PIB: IOCs take advantage of tax loopholes – Membere
There has been a lot of back and forth on the fiscal terms proposed in the new Petroleum Industry Bill, PIB. In a recent media chat, Mr Abiye Membere, the Group Executive Director, Exploration and Production, NNPC, who was also a member of the technical committee that scrutinised the bill, explained that what government is trying to do with the bill is to block the avenues of revenue losses, as captured by Clara Nwachukwu
Why are the fiscal terms so controversial?
Regardless of where you are, the taxes are very competitive, and then we have the Nigeria hydrocarbon tax which varies between the Joint Venture, JV, and the Production Sharing Contract, PSC. Within the JV is 50percent, for the onshore swamp shallow, we have 25percent for the deep water.
The reason why we did that is because the original Petroleum Act, has a consolidated tax for Petroleum Profit Tax, PPT of 55percent and because we have designed this fiscal regime to be royalty biased, which is the front uncharged, we decided to reduce the overall charges in the JV assets from 85% to 80%. This is because we want to ensure that there is no ambiguity. So the tax for JV was reduced from 55% to 50% to make it 80% compared to the 85% currently in the Petroleum Act.
However, in the PSC that is the driver of this fair share revenue, 25% tax on the hydrocarbon tax is imposed to make it 55% compared to the 50% originally in the PSC. So within the PSC, there is a 5% increase in tax base on the current PIB and then a more flexible royalty system that is going to get a fair share of the revenue to the federal government.
In addition to that, the previous PIB or the previous Petroleum Act has what we called the investment tax allowance which was designed to give incentives to those who want to invest. But it does not encourage the quality of investment, that is, if you are about to buy a table, for the mere fact that you have taken that decision to buy a table, I will give you an incentive or an allowance.
Whether this table is functional or not is irrelevant, but for the fact that it has been purchased, you would be given an incentive or allowance. Modern day taxation or incentive is not a good technique because it does not guarantee you a profitable investment. So we modified that to a production based incentive, that is, I don’t want the table but I want the table to produce something because it is the production from that table that would guarantee your allowance not because you want to invest.
For example, way back some years ago, one of the national oil companies invested some money in rice production and they took the investment tax allowance on that project but because the rice was imported or the seed was imported and not tropicalised, the entire rice went to zero but the person who invested had his allowance because that is currently the law.
But now, we are saying sorry, we can’t do such kinds of business anymore because you will produce the rice and based on the production, that is what we will use in giving you an incentive. Before you spend the money, you need to think very well that it is going to produce something and that is not what we had before.
The IOCs are going to say that previously we used to have investment tax allowance but we are changing into production-based allowance. We have wasted enough money on projects and yet we can’t realise any benefit from them so we focus more on developing projects that are going to benefit us as well.
Is there going to be transition period?
Yes, and it is 36 months. The transition is, if the PIB is passed today, it will take 36 months. From the passage to full implementation of all the aspects of the bill will take 36 months.
Some will be immediate like royalty, will be done as soon as it is signed, but the structural ones will take some time, because there are issues, you have several labour matters all within 36 months. You have to set out structures and find office for the downstream site and all these put together, you would see that 36 months is needed. Also, if you do it very well it might not take up that many months, but we anticipate 36 months will do it just fine. For example the merger between Exxon and Mobil took about 30 months.
How competitive are these fiscal terms globally?
In a nutshell, based on the current PIB submission, government’s take benchmark was carried out globally. Within the current Act and the new PIB on the joint venture assets, government take as it is today is 87% and the new PIB is 88%. There is one percent difference, and we can tell you that the one percent is as a result of the change in model, from a tax-based revenue seeking model, to a royalty-based revenue seeking model.
As I said earlier, due to the shift within the JV, we reduced the tax to be able to compensate for that. More or less the intension was to be able to be at par with global trends. We don’t want to change the JV because it is matured mostly, what we have is integrity related. We didn’t want to tamper with the fiscal model, so if you look at it from the face value, there is no change within the JV.
If it’s only one percent difference as you say, why are the IOCs screaming and crying foul?
Like I said earlier, what the IOCs have done over the years is to look at the loopholes in the tax law and exploit them. In group value we say the PPT is 87%, but in reality the tax exemptions and all the benefit they get, they don’t pay that tax.
So with this 87% it is believed that they obeyed the law. But if you are able to get a good tax lawyer that gives you: “oh! This expenditure is tax exempt; this is so and so, before you buy those ones out, the actual tax you pay to the government is far less than what you are supposed to pay…
Do you have an estimate of how much they actually pay?
Nigerian National Petroleum Corporation, NNPC cannot do that job because the general agreement is that everybody handles his own tax differently. All what we do is that we have 50/50 or 30/70, which means that as soon as you produce your oil, all the tax matters are handled by you. For instance, my own tax matter is handled by me. But you can go to FIRS to dig that data out.
We have annual cash flow but what we are saying is that, there are lots of loopholes in the tax law, anywhere there is a tax law, any smart lawyer will surely find those loopholes. Even within ourselves, we do that when you are filing your tax form. Some of us claim to have more children so that we can get tax reductions and then some of our cousins become our house girls so that we can get our taxes reduced.
