KEHINDE AKINTOLA
Nigeria’s House of Representatives on Wednesday passed through second reading a bill which seeks to increase Federal Government’s share of the revenue accruing from oil exploration by 50% royalty rate.
Similarly, Federal Government also proposed that: “additional revenue shall be determined by the product of the volume of crude oil or condensate sold and the difference between the actual nominal sales price of the oil or condensate and the nominal value of $20 per barrel, (1993 real terms), at the time of sales, provided that the value of $20 per barrel.
The Executive bill seeks to amend section 16 of the PSC Act, by adding a new subsection (3) immediately after subsection 3, with the intent of increasing the share of the Government of the Federation in the additional revenue under the production sharing contracts
It read: “16. (3) In accordance with the provisions of subsection (1) of this section:
(a) a royalty rate by price of 50% shall apply for the additional revenue in the contract area of the production sharing contracts under this Act; and
(b) the additional revenue shall be determined by the product of the volume of crude oil or condensate sold and the difference between the actual nominal sales price of the oil or condensate and the nominal value of $20 per barrel, (1993 real terms), at the time of sales, provided that the value of $20 per barrel, (1993 real terms) shall be determined based on relevant US All items Consumer Price Index (CPI) as published by the US Bureau of Labor Statistics”.
The petroleum fiscal system in Nigeria’s oil sector is governed by the Petroleum Profit Tax Act (PPT) 1959, and its amendments; Memorandum of understanding (MOU) and Production Sharing Contracts Deep Water, while the gas sector is governed by Finance (Miscallenoues Taxation Provisions Act 18 & 19 of 1998 and At 30 of 1999.
According to the provisions, the PPT rate is pegged at 85% for JV companies, 50% for PSC companies in deep offshore (over 200 metres) while Royalty graduated into:
| Land | Swamp/Shallow Waters | Shallow Offshore | Deep Offshore |
| Onshore – 20% | 0 – 100m: 18.5% | 100 – 200m: 16.67% | 201 – 500m: 12% |
| 501 – 800m: 8% | |||
| 801 – 1000m: 4% | |||
| Over 1000m: 0% |
As oil accounts for 70 per cent of the Nigerian economy, the recent decline in oil price is severely impacting the country. Approximately 70-75 per cent of Nigeria’s oil production is obtained via offshore drilling.
‘Deep-Offshore’ in Nigeria means any water depth beyond 200 meters.
Profit Oil is the predetermined allocation of production after cost oil has been kept by the contractor and the royalties have been paid to the government.
The profit oil is then divided between the IOC and the host government on a percentage basis.
The profit split is defined per contract and might differ per host country. This predetermined share of production is usually subject to taxation which is deducted from the income generated from the IOC’s share of production.
Market Price is the price determined for the valuation of the Crude Oil produced from the Contract Area. The market price might not reflect the value of the oil in trade, but rather the pricing of the oil for tax purposes, depending on the local laws and regulations.
Royalties are usually given to the government and are based on the volume of the production extracted.
Incentives are given to the IOC by the host government and include investment credits (IC), payment of taxes by the NOC as a stability mechanism, no ring fencing and assurance of fiscal stability.
Bonuses are another way that a host country can obtain oil rents from IOCs in deep water projects.
Cost Oil is allocated to the Contractor ‘in such quantum as shall generate an amount of proceeds sufficient for the recovery of operating costs in oil prospecting licences as defined in the Production Sharing Contracts and any oil mining leases derived therefrom.’
It is salient to note here that this provision provides a ‘ring fence’ on operating expenses incurred on different Oil Prospecting Licenses – this means that IOCs operating in Nigeria can only obtain cost oil for the particular licensed block. It is reported that PSCs earlier than 2005 do not provide a cap on cost recovery, while the 2005 model PSC caps cost recovery at 80%.
Further, operating costs (OPEX) can be recovered in a year while capital costs (CAPEX) are recoverable in equal instalments over a period of five years.
The Revenue Mobilization Allocation and Fiscal Commission (RMAFC) asserted that NNPC has not remitted as high as N4.9 trillion (EUR 21 billion) in oil revenue to the state treasury for the time period between January 2011 to December 2015.
Meanwhile, the House adopted the motion which seeks to investigate the $27 billion oil revenue lost by Federal Government since 1999 to date, due to delay in the review of the Act.
The resolution was passed after the passage of the bill which seeks to increase Federal Government’s share of the revenue accruing from the oil trading.
The Committee was given one week to report back for further legislative action.
According to Idris Wase, Deputy Majority Leader, the investigation became necessary in order to ascertain the position of Federal Government as stipulated in the information provided by the Executive.
Despite opposition fuelled by members of the Peoples Democratic Party (PDP) who canvassed that the bill should be stepped down, Speaker Yakubu Dogara explained that the bill has been listed on the Order Paper twice, hence ruled them out of Order.
To this end, he referred the bill to the House Committee on Petroleum Resources (Upstream) for further legislative action.
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