Nigeria Petroleum Industry Bill 2012

Nigeria Petroleum Industry Bill 2012
Contents
Introduction............................................................................................................. 4 Commentary on the PIB 2012
Pedro van Meurs............................................................................................................... 6
Annex A
Detailed review of the bill ...................................................................................... 10
Annex B
Fiscal analysis of the bill ........................................................................................ 22
How Ernst & Young can help..................................................................................................................... 26
Introduction
Introduction
The purpose of this report is to contribute to the discussions on the draft Petroleum Industry Bill (PIB) now before the Nigeria National Assembly (NA) for consideration and passing into law. If passed into law, the short title of the law will be the Petroleum Industry Act, 2012. The PIB was presented as an executive bill by the President of the Federal Republic of Nigeria on 18 July 2012 to the National Assembly. The PIB has received alk jkl j]Y\af_ af Zgl` `gmk]k g^ l`] FYlagfYd 9kk]eZdq& The PIB has the following objectives: a. To create a conducive business environment for petroleum operations; b. To enhance exploration and exploitation of petroleum j]kgmj[]k af Fa_]jaY ^gj l`] Z]f]l g^ l`] Fa_]jaYf h]ghd]3 c. Optimize domestic gas supplies, particularly for power generation and industrial developments; \& =klYZdak` Y hjg_j]kkan] k[Yd ^jYe]ogjc l`Yl ]f[gmjY_]k further investment in the petroleum industry while optimising revenues accruing to the Government; ]& =klYZdak` [gee]j[aYddq gja]fl]\ Yf\ hjgl%\jan]f gad Yf\ _Yk entities; f. Deregulate and liberalise the downstream petroleum sector; _& ;j]Yl] ]^[a]fl Yf\ ]^^][lan] j]_mdYlgjq Y_]f[a]k3 h. Promote transparency and openness in the administration of the petroleum resources of Nigeria; i. Promote the development of Nigerian content in the petroleum industry; j. Protect health, safety and the environment in the course of petroleum operations; c& 9llYaf km[` gl`]j gZb][lan]k lg hjgegl] Y naYZd] Yf\ sustainable industry in Nigeria.
Ernst & Young Nigeria has reviewed the draft PIB and clearly a\]fla]k oal` l`] YZgn]%klYl]\ gZb][lan]k g^ l`] HA:& L`] h]ljgd]me af\mkljq ak Y c]q af\mkljq af Fa_]jaY$ Yf\ gad j][]ahlk presently account for about 78% of total revenues to government and contributes about 14.27% to the gross domestic product (GDP) of the country. =jfkl Qgmf_ ^mjl`]j a\]fla]k oal` l`] f]]\ lg j]^gje l`] k][lgj in a structured and balanced manner, to ensure the continuous go g^ afn]kle]fl lg l`] k][lgj& Af na]o g^ l`] aehgjlYf[] g^ l`] sector to the Nigerian economy, and to contribute to a healthy and constructive debate on the institutional, regulatory, commercial Yf\ k[Yd hgda[q j]^gje [gfl]ehdYl]\ mf\]j l`] HA:$ o] Ykc]\ several analysts to review the bill, including Dr. Pedro van Meurs, Yf afl]jfYlagfYd gad Yf\ _Yk k[Yd kqkl]ek ]ph]jl& The attached commentary along with a detailed review of the :add Yf\ Y k[Yd YfYdqkak ak hj]hYj]\ Zq <j& H]\jg nYf E]mjk& Af l`] hYkl +0 q]Yjk$ `] `Yk ogjc]\ gf k[Yd gad Yf\ _Yk akkm]k af egj] l`Yf 0( [gmflja]k& Ogjcaf_ oal` :Yjjgok Af[gjhgjYl]\$ he developed PETROCASH, which is the most comprehensive integrated database and computer model for World Fiscal Systems ^gj Gad Yf\ ?Yk& @] ak Ydkg [g%Yml`gj g^ l`] Ogjd\ JYlaf_ g^ Gad Yf\ Gas Terms 2011. The opinions expressed in the commentary and annexures are those of Dr. Pedro van Meurs. Although we are in agreement with a number of comments made, the opinions do not represent Ernst & Young. His views arise from his close association with and ogjcaf_ gf l`] k]n]jYd n]jkagfk g^ l`] HA: hj]\Ylaf_ l`] *()* version and generally consulting for governments worldwide.
Commentary
Commentary on the PIB 2012

Pedro van Meurs
25 October 2012
Summary
The following is a commentary on the Petroleum Industry Bill 2012 (PIB 2012) made at the request of various parties. With respect to some items, comparisons will be made with the previous House Bill 159 and with the Government Memorandum (September 2010). The Government Memorandum represented l`] [gfkgda\Yl]\ Y\na[] g^ l`] ?gn]jfe]fl Afl]j%9_]f[q L]Ye gf l`] hj]nagmk HA:& A oYk Y [gfkmdlYfl lg làk l]Ye& Eq ogjc relates to being consultant to host governments on petroleum matters and I will therefore review the PIB 2012 from this perspective. Annex A contains a detailed analysis of the Bill. 9ff]p : [gflYafk Y k[Yd ]nYdmYlagf g^ _gn]jfe]fl j]n]fm]k as a result of the PIB 2012.
E]egjYf\me$ l`] :add ak nY_m] Yk lg `go làk Z]f]l oadd Z] distributed and leaves this to future regulation. This could result af hgdala[Yd afl]j^]j]f[] Yf\ fgf%ljYfkhYj]f[q& Another concern of the PHC Fund would be that the amount of l`] )( Y^l]j%lYp hjgl ogmd\ kljgf_dq m[lmYl] oal` gad hja[] egn]e]flk$ Yf\ làk oadd eYc] al \a^[mdl ^gj l`] [geemfala]k to plan their affairs. It was for this reason that the Government Memorandum provided for stable payments. Also 10% of the \]]hoYl]j Y^l]j%lYp hjglk oadd Z] ljYfk^]jj]\ \aj][ldq lg l`] petroleum producing littoral States without any transparency as to how these funds will be used. Al ak Y \]kajYZd] _gYd lg [j]Yl] Yf ]^^][lan] Yf\ hjglYZd] Fa_]jaY National Petroleum Company (NNPC) along the lines of, for instance, Petrobras. This can be best achieved by incorporating NNPC under the Companies and Allied Matters Act and subsequently privatizing NNPC partially. Km[` kl]hk [gmd\ ]fkmj] l`Yl l`] [gehYfq ak eYfY_]\ dac] Yfq other major international petroleum company with minimum political interference. Both the House Bill 159 and the Government Memorandum contained this concept. L`] HA: *()*$ `go]n]j$ \an]jlk ^jge làk gZb][lan] Zq jkl Zj]Ycaf_ mh FFH; af l`j]] ]flala]k$ Yf\ kmZk]im]fldq hjanYlaraf_ only two entities. This leaves major government assets and j]n]fm] klj]Yek af Y EYfY_]e]fl ;gehYfq$ oà[` oadd dac]dq continue to be subject to heavy political interference.
Institutions (Part II)

