Tax Implications for Oil and Gas Companies

Tax Implications for Oil and Gas Companies Under the Petroleum Industry Act, 2021.

Introduction

Tax Implications for Oil and Gas: It is an established fact that crude oil dominates Nigeria’s economy in terms of revenue. It accounts for about 86% of the country’s foreign exchange earnings, although it only contributes less than 10% to the country’s Gross Domestic Product (GDP).

Developments in the sector have substantial impact on Nigeria’s economy. This is why successive governments have remained focused on the sector despite various discussions on diversifying the economy.

The initiative to reform the Oil Sector was first taken by the Chief Olusegun Obasanjo administration who in April, 2000, inaugurated the Oil and Gas Reform Implementation Committee, with a mandate to review and streamline all existing Petroleum Laws and establish an all-inclusive regulatory framework for the industry. The first Executive Bill on the Petroleum Industry Bill (PIB) was in 2008 and ever since, Nigeria has been working to improve transparency and accountability in the Oil Sector.

Nigeria is ranked as one of the largest suppliers of crude oil in Africa, however, notwithstanding this position, the country has been unable to significantly translate its oil wealth into sufficient national development. Several factors have brought about this outcome, which has ultimately resulted in declining investments and returns in the industry.

On the 1^st of July, 2021, the National Assembly passed the Petroleum Industry Bill (PIB), and on the 16^th of August, 2021, the Bill was assented to by the President.

The Petroleum Industry Act (The Act), 2021 (PIA) seeks to introduce far-reaching reforms in the Nigerian Oil and Gas Industry aimed at establishing good governance, best practices, and the ease of doing business by clarifying roles and responsibilities of officials and institutions, enabling frontier exploration, improving environmental compliance, and transforming the Nigerian National Petroleum Corporation (NNPC) into a commercially viable enterprise.

This piece introduces the PIA by briefly looking at the administration of the Sector, the regulatory changes, the transformation of NNPC, the Fiscal Regime, the host community development, licenses and leases, and other highlights, but most particularly, the focus is on the new tax regime under the Act and how it affects players and non-players in the Oil & Gas Sector.

The following are the notable provisions of the Act:

Establishment of the Nigerian Upstream Petroleum Regulatory Commission (The Commission);

By virtue of Section 4 of the Act, the purpose of the commission is to regulate all upstream petroleum operations including technical, operational and commercial activities and to ensure compliance with all applicable laws and regulations governing upstream petroleum operations. The Commission is expected to replace the Department of Petroleum Resources.

Establishment of the Nigerian Midstream and Downstream Petroleum Regulatory Authority (The Authority);

The aim of the Authority is to regulate the midstream and downstream petroleum operations, including technical, operational, and commercial activities and also ensure efficient, safe, effective and sustainable infrastructural development of midstream and downstream petroleum operations (section 31).

Incorporation of the Nigerian National Petroleum Company Limited (NNPC)

The NNPC would be restructured to become a Limited Liability Company. The ownership of all shares in NNPC Limited shall be vested in the Government at incorporation and held by the Ministry of Finance Incorporated on behalf of the Government.

The Minister of Petroleum and the Minister of Finance shall determine the assets, interests and liabilities of NNPC to be transferred to NNPC Limited or its subsidiaries. NNPC shall cease to exist after its remaining assets, interests and liabilities other than its assets, interests and liabilities transferred to NNPC Limited or its subsidiaries under Section 54(1) shall have been extinguished or transferred to the Government.

Domestic Gas Obligations;

As part of its obligations, the Nigerian Upstream Regulatory Commission shall prescribe and allocate the domestic gas delivery obligation on a lessee. As proposed, a lessee who fails to comply with the domestic gas delivery obligation shall incur a penalty of US$ 3.50 per MMBtu not delivered, provided that, where the lessee has signed a Gas Purchase and Sale Agreement with a wholesale supplier of the strategic sectors, the penalty for failure to deliver shall be as stated in that agreement. The penalty amount may be adjusted as the Commission may prescribe in a regulation made under the Act. However, the Commission shall discontinue the imposition of domestic gas delivery obligations, where the Authority has determined that the natural gas market has attained full market status.

Prohibition of Gas Flaring

With the attempt to fulfil its obligations under the United Nations Framework Convention on Climate Change (UNFCCC) and similar Conventions, the Act demands strict adherence to a gas flaring plan. A licensee or lessee producing natural gas is expected to, within 12 months of the effective date, submit a natural gas flare elimination and monetisation plan to the Commission, which shall be prepared in accordance with regulations made by the Commission under the Act. A Licensee or Lessee who fails to adhere to the provision shall pay a penalty prescribed pursuant to the Flare Gas (Prevention of Waste and Pollution) Regulations.

The Commission may however, grant a permit to a Licensee or Lessee to allow the flaring or venting of natural gas for a specific period where it is required for facility start-up or for strategic operational reasons, including testing.

Granting of Licenses and Leases;

The Act provides for the following Licenses and Leases;

Petroleum Exploration License

Petroleum Exploration License to be granted to qualified applicants, to explore petroleum on a speculative and non-exclusive basis.

Petroleum Prospecting License

Petroleum Prospecting License to be granted to qualified applicants to carry out petroleum exploration operations on an exclusive basis. A Petroleum Prospecting License for onshore and shallow water acreages, shall be for duration of not more than 6 years, comprising of an initial exploration period of 3 years, and an optional extension period of 3 years. A petroleum prospecting license for deep offshore and frontier acreages, shall be for duration of not more than 10 years, comprising of an initial exploration period of 5 years, and an optional extension period of 5 years.

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