Fiscal Terms: FG, IOCs vehemently polarized

Sopuruchi Onwuka

Efforts of the federal government in attracting international investment capital may not have been delivering the expected results as petroleum industry investments continue to elude the country in the past 10 years when commercial operators and government vehemently disagreed over fiscal terms.

Chaiman of OPTS, Mr Mike Snagster

Industry panelists at the just concluded Practical Nigerian Content Conference (PNC) hosted by the Nigerian Content Development and Monitoring Board (NCDMB) concluded that stringent fiscal conditions and hostile social and security environment form the major reasons for very high investment apathy in the Nigerian petroleum industry over the period.

The Oracle Today reports that petroleum industry operations account for over 90 percent of the country’s total foreign exchange earnings, over 80 percent of total commodity exports, some 75 percent of deep pocket investment inflow, about 40 percent of gross domestic product (GDP) and some 40 percent of total funding support to government’s annual fiscal budgets.

However, prolonged investment quandary in the industry amidst low oil prices in the international markets and high cost of production in the domestic environment combine to undermine the cumulative revenue and sundry economic benefits from the petroleum industry in the past decade. And strong dispute between government and investors over fiscal terms that govern commercial operations has left the industry in doldrums.

At the conference in Yenegoa, Bayelsa State, government’s representatives and captains of petroleum industry remained strongly polarized on how to reinject vibrancy in the upstream petroleum sector and spur absorption of local content in ancillary activities.

Whereas government demanded significant investments in realizing economic aspirations from the sector and reduction of cost in industry operations, operators pointed at the domestic operating environment as the major cost factor, arguing that fiscal and security environment would play great roles in attracting international investible funds.

In his ministerial goodwill speech, Chief Timipre Sylva pointed out that Nigeria’s per capita production cost per barrel of oil equivalent remains highest among peer members of the Organization of Petroleum Exporting Countries (OPEC). He challenged operators to cut production cost by 50 percent.

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He promised to influence speedy passage of the Petroleum Industry Bill (PIB) to provide the required fiscal clarity for investors while insisting on implementation of the nation’s Deepwater Act amendment.

Chairman of Oil Producers Trade Section (OPTS) of the Lagos Chamber of Commerce and Industry (LACCI), Mr Paul McGrath, pointed out that Nigeria has the mineral resources, skilled workforce and excellent partnership models that built the industry across year.

He however pointed out that players industry must be encouraged with the right fiscal terms and a petroleum law that would attract investments from international companies. He made it clear that human capacity, technology and certainty critical to commercial investments in any business environment.

Mr McGrath who is the Chairman of ExxonMobil affiliates in Nigeria and Managing Director of Mobil Producing Nigeria Unlimited stressed that frequently changing the laws that form basis for investments and also allowing prolonged arguments over terms of operations raise investment caution.

He noted that global commodity business re quires the players to be competitive, adding that the petroleum industry was suffering a period of fragility that imposes greater risks to investments.

In calling on government to dismantle disincentives in the industry, he cited the allure flaunted by the United States government as the primary basis for oil production boom in the American country.

In his contribution, the Chairman of Shell companies in Nigeria, Mr Osagie Okunbor, called for stable and constant fiscal environment that would be attractive to investors, adding that safe and congenial operating environment would address the issue of cost in the industry.

He made it clear that the industry players would require an attractive fiscal environment to drive realization of government’s mandate in the industry, pointing out that the company’s Bonga Southwest and Aparo deepwater development project has failed to reach final investment decision due to concerns over domestic fiscal environment.

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He made it clear that government’s economic aspirations expected from the petroleum industry would not happen if there was no congenial fiscal and operating environment for investors to deliver projects.

“Uncertainty in the deepwater side has kept project base load flat,” he declared, adding that big projects would require collaboration in conditioning the operating environment to be competitive. He listed some of the issues in the operating environment to include long contracting cycles, asset insecurity and associated outages, sanctity of contracts and sluggish approval processes.

Mr Okunbor called for pan industry Service Level Agreement (SLA) to guarantee time frames for industry work programmes.

Managing Director of Chevron Nigeria Limited, Mr Jeff Ewig, called on government to enthrone fiscal and regulatory regimes that would enhance industry activities and earn the economy greater value. This, according to him, would require globally competitive fiscal regimes that would make activities bigger in the short to long term.

Mr Ewig stated that tax and royalty rates in Nigeria have remains high and uncompetitive with peer countries around the world. He blamed the situation for the paltry investment inflow into the Nigerian petroleum industry in the past 10 years.

According to him, only 2.0 percent of the total oil and gas investments that flowed into the African continent in the period landed in Nigeria primarily because, according to him, the issues that hinder investments have not been addressed.

According to him, it required to make the pie bigger in order to take a greater share while fixing on a bigger share from a small pie would impose loss situation on parties.

He called on government to diversify the economy from oil dependence as in order to reduce the financial pressure that stokes fiscal conflicts in the petroleum industry. He advised policy makers to address lingering issues that plague local operating environment, pointing out that it would still require petroleum income to drive the economic diversification agenda.

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In his presentation, General Manager in charge of Nigerian Content at Eni’s affiliates in Nigeria, Mr. Tajudeen Adigun, advised government to respect sanctity of contracts and uphold agreements that govern commercial investments in the country.

He pointed at contributions of various oil companies in the country to the growth of the local economy as part of the reasons for harmonious relationship among parties and stakeholders in the domestic industry play.

In trying to provide a middle ground for the opposed sides, the Executive Secretary of NCDMB, Mr Simbi Wabote, acknowledged the role of international investors in growing Nigeria’s economy through high Nigerian Content performance. He credited international oil companies with 29 percent of the 30 percent Nigerian Content level in the industry.

He advocated a win-win strategy that would ensure the right fiscal environment, pointing at the future roles the international investors would still have to play in growing capacity utilization across the full spectrum of the petroleum industry.  He also supported the case for creation of the right environment for ease of doing business in the economy in order to attract greater investments in resource optimization.

He however warned that discourse on fiscal regimes should not benchmark Nigeria with small and emerging petroleum plays where investors are offered pioneer incentives to assist governments open up their industry.

He called on players to advance credible benchmarks and logical arguments that would frank enough to bring government to negotiation table. Such frank discussions, according to him, have become necessary to move the industry forward.

He called on the investors to look deeper and understand the challenges that drive governments in search for national economic development funds. The situation, he said, has made it compelling for a pan-industry movement towards economic diversification of the country.

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