2% Annual Increase on Price Royalty for Nigeria’s Crude Oil.

The Nigerian Government has introduced a two per cent annual increase on price based royalty for crude oil and condensates in the Petroleum Industry Act (PIA).

The PIA, whose tortuous journey into becoming a law started in 2007, targets the revamp of the oil and gas sector by ensuring optimal levels of transparency and accountability through strengthening of governance institutions and attracting the much-needed capital with changes to the administrative, fiscal and regulatory frameworks, was signed into law by President Muhammadu Buhari, on August 26, 2021.

According to the PIA, additional price based royalty shall apply to crude oil and condensates, which crystallises only when crude oil prices exceeds $50 ($100 shall attract 5 per cent and above $150 shall attract 10 per cent).

The rates apply to the 2020 fiscal year and shall be increased by 2 per cent yearly as provided in the PIA. The price-based royalty shall be credited to the Nigerian Sovereign Wealth Fund.

The PIA had retained production-based royalty rates but added price-based royalty rates. Production-based royalty is between 5 per cent-15 per cent for crude oil and condensates and 5 per cent for gas although, for local gas supplies, the rate is lower at 2.5 per cent.

Nigeria is believed to have lost over $50 billion in the last ten years largely due to the uncertainties around the legal, administrative and fiscal policies of the oil and gas industry.

On fiscals, the PIA recognises the impact of the declining oil prices on operators’ profitability and consequently adjusted some fiscal terms.

The Act replaced the Petroleum Profits Tax (PPT) with the Hydrocarbon Tax (HT), which applies to crude oil production, condensates and natural gas produced from associated gas in the onshore and shallow waters. It does not apply to associated and non-associated natural gas, and frontier acreage.

HT is charged at varying rates depending on the licence.

For onshore and shallow waters, a rate of 30 per cent will be applied to converted Petroleum Mining Lease (PML), while a 15 per cent rate will be applied to converted PPLs.

In addition to the HT, companies involved in upstream operations will also be subjected to Companies Income Tax (CIT) at 30 per cent if such companies are involved in deep offshore, upstream gas, midstream or downstream activities.

This effectively caps the income tax rate applicable to oil and gas companies at 60 per cent, which is a reduction from the 85 per cent rate applicable under the Petroleum Profits Tax Act (PPTA). The fiscal terms in the PIA will apply upon the conversion of existing Oil Prospecting License(OPL) and Oil Mining License(OML) into Petroleum Production License(PPL) and PMLs, the termination or expiration of unconverted leases and the renewal of OMLs.

While investors can model risk into their budgets and investments, modelling uncertainty (around the passage of the PIA) is difficult and explains the decreasing levels of investment in the sector as well as withdrawals of major International Oil Companies (IOCs) from Nigeria’s oil and gas industry.

Sadly, the performance of the global crude oil market directly influences the Nigerian government’s finances as proceeds from the sale of crude oil account for over 90 per cent of the country’s export revenue and 60 per cent of the government’s total revenue.

The Nigerian Capital Importation Report released by the National Bureau of Statistics (NBS) shows that capital importation targeted at the oil and gas sector averaged a meagre one per cent of the total capital imported into the country over the past three years (2018-2020), a significant reduction compared to 2016 (14 per cent), evidencing preferences for other sectors as investment destinations over the oil and gas sector.

The passage of the PIA has been hailed by industry players as a welcome development, albeit long overdue. The PIA is a root and branch review of the entire oil and gas sector and is expected to place Nigeria on the right path to competing better in the global oil and gas market.

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