Sunday, 1st October 2023

Russia, Nigeria PMS subsidies and Petroleum Industry Act – Part 2

By Patrick Dele Cole
27 May 2022   |   3:40 am
Voluntary conversion to incorporated Joint ventures, subject to the guiding principles defined in the second schedule to the PIB.

Voluntary conversion to incorporated Joint ventures, subject to the guiding principles defined in the second schedule to the PIB.

Ministerial approval of lease or consent on assignment subject to the recommendation of the Commission and must be given within the specified period; otherwise, it is deemed as given.

Acquisition cost of interest in a lease to be broken into value of rights and value of assets.

Establishment of New Licences and Leases under the Bill, namely: Petroleum Exploration Licence (equivalent to the current Oil Exploration Licence), Petroleum Prospecting Licence (equivalent to the current Oil Prospecting Licence) and Petroleum Mining Lease (equivalent to the current Oil Mining Lease).

Development of Model Licence and Model Lease, which shall be incorporated into contracts before approval of Licence or Lease by the Minister.

Oil producing companies to pay HT and CIT. HT will be at 15% for PPLs and 30% for PMLs. However, deep offshore operations are NOT subject to HT while only costs directly related to production are allowable in calculating HT. The non-direct costs will, however, be deductible under CIT.

Costs allowable for HT (i.e., capital allowances and operating costs but excluding rentals on PPLs and PMLs, royalties and contributions made in respect of Host Community Fund, Environmental remediation, NDDC and similar funds) limited to 65% of gross revenues.

Operators are entitled to production allowances rather than investment allowances and investment tax credits.

Additional Chargeable Tax may become payable by an Operator in an accounting year based on the fiscal price advised by the Commission.

Requirement to submit revised HT returns whenever prices, costs and volumes change, and strict penalty for non-compliance.

Royalty based on production and price. However, there is a preferential royalty rate for oil sold to Nigerian refineries and gas utilised in-country.

Segregation of upstream operations from midstream/downstream operations, except for strategic projects. However, stamp duties and CGT will not apply upon segregation.

Requirement for Producing Marginal Field to convert to Petroleum Mining Lease within 18 months from the Effective Date of the PIB.

Introduction of Environmental and Gas Flare Management with annual contribution that is dependent on the size of the operations and risk involved.

PIB provides for suppliers and buyers to willingly agree on price. However, the Authority will still regulate gas prices.

Companies with active refining licences or proven track record of international crude oil and petroleum products trading will be allowed to import any product shortfall that domestic refineries are unable to meet.

Gas flare penalties from upstream operations to be utilized for environmental remediation and relief of the impacted host communities while that arising from midstream operations will be credited to the Midstream and Downstream Infrastructure Fund to be utilized for midstream and downstream infrastructure investment in the affected host communities.

Marginal Field redefined as a field or discovery declared a marginal field prior to 1st January 2021 or which has been dormant for 7 years after its discovery prior to the enactment of the PIB.

NB: With regards, to the 13% derivation for states in which the pipeline is situated, there are no specific provisions in the bill for these figures. The bill already makes provisions for Host Community settlement through the Host Community Development Trust.

Section 240 of the PIB requires each settlor to contribute 3% of its actual operating expenditure in the upstream petroleum operations in the preceding calendar year to a fund established by the Trust.

5. On average the government supplies 60m litres/day = 49,019 tons/day, it will cost an estimated $30m a day which equates to about $10 billion dollars a year (figures vary depending on the market realities per time)

It will require a government with a strong political will to scrap subsidy. It must be done with expertise and precision and ideally in a market of $30 – $50 per barrel crude oil.

Refining must be done locally to reduce the pressure on Nigeria’s FX and stabilise the Naira – Dollar ratio, this will lead to FX availability and the narrowing of the official/parallel market spread. Independent importers can then source FX at a reasonable rate and price the product accordingly.

With no pegged price, market forces determine the retail price. It will be important to simultaneously develop alternative energy sources as well.

6a. Turn around maintenance
TAM will enable the replacement of aging/obsolete equipment, as well as ensure that the refineries operate at a minimum of 90 per cent capacity utilisation. It also involves the significant replacement of key equipment within the refinery’s major units and components. Nigerians will benefit immensely as PMS and other petroleum products will become available locally, jobs will be created from the value chain of activities, and the current strain on forex for importation of products will reduce. In addition, interested parties who benefited from the age-long importation largesse and have fleeced the nation dry will potentially be out of business.

6b. Third party O&M agreements
Currently, the NLNG model (49/51 percent government/private investor model) is being explored as an option for operating the refineries where NNPC becomes a minority shareholder and private partners are allowed to invest in the refineries. Upon the completion of the rehabilitation exercise, the services of a world-renowned company will be procured to manage the refineries on an Operations and Maintenance (O&M) basis. PHRC and WRPC should be fully rehabilitated and handed over to private sector O&M experts.

Furthermore, the refineries need to function at optimum capacity. To achieve this, crude supply issues must be addressed. Pipelines leading to the refineries must stop being vandalized. The Kaduna refinery should be converted into a strategic national storage/depot, as it makes no economic sense to locate refinery so far inland without easy access to crude oil producing wells.

Dr. Cole (OFR) is Nigeria’s former Ambassador to Brazil.