipelines to one or more power plants, what would

such an investor do? How would such a project be approved?

There is no clear policy structure in Part IV, despite the detailed

procedural provisions.

Part V Downstream petroleum

Section 222. Open access severely limited.

access provisions apply only to current downstream facilities,

apparently not future facilities. Also open access does not apply

to gas processing facilities. At the same time the PIB 2012

to the measurement point and therefore part of the upstream

operations. As a result small producers will have very severe

facilities.

Section 224 (1). No tariffs for gas processing.The PIB 2012

does not include the power to set tariffs for gas processing.

natural gas for royalty and Nigerian Hydrocarbon Tax purposes,

since gas processing costs would typically be a deduction for

determining the value of gas at the measurement point. In

for liquefaction. This means where petroleum companies own

both gas production and gas processing facilities, excessive

produced gas and therefore reduce royalties and taxes.

Section 224 (4). Contract tariffs adopted. The addition of this

tariffs. Again this opens the door widely to the reduction of

the value of oil and gas at the measurement point and could

Section 232. Arms length relationship between producer

and pipeline transporter removed.The concept that a pipeline

transporter should have an arms length relationship with

producers was removed in the PIB 2012.

Section 256. Transitional gas pricing.The PIB 2012 sets out

the possibility for transitional gas pricing arrangements. This

contemplated in the Government Memorandum.

Section 261. Public service levy.This section creates the

possibility for a public service levy.

have now been replaced by the new section 256. Also the

concept of the domestic gas aggregator was removed. This is

a positive step. The domestic gas aggregator was in fact an

oligopolistic structure that could have hampered the development

gas for domestic consumption in Nigeria will now largely depend

on the pricing structure developed under section 256. However,

better protected if the PIB 2012 contained as a minimum an initial

EY comment

We agree that it is desirable to have a minimum gas pricing

system. This creates certainty and will aid the development of a

competitive domestic gas market, which will encourage investment

in the sector.


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Section 271. Franchise areas set for gas processing.This

section permits the development of gas processing franchise

provisions for gas processing. Also gas processing tariffs are not

set. The creation of gas processing franchise areas, without open

this monopoly power. It would prevent smaller producers from

own gas processing facilities.

Section 272 (1)(b)(ii). Penalties for failure to supply the

domestic market made very weak.The PIB 2012 no longer

that as long as the supplier has made reasonable commercial

Sections 275282. Effective provisions to prevent routine gas

The PIB 2012 now includes effective provisions to prevent

EY Comment

This is a good development and will encourage gas gathering

39 of the Companies Income Tax, which includes a tax-free

period, investment allowance of 35%, and an accelerated capital

allowance of 90% in year one. These incentives have been

extended to LNG projects for export, as provided for undersection 353(8) of the PIB.

Part VI Indigenous petroleum companies

The provisions of this part with respect to indigenous petroleum

companies have remained similar compared to the Government

Memorandum.

EY comment

However, the Minister is empowered under section 287 of the

PIB to make regulations to enable the increase of indigenous

Content Development Act of 2010, which is referred to under thePIB, gives preference to Nigerian companies in the award of oil

blocks. Nigerian companies are also given preferential technical

allowable output under the license or lease where such companies

are producing below 25,000 bpd, in which case the Federal

Government is obliged not to exercise the right of participation in

such operations.

Part VII Health, safety and environment

The provisions of this Part have remained similar to

the Government Memorandum, with the exception of

subsection 293(2).

293(2). Companies not responsible for environmental damageas a result of sabotage.The v 2012 now includes a provision

whereby companies will not be responsible for environmental

damage in the case of acts of sabotage or tampering

with equipment.

298. Penalties and sanctions.A new, good section was added

liable to sanctions and to levy penalties.