The PIB 2012 creates two regulatory entities. The Upstream Petroleum Inspectorate incorporates responsibilities with respect to technical and commercial matters related to the upstream. The Downstream Petroleum Regulatory Agency combines technical and commercial responsibilities with respect to the downstream. The entities are organized as a body corporate. Làk ]fkmj]k l`Yl l`] ]flala]k [Yf YlljY[l imYda]\ hjg^]kkagfYdk Yf\ gh]jYl] ]^[a]fldq& L`] hgo]jk Yf\ ^mf[lagfk hjgna\]\ af l`] PIB 2012 would permit the two entities to be effective regulators because both technical and commercial functions are united in the same regulatory entity as recommended in the Government Memorandum. The PIB 2012 creates a Petroleum Host Communities Fund. H]Y[] Yf\ klYZadalq af l`] Fa_]j <]dlY [Yf Z] ka_fa[Yfldq enhanced if people in the region believe that they share fairly af l`] Z]f]lk g^ gad Yf\ _Yk hjg\m[lagf& L`] H]ljgd]me @gkl ;geemfalq >mf\ H@; >mf\! k]lk Yka\] )( g^ l`] Y^l]j%lYp hjglk lg Y[à]n] làk _gYd& Làk Yegmfl [Yf kmZk]im]fldq Z] credited by the companies against other payments to government, kg l`]q oadd fgl Z] gml g^ hg[c]l& L`] j]n]fm]k ^jge l`] gfk`gj] and shallow water are to be distributed to the communities. However, rather than distributing revenues directly from the operators to the communities, as was proposed in the Government
Upstream (Part III)

The PIB 2012 dealing has excellent upstream provisions related lg ljYfkhYj]f[q Yf\ fgf%[gf\]flaYdalq& Làk ak Y n]jq _gg\ step forward for Nigeria. From a legislative point of view these hjgnakagfk Yj] Yegf_ l`] egkl Y\nYf[]\ af l`] ogjd\ Yf\ eYc] Nigeria a leader in Africa in this respect. Generally, the provisions related to the upstream license and lease YoYj\ hjg[]kk$ ogjc hjg_jYek$ j]dafimakè]flk$ \]n]dghe]fl plan approval, unitization and production adhere to best international practices.
A very negative provision is that the President has the power to grant licenses and leases without a competitive process or any other process. This leaves the door wide open to political favoritism and corruption in a manner that has been practiced in Nigeria in the past. It should be noted that, for instance, the Presidents of the United States or South Africa would not have such powers.
Petroleum Revenues (Section 197 and part VIII)

Section 197 provides the Minister of Petroleum with draconian powers to determine rentals and royalties by regulation. It cannot be recommended to leave such an important revenue source for Nigeria to political manipulation after the Bill has passed. With j]kh][l lg jgqYdla]k \]f]\ mf\]j l`] j]_mdYlagfk af l`] H]ljgd]me Act it is understood that these regulations remain in force until replaced by new regulations. However, it seems that the royalties under the Deep Offshore and Inland Basin Production Sharing Act will be terminated as soon as the PIB is passed. J]_Yj\d]kk g^ l`] f]o jgqYdlq j]_mdYlagfk$ l`] aehj][ak] \]falagf of measurement point in the Bill leaves the door wide open for the current practice of stealing oil. Also, the Bill provides hgkkaZadala]k ^gj ka_fa[Yfl ljYfk^]j hja[af_ ^gj ]phgjl _Yk& The PIB 2012 maintains the concept of creating a fully consolidated Companies Income Tax plus a Nigerian Hydrocarbon Tax. This is a modern concept that in principle could result in attractive petroleum revenues for Nigeria, while encouraging ka_fa[Yfl afn]kle]fl& >gj l`] gfk`gj] al ak hjghgk]\ lg dgo]j the combined tax rate from 85% to 80%. However, the uplift of 5% would be replaced by a production allowance largely as originally hjghgk]\ Zq l`] Afl]j%9_]f[q L]Ye& >gj l`] \]]hoYl]j l`] proposed combined tax rate is 55%. Also the current uplifts of 50% in deepwater would be replaced by the production allowances. The Bill does not refer to production sharing contracts (PSCs), but it seems understood from the Bill that the current tax oil concept would be replaced in existing PSCs with the new tax provisions. This means that the tax will be determined after \]\m[lagf g^ l`] hjgl gad hYqe]flk& Table II in the Fourth Schedule contains either an error or a large giveaway of the Nigerian Hydrocarbon Tax through excessive capital allowances. Also the production allowances that were meant to encourage new production are now granted on existing production without the need for additional investment. Yet, these allowances are not made available with respect to leases companies that are in joint ventures with NNPC. This is unreasonable. L`] [mjj]fl gfk`gj] Yf\ k`Yddgo%oYl]j l]jek Yj] lgg lgm_` lg encourage strong investment in new production. The production allowances were meant to stimulate investment in all new production.
Downstream (Part IV and V)

