Prof. Omowumi O. Iledare
1.0 Preamble
The Presidential Executive Order (PEO) 2024 to incentivize non-associated (NAG) Greenfield Development has received great acclamation among industry stakeholders and energy analysts. The oil and gas companies operating in the shallow-water and onshore terrains in Nigeria are majorly thrilled at the ease at which the NAG order came to pass. The PEO 2024 aims to make investments in NAG projects competitive and attractive to investors. Interestingly, Nigeria has done laudable things in the past to spur gas development within the context of investment attractiveness and competitiveness. However, not much empirical evidence is there to support that such incentives for gas development have contributed meaningfully to the national economy in terms of the total value of goods produced and services provided in Nigeria. Excellent examples include NLNG fiscal incentives, the Associated Gas Flaring Act incentives, the Gas -to-Liquid incentives, and the many incentives in the PIA targeted at natural gas development. As a matter of fact, the contribution of gas to the federation account despite the proliferation of gas targeted incentives, over the last several decades, leaves much to be desired. Thus, this op-ed aims to instructively espouse the importance of fiscal rules of general applications in the implementation of PEO 2024 to expand the development of non-associated gas with intergenerational implications. The premise being that a thousand cubic feet incentivized to be produced or developed without maximizing the mutuality of interests of all stakeholders is bound to be suboptimal. Thus, effectiveness and efficiency in the implementation strategy must be beyond rent seeking and rent sharing but for maximizing the social well-being of citizens in the Federation without compromising fiscal attractiveness and competitiveness.
2.0 NAG executive order synopsis
According to sources, the NAG Order 2024 stipulates that there shall be a tax credit of $1 per MSCF of gas or 30 per cent of the fiscal gas price for gas production from NAG greenfield projects, whichever is lower. However, the Natural Gas Liquids (NGL) content from such greenfield NAG project must not exceed 30 barrels per Million Standard Cubic Feet (MMSCF) to earn the tax credit. There is also a stipulated period, January 1, 2029, within which such a project can earn the tax-credit benefit. This additional noble specification, perhaps, is to enable immediate investment action and produce impactful results. On the other hand, if the NGL exceeds 30 barrels per MMSCF but less than or equal to 1,000 barrels per MMSCF, then the gas tax credit shall be at the rate of US$0.50 per MSCF or 30 per cent of the fiscal gas price, whichever is lower.
For sustainability, the NAG development incentives stretched beyond the immediate bounded time. Greenfield NAG projects that do not start commercial gas production by January 1, 2029 shall be eligible for gas tax allowance of US$0.50 per MSCF or 30 percent of the fiscal gas price, whichever is lower. There is a caveat that the NGL content does not exceed 100 barrels per MMSCF to qualify. It is important to understand the difference between tax credits and tax allowances. The former is a deduction from a chargeable tax and the latter is a deduction before estimating chargeable tax. Every taxpayer prefers the former to the latter. That truism, perhaps, is evident in the enthusiasm at which industry players embraced PEO 2024, notwithstanding the caveat that, after ten years the tax credits shall become tax allowances in perpetuity. There is also another stipulation that is important to note- the gas tax credit shall not exceed the company income tax payable for that year by that company. Of cause, this derives from lessons learnt from the PSC 1993 investment tax credit saga, with an unending tax credit based on efforts with little or no consideration for output and with no dynamic impact on the petroleum profit tax dynamics.
To the extent possible, however, and with effective and efficient implementation, which of course may have institutional delimitation because of lack of institutional empowerment and societal prebendalistic propensity to be transactional; the Order is in line with the PIA philosophy to reward output rather than efforts. PEO 2024 is certainly creditable because of the silence of PIA 2021 on production allowance for gas and specifically, NAG. However, PEO 2024 is not an Act but a Presidential Executive Order that is subject to political premium and constituency powerplay, which the PIA was designed to avoid. That the President opted for an Executive Order beats my imagination and makes me to think differently from those that have been humming praise about this NAG Order. Not all things that are lawful are beneficial, especially if stakeholders’ mutuality of interests is sub-optimal in the long run with no empirical evidence of value creation to the economy.
3.0 PIA 2021 fiscals and PEO 2024
Some petroleum economists would rather have embraced an amendment to the PIA 2021 to correct the very last-minute dismantlement of fiscal rules of general applications. The subversion of the core principles of the dual tax system along with compromising the progressive royalty schemes in the PIA 2021 Act enabled stakeholders’ equity dilemma. Is PEO 2024, therefore a formal indictment on PIA 2021 fiscals in respect of gas development? A quick review of the classical elements in fiscal regimes, which anchor petroleum rent extraction mechanism, could help answer the question. Understanding the dynamism of mutuality interests among the stakeholders—investors, government, and the society competing for the huge economic rent from petroleum resources development is critical. Interestingly and more often than not, of the three stakeholder groups listed above, the well-being of the society with intergenerational implications is usually compromised if fiscal rules of general applications are not properly applied in fiscal systems design.
Thus, the progressive royalty schemes, the dual tax system, and incentives based on rewards formed the core principles underlying the conceptual framework of PIA 2021. Abiding by the fiscal rules of general applications guarantees competitiveness and attractiveness of fiscal system for investors, and of course, an equitable share of economic rent for the federation account. Thus, equity, efficiency, and effectiveness with Pareto of optimality condition drive the PIA 2021 expectations. Unfortunately, too, the government holding trust for the society tends to surrender its inheritance on the platter of competitiveness and attractiveness trump-card as evident in the last three months of the 20 years PIB journey to PIA and the rapidity of the issuance of PEO 2024, in my opinion. Here are the facts to ponder using the three classical instruments in the PIA 2021 that were compromised and should be amended for posterity.