EY comment

In addition to the above provisions, licensee, lessees and

contractors are obliged to do the following:

(a) Support a precautionary approach to environmentalchallenges

(b) Encourage the development and use of environmentally

friendly technologies for exploration and development

in Nigeria

(c) Comply with the relevant requirement of environmental

guidelines and standards approved for the petroleum industry

in Nigeria

(d) Companies are also required to utilize good oil field practices

and to restore the environment


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Part VIII Provisions on taxation in the

petroleum industryGeneral Comments

Contrary to the Government Memorandum and the House Bill

159, Part VIII no longer contains provisions related to rentals,

royalties and production sharing. Part III now includes broad

powers to determine rentals and royalties through regulations.

Since no mention is made with respect to production sharing

provisions it is understood that these provisions in contracts will

were deleted.

EY comment

Companies Income Tax (CIT tax rate of 30%) will be levied in

addition to the Nigerian Hydrocarbon Tax (NHT tax rate of 50%

for onshore and shallow-water projects and 25% for deepwater

projects) resulting in the overall tax rate of 80% for onshore and

shallow-water projects and 55% for deepwater projects.

The absence of detailed provisions on production-sharing contracts

under the draft PIB creates a gap, particularly with respect to

several production-sharing contracts signed at different times

by the Nigeria National Petroleum Company with contractors.

Production Sharing Act creates further uncertainty with respect

to applicable rental and royalty rates for the PSC.

Stealing of oil.

implication with respect to the measurement of petroleum

production. Under the Government Memorandum it was proposed

to adopt the international practice of measuring oil and gas

existing practice of measuring at a point downstream where oil or

gas is delivered or sold. The reason for the tougher measurement

point provisions in the Government Memorandum was to stop the

practice of stealing or diverting oil or gas before it is measured.

The PIB 2012 will continue the existing practices. This means

that it will remain possible to steal or divert oil or gas before it

is measured. This will continue to result in losses to the Nigerian

practices.

Relative revenue loss in case of price increases.Another

Memorandum and House Bill 159 contained royalty provisions

related to the increases in oil and gas prices. A special additional

would increase to $200 per barrel, under the previous proposals

Nigeria would receive an extra royalty on oil.

$10 per MMBtu or more Nigeria would automatically receive extra

royalties on gas.

Under the PIB 2012 such extra royalties do not exist and therefore

oil and gas companies may earn a windfall if oil and gas priceswould increase to high levels. It will now depend on regulations

whether such features will be reintroduced.

The deletion of the price progressive royalties contradicts the

LNG export pricing.Under current attractive export conditions

Nigeria would be relatively high. The Government Memorandum

included detailed provisions to ensure that Nigeria would receive

have been deleted from the PIB 2012. The Bill now therefore

resulting in potentially very large losses to the Nigerian petroleum

revenues.

Very favorable 1993 PSCs maintained, while 2005 PSCs are

not improved for investors.The terms and conditions of the

1993 series of deepwater PSCs were excessively favorable for

investors. These terms are now being maintained under PIB 2012.

From an international perspective the terms of the 2000 series of

deepwater PSCs were acceptable, and no change in overall burden

on existing production is required. The terms for the 2005 series

of deepwater PSCs are too tough to stimulate active investment

and therefore better terms should be established for such PSCs.


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Electronic Management Information Systems deleted.

The Government Memorandum provided for the requirementfor companies to establish electronic management information

and would have improved the ability of the Ministry of Finance to

carry out revenue collection forecasting. The PIB 2012 deletes

this requirement.

Hydrocarbon Tax

Tax (NHT).

Section 304 (1) (a). Door wide open for transfer pricing.

This subsection establishes that the NHT will be determined

based on the proceeds from sales of oil, gas, condensates or

bitumen. This leaves the door open in principle for transfer pricing

Section 315 builds in some protection for the valuation of crude

low prices.

Section 305 (1)(g). Favorable interest deductions.This

subsection essentially permits any deductions for interest on loans

as long as it is incurred for upstream capital expenditures. There is

an arms length basis.

Section 312 (2) Fourth Schedule Table 1 Not necessary.The

Fourth Schedule eliminates the Petroleum Investment Allowance.

Nevertheless Table I is maintained. This Table should have been

deleted, since maintaining it may create tax implementation

problems as a result of the confusion it is creating.