The PIB 2012 has adequate downstream provisions related to lYja^^ e]l`g\gdg_q Yf\ f]logjc [g\]k$ da[]fk] [gf\alagfk ^gj hah]daf]k$ hah]daf] f]logjck$ _Yk kmhhda]jk Yf\ _Yk \akljaZmlgjk$ as well as oil product consumer protection mechanisms. In general, Part V enshrines the desirable goal of creating a fully [geh]lalan] _Yk eYjc]l af Fa_]jaY& @go]n]j$ Y f]_Ylan] ^]Ylmj] ak l`Yl Y[[]kk lg l`] \ge]kla[ eYjc]l ^gj keYdd]j _Yk hjg\m[]jk ak k]n]j]dq `Yeh]j]\ Zq Y dY[c g^ open access and tariff provisions for gas processing plants and mhklj]Ye hah]daf]k& Làk oadd eYc] l`] gZb][lan] g^ Y [geh]lalan] _Yk eYjc]l \a^[mdl lg Y[à]n] Yf\ d]Yn]k l`] \ge]kla[ eYjc]l Yl the mercy of the major petroleum companies. In this context it is of concern that the domestic supply obligation section has been much reduced in strength with ample hgkkaZadala]k lg Ynga\ h]fYdla]k af [Yk] g^ fgf%[gehdaYf[]& Fa_]jaYf gas consumers would be better protected if the PIB 2012 would hjgna\] ^gj Y egj] \]f]\ afalaYd \ge]kla[ _Yk hja[af_ ^jYe]ogjc& Km[` ^jYe]ogjc k`gmd\ g^^]j à_` ]fgm_` _Yk hja[]k lg ]fkmj] Y jYha\ \]n]dghe]fl g^ kmhhda]k ^gj l`] \ge]kla[ eYjc]l& The domestic gas price should be in the $2.50 to $4 per EE:lm jYf_] Yl l`] hgafl o`]j] _Yk ak g^ eYjc]lYZd] [gf\alagf ^gj hah]daf] ljYfkhgjlYlagf lg fYd [mklge]jk& Làk ogmd\ Z] [gfkakl]fl oal` \ge]kla[ eYjc]l hja[]k af gl`]j eYbgj _Yk%hjg\m[af_ 9^ja[Yf Yf\ 9kaYf [gmflja]k&
Indigenous companies, health, safety and environment (Part VI and VII)

Part VI and VII remain largely unchanged from House Bill 159. An interesting addition is that companies will not be responsible for environmental damage caused by sabotage. Part VI does not include the softening of the provisions proposed Zq l`] Afl]j%9_]f[q L]Ye g^ l`] [gmfl]jhjg\m[lan] Fa_]jaYf Gad and Gas Industry Content Act of 2010.
Penalties for not paying Nigerian Hydrocarbon Tax are severely reduced in the PIB 2012. In summary, the petroleum revenue provisions of the PIB 2012 eYq j]kmdl af ka_fa[Yfl j]n]fm] dgkk]k gf ]paklaf_ hjg\m[lagf without encouraging investment in new production. Annex B illustrates that depending on the interpretation of the various clauses of the PIB 2012, revenue losses with respect to existing production from onshore and shallow water may be 22% for leases in which NNPC does not participate and 6% for leases in which NNPC participates. For deepwater PSCs the revenue losses with respect to existing production could be as much as 50% depending on the interpretation of the various clauses of the PIB 2012. The PIB 2012 should therefore be revised by clarifying and amending the tax provisions and by including royalty provisions in a manner that would strongly encourage investment in production from new mining leases and other new production. A clear and mfYeZa_mgmk k[Yd kqkl]e k`gmd\ Z] ]klYZdak`]\ l`Yl oadd d]Y\ lg higher levels of oil and gas production. 9l [mjj]fl hja[] d]n]dk l`] _gn]jfe]fl lYc] ^gj gad ^gj f]o d]Yk]k in the onshore, shallow water and deepwater should be from .( ^gj l`] keYdd à_`%[gkl ]d\k lg /- ^gj dYj_] dgo%[gkl ]d\k Ykkmeaf_ l`] _gn]jfe]fl lYc] ak [Yd[mdYl]\ oal`gml af[dm\af_ FFH; hYjla[ahYlagf af l`] [Yd[mdYlagf!& 9l à_`]j%hja[] d]n]dk l`] _gn]jfe]fl lYc] k`gmd\ af[j]Yk] oal` hja[]& L`] _gn]jfe]fl lYc] should be lower for gas.
Repeals, transitional and savings provisions (Part IX)

The PIB 2012 does not repeal a number of Acts that were repealed under the Government Memorandum and the House Bill 159. A legal analysis is required of the various implications. Part IX also includes what was considered Part X under the House :add )-1 j]dYl]\ lg afl]jhj]lYlagf Yf\ [alYlagf& L`] \]falagfk g^ upstream and downstream are confusing and unclear. There is a nYja]lq g^ ]jjgjk af [jgkk%j]^]j]f[af_$ Yf\ \]falagfk Yj] af[dm\]\ that are not used in the PIB.
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Annex A
We provide our comments in Annex A, a detailed review of the Bill. Dr. Pedro van Meurs has made reference to earlier PIB versions. In our comments, we provide additional information on PIB 2012 provisions where this may assist investor understanding.
Detailed review of the bill
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Part I Objectives
This part is an appropriately structured introduction setting out the general objectives. EY comment We agree with Dr. Pedro van Meurs that the objectives are elaborate, as already highlighted above.
Petroleum Corporation (NNPC), the PTB is required to identify opportunities in the frontier acreages, develop exploration strategies and portfolio management programs for the exploration of unassigned frontier acreages, and generally stimulate investor interest in the frontier acreages.
C. Upstream Petroleum Inspectorate

The Inspectorate has both technical and commercial functions, as can be highly recommended. Only if technical and commercial issues are considered simultaneously will the appropriate \][akagfk Z] eY\] YZgml \]n]dghe]fl hdYfk ^gj gad Yf\ _Yk ]d\k or for other infrastructure projects. An important provision is that l`] Afkh][lgjYl] `Yk l`] hgo]j lg j]_mdYl] làj\%hYjlq Y[[]kk lg ^Y[adala]k$ oà[` ogmd\ af[dm\] gad hah]daf]k lg j]f]ja]k gj ]phgjl terminals and gas pipelines to gas processing plants. In principle, this will create the possibility for the smaller [gehYfa]k lg _Yaf Y[[]kk lg l`] ljYfkhgjlYlagf kqkl]ek lg eYjc]l Yf\ ]phgjl l`]aj gad Yf\ _Yk& Q]l$ làk hgkkaZadalq ak fgl ZY[c]\ up by corresponding provisions in Part III of the Bill, which is a considerable concern. The Inspectorate is also in charge of ensuring the payment of royalties, rentals and fees. This is normal power for such an entity. The Inspectorate will also liaise with the FIRS on cost deductions, which is welcome assistance to the FIRS. However, there is no coordination with the FIRS on determining oil and gas prices for royalties and tax purposes. This is an unfortunate gap in the functions, since, as will be discussed under Part VIII, the matter of transfer pricing is a serious concern. EY comment Although there is no mention in the PIB of coordination between >AJK Yf\ MHA gf gad Yf\ _Yk hja[]k$ af hjY[la[]$ l`] >AJK [gfjek prices from the Department of Petroleum Resources (DPR) and should continue to do so with UPI under the PIB. Apart from the commercial and technical functions of the Upstream Petroleum Inspectorate (UPI), its other functions include: The UPI will, subject to the approval of the Minister of Petroleum Resources, conduct bid rounds for all licenses (PPLs) and leases (PMLs). It will also issue authorizations for seismic activities, drilling, design and construction of upstream facilities. It will enforce health and safety standards for the upstream petroleum industry, as well as take necessary steps to monitor activities of grant holders, publish tariffs, and ensure accurate [YdaZjYlagf Yf\ []jla[Ylagf g^ ]imahe]fl mk]\ ^gj k[Yd measures.
Part II Institutions
A. The Minister
The provisions of this part contain improved provisions with j]kh][l lg l`] ja_`l g^ hj]%]ehlagf Yf\ l`] hgo]j lg eYc] regulations, compared to the Government Memorandum and House Bill 159. Systematic input of all stakeholders in the development of regulations is an important issue contained in the PIB 2012. EY comment The Ministers powers under the PIB are very extensive, although in many instances this has to be exercised under an enabling Regulation to be made after the Bill is enacted. It is therefore correct as stated by van Meurs that the development of the Regulations will depend on systematic inputs of all stakeholders. This, in our view, introduces another layer of activity and uncertainty that will require strict monitoring. Moreover, leaving such important matters as rental and royalty rates to a future ]n]fl oadd k]jn] gfdq lg ]jg\] l`] [gf\]f[] g^ afn]klgjk af l`] sector, with adverse effects for investment.
B. Petroleum Technical Bureau

