PROEM
The President of Nigeria is empowered to exercise certain powers by virtue of clear provisions of the Nigerian Constitution (the "Constitution" as amended) and certain other pieces of legislation. Specifically, by virtue of Section 5 of the Constitution, he is empowered with executive powers and Sections 23(2) and 89 of the Companies Income Tax Act (the "CITA", as amended) enable him to issue orders exempting any company or class of companies from paying income tax or from complying with any provision of the CITA. Consequently, President Bola Ahmed Tinubu, GCFR1 (the "President"), who doubles as the Minister of Petroleum Resources2, issued the Oil and Gas Companies (Tax Incentives, Exemption, Remission, etc.) Order, 2024 (the "Order").
As specified by the Order, the President granted certain tax incentives, exemptions and remissions to oil and gas companies operating in Nigeria. Further, pursuant to Paragraph 10 of the Order, the President obliged the Honourable Minister of Finance and Coordinating Minister of the Economy in Nigeria, Mr Wale Edun (the "Minister" or "Minister of Finance"), to introduce fiscal incentives to ensure that investments for deep water oil and gas projects achieve a competitive Internal Rate of Return.
Following the President's approval, the Minister of Finance, has, in compliance with Paragraph 10 of the Order (and all other powers enabling him in that respect), issued the Notice of Tax Incentives for Deep Offshore Oil & Gas Production, 2024 (the "Notice"), a new subsidiary legislative instrument. The Value Added Tax (VAT) Modification Order 2024 (the "VAT Modification Order 2024") was also issued (the VAT Modification Order and the Notice are together referred to, as the "Instruments"). The primary objective of the Instruments is to introduce new fiscal incentives to further strengthen Nigeria's commitment towards attracting both local and foreign investments to restore economic growth by facilitating a conducive operating and investment environment.
This article provides an analysis of the Instruments and takes a cursory look into their anticipated impacts on the Nigerian oil and gas sector.
ANALYSIS OF THE INSTRUMENTS
Value Added Tax (VAT) Modification Order 2024
The First Schedule to the Value Added Tax Act3 ("VAT Act") exempts certain goods and services from being subject to payment of VAT. In furtherance of this, the VAT Act empowers the minister responsible for matters relating to finance to amend, vary or modify the list set out in the First Schedule accordingly.4 It is pursuant to this power that the Minister signed the Order.
First, the Order amends the list of goods that are VAT exempt under part 1 of the First Schedule to the VAT Act to include5 (a) equipment and infrastructure related to the expansion of Compressed Natural Gas (CNG) including conversion kits; (b) equipment and infrastructure related to the expansion of Liquefied Petroleum Gas (LPG) including conversion kits; (c) domestic Liquefied Natural Gas (LNG) processing facilities and equipment; (d) electric vehicles; (e) parts, semi-knock-down units for the assembly of electric vehicles; and (f) biogas and biofuel equipment and accessories for clean cooking and transportation.
Secondly, the Order amends the list of services that are VAT exempt under part 2 of the First Schedule to VAT Act to include6 (a) CNG conversion and installation services; (b) LPG conversion and installation services; and (c) manufacturing, assemblage and sale of electric vehicles.
An important modification made by the Order is the redefinition of 'petroleum products' which is now defined in a more expansive manner to include feed gas for all processed gas, aviation turbine kerosene, premium motor spirit, automotive gas oil, household kerosene, locally produced liquefied petroleum gas, compressed natural gas, imported liquefied petroleum gas, and crude petroleum oils.7 In effect, these listed petroleum products all fall under goods which are VAT exempt. The basis for this is found under Order 2(1)(b) of the Value Added Tax Modification Order 2021 which lists petroleum products as part of the goods exempt from VAT.8
For automotive gas oil (AGO) – a new addition to the list of the VAT exempt goods – it is important to note that the provisions of the Order which relate to AGO shall be deemed to have commenced on October 1, 20239. It is not expressly stated in the Order whether VAT payments made by AGO suppliers for supplies made between October 1, 2023, to the Commencement Date of the Order10, will be treated as non-refundable or refundable credits. Hence, it is expected that the FIRS (with the Ministerial approval) will issue guidelines to clarify this point. Additionally, we note that the retrospective application of the Order (as is the case with AGO) will not apply to other newly added goods including compressed natural gas (CNG) and imported liquefied petroleum gas (LPG). Understandably, CNG and imported LPG, have been on VAT exempt status since 7 December 2023, pursuant to a Circular on fiscal incentives for the gas sector, released by the Minister dated 7 December 2023.
Notice of Tax Incentives for Deep Offshore Oil & Gas Production, 2024
Background
As specified above, the President had, earlier in the year,11 issued the Order, introducing gas tax credits for non-associated gas greenfield developments in onshore and shallow water locations with first gas production on or before January 1, 2029. As also mentioned previously, paragraph 10 of the Presidential Order mandated the minister responsible for finance to introduce fiscal incentives to ensure that investments for deepwater oil and gas projects achieve a competitive internal rate of return. Therefore, the Notice is supplemental to the Presidential Order to enable the application of additional fiscal incentives to deep offshore oil developments and deep offshore non-associated gas developments. By so doing, the Notice is geared towards incentivising investments in the deep offshore developments, thereby benefiting, in particular, parties to production sharing contracts or profit-sharing contracts who directly provide the funding for developments that lead to production.
