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PIB’s Fiscal Regime: A Moment of Truthfulness

By Felix Ayanrouh

I’m starting to have this sinking feeling that meaningful opportunities are slipping away from the Petroleum Industry Bill’s (PIB) debate – particularly its fiscal regime. Stakeholders are threading the 2009 PIB path of self-destruct. Although, the global debate regarding oil and gas fiscal regime is not new and will continue for ages, one wonders the motive behind the IOC’s recent chutzpah of debagging the PIB on the pages of Newspapers instead of a constructive discourse.

Some background: Although you’d never know it from all the diatribes, with the IOC’s predicting a dooms day if the PIB is passed, the PIB is based on the Report of the Oil and Gas Reform Implementation Committee (OGIC) set up by the Federal Government in year 2000 to carry out a comprehensive reform of the oil industry. The PIB is a reform legislation geared towards a robust legislation that establishes lucid rules, procedures and institutions for the administration of the petroleum industry in Nigeria.

Some of the objectives of the PIB include the following:

Establish transparency and Accountability

Create a robust economic environment to attract investments

Establish flexible and competitive fiscal framework

Promote exploration and exploitation of Petroleum Resources

Increase gas supply for domestic utilization and industrialization

Create efficient and effective regulatory institutions

Furthermore, the PIB’s fiscal regime will increase government take and yet encourage investment in the petroleum industry – it allows for production based incentive system. The bill proposes the volume-based royalty – sliding scale between five percent and 22 percent depending on production volumes and location.

The OICs in their recent media blitz have alleged that the fiscal regime proposed under the new law risk cutting oil and gas output from 63 percent to about 25 percent – about 2.4 million barrels a day. Also, that this will translate to about $185 billion loss in revenue for all stakeholders as new project will be stalled.They went on to state that this will create one of the harshest production sharing contract, PSC regime globally – governmentseconomic rent (royalties, taxes and NOC profit oil) will be at 96 percent.The IOC’s predictions and figures in my opinion are stochastic and should be taken as is. Does the IOC’s think this tactic will stop the PIB’s passage?

President Jonathan and Petroleum Minister, Diezani
President Jonathan and Petroleum Minister, Diezani

It is wrong for the government and its proponents to keep on hinging on the fact that previous fiscal regimes were grave wrong meted on the country by the IOC’s, as if the 2012 PIB isa reparation legislationmeant to atone for past wrong or injury done. Stakeholders should not be oblivious to the fact that oil and gas exploration and development is a business and should be taken as such.It is readily apparent from heuristic analysis by expert in the field that a fiscal regime should neither deter investment which would otherwise have been made, nor should it encourage investments which would otherwise not have been made. That is, the interest of both parties – as in this case the government and the IOC’s should be mutual.

It is obviousthat the objective of both host government and the IOC’s is maximizing the present value of revenues generated by petroleum activities. 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 IOCs have a fiduciary duty to manage and protect their shareholders interest in its investment, including where they believe it will yield the best returns. However, comparing fiscal regimes on the level of “state take” is an over-simplification of the issues, 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 among others economic factors.

It should be noted however, that fiscal system also includes all aspects of the contractual relationship between the host government and an IOC. Petroleum contracts or agreements require negotiation by the parties involved. It is important to state that at every contract stage which often involves the battle of the forms (exchange of contracts) end with parties adopting a contract beneficial to all parties involved – including one’s entered into in Nigeria. The OIC’s should also in the legislative formulation of the PIB put on its contractual negotiation armor in the drafting process of this bill.


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