… Grants 5yr tax holiday, production allowance
Even as the executive and legislature struggle to harmonise some contentious fiscal issues and other grey areas in the Petroleum Industry Bill, PIB, the development of the nation’s gas resources as being proposed in the bill will remain non-negotiable.

Government is also willing to grant a five-year tax holiday as an added incentive for domestic gas production as well as a production allowance worth up to 100 percent of prevailing gas prices in order to fast-track the development of Nigeria’s natural gas resources, which reserves are put at about 187 trillion cubic feet.

A member of the PIB technical Committee, Mr. Abiye Membere, who made the clarification in one of the sessions at the just-concluded Nigeria Oil and Gas, NOG 2013 International Conference and Exhibition in Abuja, noted that before now, gas development was almost non-existent.

This is because in the past, the discovery of gas was treated as an incidental, and no conscious effort was made to exploit the natural resource, despite the millions of dollars doled out by government to the international oil companies, IOCs, to do so. The development led to the continued flaring of gas with no end in sight, as opposed to global initiatives to make the environment less contaminated.

Membere, who is also the Group Executive Director, Exploration and Production, Nigerian National Petroleum Corporation, NNPC, however maintained that this will no longer be the practice in the current dispensation.

President Jonathan and Petroleum Minister, Diezani

More incentives for gas producers
Reacting to the clamour for more incentives by the IOCs, Membere: “Today, we hear the incentives are not enough. In the past, we were giving out money as an incentive for gas development. We gave out cheques to people just for them to develop gas, but where are we today?  We have changed the deadline for gas flare out many times. Even before you finished your gas project, you have collected your money for gas. Government was dishing out money free to those who wanted to develop gas.”

Explaining the wisdom in higher tax and lower royalty, he said:”Nigerian gas, based on what we have today, is not that bad with respect to liquid. All we are trying to do is to compensate the increase in tax with decrease in royalty. Royalty is a front line action; it has a long way of gapping the equivalent tax you pay. So, we reduce royalty to compensate for that gas. Addition to that, for domestic gas production, there is a five year tax holiday. Five years are typical years where projects are being amortised. If you have a project that you spent $100 million, it is expected that you amortise it in five years, which is $20 million each year. You will have that as a tax holiday.

“In addition to that, we introduced production allowance. For you to produce gas, there is an amount of money that the government will give to you back. In some cases, depending on the type of production, you get 100 per cent, more or less, the price of gas. Take for instance for smaller field, you get a production allowance of up to $2 per 1,000 cubic feet. It is for you to get that drive to supply gas to the domestic market. With the combination of these incentives to the fiscal regime, we strongly believe that gas projects will get minimum rate of return that may encourage investors to come.

Harmonising issues
Membere said part of the plan is to harmonise oil and gas development, saying, “One of those things, which are gaps currently in the Petroleum Act – the separation of oil from gas. Over the years, gas development was actually not in existence. People just take the oil and leave the gas, which is why we are where we are today.

“So, the current thinking is to harmonise the tax regime for oil and gas so that when somebody is looking for oil and knowing that the oil does not flow alone but it comes with the gas, he has to plan for the gas. So, in a situation where you are having development, it has to be an integrated oil and gas development strategy and no longer oil strategy, which used to happen. Because it used to be different in the Petroleum Act, we had to give separate incentives for gas development.

With harmonisation, he argued that operators will begin to treat gas finds more seriously than they had previously, while also distinguishing between associated gas and non-associated gas. “On the associated gas, you can leverage on the oil. On the non-associated gas, you do not have anything to leverage on, especially when the gas is dry. When the gas is wet, the liquid is actually dried for sustainability.

“We fully understand that one of the key drawbacks in gas development is lack of infrastructure. Government has taken a bold step in ensuring that key infrastructures like trunk line, Ob/Ob-Oben East West gas pipeline, which is going to link the gas between the east and the west, is in place. The Ajaokuta-Kano-Katsina line, which is another major key infrastructure that is going towards the north, is also in place.”

Other incentives
Membere further disclosed that part of the special incentives for gas development as being proposed in the granting of open access to infrastructures, especially for the small producers.  “One additional aspect of this is the open access policy in gas, where small producers that are lacking all these infrastructures do not go back in developing high cost and high value types of infrastructures before they can produce gas.

Irrespective of what the price of gas is at the international market, which is determined by USA, he argued that gas producers will not run at a loss as long as the domestic market is adequately supplied. He said that this will among others, “ensure that there is constant, reliable and sustainable power in this country. That is going to stimulate the gas feed industrialisation that we are talking about.”