Deep Offshore Oil Development
For existing deep offshore leases12, the Order provides that where the producible reserve of a deep offshore development does not exceed four hundred million (400,000,000) barrels of crude oil equivalent, a tax credit of Three United States Dollars (US$3.00) per barrel or at twenty percent (20%) of the fiscal oil price, whichever is lower, shall be applicable to crude oil produced from the commencement of production up to a cumulative production of One Hundred and Fifty Million (150,000,000) barrels.13 However, where the producible reserve of a deep offshore development exceeds four hundred million (400,000,000) barrels of crude oil equivalent, a tax credit of Four United States Dollars, Fifty Cents (US$4.50) per barrel or at twenty percent (20%) of the fiscal oil price, whichever is lower, shall be applicable to crude oil produced from the commencement of production up to a cumulative production of five hundred million (500,000,000) barrels.14
For future leases awarded after the Effective Date of the Notice, 15 as well as those derived from existing licenses or future licenses but awarded after the Effective Date of the Notice, in addition to the applicable tax credit from the list above, One United States Dollars (US$1.00) tax credit will be applicable per barrel from the commencement of production up to a cumulative production of 500 million (500,000,000) barrels.16
From the foregoing, the maximum production threshold for the application of the incentives is thus five hundred million (500,000,000) barrels. Also, with the conscious reference to crude oil production from 'deep offshore Development' of a lessee, rather than 'field', and going by the definition of 'Development' in the Notice17, it is deducible that the tax credit incentives for crude oil production are applicable to the total production portfolio of a lessee (which could cover a group of greenfields within single or multiple leases) and not the production per field.18 In effect, once the cumulative crude oil production volume of a lessee's deep offshore Development exceeds 500,000,000 barrels, such lessee will no longer benefit from the said tax-credit incentives.
It is important to note that the Notice takes cognisance of the possibility of a reduction in crude oil prices below Fifty United States Dollars (US$50.00) per barrel. Hence, the Notice provides that in such a situation where crude oil prices fall below $50 per barrel, the tax credit incentives specified in the preceding paragraphs shall apply at a reduced rate of fifty percent (50%) across board.19
We further note that for deep offshore leases preceding the Effective Date of the Notice, having their respective FDP in place, the respective lessees must reach FID between the Effective Date of the Order and 1st January 2024 ("Stipulated Period"), to take benefit of the incentives.20 However, where a lessee is unable to reach an FID within the Stipulated Period due to the occurrence or subsistence of a force majeure event, the affected lessee desirous of benefiting from any of the listed incentives, is required to seek an extension of time from the Nigerian Upstream Petroleum Regulatory Commission (the "NUPRC" or "Commission"), and further notify the Commission of its FID for the development of its deep offshore field within 30 days of the FID being made.21 It is expected that such extension of time will be sought prior to the expiration of the Stipulated Period. However, we are of the view that the time window for the application for an extension ought to be defined and limited to the later stages of the Stipulated Period. By so doing, (a) an affected lessee will have a sense of when it should apply for an extension of time, during the subsistence of a force majeure event, and (b) it will be ensured that extensions are not sought way too early within the Stipulated Period.
With respect to future leases awarded after the Effective Date, including those derived from existing licenses or future licenses awarded after the Effective Date, it is noted that there is no stipulated deadline for the respective awardees of the leases/licenses, to reach FID for purposes of benefiting from the incentives.
Deep Offshore Non-Associated Gas Development
The production tax credit under this section relates to gas production sold from non-associated gas Developments or Developments containing crude oil and non-associated gas in the deep offshore.
Where the hydrocarbon liquids ("HCL") content in a field does not exceed thirty (30) barrels per million standard cubic feet (mmscf), the applicable tax credit shall be One United States Dollars (US$1.00) per thousand standard cubic feet (mscf) of gas sold or thirty percent (30%) of the fiscal gas price of such sale, whichever is lower, from the commencement of production up to a cumulative volume of gas sold of five (5) trillion cubic feet ("TCF").22 However, where the HCL content in the field exceeds thirty (30) barrels per million standard cubic feet (mmscf), but does not exceed one hundred (100) barrels per million standard cubic feet (mmscf), the applicable tax credit shall be Fifty Cents (US$0.50) per thousand cubic feet (mscf) of gas sold or thirty percent (30%) of the fiscal gas price of such sale, whichever is lower, from the commencement of production up to a cumulative volume of gas sold of five (5) TCF.23
Where the HCL content from the relevant development exceeds one hundred (100) barrels per mmscf, the production tax credit stated above shall not apply.24 Also, determination of the HCL in a non-associated gas field as contemplated under this section shall be limited to HCL within upstream petroleum sector and based on guidelines issued by the Nigerian Upstream Regulatory Commission.25
In addition, the Notice makes provision for the sharing formula for profit gas under existing non-associated gas deep offshore production sharing contracts.26
Comments on Generally Applicable
Provisions of the Notice It is worth noting that production tax credit accruable in any year shall not be combined with the production allowances incentives provided in the sixth schedule to the Petroleum Industry Act, 2021 (PIA) or the Associated Gas Framework Agreement (AGFA).27 In essence, a qualifying lessee cannot benefit from both the production tax incentives regime under the Notice and the production allowances incentives regime under the PIA or AGFA at the same time within a year. It must choose one regime. It is thus left for lessees to make their choice based on their commercial considerations.