So I think the answer to your question is that they are screaming because we have tightened the loopholes they were using to make money, thinking that we have made so much money not knowing that what they made in the bent, they will lose at the roundabout.
For me I know that the problem with Nigeria is not about policy formulation but with the implementation, with this PIB, will there be sincerity in the implementation of the bill?
The implementation will be transparent. It will be based on the international standard of taxation. So we just don’t have any choice than to commit to the implementation. However, there are enough guidelines and processes in the system that if you did not perform, you will be relieved of your work. I don’t think we will want to enshrine that one again, because it is a documented way of handling failure.
Also, corruption is inherent in the system but what we are trying to do now is to bring in private participation into the national company to bring about transparency and accountability. With the government, often times, questions are not asked but if your money is in private company, you are bound to ask, “Sorry, how did you spend this money” and you have to give an answer.
On the gas side, yes, we made it 49 per cent because it underpins the power supply system in this country. The national company should have at least a minimal control to make sure that the private sector does not drive that gas back to export. So we need that minimal control. Where you have a fairly established upstream company like the NPDC currently producing at 130,000bpd and in the next few years we are going to go to 150- 250,000bpd, and we will have a company that is actually making profit.
And that is why I said we are using NPDC, the upstream side of the National Oil Company to sell the refineries. So some people don’t just have one good and some other people have one bad. But we are going to get some good and a bad. You will then be happy that you have a good investment. If you are buying shares in the National Oil Company when the refineries are not doing well, the upstream side of NPDC is doing well so you don’t go into a loss. And I also said if you sell the refineries the way they are, you are going to sell it so cheap. It will be worse than what you see in NITEL. No, we don’t want to do that.
The Committee on refineries recommended privatisation of the refineries. Is this proposal not contradictory?
No, it is not conflicting. It is like someone who saw two animals and one person who saw one animal. We are still privatizing, but it is not isolated privatisation. We are also trying to make sure that the refineries as a national asset are not a give away. Nigeria has invested a lot of money in these facilities, you don’t sell it cheap, but if you try to isolate them and sell them, trust me it’s the wealthy people that are going to price it and when you go through a bid, you will see, you will weep. For you to build a new refinery now, it will cost you nothing less than $2-4billion depending on the size. But these are 100.000, 200,000 barrels refineries. Efficiency, yes it is an issue because of lack of turnaround maintenance.
Some people have suggested legalising the illegal refineries in the Niger Delta as solution to fuel shortages?
I don’t think as an engineer I would encourage something like that. The reason is this, because of the quality of the produced petrol. Two, it is the illegal refineries that are causing the environmental damage in the Niger Delta. They take the crude that is completely unrefined, that is why you see a lot of cars being knocked down, because petrol has standards for those of you who have travelled.
If you go outside the country, there are different grades in use. If you really want to know whether it is beneficial, ask them to buy the crude and then refine, then you see if they will be able to be in business, because they are stealing the crude, it is zero cost to them then they are making revenue and someone is comparing that with a refinery.
If you are giving the crude free to anybody who is refining and then you say you are competing with the local refineries? You cannot steal crude and then refine. Everything you get is dumped in the area where you refine, and the damage you cause is far more than the petrol you get. You ask yourself, if you give them one barrel, out of that one barrel, how much do they get out of the one barrel that they sell, it is less than 20%. Because you don’t control the heat, what you see is what you get. It is not good to compare them.
This is why we are not selling the refineries individually. If you know that a refinery is operating at 20%, if you are asked to buy it, how much will you buy it, cheap?
You will buy it for less than free, this is not what we are saying. We want to do but because NPDC has come of age and people are seeing NPDC growing, we want to leverage on NPDC to be able to sell this and get a good value with respect to how much we are going to divest in the National Oil Company.
But instead of you divesting an inefficient refinery, we are going to divest 30% of a refinery plus a good upstream sector. This is the reason why the entire 6.5 billion barrels reserves will be assigned to NPDC to shore up the value of the National Oil company, so that when you are divesting, the people are not seeing the refinery, they are seeing the National Oil Company with a lot of assets. If you put 6.5 Billion reserves, plus the current reserves owned by NPDC, that will take you to almost 10 billion barrels when you put the gas into it, that is enough for anybody to price a share of the National Oil Company and get the benefit.
Will the PIB boost investments?
PIB is good enough. Anybody who wants to explore will explore. After all, it took Brazil almost 50 years before it got their salt boom. Initially, the IOCs, nobody wanted to invest but this is where it is very critical for us to develop the National capacity. That Salt boom was about two billion barrels, was explored by Nationals in Brazil.
So you must develop. We waited for the white man to develop us. The White man is not ready to develop us; he is ready to move the money back to his country to develop his country. That is why we are where we are today. Take a look at the 1991 Joint Operation Agreement, JOA. The Nigerian content was part of that JOA. But nobody implemented it, until it came to about 2004/2005, then we started shouting Nigerian content.
So we must challenge ourselves and this is why the new National companies are transformed companies. We will start developing operational capability within the national oil company especially with private sector investment. If you are not getting more reserves, then you will be going down in terms of your market value. In the stock market all over world, the IOCs get the higher stock price because of their reserves. So it is either you explore or you drop.