GOVERNMENT MEMORANDUM
On the Petroleum Industry Bill, 2009
Explanatory Memorandum
Executive Summary
This is the Explanatory Memorandum of the Government Memorandum on the Petroleum Industry Bill (“PIB”), 2009. The Government Memorandum is a comprehensive proposal to amend the PIB submitted in 2009 and is based in part on the original work of the OGIC.
This Government Memorandum has been prepared by the Inter Agency Team (“IAT”) created by the former HMPR Dr. Rilwan Lukman in April 2009. The IAT consists of:
- Ministry of Petroleum Resources (MPR)
- Ministry of Finance (MOF)
- Ministry of Justice (MOJ)
- Department of Petroleum Resources (DPR)
- Nigerian National Petroleum Corporation (NNPC)
- Federal Inland Revenues Services (FIRS)
- Revenue Mobilization and Fiscal Commission (RMAFC)
- Nigeria Extractive Industries Transparency Initiative (NEITI)
The IAT is supported by Dr. Pedro van Meurs at the request of the HMPR, in order provide independent views to the Inter Agency Team and the Minister and to ensure the adoption of international best practice. The consultant has worked for governments on petroleum legislations and fiscal systems in more than 70 countries in the world.
General Nature of the Government Memorandum
In case the Senate and House adopt this Government Memorandum in order to amend the PIB, the result would be that Nigeria would obtain one of the most modern and forward looking petroleum laws in the world. The Government Memorandum incorporates the best international practice from a large number of countries.
The IAT defined a number of objectives, which the IAT believes reflect the national interest. The incorporation of these objectives in the Government Memorandum will be discussed in the following sections.
Increase oil and gas production
The objective is to increase oil production within the overall framework of OPEC and to increase gas production for domestic markets and for exports. Higher levels of production will mean more employment and business opportunities in Nigeria and more revenues for Government.
Over the last five years Nigeria has experienced a gradual decline of its oil production. Yet, it is generally recognized that the oil potential of Nigeria is very large and can be easily expanded with new exploration and development of conventional resources.
In the Government Memorandum, the IAT proposes the following comprehensive set of solutions:
- More attractive fiscal terms for investors in onshore and shallow water areas. The government take for small new onshore fields is reduced from about 90% to 65%,
- Higher profitability for fields in deep water areas with specific new fiscal incentives to encourage re-investment in Nigeria as will be discussed in more detail below,
- More acreage availability through mandatory relinquishment of unused acreage. This will enable the Government to attract large scale new investment through new bidding rounds, and
- Strong work commitments and effective acreage management on new PPLs through the application of the “drill or drop” system.
Significant increase in gas supplies for power generation and domestic industries
The objective is to rapidly increase domestic gas supplies for power generation and provide total support for the plans of Mr. President to create a reliable and effective power supply and ensure sustainable development of gas for national economic growth.
Nigeria has very large resources of relatively low cost gas. At the same time the country has an enormous need for electric power. Without rapid expansion of power generation and gas based industries such as fertilizer, methanol and petrochemicals, on the basis of cheap natural gas the nation will not achieve its full economic potential. Nigeria has been notoriously unsuccessful in creating large scale electric power based on natural gas so far.
The IAT proposes a new comprehensive strategy in the Government Memorandum to deal with these issues which consists of the following:
- Attractive fiscal terms for the production of gas and condensates through royalties which are capped at 12.5% and substantial production allowances on the Nigerian Hydrocarbon Tax creating an overall government take of about 65%,
- Application of these new fiscal terms to new projects that eliminate gas flaring or develop deeper gas reservoirs,
- A comprehensive gas pricing framework, with substantially higher gas prices, linked to international market indicators, that will encourage producers to rapidly increase gas production and that links domestic prices to market based indicators, and
- Gas pipeline and processing tariffs, to be regulated by a midstream regulatory agency, which are the most attractive in the world, in order to provide strong incentives for investments in gas infrastructure, under strong fiscal incentives.
Increase government revenues from deep water
The objective is to establish a fiscal framework for deep water that provides a fair share of the economic rent for Nigeria, is competitive from an international perspective and provides a framework for further expansion of deep water oil and gas production.
Currently, there are basically three “series” of deep water PSCs:
- The 1993 Model, which provides on the first fields to be developed from a contract area a share to Nigeria that is well below international levels,
- The 2000 Model, which provides a fair share for Nigeria, but requires fiscal incentives to increase the level of investments, and
- The 2005 Model, which has tough fiscal provisions that are no longer competitive internationally.
The IAT proposes through the Government Memorandum:
- To establish a single fiscal system for all existing deep water contracts, with a level of government take that is similar to the 2000 Model, but with increased royalties and taxes and with a reduced NNPC profit oil share,
- To consolidate for tax purposes all deep water areas in order to encourage current operators to invest in the new blocs of 2000 and 2005 PSCs in which there is currently no production, so investments in such blocks can be deducted for tax purposes from production in 1993 PSCs, and
- To establish a new and lower profit oil scale which will apply on a field by field basis, so each each field benefits from a low profit oil share during the initial phase of production.
The proposed system will result in a significant increase in government revenues from existing producting fields in 1993 PSCs. However, investments in blocks that are 2000 or 2005 PSCs and new fields in 1993 PSCs will have a higher profitability, which in turn will result in a significant increase in deep water activity and production.
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