1. 1. Fiscal aspects of the Nigerian Oil and Gas Industry by Kayode Adebiyi Manager Taxes, Nigerian Petroleum Development Company Ltd Benin-City
2. 2. OUTLINE E & P sector basics Petroleum regime framework Petroleum fiscal regimes Fiscal terms, revenues and cash flows PIB fiscal incentives
3. 3. Figure 1. The Project Cycle . Leas e Exploratio n Developme nt Production Closure Post- Closure Recover y End of Production Lease is returned Start of Production
4. 4. E & P Sector Characteristics (1) Long and costly exploration and development High geological and technical risk Mega-size uncertainty Volatility and uncertainty of prices Resource exhaustion Difficulty in acquiring information and expertise on the extractive industry
5. 5. E & P Sector Characteristics (2) Significant environmental and social impacts Prominent political profile Technologically demanding Limited host country funding Foreign investment incentive
6. 6. E & P BUSINESS INVESTMENT PROCESSES Investment Identification of Opportunities Evaluation (Economics) Planning Work Process Capital Spending Plan Budget Plan Action Plan FEED (Conceptual Design) Pre-qualification ITT (Investment to Tender) Technical Evaluation Commercial Evaluation Approval Contract Execution EPIC
7. 7. Petroleum Regime Framework PETROLEUM LAWS/ REGULATIONS CONSTITUTION E & P BUSINESS REGIMES Legislativ e/Regulato ry CONCESSION JOINT VENTURE SERVICE CONTRACT HYBRID & SAs PSC
8. 8. Legal/Contractual framework The constitution The Law E.g tax law Petroleum Law and Legislation Not all countries have a separate petroleum law. If that is the case the contract has to cover all aspects Production sharing contract Concessionary agreement in countries using that system Joint Operating Agreements Between partners in a field (can also be the state company)
9. 9. Key Elements of Successful Petroleum Legal Frameworks Area key components Government authority Ownership of natural resources; powers granted to government officers; enforcement; penalties and fines; the authority to negotiate contracts; the taxing authority and approvals authorities Access to the acreage Qualifications for authorization to explore, develop, produce and process; area closed to mineral activities; areas subject to special controls or conditions; right of ingress and egress; resolution of conflicting land disputes; and the relation between surface and subsurface right holders. Exploration and production Extent of the exploration and production area; rights and obligations duration of term for exploration and production rights, renewal of exploration and production rights, utilization; cancellation or terminated of a right; area relinquishment; minimum work programs; security of tenure; reporting; transferability of rights and mortgage ability; surface fees. Protection of the environment Environmental impact assessment ; environmental impact mitigation; social or community impact; monitoring and reporting; abandonment liability; reclamation; and environment sureties . Fiscal Terms State participation; royalties; production sharing rate and base; custom duties ; income duties; income tax rate and base; special petroleum taxes; other levies and taxes; gas production incentives and other incentives; ring fencing; and stability clauses
10. 10. 10 Rentals / Fees Royalty Volume-based Production Sharing Vat Tax Government Profit Split Income Tax Surtax Additional Profits Tax Return on Investment After-tax Profit Margin Gross Production Value Rent/State Take Investment and Operating Costs Red Text -- Pre-tax Take Blue Text -- Profit-based Take Investor Company Cost Recovery Tax Depreciation (Equity) Cost Recovery Volumes (Psc) Cost or Revenue-based Government Take Profit-based Government Take Divisible Income Divisible Income & Economic Rent Schematic Investor Take
11. 11. Petroleum Fiscal Regime Licensing Regime FISCAL REGIME Fiscal Features Bid Process Legislatio n Market Environment Competition (markets) Price Low/High Social Local content Energy needs Education Ecological Climate changes Carbon Trading Technology Availability Research & Development Political Environme nt Stability Confidence Risk Technica l Financial Others Oil $ Gas Reserves Availability Acreage Emerging industry Mature Industry
12. 12. What is a fiscal regime? Fiscal Regime is defined as the sum of all impositions on an investor by the state via legislation or otherwise Oil economies are based on the efficient sharing of shareable surplus derived from the winning of oil and gas by investing companies The fiscal arrangement is the Government's most important tool for managing petroleum resources There are more fiscal regimes in the world than there are countries due to: - Negotiation of terms - Numerous vintages