First, the royalty design in the PIA has three terrains-onshore, shallow water, and deep offshore and three tranches design to slide by production. For the first time also, natural gas either as free gas, solution gas and/or non-associated gas has its own royalty scheme. The drive for competitiveness and attractiveness led to an unjustifiable compromise that led to PEO 2024 to appease majorly by operators in the shallow and onshore terrains. The royalty for natural gas did not follow the original scheme, which differentiates rates by terrain. Instead, the royalty for natural gas was differentiated by market—domestic or international, thereby creating a loophole, which perhaps led to the agitation for the PEO 2024 for NAG.
The second misalignment in the PIA is the special treatment of the deep offshore terrain with respect to the oil royalty scheme based on two tranches rather than three. Of course, we can guess why, the power of the political action capital of oil and gas companies operating in the deep offshore terrain is incredible. It was not difficult for the shallow water operators to see the skewness and waited in the wings to strike. PEO 2024 conceptualization offers the platform to strike quickly, and quickly they did. Thus, in the short run at the least and also in the process, the federation account become delimited and the society is marginalized further even with the PEO 2024 on NAG.
Third, the dual tax system designed to protect CITA with the creation of resource tax, called Nigeria Hydrocarbon Tax (NHT) is truncated in the PIA 2021 Act. The Hydrocarbon Tax in the PIA 2021 designed to guard or protect government access to gross revenue without delimiting the attractiveness and competitiveness of fiscal regimes in Nigeria is compromised. The purpose was to give room to incentives targeted at hydrocarbon capacity expansion, reserves growth and government revenue tied to new capacity. To further enhance the desired progressive characteristic of fiscal regime in Nigeria, the NHT was terrain-based and with differential rates. Unfortunately, again, political expediency trumped efficiency, effectiveness, and equity. The stakeholder group interested much more in prosperity than posterity of the federation persuaded the political elites to exclude deep offshore terrain from NHT and used the evolving energy landscape to erroneously exclude natural gas from NHT. Do I see the same political power play with respect for PEO 2024? You bet! When you stop thinking about tomorrow in making decisions today, the consequences of such decisions do catch up sooner than later. The deep offshore terrain and gas from anywhere were erroneously exempted from NHT. Operators in the deepwater as well as gas producers in all terrains are not eligible for production allowance incentives. Could it be that the operators are now attempting to get the allowance incentives through the backdoor with PEO 2024? Time will tell because political expediency tends to deliver the unimaginable to stakeholders with persuasive political power and clout. Unfortunately, the Federation at large bears the axe directly or indirectly with delimited revenue to the constituent states.
Finally, the other classical instrument to enable equity, attractiveness, and competitiveness of PIA 2021 fiscals is a cluster of incentives based on efforts and output. In the past, Nigeria disavowed fiscal incentives described as up-lift as a legalized gold-plating mechanism. The narratives surrounding investment tax credits (ITC) in the PSC 1993 makes it unwelcome in the subsequent production sharing contracts. Thus, investment tax allowance (ITA) replaced ITC in PSC 2000 and PSC 2005. Of course, empirical evidence shows that the investors prefer the former to the latter and the rest is history. Do you wonder why the PIA 2021 journey took that long? The ITC effects contributed. In fact, a study of all the PIB fiscals supports this assertion. The professionals in government must come to terms with the ethics of their professions. It is an obligatory call to duty for them to offer proper advice to political appointees in every sector of the economy for posterity. The persistent lobby against NHT by offshore deep-water operators and gas producers was ill-advised few months to passing of PIA 2021.
4.0 Concluding remarks
This op-ed instructively espouses the importance of fiscal rules of general applications in petroleum resources development. Fiscal incentives to expand the development of non-associated gas have intergenerational implications, implying it should not be about investment attractiveness and competitiveness alone. Understanding the dynamism of mutuality interests among the stakeholders—investors, government, and the society- competing for the huge economic rent from petroleum resources development is critical. The desire to grow and sustain economic development using oil and gas wealth optimally must always be part of the objectives in the long run. Interestingly, Nigeria has done laudable things in the past to spur gas development within the context of investment attractiveness and competitiveness. But not much empirical evidence is there to support that such incentives for gas development have contributed meaningfully to the national economy in terms of the total value of goods produced and services provided in Nigeria. As a matter of fact, the contribution of gas to the federation account despite the proliferation of gas-targeted incentives, over the last several decades, leaves much to be desired. It is quite understandable to identify with the public affirmation and acclamation President Bola Ahmed Tinubu (PBAT) received for issuing PEO 2024. Honestly speaking, however, and even if I am the only Jeremiah in town, targeting NAG with PEO 2024 instead of amending the PIA 2021 is ill-advised and time will tell.
Omowumi Iledare, Ph.D., Snr. Fellow
USAEE, Fellow NAEE, Fellow EI, Fellow
NIPetE, Professor Emeritus in Petroleum Economics and Executive Director,
Emmanuel Egbogah Foundation, Abuja,
Nigeria.