The Petroleum Technical Bureau is a relatively modest unit in the Ministry to give some technical advice where required. The powers are not comparable with the National Petroleum Directorate proposed in the Government Memorandum or the National Petroleum Commission proposed in House Bill 159. The proposals for the Directorate and Commission envisioned that a strong coordinating role was required for the management and guidance of the Nigerian petroleum industry. L`] dY[c g^ km[` Yf ]^^][lan] [ggj\afYlaf_ ]flalq eYq j]kmdl af Y dY[c g^ [d]Yj \aj][lagf af \]n]dghaf_ l`] h]ljgd]me k][lgj& EY comment In addition to the above observations by van Meurs, an important role of the Petroleum Technical Bureau (PTB) is to assist the Minister of Petroleum Resources in formulating and developing strategies to implement government policy. As successor to the former Frontier Exploration Services of the Nigeria National
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D. Downstream Petroleum Regulatory Agency (DPRA)

The Agency has both technical and commercial functions as can be recommended. The Agency seems to have full and adequate powers to deal with the downstream sector. 9f afl]j]klaf_ akkm] ak l`Yl l`]j] ak fg e]flagf g^ j]faf_ gj j]faf_ gh]jYlagfk af l`] HA: *()* gl`]j l`Yf af Section 220 (2)(b), which mentions that regulations may be made for these operations. Given the fact that precisely the matter of construction and gh]jYlagf g^ f]o j]f]ja]k ak Y eYbgj akkm] af Fa_]jaY$ làk k]]ek a major omission. The PIB 2012 does not provide any guidance or ^jYe]ogjc ^gj l`] 9_]f[q Yk lg `go lg \]Yd oal` j]f]ja]k& EY comment In addition to the technical, commercial and regulatory functions of the DPRA, other responsibilities include: Al akkm]k$ eg\a]k$ ]pl]f\k Yf\ j]f]ok$ Yf\ j]ngc]k downstream licenses or authorizations. The DPRA is responsible for monitoring and enforcing the application of its tariff and pricing framework for third-party access to facilities. The DPRA may publish information relating to downstream petroleum operations, where this is in the public interest. It may also enforce the provisions of any enactment or regulation applicable to the downstream petroleum industry made before the Act commences. L`] <HJ9 Ydkg `Yk l`] ka_fa[Yfl ^mf[lagf g^ ^Y[adalYlaf_ _Yk supply to strategic sectors of the economy in line with the approved national gas pricing framework.
F. Petroleum Equalisation Fund

The Equalisation Fund provisions are largely unchanged from earlier proposals. This Fund will be required as long as the h]ljgd]me hjg\m[lk eYjc]l ak fgl [gehd]l]dq \]j]_mdYl]\& EY comment The Petroleum Equalisation Fund (PEF) also has the responsibility of benchmarking product prices.
G. Petroleum Host Communities Fund

There is a strong sense in the Niger Delta communities that the h]ghd] danaf_ af làk Yj]Y Yj] fgl Z]f]laf_ \aj][ldq ^jge l`] gad and gas wealth of the area, despite the activities of the Niger Delta Development Commission. Therefore, the Government Memorandum included a detailed Yf\ ljYfkhYj]fl fYf[aYd \akljaZmlagf kqkl]e lg ]fkmj] l`Yl l`] [geemfala]k ogmd\ Z]f]l \aj][ldq ^jge l`] h]ljgd]me activities. Financial transfers would go directly from the petroleum [gehYfa]k lg l`] [geemfala]k ZYk]\ gf hj]%\]l]jeaf]\ ^]]k without interference from government. This would ensure that the communities would actually get the funds. The PHC Fund leaves the matter wide open. It allocates 10% of the Y^l]j%lYp hjglk g^ l`] gfk`gj] Yf\ k`Yddgo%oYl]j gh]jYlagfk lg the communities and the littoral States. The Minister will regulate the manner in which revenues will be distributed. This opens the \ggj af hjaf[ahd] lg ka_fa[Yfl hgdala[Yd afl]j^]j]f[] Yf\ hgkkaZd] non-transparency. 9dkg al [Yf Z] ]ph][l]\ l`Yl l`] Y^l]j%lYp hjglk oadd m[lmYl] considerably with the oil price movements. This will expose l`] [geemfala]k lg oa\]dq m[lmYlaf_ af[ge] klj]Yek l`Yl oadd Z] n]jq \a^[mdl lg ]^^][lan]dq YZkgjZ& Al oYk ^gj làk j]Ykgf that the Government Memorandum included stable payments directly related to the value of the assets located in or near the communities. The 10% payment can subsequently be credited against any payments to government. Since this could be both against royalties and tax and because there is no coordination on this matter between the Inspectorate and FIRS, this could lead to double dipping. Also it states that the PHC Fund will be used for economic and social infrastructure. This means that the PHC Fund may simply replace existing government programs for investment in infrastructure, rather than being a net gain to the communities.
E. Petroleum Technology Development Fund