13. 13. Basic Components of a Fiscal Regime CONTRACTUAL LEGISLATIVE FISCAL INSTRUMENTS FRAMEWORK FRAMEWORK Tax/ Royalty systems Production sharing contracts Service Contracts Ownership of the resources Governing Petroleum Laws Tax Legislations Environmental Laws Local Content policies or Laws Incentives Capital Allowances Uplifts Royalty & Tax Rates Profit Splits Consolidation or Ring fenced Windfall Profit Features Cost Recovery Limit Financial Obligations Domestic Market Obligations
14. 14. Objectives of Fiscal Regime: Govt. (1) Attracts Investments Asserts ownership of resources Predictable Revenues Offers greater flexibility to capture increasing rent as profitability increases Supports Macroeconomic Stability Encourages economic efficiency Promotes diversification
15. 15. Objective of Fiscal Regime: Govt.(2) Maximize the value of the revenues from oil and gas resources for Governments Increase/replace reserves and production Attract foreign investment Ensure transfer of technology Development of local infrastructure Create jobs
16. 16. Ideal Government Objectives Provide a fair return to the state and the industry Avoid undue speculation Limit undue administration Provide flexibility Create healthy competition Create a market efficiency
17. 17. Value of National resources Determining factors The resources base The market oil price Terms and regulations
18. 18. ROLE OF GOVERNMENT Definition of policy Setting of terms Promotion Licensing Monitoring and supervision Adjustment of terms as required Managing the impact
19. 19. Objectives of fiscal Regime : Investor (1) Adequate Rate of Return Ability to repatriate profits Economic/Fiscal Stability Internationally recognised standards Transparency and clearly defined processes & systems To attain maximum net present value of the present value of the petroleum resources
20. 20. Objectives of fiscal Regime : Investor (2) Increase/Replace Reserves Competitive return on investment Incentives for activity with low oil price and marginal discoveries Build equity
21. 21. Fiscal terms act as the contractual balance between the financial objectives of the host government and the investor company 21 Realization of Countrys Economic Potential Development of National Expertise Broad Control of Overall Activity Balanced Risk / Reward Relationship Stable Political and Fiscal Environment Management of Operations on Sound Commercial Basis Government Investor Company Maximum Economic Development of Hydrocarbon Resources Fiscal Terms Fiscal Terms: Balance of Objectives
22. 22. Why JVs, Partnerships, Sharing contracts and alliances? Better to own half of a cow than the whole of a rat Anonymous Behind an Able Man There Are Always Other Able Men. Chinese Proverb
23. 23. . PETROLEUM LEGAL ARRANGEMENTS CONCESSIONARY CONTRACTUAL SERVICE CONTRACTS The contract paid a service fee, typically in cash PRODUCTION SHARING CONTRACTS The production in kind is shared between the investor and the host government Pure service Risk service contracts The service fee is linked to the profit
24. 24.
25. 25. BALANCE SHEET
26. 26. Concession Contractor has exclusive rights to explore, develop, sell, and export oil/gas from a specified area for a fixed period of time Equity or Royalty & Tax structure Maximum control to Contractor Oldest & most widely used
27. 27. Joint Venture Private/Foreign Companies and NOC form a Joint Venture Each JV partner pays/receives its share in proportion to its Participating Interest. JV pays royalty, income tax and usually some form of Petroleum Profit Tax (PPT) Low success rate, less commonly used
28. 28. Service Contract Contractor pays all exploration and development costs Contractor works under governments mandate and is paid for its work Government maintains ownership and title of minerals Most suitable for Contractor for risk-free operations and for States having Producing Assets
29. 29. Hybrids Combinations of Concession/JV/PSC, royalty, tax, cost oil/profit oil shares and fees etc. Efforts to develop a world model Hybrid agreement have been unsuccessful because structures are becoming more diverse Host governments seeking structures that suit their particular needs
30. 30. Production Sharing Contract State enters into a PSC with Contractor for a specified period Contractor finances exploration and development If successful, Contractor will recover its costs and earn a profit by receiving a share of production Royalty & Income Tax are paid as applicable Significant control to Contractors, but State has contractual controls
31. 31. Production Sharing Contract Attributes (1) Contract term Relinquishment Management Committee Discovery, Development & Production Unit Development
