Influence of taxation system on the petroleum industry of the country: case of Nigeria

Nigeria is today the largest Sub-Saharan Africa's economy and depends majorly on oil as its primary source of income, with the oil sector responsible for 95% of the country’s foreign exchange earnings and 80% of its budgetary income. Nigeria is proven to be naturally endowed with oil-rich reserves with an estimate of over 40 billion barrels according to OPEC, yet, the country is classified today as under-developed or developing compared to similar oil producing countries. The country has been unable to make a consequential conversion of its oil wealth into sufficient national development. Poverty rate is high, the level of insecurity is alarming, the local community's health is deteriorating, and unemployment is at its peak. This is due to misappropriation of funds, inefficient use of resources, bad governance and nepotistic practices amongst leaders. In other words, the country suffers greatly from what is known as "resource curse". There have been controversies and corrupt practices in the management and appropriation of petroleum funds. Numerous fiscal arrangements and legislations arose to tackle the prevailing socio-economic problems, imbalance, and the inconsistency in the resource endowment and the efficiency of the Nigerian oil sector. Thus, to further improve transparency, accountability, governance within the oil sector and the economy at large, and for efficient and effective use of oil funds, the introduction of the Petroleum Industry Bill (PIB) came into existence, which has been signed into law as at August, 2021.

The PIB splits the previous Petroleum Profits Tax (PPT) regime and instead impose the following taxes: Hydrocarbon tax (an entirely new form of taxation applicable to upstream operations), Companies income tax; Tertiary education tax; and Withholding tax on dividends.

Both the pervious and present tax provision have different implications and affects the industry differently depending on the nature and location of project; either onshore or offshore, and the fiscal arrangement under which the project is subjected to. Today, the main fiscal arrangement under which the Nigerian petroleum industry operates are Production Sharing Contracts (PSCs), Joint Ventures, Service Contracts, and Marginal Field Operators.

The aim of the research is to assess the effect of both the current and previous tax provisions on Nigerian Petroleum Industry under different fiscal arrangements, using a specific active oil and gas project in Nigeria. The main result would be to find the best fiscal arrangement under which oil and gas project should be engaged and to also propose some alternative fiscal arrangement under which projects might be carried out. Results of this work will help operators and IOCs to easily assess the content of the Nigeria taxation provisions affecting the petroleum industry and how it affects project’s viability and efficiency. This will enable them to make better investment decisions. Furthermore, the results will also help the government to assess which fiscal arrangement is most appropriate for the state and how better improve the provisions to better incentivize investments, and at the same time meeting its own primary objective of maximizing the economic rent from its resources.

For this study to be able to measure the efficiency of different tax provisions under different fiscal arrangements for the specific project, the simulation method is used, using NPV approach as its main approach. First, we ascertain the Government take (G-take) and Company take (C-take) under different fiscal arrangements, putting into consideration the different tax provisions. Secondly, we ascertain the economic efficiency of the project using the NPV approach to test for the efficiency and viability of the project under different fiscal arrangements, putting into consideration the various tax provisions. We further introduced some other economic indicators such as Net Present Value per Barrel of Oil Equivalent (NPV/BOE), Internal Rate of Return (IRR/ROR), Profitability Index (PI), Savings Index (SI), Operating leverage. Based on the previously performed procedures, we rank each of the fiscal arrangements from best to worse and we give our recommendation based on the outcome.

The choice of any fiscal arrangement under which a project should be executed, either Production Sharing Contracts (PSCs) or Joint Ventures, is dependent on the nature of project and the controlling and coordinating mechanisms put in place to ensure the effectiveness of such arrangement. The nature of the project is related to the kind of operations to be undertaken, whether onshore or offshore with both types of projects having varying risk profiles. Hence, the choice of any fiscal arrangement should account for the associated risk.