Section 312 (2) Fourth Schedule Table II Excessive

Allowances will reduce the Nigerian Hydrocarbon Tax to zero. The Fourth Schedule was retained with some improvements from

the PPT Act. Nevertheless, Table II was changed dramatically.

Under the PPT Act companies were permitted allowances equal

to 99% of the value of the capital assets, based on a 20% straight

six and after. This means that, for instance, the total allowances

Nigerian Hydrocarbon Tax will in effect be reduced to zero. These

allowances are not constrained by Provision 6(2) of the Fourth

mention of year six and after clearly establishes this. This

change is either an error in the Table or a very large giveaway of

government revenues.

EY comment

We believe that the reference to six years and after in

Table II is an error as this would in effect exceed the maximum

100% capital allowance for tax, which is the practice under the

of NHT, the principle would be to achieve 99% capital allowance on

value. However, we completely subscribe to van Meurs opinion

that more certainty is required and the reference to six years andafter in the Table needs to be deleted, as this can result in several

interpretations and tax treatment of qualifying capital expenditures

on the asset value.

Section 312 (2) Fifth Schedule Giveaway on production

The Fifth Schedule seems to adopt

the production allowances approximately as provided for under

the Government Memorandum or House Bill 159. Nevertheless,

there is an important difference with respect to the application.

Under the Government Memorandum the production allowances

applied only to petroleum mining leases that started production

after the enactment of the Act. The purpose was to encourage

new production. The production allowances were meant to replace


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the existing investment tax allowances. This was, for instance,

clearly provided for under Subsection 353(8) of the Government

Fifth Schedule (in fact, interestingly the numbering was not even

adjusted Subsection 9 is missing in PIB 2012).

This means that the production allowances now apply to all leases.

Producers of existing production will now be able to double dip

and claim the production allowances, in addition to the investment

tax allowances already claimed prior to the promulgation of

the Act.

Section 312 (2) Fifth Schedule (3) This section provides

for an allowance for tax purposes of the lower of $1 per

MMBtu and 100% of the value of dry gas.Yet all costs still

Hydrocarbon Tax on dry gas under a gas price of $1 per MMBtu

loss. This is not a sensible tax practice.

Section 312 (2) Fifth Schedule (1) (i) Confusion on

Production Sharing Contracts.A general production allowance

Investment Tax Allowance. It seems contrary to legal principles

Credit and Investment Tax Allowance when the PPT Act has been

repealed.

Section 312 (2) Fifth Schedule (1) (ii) Joint venture

companies with NNPC not entitled to the production

allowance.It seems puzzling that companies in joint venture with

for new petroleum mining leases. This is contrary to the concept

production should be encouraged in Nigeria, regardless of who

Roles of National Oil Company and Government Agencies as

well as some other provisions deleted.Under the Government

National Oil Company and Government Agencies to provide

assessment of the Service more effective. These provisions have

been deleted from PIB 2012. Furthermore, some other provisions


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that enhance the power of the Service to effectively collect tax,

such as the power to distrain, were deleted.Section 344. Penalty for failure to pay tax reduced to

The penalty for failure to pay tax was

200% of the tax not paid plus interest under the PPT Act and

subsequent Government Memorandum. This has been reduced to

low penalty amounts it seems that it could be advantageous to

simply not pay tax, since the rate of return on the tax amount not

paid and retained may be higher than the penalty plus interest.

In other words it pays not to pay tax.

Section on Companies Income Tax not numbered.Part B of PartVIII relating to the Companies Income Tax follows Section 353

but is not numbered. The subsections are numbered.

Subsection (1). Nigerian Hydrocarbon tax not deductible.