32. 32. Production Sharing Contract Attributes (2) Cost Recovery & Production Sharing Taxes, Royalties & Rentals Domestic sourcing & supply obligations Employment & training Title to assets
33. 33. MAIN DIFFERENCES BETWEEN CONCESSIONARY SYSTEMS AND PRODUCTION SHARING CONTRACTS Concessionary systems Production sharing contracts Ownership of nations Held by sovereign state Held by sovereign state mineral resources Title transfer point At the wellhead At the export point Company entitlement Gross production less royalty Cost oil/gas + profit oil/gas Entitlement percentage Typically 90% typically 50 60 % Ownership of facilities Held by company Held by state Management and control Typically less government control More direct government control and participation Government participation Less likely More likely (carried working interest) Ring fencing Less likely More likely
34. 34. Comparison of Royalty/Tax & PSC Regimes Primary Components of Govt. Take Bonus Payments Royalties Income/Dividend Withholding Taxes Special Oil & Gas Taxes (PPT, SPT, PRT) Other taxes/Levies (NDDC, Social etc) State Participation/ Carry (Alternative Funding) Primary Components of Govt. Take Bonus Payments Royalties Income/Dividend Withholding Taxes Special Oil & Gas Taxes (PPT, SPT, PRT) Other taxes/Levies (NDDC, Social etc) Profit Sharing Terms State Participation/ Carry (NPDC) 34 Royalty/Tax Regimes PSC Regimes Primary Advantages of R/T Systems Transparency of terms Rights to resources owned by Investor (IOC) Higher % of resource can be booked Net reserves/production independent of costs and price Investor is more likely to share in high side value More control over decisions? De jure but not de facto? Primary Advantages of PSC Systems Stability of Terms (PSC Decree, 1999 contains re- openers) Terms can be tailored to specific needs of a project Investor risk can be mitigated in some low side scenarios. (So also the MOU which is an R/T system) Total level of Government Take is driven more by the specifics of the terms than by the type of regime Terms generally consistent with prospectively of the country/block relative to other world-wide opportunities Conventional R/T system structures have been more likely to create an equitable sharing of risk/reward between the contractor and the government Many R/T systems have recently incorporated features that make them behave more like PSC regimes Sliding scale royalties tied to production rates, project IRR, or R-factors (e.g. Venezuela, Kazakhstan, proposed in Nigeria-JDZ) Income/Other tax rates tied to R-factors and or oil prices (e.g. Chad (Income tax), Russia (export duty), Nigeria) Whatever systems Governments impose, agreements can be structured to meet all partys requirements
35. 35. Strategic Alliances Informal or formal decisions or agreements to cooperate in some form of relationship between two or more firms Represent forms of relationships that are uncertain and ambiguous Nightmare or goldmine, it depends
36. 36. Characteristics of Strategic Alliances (Non JV Alliances) Usually non-equity relationship between the parties No contribution of capital by either party No creation of new legal entity Relationship of the parties governed by contract Generally, less formal documentation
37. 37. Characteristics of Strategic Alliances (Non JV Alliances) Each party retains its independence Each party responsible for certain agreed upon costs/expenses (e.g. Marketing; Sales; Inventory, etc.) Fairly straight forward process to terminate the alliance (e.g. defined term of alliance)
38. 38. 38 Government Take Government Take = Royalty (based on the value of oil and gas recovered + Tax (a percentage of taxable income) Taxable income = Revenues Fiscal costs Fiscal cost = Royalty + OPEX + Fiscal depreciation (for CAPEX)
39. 39. Fiscal Control of Petroleum Companies (1) . NAPIMS FIRSDPR
40. 40. Fiscal Control of Petroleum Companies (2) NAPIMS responsible for the control and monitoring of costs of companies DPR for royalty administration and fiscal procedures linked with reserve addition FIRS administration of PPT and other direct taxes to oil companies, and also for VAT
41. 41. PETROLEUM FISCAL POLICIES: MAIN FACTORS Cost of operations Rate of explorations Oil price
42. 42. PETROLEUM FISCAL POLICIES: THE VARIABLES Signature bonuses Royalties Cost oil profit oil split profit tax
43. 43. Petroleum Expenditure & Revenue Profile $ 5 10 20 30 40 Exploration & Appraisal Developmen t Production Abandonment & Reclamation Costs Revenues
44. 44. Activities and cash flowIncom e Costs Time C o n tr a c t si g n i n g O D P AbandonmentProductio n Rehab. ProductionDevelopmentExplorationPre-license Government
45. 45. DIVISION OF REVENUES