The Development Fund provisions are largely unchanged from earlier proposals. EY comment Consistent with the aforestated objective of developing local capacity, the Petroleum Trust Development Fund (PTDF) has powers to initiate, design and implement effective indigenous j]k]Yj[` Yf\ [YhY[alq hjg_jYek$ ]kh][aYddq af l`] ]d\k g^ engineering, geology, science, management and other related ]d\k l`jgm_` l`] YoYj\ g^ k[`gdYjkàhk Yf\ ZmjkYja]k&
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9dkg )( g^ l`] \]]hoYl]j hjglk oadd Z] ljYfk^]jj]\ \aj][ldq lg l`] >mf\ ^gj l`] h]ljgd]me%hjg\m[af_ dallgjYd KlYl]k oal`gml Yfq transparency as to how these funds will be used. EY comment Clarity is required with respect to the confusion on the contributions that can be credited against payments to government, which could be in the nature of royalty or tax, as against the treatment of the contributions as allowable deductions against the new Nigeria Hydrocarbon Tax.
HjanYlaraf_ gfdq ha][]k g^ FFH; Yf\ d]Ynaf_ ka_fa[Yfl Ykk]lk af Y )(( _gn]jfe]fl%gof]\ [gehYfq ak _gaf_ lg Z] Y [gf^mkaf_ strategy. Deciding which assets go to which company and splitting up NNPC will be a complicated process. Why go through such a [gehd]p hjg[]kk a^ l`] _gYd g^ Yf ]^[a]fl FFH; [Yf Z] Y[à]n]\ much simpler? It may be that there remains a strong desire for political interference with NNPC matters. EY comment It is also important to state that to create an effective, welleYfY_]\ Yf\ hjglYZd] FYlagfYd Gad ;gehYfq FG;!$ al ak \]kajYZd] l`Yl l`] FG; k`Yj] \an]kle]fl ak [Yjja]\ gml oalàf Y kh][a[ time frame and that a ceiling is placed on the level of public (government) and privately held shares. It would be recommended that a scheme should be put in place for the shares to be held by interested Nigerians.
@& :j]Ycmh g^ FFH;

General comments
FFH; ak lg Z] Zjgc]f mh af l`j]] k]hYjYl] [gehYfa]k2 The National Petroleum Assets Management Corporation The National Oil Company The National Gas Company Plc The two companies and a Management Company under the Corporation would be incorporated under the Companies and Allied Matters Act. The Corporation would receive the NNPC interests in the current unincorporated joint ventures. The National Oil Company and National Gas Company Plc would split the remaining assets. Both the National Oil Company and the National Gas Company Plc will be partially privatized. The apparent goal is to create Nigerian companies similar to, for instance, Petronas or Petrobras. It is puzzling to understand how làk ak _gaf_ lg Z] Y[à]n]\ Zq Zj]Ycaf_ mh FFH; aflg l`j]] hYjlk& Also splitting activities in oil and gas would not lead to a strong fYlagfYd [gehYfq& F]al`]j H]ljgfYk gj H]ljgZjYk oYk Zjgc]f up in a similar manner. Petronas and Petrobras have extensive operations in both oil and gas. L`] c]q lg Y km[[]kk^md FYlagfYd Gad ;gehYfq ak lg af[gjhgjYl] NNPC as a whole under the Companies and Allied Matters Act and then partially privatize it. This was contemplated in both the Government Memorandum and the House Bill 159. Such a partial privatization, similar to Petrobras or Statoil, would create an entity Z]af_ eYfY_]\ oal` Ydd l`] ^]Ylmj]k g^ Y hjanYl] hjgl%gja]fl]\ company and with, hopefully, a minimum of political interference.
Kh][a[ [gee]flk
Sections 129(3), 157(3) and 168(2). Most favored company clauses. The tax provision under these subsections would leave l`] \ggj oa\] gh]f ^gj n]jq ka_fa[Yfl lYp dgkk]k ^gj Fa_]jaY& EY comment We wish to state that it would be perfectly in order to seek to grant such companies protection or exemption from other taxes outside of the two principal taxes of Nigerian Hydrocarbon Tax (NHT) and Companies Income Tax (CIT), which they would normally be subject to and liable to be assessed.
Part III Upstream petroleum

Subsection 172(3). Unnecessary restrictions on exploration. Petroleum exploration licenses do not give any right to petroleum Yf\ Yj] fgf%]p[dmkan]& L`] eYaf hmjhgk] ak lg [gdd][l af^gjeYlagf& It is an unnecessary obstacle to restrict such information [gdd][lagf lg gh]f Y[j]Y_]& Al oadd eYc] l`] ]nYdmYlagf g^ km[` Y[j]Y_] egj] \a^[mdl a^ j]kmdlk [Yffgl Z] la]\ af lg \YlY ^jge ]paklaf_ o]ddk Yf\ ]d\k gf ]paklaf_ hjgkh][laf_ da[]fk]k Yf\ leases. This in turn will hamper the bid process for such open acreage.
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EY comment We agree that it is established international practice that geophysical surveys can be carried out anywhere, including over existing leases and licenses; however, we would observe that it would encourage investment in prospecting and exploration if operators are granted exclusive right to data and information obtained through the exercise of the license and oil mining lease rights. K][lagf )/,& LjYfkhYj]f[q Yf\ fgf%[gf\]flaYdalq eYaflYaf]\& A very good provision of the PIB 2012 is that the provisions j]dYl]\ lg ljYfkhYj]f[q Yf\ fgf%[gf\]flaYdalq `Yn] Z]]f maintained as per the Government Memorandum. This is a very good step forward for Nigeria. From a legislative point of view these provisions are now among the most advanced in the world Yf\ oadd eYc] Fa_]jaY Y d]Y\]j af 9^ja[Y af làk j]kh][l& Sections 178 and 179. Bank guarantee removed. In general, l`] \]lYad]\ ogjc [geeale]fl hjgnakagfk Yf\ \]n]dghe]fl plan approval process of the Government Memorandum were eYaflYaf]\& @go]n]j$ l`] gZda_Ylagf lg hjgna\] Y ZYfc _mYjYfl]] ^gj l`] ogjc lg Z] [geeall]\ oYk j]egn]\& Làk k]jagmkdq o]Yc]fk l`] YZadalq g^ l`] Afkh][lgjYl] lg ]f^gj[] Y ogjc commitment and a development plan. Section 181(6). The reference to a competitive bid process is in error, since the license area from which further lease parcels will be selected already belongs to the licensee. Section 190 (6). Public bid opening removed. The provision that bids have to be opened in public was removed. Section 191. President has the power to grant licenses and leases. A very negative provision of the PIB 2012 is that the President has the power to grant licenses and leases without competitive process or any other process. This leaves the door wide open to political favoritism and corruption in a manner that has been practiced in Nigeria in the past. It should be noted that the President of the United States or of South Africa do not have similar powers.
EY comment We agree that the conferment of the powers to grant licenses and leases without a competitive process negates the stated PIB objective of transparency and may indeed be open to abuse. Section 193(3)(c). Return of acreage severely diminished. The inclusion of paragraph (c) of Subsection (3) as drafted defeats the entire purpose of Section 193. Currently, companies Yj] kallaf_ gf dYj_] gad eafaf_ d]Yk]k l`Yl [gflYaf ka_fa[Yfl mf]phdgj]\ Y[j]Y_] af Y\\alagf lg l`] \ak[gn]j]\ ]d\k& L`] concept of Section 193 was to enforce either the drilling of unexplored acreage or to have companies drop this acreage so it can be subject to a bidding round for other interested companies. :q eYcaf_ l`] j]dafimakè]fl \Yl] l`] ]f\ g^ l`] gad eafaf_ d]Yk] period, this whole concept is no longer of use and the purpose of most the Section 193 been made useless. K][lagf )1/& JgqYdla]k$ ^]]k Yf\ j]flYdk lg Z] \]f]\& The PIB 2012 leaves the entire determination of royalties to the Minister under regulations. Since royalties are not provided for in the Act and since the Acts containing royalty provisions will be repealed under the PIB 2012, royalties will be set based on regulations. Determining royalties through regulations rather than in the PIB itself will lead to constant pressure on the Minister in the future to lower royalties for a wide variety of reasons. Also it can certainly not be recommended that such an important revenue source is determined after the Bill has passed and the matter of royalty levels can become a matter of political manipulation. EY comment This provision, which defers the setting of royalty, fees and rental rates to the enactment of Regulation by the Minister of Petroleum Resouces, along with the fact that the PIB proposes the repeal g^ l`] <]]h G^^k`gj] Yf\ AfdYf\ :Yka[ Hjg\m[lagf K`Yjaf_ 9[l introduces a high degree of uncertainty, which apart from being open to abuse may also affect investment decisions as investors are unable to plan accurately. Section 200 (4)(a). ;jgkk%j]^]j]f[] lg KmZk][lagf )! ak af ]jjgj and should be Subsection (3).
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Part IV Downstream licensing

