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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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6 Nigeria Petroleum Industry Bill 2012
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
10 Nigeria Petroleum Industry Bill 2012
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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Nigeria Petroleum Industry Bill 2012 19
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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20 Nigeria Petroleum Industry Bill 201220
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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Nigeria Petroleum Industry Bill 2012 21
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
22 Nigeria Petroleum Industry Bill 2012
Dr. Pedro van Meurs to evaluate the Bills economic impact using current royalty and
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Nigeria Petroleum Industry Bill 2012 23
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)
Current Case #1 Case #2
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24 Nigeria Petroleum Industry Bill 2012
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)
Current Case #1 Case #2
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
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Nigeria Petroleum Industry Bill 2012 25
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)
Current Case #1 Case #2
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
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26 Nigeria Petroleum Industry Bill 2012
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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