By Felix Ayanruoh
Watching, listening and reading news stories and commentaries debagging the PIB for the main reason of preying upon people’s fears and prejudices is unfathomable, the most interesting question of all the allegations raised in part I & 2 of this topical issue for me is this: Will the PIB as presented to the National Assembly attract foreign investment?
The answer to that question is not far-fetched. The fact that the objective of both host government and the International Oil Companies is maximizing the present value of revenues generated by petroleum activities is ubiquitous.
Every government in drafting a fiscal regime for its petroleum industry must ensure that the host state as a custodian to oil and gas resources on behalf of its citizens, maximize revenue, including tax receipts generated by the exploration and development operations. This objective entails designing a fiscal system where exploration and development rights are acquired by companies who place the highest value on them. On the other hand OIC’s objective is to build equity and maximize wealth by producing oil and gas at the lowest possible cost and the highest possible margin.
The allegation that the fiscal terms in the reform bill are extremely uncompetitive and would dampen future deep water projects, and that the current fiscal terms are already among the harshest in the world, in addition to the high risks and costs due to security and bunkering in the oil-producing communities are not entirely true.
It is axiomatic that in the world of natural resources, fiscal regimes hinges on the argument that government should limit their take from a project to the economic rent in order that the behavior of investors should not be altered. That is the fiscal regime should neither deter investment which would otherwise have been made, nor should it encourage investments which would otherwise not have been made.
In other words the more appropriate measures of the attractiveness of a fiscal regime should include the following;
• The rate of return permitted to the investor on development
• The profit-to-investment ratio of development (a measure of the capital efficiency and therefore a guide to where a company should direct its capital)
• The exploration cover ratio (a guide to whether it is worth investing in trying to discover hydrocarbons in the first place)
When comparing ?scal regimes, most experts focus on the level of “state take” as a tool for ranking. This is an over-simpli?cation of the issues involved, particularly when the calculation is of the percentage of the gross project revenues that accrue to the state as this ignores even the effect of differences in costs of development and production.
Ranking on state take, even when calculated as a percentage of net project revenues, is an archaic evaluation for what really influences investment decisions—the value creation resulting from the deployment of investors’ capital. However, this approach still oversimplifies the situation by assuming a world free of varying geographies, climates, topographies, and reservoir conditions, not to mention market conditions (including whether markets are regulated or trade on a spot basis) and, potentially, local economic effects.
Nigeria’s fiscal regime in comparison to its competitors and peers still remained attractive. The PIB introduces a more balanced and fair cost based incentives regime in place of the production-based regime -government revenues come from production and not cost. It should be noted that the sequence of imposition does not appear to be significantly different from the current regime in terms of economic impact.
Given that the ranking of state take is fundamental in comparing fiscal regimes, the PIB’s fiscal impositions in relation to level of fiscal burden on the investor could be said to be around 81.3% government take. In terms of international comparators such as Norway, Iran, Kuwait and Egypt (average of about 85%), this level appears to be solid.
The alarmist magniloquence should cease. Nigeria has enough economic problems to worry about without being frightened that the PIB will endanger its corporate existence. Some of the fears of the OIC’s are well placed when it comes to the fiscal regime of the bill. But there should be no reason to believe that if passed the PIB will cause more harm than good.