Subsection 1 maintains the provisions of the Government

Memorandum and House Bill 159 that made the Nigerian

Hydrocarbon Tax not deductible for Companies Income Tax

purposes. This provision strengthens the government revenues

from the two taxes.

projects is reasonable.Under the Government Memorandum

Subsection (8) does not provide such restriction. Given the delay

EY comment

Companies Income tax Act (CITA) being extended to companies

engaged in export gas operations with respect to LNG, as well

as to companies engaged in downstream gas distribution, gas

extraction facilities and companies operating downstream crude oil

(a) An initial tax-free period of three years that may, subject to

the satisfactory performance of the business, be renewed for

an additional two years

(b) As an alternative to the initial tax-free period granted under

paragraph (a) of this subsection, an additional investment

allowance of 35% which shall not reduce the value of the asset,

so however that a company that claims the incentive providedunder this paragraph shall not also claim the incentive

provided under paragraph (c)(ii) of this subsection

(c) Accelerated capital allowances after the tax-free period,

as follows: this is (i) an annual allowance of 90% with 10%

retention, for investment in plants and machinery and (ii) an

additional investment allowance of 15% that shall not reduce

the value of the asset

(d) Tax-free dividend during the tax-free period, where the

investment for the business was in foreign currency, or the

introduction of imported plant and machinery during the

period was not less than 30% of the equity share capital of

the company

(e) Interest payable on any loan obtained with the prior approval

of the Minister for a gas project shall be deductible

Nigeria Petroleum Industry Bill 2012


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Subsection (8)(b). Extraction is imprecise.The word

extraction is imprecise and could lead to confusion withexploitation. It would be better to use the word processing.

Subsection (9). Incentives for upstream operations not

revenues.It is not necessary to provide tax incentives for

be associated gas, which is produced together with crude oil or

for the production of crude oil and condensates for companies

Part IX Repeals, transitional and savingsprovisions

This part now also includes what used to be Part X under

the House Bill 159 and the Government Memorandum related

to interpretation.

Section 354. PIB 2012 does not repeal a number of Acts.

The list of Acts repealed under the PIB 2012 is shorter than under

the House Bill 159 and the Government Memorandum. A legal

analysis is required to determine the implications of this.

Section 362. Interpretation.The definitions of upstream and

downstream are rather confusing. Upstream now includes

pipelines from the fields to refineries or export points. These are

typically not considered part of the upstream. The large upstream

transportation systems are not regulated under Part III. No open

access or tariff provisions apply to these systems.

In principle the Inspectorate has the power to impose such

provisions, but without guidance in the Act, this may be a difficult

concept to implement. As a result it may be difficult for small

companies to have access to these systems.

The Interpretation section contains various errors, and concepts

are defined that are not used in the Bill. For instance production

allowances refers to Schedule Three rather than to Schedule Five.

The concept of a Domestic Gas Aggregator is not used inthe Bill.


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Annex B

Following is an economic analysis for

The analysis is done for the leases and production sharing contracts under existing

production.

Fiscal analysis of the bill


Dr. Pedro van Meurs to evaluate the Bills economic impact using current royalty and


23/28


Government Take analysis

Onshore

For the onshore it is assumed that the royalties will remain

unchanged. Of course, if royalties would be lowered, the revenue

losses to Nigeria would be higher than estimated in this Annex B.

The onshore evaluation is based on two cases:

perpetual uplift for the investor.

Furthermore, the cases with and without NNPC participation are

being evaluated for existing production.

Chart 1 illustrates the case of leases in which NNPC does not

However, it should be noted that in reality the losses would be

more since most companies will be able to double dip. They

production allowances also.

Chart 1. Government Take of Nigerian PIB for onshore leases in

which NNPC does not participate

Current Case #1 Case #2

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

GovernmentTake(%)(real)

5 10 20 50 100 200 500

Onshore oil eld sizes (million barrels)

Chart 2 illustrates the case of leases in which NNPC would

participate. Such leases would not be subject to production

change in economics. However, also in this case if the Fourth

Schedule indeed represents an uplift, the losses would be 6% for

Chart 2. Government Take of Nigeria PIB for onshore leases

in which NNPC participates

A loss of revenues on existing production is not in the interest

of Nigeria. It should be noted that production from new mining

leases should be stimulated with better terms since a higher

Shallow water

The results for shallow water will be very similar to the onshore

results. Only the royalties are somewhat less.

Deepwater

In deepwater there are three different types of PSCs. The year

2000 type was used to analyze the Current Terms. These

PSCs are competitive from an international perspective.