General comments
Part IV is a very broad procedural part that permits licensing with any type of conditions attached for any downstream project. Part IV also permits any type of corresponding regulations to be made. In general the procedures are simpler than those proposed in the Government Memorandum. This is an advantage. However, it is unclear what process the Agency would follow to approve and grant a license for a project or what type of license is required for what type of activity. For instance, if an investor would want to invest in a gas project afngdnaf_ _Yk hah]daf]k ^jge k]n]jYd _Yk ]d\k$ Y _Yk hjg[]kkaf_ facility and gas pipelines to one or more power plants, what would such an investor do? How would such a project be approved? There is no clear policy structure in Part IV, despite the detailed procedural provisions.
Section 224 (4). Contract tariffs adopted. The addition of this kmZk][lagf oadd eYc] al hgkkaZd] lg Y\ghl [gfljY[l]\ hja[]k Yk tariffs. Again this opens the door widely to the reduction of the value of oil and gas at the measurement point and could [j]Yl] Y ka_fa[Yfl gZklY[d] ^gj keYdd]j [gehYfa]k lg ]fl]j l`] Fa_]jaYf eYjc]l& Section 232. Arms length relationship between producer and pipeline transporter removed. The concept that a pipeline transporter should have an arms length relationship with producers was removed in the PIB 2012. Section 256. Transitional gas pricing. The PIB 2012 sets out the possibility for transitional gas pricing arrangements. This hjgna\]k Y egj] ]paZd] YhhjgY[` l`Yf l`] afalaYd hja[] j]_mdYlagf contemplated in the Government Memorandum. Section 261. Public service levy. This section creates the possibility for a public service levy. K][lagf *.1& <ge]kla[ kmhhdq gZda_Ylagf eY\] d]kk kh][a[& L`] \ge]kla[ kmhhdq gZda_Ylagf ak eY\] d]kk kh][a[$ Yf\ afalaYd _Yk eYjc]l hja[]k Yj] fgl k]l af l`] HA: *()*& L`]k] hjgnakagfk have now been replaced by the new section 256. Also the concept of the domestic gas aggregator was removed. This is a positive step. The domestic gas aggregator was in fact an oligopolistic structure that could have hampered the development g^ [geh]lalan] _Yk eYjc]lk& Làk e]Yfk l`Yl l`] afljg\m[lagf g^ gas for domestic consumption in Nigeria will now largely depend on the pricing structure developed under section 256. However, al ak dac]dq l`Yl al oadd lYc] [gfka\]jYZd] lae] ^gj Y ^mddq [geh]lalan] eYjc]l lg ]e]j_]& >gj làk j]Ykgf Fa_]jaYf [gfkme]jk ogmd\ Z] better protected if the PIB 2012 contained as a minimum an initial \]f]\ _Yk hja[af_ kqkl]e& EY comment We agree that it is desirable to have a minimum gas pricing system. This creates certainty and will aid the development of a competitive domestic gas market, which will encourage investment in the sector.
Part V Downstream petroleum