We also note that non-associated natural gas and deep offshore operations are excluded from the application of hydrocarbon tax under section 260(b)(i) and section 260(3) of the PIA, respectively. In essence, the tax credit under the Notice will be calculated on the companies income tax (CIT)28 chargeable on a qualifying lessee by the FIRS, which Agency is empowered to assess and collect government revenue in the petroleum industry by virtue of section 259(a) of the PIA.
Furthermore, whereas the surplus of a tax credit for any year can be carried forward to the subsequent year however, such surplus accruing in a year cannot be carried forward for more than three (3) years.29
With respect to modalities for the implementation of the Notice, the Federal Inland Revenue Service ("FIRS") is required to issue implementation guidelines with respect to the incentives within fifteen (15) days from the Effective Date of the Notice.30 It is expected that the implementation guidelines will provide more detail about the implementation of the Notice and address outstanding concerns such as above listed, to enable a smooth implementation of the Notice.
FINAL THOUGHTS
In recent times, Nigeria's crude oil production is reported to have witnessed a significant increase. For example, in its September 2024 Monthly Oil Market Report, the Organisation of Petroleum Exporting Countries reported that Nigeria's crude oil production increased from 1,307,000 bpd in July 2024 to 1,352.000 bpd in August 2024. This development, which represents a 3.4% increase, is a testament to the Federal Government of Nigeria's commitment towards maximisation of production in the Nigerian oil and gas industry.
Notwithstanding, Nigeria needs to do more in terms of increasing production levels to further maintain its position as Africa's largest oil producer with a wider margin. From the provisions of the Order and Notice, it is evident that they are specifically tailored towards encouraging investments and financing in the development of oil and gas assets to enhance production. Therefore, if properly implemented, the Instruments will attract investment and further help to increase the country's crude oil production level.
Footnotes
1. President of the Federal Republic of Nigeria.
2. As the Minister of Petroleum Resources, President Bola Ahmed Tinubu, GCFR, is assisted by the Minister of State for Petroleum Resources (Oil), Senator Heineken Lokpobiri Ph.D., and the Minister of State for Petroleum Resources (Gas), Rt. Hon. Ekperikpe Ekpo.
3. Cap. V1, Laws of the Federation of Nigeria, 2004 (as amended).
4. Section 38 of VAT Act.
5. Order 2 (a) of the Value Added Tax (VAT) Modification Order 2024.
6. Order 3 of the Value Added Tax (VAT) Modification Order 2024.
7. Order 2(b) of the Value Added Tax (VAT) Modification Order 2024. 'Petroleum products', as previously defined under the Value Added Tax (Modification) Order, 2021 ("VAT Modification Order 2021), was limited to aviation turbine kerosene, premium motor spirit, household kerosene, locally produced liquefied petroleum gas, and crude petroleum oils.
8. Unlike the VAT Modification Order 2021 which revoked previous VAT modification orders, the VAT Modification Order 2024 does not revoke the VAT Modification Order 2021. Therefore, the two currently exist side by side.
9. Order 5 of the Value Added Tax (VAT) Modification Order 2024.
10. 1st September 2024.
11. Precisely on 28 February 2024.
12. These are existing deep offshore leases with Field Development Plans (FDPs), where the lessees make Final Investment Decisions (FIDs) for their Development, in the period from the Effective Date to 1st January 2029. See paragraph 1(1)(a) of the Notice.
13. Paragraph 2(1)(a) of the Notice.
14. Paragraph 2(1)(b) of the Notice.
15. The Effective Date of the Notice is the date of the Presidential Order which is 28 February 2024.
16. Paragraph 2(2) of the Notice.
17. 'Development is defined in the Notice to mean "a set of activities solely aimed at developing a greenfield (undeveloped field) or group of greenfields within a single or multiple leases, pursuant to a field development plan".
18. This is unlike the case with the incentives for gas production as seen below, which are applicable per producing field.
19. Paragraph 2(3) of the Notice.
20. Understandably, the rationale for this dateline is that an existing leaseholder who is committed to the development of a field should be able to reach a final investment decision on how to proceed with the development of the field(s) within such timespan. In contrast, under the Presidential Order, the tax credits introduced therein are to cease where first gas production is not achieved by 1st January 2029 while tax allowance as stipulated therein will apply to first gas produced after 1st January 2029.
21. Paragraph 1(1)(a)(ii) of the Notice.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.