Nigeria Dynamic Fiscal Regime
The Nigeria government has always had anticipate the global oil and gas industry by ensuring a dynamic approach to drawing up rules and fiscal regimes which make the industry one of the most competitive and investor friendly throughout the world. In 1991, a Memorandum of Understanding (MOU) was signed between the Nigerian National Petroleum Corporation (NNPC), representing the Federal Government of Nigeria on one hand and the Operation Companies (OPCOS) - Shell, Mobil, Chevron, Agip, Elf, and Pan Ocean on the other.
The intention of government then was to attract more investments than that already made. That major policy shift was also to ensure for the company a minimum profit margin of $2.30/bbl; after tax and royalties on the company's equity crude. With the shift, the companies were encouraged to embark on bullish exploration activities, which enable Nigeria's crude oil reserves to move from 18.0 billion barrels to 22billion barrels in 1992, barely a year after the policy decision was taken.
Yet, the MOU contained inherent mechanism for review in a way that both parties (NNPC and its Joint Venture partners) are left satisfied even when the dynamics of the economy such as inflation and exchange rates set in. this is why in the companies reviewed the MOU to reflect prevailing economic realities.
Peace in the Niger Delta
Government realizes that investment can only thrive in a peaceful atmosphere. It is for this reason that the development of the Niger Delta area has been attracting the attention of the present democratic Dispensation. To this end, after sending a bill to the National Assembly and getting it passed, government has set up the Niger Delta Development Commission (NDDC) with a board of its own.
The Commission is to ensure even and equitable development of the Niger Delta. This step is expected to ensure amity in the region and thereby offers a positive response to the problems which had often disrupted industry operations in the area.
There are four different types of Petroleum Arrangements operating in the Nigerian Oil and Gas Industry. This arrangement preserves the Contractual framework within which the Nigerian National Petroleum Corporation on behalf of the Nigerian government and the Multinational oil companies conduct Petroleum Operations in Nigeria. The Petroleum Arrangement includes Joint Operating Agreement (JOA), Production Sharing Contract (PSC), Service Contract (SC), and Memorandum of Understanding (MOU).
The development of these contractual agreements is a reflection of the readiness of the Nigerian government to respond to trends in he global oil and gas industry as well as tackle inherent problems emanating in old arrangements. For instance, the PSC is a responsible for some of the fears expressed over the JV more so as the nation was opening the Frontier areas such as the Inland basins and Deep/ Ultra Deep Waters.
Joint Operating Agreements (JOA)
The JOA is the basic, standard agreement between the NNPC and the operators. It sets the guidelines /modalities for running the operations. It is different from the MOU. While it contains the basic understandings on the Joint Ventures, the MOU is a response to the specifics of fiscal incentive.
Some Highlights of the Revised 2000 MOU
The revised MOU stated, stated interalia: ?It is the intention of parties to this Memorandum to encourage investment in the petroleum industry and maintain cost efficiency.? Some of the highlights of the MOU are:
- To encourage unit cost efficiency, a tax inversion rate of 35% shall be applied.
- Guaranteed notional margin of $2.50/ bbl, after Tax and Royalty to the company in its equity crude and a minimum of $1.25/ bbl after tax and Royalty on the NNPC Crude which it lifts under the MOU.
- The minimum guaranteed notional margin is premised on the fact that the Technical Cost (TC) of operations is not more than the notional fiscal technical cost, which is presently $4.00/ bbl.
- If in any one calendar year, a company's Capital Investment Cost (T2) exceeds $2.00/ bbl on average, the minimum guaranteed notional margin hall be increased to $2.70/ bbl for the company's equity crude and $1.35/bbl for NNPC's equity crude.
The main pegs of the JOA are:
- One of the partners is designated the operator
- The NNPC reserves the right to become an operator
- All parties are to share in the cost of operations.
- Each partner can lift and separately dispose its interest share of production subject to the payment of Petroleum Profit Tax (PPT) and Royalty.
- The operator is the one to prepare proposals for programmes of work and budget of expenditure on an annual basis, which shall be shared on share-holding basis.
- Each party can opt for and carry on sole risk operations.
- Technical matters are discussed and policy decisions are taken at operating committees where partners are represented on the basis of equity Holding.
The Production Sharing Contract (PSC)
The PSC is today the toast of Nigerian Petroleum industry. It is an agreement born in response to the funding problem faced by the old JV arrangement as well as the desire of the Nigerian government to open up the sector for more foreign participation.
The PSC arrangement governs the understanding between the NNPC and all new participants in the new inland deep & ultra deep-water acreages.
Its main features are:
- The contractor bears al costs of exploration and production without such costs being reimburseable if no find is made in the acreage.
- Cost is recoverable with crude oil in the event of commercial find, with provisions made for:
- Tax Oil: This is to offset actual Tax, Royalty and Concession Rental due and payable /deductible in full in the year.
- Cost Oil: To reimburse the contractor for capital investments and operating costs.
- Profit Oil: The balance after deduction of Tax Oil and Cost Oil, which is to be shared between the NNPC and the contractor in an agreed proportion.
Currently, Statoil, Snepco, Esso, Elf, Nigerian Agip Exploration Limited, Addax, Conoco and Petrobas, Star Deep Water, Chevron, Oranto Philips are operating the PSC in the country.
The Service Contract (SC)
Under the SC arrangement, the OPL title is held by the NNPC. The operator is designated the Service Contractor and he provides all the funds required for exploration and production works, a feature which this arrangement shares with the PSC.
In the event of a commercial find, Contractor's costs are recouped in line with procedures enunciated in the contract. One major difference between the SC and PSC is that SC covers only the OPL, the PSC may span two or more OPLs at a time.
Also, the SC covers a fixed period of five years and should the efforts results in no commercial discovery, the contract automatically terminates. Under the SC, exploration and development costs are paid in installments over a period of time and the contractor has no title to the crude oil produced, although he may be allowed the option to accept reimbursement and remuneration in oil.
As an incentive for the risk taken, the contractor has the first option to purchase certain fixed quantity of crude oil produced from the SC area. Only the Agip Energy and Natural Resources (AENR) operates the SC in Nigeria.
Parts of the highlights of the JV Contract are:
- The Participation Agreement sets out the level of participation of each party in running the affairs of the company.
- The agreement determines the interest and obligations.
The Agreement determines ownership of Production facilities assets e.t.c.