Section 222. Open access severely limited. L`] gh]f% access provisions apply only to current downstream facilities, apparently not future facilities. Also open access does not apply to gas processing facilities. At the same time the PIB 2012 \g]k fgl [gflYaf Yf gh]f%Y[[]kk hjgnakagf ^gj hah]daf]k hjagj to the measurement point and therefore part of the upstream operations. As a result small producers will have very severe \a^[mdla]k _]llaf_ Y[[]kk lg ljYfkhgjlYlagf Yf\ hjg[]kkaf_ facilities. Section 224 (1). No tariffs for gas processing. The PIB 2012 does not include the power to set tariffs for gas processing. Làk eYc]k al n]jq \a^[mdl lg k]l l`] ^Yaj eYjc]l nYdm] ^gj natural gas for royalty and Nigerian Hydrocarbon Tax purposes, since gas processing costs would typically be a deduction for determining the value of gas at the measurement point. In hYjla[mdYj ^gj daim]]\ fYlmjYd _Yk DF?! ]phgjlk$ _Yk lqha[Yddq `Yk lg Z] hjg[]kk]\ jkl Z]^gj] Z]af_ \]dan]j]\ lg Yf DF? ^Y[adalq for liquefaction. This means where petroleum companies own both gas production and gas processing facilities, excessive _Yk hjg[]kkaf_ ^]]k [gmd\ j]\m[] ka_fa[Yfldq l`] nYdm] g^ l`] produced gas and therefore reduce royalties and taxes.
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Section 271. Franchise areas set for gas processing. This section permits the development of gas processing franchise Yj]Yk& Q]l$ Yk oYk af\a[Yl]\ ]Yjda]j$ l`]j] Yj] fg gh]f%Y[[]kk provisions for gas processing. Also gas processing tariffs are not set. The creation of gas processing franchise areas, without open Y[[]kk Yf\ lYja^^ hjgnakagfk$ eYq j]kmdl af ka_fa[Yfl eakmk] g^ this monopoly power. It would prevent smaller producers from ]fl]jaf_ l`] _Yk eYjc]l gf l`] ZYkak g^ l`] [gfkljm[lagf g^ l`]aj own gas processing facilities. Section 272 (1)(b)(ii). Penalties for failure to supply the domestic market made very weak. The PIB 2012 no longer af[dm\]k kljgf_ Yf\ kh][a[ h]fYdla]k ^gj ^Yadaf_ lg kmhhdq l`] \ge]kla[ eYjc]l& Af ^Y[l Y hYjY_jYh` ak fgo af[dm\]\ l`Yl klYl]k that as long as the supplier has made reasonable commercial ]f\]Yngjk lg eYc] _Yk YnYadYZd]$ h]fYdla]k oadd fgl Yhhdq& Làk hYjY_jYh` oadd _]l ]n]jqgf] g^^ l`] `ggc& Sections 275282. Effective provisions to prevent routine gas Yjaf_& The PIB 2012 now includes effective provisions to prevent jgmlaf] _Yk Yjaf_& EY Comment This is a good development and will encourage gas gathering hjgb][lk$ hYjla[mdYjdq oal` l`] _Yk k[Yd af[]flan]k mf\]j k][lagf 39 of the Companies Income Tax, which includes a tax-free period, investment allowance of 35%, and an accelerated capital allowance of 90% in year one. These incentives have been extended to LNG projects for export, as provided for under section 353(8) of the PIB.
h]ljgd]me j]k]jn]k& 9dkg$ l`] Fa_]jaYf Gad Yf\ ?Yk Af\mkljq Content Development Act of 2010, which is referred to under the PIB, gives preference to Nigerian companies in the award of oil blocks. Nigerian companies are also given preferential technical allowable output under the license or lease where such companies are producing below 25,000 bpd, in which case the Federal Government is obliged not to exercise the right of participation in such operations.
Part VII Health, safety and environment

The provisions of this Part have remained similar to the Government Memorandum, with the exception of subsection 293(2). 293(2). Companies not responsible for environmental damage as a result of sabotage. The v 2012 now includes a provision whereby companies will not be responsible for environmental damage in the case of acts of sabotage or tampering with equipment. 298. Penalties and sanctions. A new, good section was added l`Yl h]jealk l`] Afkh][lgjYl] Yf\ 9_]f[q lg eYc] [gehYfa]k liable to sanctions and to levy penalties. EY comment In addition to the above provisions, licensee, lessees and contractors are obliged to do the following: (a) Support a precautionary approach to environmental challenges (b) Encourage the development and use of environmentally friendly technologies for exploration and development in Nigeria (c) Comply with the relevant requirement of environmental guidelines and standards approved for the petroleum industry in Nigeria (d) Companies are also required to utilize good oil field practices and to restore the environment
Part VI Indigenous petroleum companies

The provisions of this part with respect to indigenous petroleum companies have remained similar compared to the Government Memorandum. EY comment However, the Minister is empowered under section 287 of the PIB to make regulations to enable the increase of indigenous
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Part VIII Provisions on taxation in the petroleum industry

General Comments
Contrary to the Government Memorandum and the House Bill 159, Part VIII no longer contains provisions related to rentals, royalties and production sharing. Part III now includes broad powers to determine rentals and royalties through regulations. Since no mention is made with respect to production sharing provisions it is understood that these provisions in contracts will j]eYaf mfYdl]j]\& 9dkg k[Yd j]n]fm] eYfY_]e]fl hjgnakagfk were deleted. EY comment Companies Income Tax (CIT tax rate of 30%) will be levied in addition to the Nigerian Hydrocarbon Tax (NHT tax rate of 50% for onshore and shallow-water projects and 25% for deepwater projects) resulting in the overall tax rate of 80% for onshore and shallow-water projects and 55% for deepwater projects. The absence of detailed provisions on production-sharing contracts under the draft PIB creates a gap, particularly with respect to several production-sharing contracts signed at different times by the Nigeria National Petroleum Company with contractors. 9dkg$ l`] hdYff]\ j]h]Yd g^ l`] <]]h G^^k`gj] Yf\ AfdYf\ :Ykaf Production Sharing Act creates further uncertainty with respect to applicable rental and royalty rates for the PSC. Stealing of oil. L`] dY[c g^ f]o jgqYdlq hjgnakagfk `Yk Y ka_fa[Yfl implication with respect to the measurement of petroleum production. Under the Government Memorandum it was proposed to adopt the international practice of measuring oil and gas hjg\m[lagf Yl l`] e]Ykmj]e]fl hgafl af l`] ]d\$ \aj][ldq o`]j] gad Yf\ _Yk d]Yn]k l`] ]d\ Yj]Y& Làk oYk af [gfljYkl lg l`] existing practice of measuring at a point downstream where oil or gas is delivered or sold. The reason for the tougher measurement point provisions in the Government Memorandum was to stop the practice of stealing or diverting oil or gas before it is measured. The PIB 2012 will continue the existing practices. This means that it will remain possible to steal or divert oil or gas before it is measured. This will continue to result in losses to the Nigerian ][gfgeq Yf\ oadd [gflafm] lg Z]f]l l`gk] afngdn]\ af l`]k] practices.
Relative revenue loss in case of price increases. Another ka_fa[Yfl dgkk lg Fa_]jaY ak l`] ^Y[l l`Yl Zgl` l`] ?gn]jfe]fl Memorandum and House Bill 159 contained royalty provisions related to the increases in oil and gas prices. A special additional jgqYdlq oYk [da[caf_ af mf\]j à_` gad gj _Yk hja[]k& >gj afklYf[]$ a^ Yk Y j]kmdl g^ ka_fa[Yfl hgdala[Yd lmjegad af l`] ogjd\$ gad hja[]k would increase to $200 per barrel, under the previous proposals Nigeria would receive an extra royalty on oil. A^ DF? ]phgjl [gfljY[lk ogmd\ Z] [gf[dm\]\ l`Yl mf\]j []jlYaf [gf\alagfk g^ l`] ogjd\ _Yk eYjc]l ogmd\ j]kmdl af f]lZY[ck g^ $10 per MMBtu or more Nigeria would automatically receive extra royalties on gas. Under the PIB 2012 such extra royalties do not exist and therefore oil and gas companies may earn a windfall if oil and gas prices would increase to high levels. It will now depend on regulations whether such features will be reintroduced. The deletion of the price progressive royalties contradicts the klYl]\ gZb][lan] g^ l`] :add af K][lagf ) \!$ oà[` kh][a[Yddq [Yddk ^gj [j]Ylaf_ Y hjg_j]kkan] k[Yd kqkl]e& LNG export pricing. Under current attractive export conditions lg BYhYf Yf\ =Ykl 9kaY$ l`] hja[] g^ DF? Yl l`] ]phgjl hgafl af Nigeria would be relatively high. The Government Memorandum included detailed provisions to ensure that Nigeria would receive ^Yaj eYjc]l nYdm] ^gj DF? Yl l`] ]phgjl hgafl& L`]k] hjgnakagfk have been deleted from the PIB 2012. The Bill now therefore d]Yn]k l`] \ggj oa\] gh]f ^gj ka_fa[Yfl ljYfk^]j hja[af_ g^ _Yk$ resulting in potentially very large losses to the Nigerian petroleum revenues. Very favorable 1993 PSCs maintained, while 2005 PSCs are not improved for investors. The terms and conditions of the 1993 series of deepwater PSCs were excessively favorable for investors. These terms are now being maintained under PIB 2012. From an international perspective the terms of the 2000 series of deepwater PSCs were acceptable, and no change in overall burden on existing production is required. The terms for the 2005 series of deepwater PSCs are too tough to stimulate active investment and therefore better terms should be established for such PSCs.
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Electronic Management Information Systems deleted. The Government Memorandum provided for the requirement for companies to establish electronic management information kqkl]ek [gflYafaf_ Ydd k[Yd Yf\ fgf%k[Yd \YlY lg oà[` _gn]jfe]fl g^[aYdk afngdn]\ af j]n]fm] [gdd][lagf$ Ym\alaf_ Yf\ kmh]jnakagf [gmd\ dafc mh lg af j]Yd lae]& Làk ogmd\ `Yn] ka_fa[Yfldq aehjgn]\ l`] ljYfkhYj]f[q g^ l`] j]n]fm] [gdd][lagf and would have improved the ability of the Ministry of Finance to carry out revenue collection forecasting. The PIB 2012 deletes this requirement.
Kh][a[ [gee]flk gf l`] Fa_]jaYf Hydrocarbon Tax