46. 46. Cash Flows Under PSC Regime Production value Cost Petroleum Profit Petroleum Contractors share Governments share Development Exploration Production Royalty Income tax Governments take Contractors take
47. 47. 47 LEGAL FRAMEWORK Concessionary System Royalty/Tax system. Operator owns part Interest or all of license/Lease Multinationals in JVs 55-60% NNPC Equity interest Governed by the MOU and the JOA Multinational operators have minority interests ~95% of Nigeria oil production Risk Service Contracts Agip Energy 1979 & 2001 NNPC holds the lease. Contractor bears all costs & recovers same from production Contractor has first option to buy fixed amount of crude from contract area Production Sharing Contract Contract type of choice in the 1990s (1st in 1973 with Ashland) NNPC holds the License. Contractor bears all cost & recovers same from production Profit Oil split after Royalty, Cost recovery and Tax Shallow Water For W.D. 200M) Sliding royalty rate based on water depth Lower tax rate - 50%/Flat ITC rate- 50% for PSC signed 1993, Post 1993 ITA Sliding profit oil share to contractor based on cum production Contractual System Operator is contractor to the License/Lease holder (NNPC). Contractor : CITA Leaseholder - PPTA Royalty 16.67-20% Tax 65.75/85% Capital Recovery 5 years ITA 5 - 15% Royalty: 16.67% - 20% Tax Rate: 65.75/85% Capital Recovery: 5 years ITA: 5 -15% Royalty: 16.67% - 20% Tax Rate: 65.75/85% Capital Recovery: 5 years ITA: 5-15% Nigerian Fiscal Terms Indigenous Producers 60% or more Equity held by Indigenous company 40% or less Interest held by technical partners who, in some cases, carry Indigenous Co.s cost and recover from production NNPC -50% back-in to Ind. Prod Equity ~5% of Nigeria oil production PA & PPTA
48. 48. OBJECTIVES OF THE PIB To Enhance Exploration and Exploitation of Petroleum Resources To Significantly increase domestic gas supplies especially for power and Industry Create Competitive Business environment To Establish fiscal framework that is flexible, stable and competitively attractive To create Commercially viable National Oil Company To deregulate downstream petroleum business To Create efficient regulatory institutions To Engender Transparency and accountability To Promote Nigerian Content To Promote and protect Health Safety and Environment 48
49. 49. FISCAL INCENTIVES . 49 Fiscal regime (Royalty andTax) predicated on production as opposed to terrain and investment respectively. o Royalty by Production Captures the output of a company as opposed to its location. Creates a fair balance between small and big producers operating in the same terrain. Enables operators to continue to make fair returns during field decline. Lower rates proposed for condensate from NAG fields. Lower rates also proposed for frontier and ultra deepwater basins o Royalty by Price Trigger mechanism is fair to all irrespective of the terrain Self adjusting rate based on the price of crude oil (> $50/bbl) and natural gas price (> $2.0/Mmbtu).
50. 50. FISCAL INCENTIVES . 50 Tax Regimes o CITA Puts all operating companies on the same pedestal Provides for the payment of minimum tax where incentives would otherwise not have made the company liable to NHT Removes all the rigours and intricacies involved in the calculation of NHT. CIT rate is 30% regardless of geographical location o NHT and Production Bonus (PB) PB based on production as opposed to investment (which may not fully capture the essence of capital deployed) Field size dependent, therefore, fair to both small and large producers NHT rate is 50% in the case of onshore/swamp/shallow offshore and 25% for deepwater operations.
51. 51. PIB, in a nutshell The new PIB allows for A totally liberalized private sector led industry operating on principles of international best practices An open and transparent framework for petroleum sector businesses An attractive investment environment that cuts across sectors A flexible fiscal and taxation model that allows for commensurate returns on investment A sustainable environment for petroleum industry business 51
52. 52. Effective and efficient fiscal regimes To design effective and efficient fiscal regimes requires continuous review of our environments, so as to ensure, among other things: 1. Global competitiveness in the constantly changing environment 2. In designing fiscal systems, it is important to create an alignment between the contractors' and host government's interests as well as make adjustments as the field moves through its life cycle. 3. Maximization of this countrys revenue streams, and 4. A fair distribution of the economic rents between governments and companies.
53. 53. Thank you 08033181225 kydadebiyi@yahoo.com