Indigenous firms gear up to bid for Nigeria’s 30 marginal oil fields
Local investors in Nigeria are plotting strategies to participate in the forthcoming bid round for about 30 marginal oil fields expected to commence next month, after suffering delays arising from delayed passage of the Petroleum Industry Bill and the president’s absence from the country.
Marginal fields are undeveloped discoveries located in oil blocks held by oil majors operating in the country. Twenty-four such fields were awarded in 2003, to 31 Nigerian independents. Four more have since been granted, outside the process of a bid round, since then.
A group of investors in Lagos are organising a business summit next week, led by EnergyDatar, an advisory firm, to discuss the terms of participation by local players in the oil licensing round. Last month, another group met at a roundtable breakfast session organised by Apsen Energy and called on the Federal Government to review the proposed fiscal terms in the Petroleum Industry Bill.
Maikanti Baru, the group managing director of the Nigerian National Petroleum Corporation (NNPC) last week indicated that the oil licensing round is imminent and charged a delegation of the Independent Petroleum Producers Group (IPPG) led by its chairman, Ademola Adeyemi-Bero, who visited him, to take advantage of the low crude oil price regime to develop their capacity and acquire technology.
“The marginal oil field lease renewal is an opportunity for your group. You will need to engage the DPR early, in discussion to find out the conditions that the Federal Government is interested in. For example, the supply of gas to power plants and fertilizer plants and I think your group will be successful,” Baru advised.
But a section of indigenous players say local operators would be encouraged if Nigeria’s proposed fiscal policy is reviewed. Nigeria has introduced a hydrocarbon tax to maximise government tax-take, at the same time minimising allowable costs for operators in the proposed fiscal terms.
The timing is most inauspicious operators say. The world is seeing a significant shift away from fossil fuels, with increased adoption of renewable energies and battery-powered vehicles. Countries that produce cars are planning to ban fuel and diesel cars in about 20 years, while China, the world’s biggest energy consumer, is redoubling efforts to scale down consumption.
“So, we must ensure that we make our fiscal framework very competitive, even if you put money on the table, it is far more important to keep independents growing to create jobs, peace in the Niger Delta and create the volumes needed to grow our economy,” said Segun Olujobi, managing director of Vertex Energy, at the Aspen roundtable conference.
People once scoffed at shale producers but now they are disrupting the global market. “So, the focus should not be on rent for government, the focus should be on investments, on jobs, even if government puts its own money in it. We should focus on incentivising investments,” said Olujobi.
But Nigeria plans to maximise rent on its oil acreages. The Petroleum Profit Tax (PPT) granted too generous concessions for exploration and production companies, gifting them zero royalty rates in water depths of 1,000 meters, where the bulk of Nigeria’s deepwater finds have been located.
This is why the proposed fiscal terms contained in the Petroleum Industry Reform Bill (PIRB), seeks to make royalty a major source of government earnings. It proposes a multi-tiered tax system, where operators pay a Nigerian Hydrocarbon Tax (NHT) at graduating rates of 40% (onshore operations), 30% (shallow water operations) and 20% (deep water operations).
Companies operating in the upstream sector will also be subjected to Company Income Tax (CIT) at 30% and Education Tax at 2% on taxable profits. This brings the aggregate tax rate for both NHT and CIT up to 70% when compared to 85% per petroleum profit tax (PPT).
However, it gets tricky from there. “Unlike the Petroleum Profit Tax Act (PPTA), which allows exploration and production operators who are yet to fully expense their pre-production expenditure to be taxed at 65.75% for the first five years of commencement of commercial sales of crude oil, the policy does not provide for such lower or preferential tax rate. This suggests that the tax burden may be relatively higher for upstream companies,” said analysts at Deliotte, led by Seye Arowolo, partner, Tax & Regulatory Service in a note.
Operators say this system may not achieve the balance between short term revenue uptick and long term guarantee of income from taxation needed to catalyse other sectors of the economy. Local oil companies say a progressive tax regime is more likely to attract investments compared to a regressive tax regime which the current proposals tend to promote.
“Nigeria needs to completely rethink its oil and gas industry, what use do we want for oil and gas, do we need to refocus it for domestic utilisation or what? This should guide the fiscal framework for the country,” said Israel Aye, oil and gas lawyer and director at Aspen Energy Limited.
Ahead of the current oil licensing rounds, Nigeria is planning to engage an external firm to handle the process as previous oil licensing rounds have been dogged by lack of integrity in the process. This has led to award of licenses to companies without requisite technical and financial competence to undertake. Eleven of these oil blocks license will expire this month.
Local oil players are also uneasy about where to secure funding to purchase oil acreages to prevent foreign oil companies snapping up the assets as local banks lack motivation to lend to the sector. This is even as the threat of militancy still clouds assets onshore.
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