0%

10%

20%

30%

40%

50%

60%70%

80%

90%

100%

5 10 20 50 100 200 500

Governmenttake(%)(real)

Onshore eld sizes (million barrels)



24/28


0%5%

10%15%20%25%30%35%40%45%50%

IRR(%)(real)

$45

10

$36

5 20

$28

50

$20

100

$15

200

$10

500

$6Field sizes (million barrels) and costs ($/bbl)


Again it should be noted that actual revenue losses may be more

where companies will be able to double dip by having been able to

and subsequently still receive the production allowances and the

perpetual uplift.

Also for the deepwater PSCs a loss of revenues from existing

production is not in the interest of Nigeria. Only production from

new mining leases should be stimulated with more favorable

terms. Also the terms of the 1993 series of PSCs should be

improved for government, while the 2005 series of PSCs should

be improved for investors.

The following Charts 4, 5 and 6 provide the IRR analysis of the

Charts 4 and 5 illustrates how current terms for the onshore

costly than $20 per barrel (capital and operating costs).

Chart 4 illustrates how the proposed production allowances would

system is an important and required stimulus for new production

IRR is modest.

Chart 4. IRR of Nigerian PIB for onshore leases in which NNPC

does not participate

Many issues would affect the revenues in the PIB 2012. Here

are the cases as a result of interpretation issues with PIB 2012.

case are cumulative. The cases are:

be a perpetual uplift.

Inland Basin Production Sharing Act will indeed result in the loss

of royalties.

arrangements will be made to transfer the production sharing

profit oil revenues to Nigeria from NNPC to Nigeria. In otherwords it is assumed that the privatized NNPC can retain

these profit oil shares and will pay corporate income tax and

hydrocarbon tax on its income. It should be noted that the

dividend policy would not be determined by a Board in which

private investors participate. It is assumed that dividends will be

retained. If Nigeria is to achieve the goal of a Petrobras style

national oil company, profits would have to be reinvested rather

than paid as dividends for a very long period.

the profits and that these amounts will be credited against the

revenues to the Federal Government.

As can be seen the revenue losses to Nigeria based on the

Chart 3. Government Take of Nigeria PIB for deepwater PSCs

0%

10%20%

30%

40%

50%

60%

70%

80%

90%

100%

GovernmentTake

50 100 200 500 1,000 2,000 5,000

Deepwater eld sizes (million barrels)

Current-2000PSC Case #1 Case #2 Case #3 Case #4 Case #5


25/28


Chart 6 illustrates how under current terms of the year 2000

the contract area if costs are higher than about $23 per barrel

(capital and operating costs). The production allowances

economics. Fields costing $31 per barrel are economic under

these terms. This would be a welcome and adequate stimulus if

applied to new production.

against other government payments.

Chart 6. IRR of Nigeria PIB for deepwater PSCs

27 September 2012 (EA comments)

Chart 5 illustrates how not applying the production allowances to

these leases uneconomic and therefore undeveloped.

Chart 5. IRR of Nigeria PIB for onshore leases in which NNPC

does not participate

0%

5%10%15%20%25%30%

35%40%45%50%

IRR(%)(real)

5$45

10$36

20$28

50$20

100$15

200$10

500$6

Field sizes (million barrels) and costs ($/bbl)


0%

5%

10%15%

20%

25%

30%

35%

40%

45%

50%

IRR(%)(real)

Field sizes (million barrels) and costs ($/bbl)

Current-2000PSC Case #1 Case #2 Case #3 Case #4 Case #5

50$45

100$36

200$31

500$25

1,000$21

2,000$17

5,000$13


26/28


Our dedication to oil and gas of the Nigerian Government with the objective of creating a

conducive business environment for petroleum operations.

The recent draft PIB submitted by the President to the

while optimizing revenues accruing to the Nigerian Government.

We can help you operate in this changing business environment.

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How

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27/28


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Henry EgbikiRegional Managing Partner,

West Region

T: 463 0479 80 Ext: 119

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Nigeria Petroleum Industry Bill 2012

Documents

Transcript of Nigeria Petroleum Industry Bill 2012