@]j] Yj] kge] kh][a[ [gee]flk gf l`] Fa_]jaYf @q\jg[YjZgf Tax (NHT). Section 304 (1) (a). Door wide open for transfer pricing. This subsection establishes that the NHT will be determined based on the proceeds from sales of oil, gas, condensates or bitumen. This leaves the door open in principle for transfer pricing Zq ]phgjlaf_ [jm\] gad Yf\ Yjla[aYddq dgo hja[]k& KmZk]im]fldq$ Section 315 builds in some protection for the valuation of crude gad Yf\ [gf\]fkYl]k$ Ydl`gm_` jYl`]j o]Ycdq$ kaf[] l`] k]ddaf_ hja[] `Yk lg `Yn] Y j]YkgfYZd] j]dYlagfkàh oal` l`] g^[aYd k]ddaf_ hja[]$ jYl`]j l`Yf Z]af_ ]imYd lg l`] g^[aYd k]ddaf_ hja[]& Fg km[` hjgl][lagf ak Zmadl af ^gj DF? ]phgjlk& L`]j]^gj]$ l`] HA: *()* d]Yn]k l`] \ggj oa\] gh]f ^gj ]phgjl g^ fYlmjYd _Yk Yl Yjla[aYddq low prices. Section 305 (1)(g). Favorable interest deductions. This subsection essentially permits any deductions for interest on loans as long as it is incurred for upstream capital expenditures. There is fg e]flagf g^ Yfq j]imaj]e]fl ^gj ^Yaj eYjc]l jYl]k g^ afl]j]kl gf an arms length basis. Section 312 (2) Fourth Schedule Table 1 Not necessary. The Fourth Schedule eliminates the Petroleum Investment Allowance. Nevertheless Table I is maintained. This Table should have been deleted, since maintaining it may create tax implementation problems as a result of the confusion it is creating.
Section 312 (2) Fourth Schedule Table II Excessive Allowances will reduce the Nigerian Hydrocarbon Tax to zero. The Fourth Schedule was retained with some improvements from the PPT Act. Nevertheless, Table II was changed dramatically. Under the PPT Act companies were permitted allowances equal to 99% of the value of the capital assets, based on a 20% straight daf] ^gj n] q]Yjk& Làk oYk Y j]_mdYj Yf\ fgjeYd hjg[]\mj]& LYZd] AA g^ l`] HA: *()* ]pl]f\k l`] YddgoYf[]k af\]fal]dq ^gj q]Yj six and after. This means that, for instance, the total allowances gf Yf Ykk]l oal` Y *(%q]Yj da^] ogmd\ Z] +,. g^ l`] afalaYd nYdm] g^ l`] Ykk]l& Oal` km[` ]fgjegmk YddgoYf[]k al ak dac]dq l`Yl l`] Nigerian Hydrocarbon Tax will in effect be reduced to zero. These allowances are not constrained by Provision 6(2) of the Fourth K[`]\md]$ oà[` j]imaj]k lg j]lYaf ) g^ l`] Ykk]l af l`] Zggck ^gj Y[[gmflaf_ hmjhgk]k fgl ^gj lYp hmjhgk]k!& L`] kh][a[ mention of year six and after clearly establishes this. This change is either an error in the Table or a very large giveaway of government revenues. EY comment We believe that the reference to six years and after in Table II is an error as this would in effect exceed the maximum 100% capital allowance for tax, which is the practice under the H]ljgd]me Hjgl LYp 9[l& Al ak kmZeall]\ l`Yl ^gj l`] [gehmlYlagf of NHT, the principle would be to achieve 99% capital allowance on Y kljYa_`l%daf] ZYkak gn]j Y n]%q]Yj h]jag\$ oal` ) j]lYaf]\ Ykk]l value. However, we completely subscribe to van Meurs opinion that more certainty is required and the reference to six years and after in the Table needs to be deleted, as this can result in several interpretations and tax treatment of qualifying capital expenditures on the asset value. Section 312 (2) Fifth Schedule Giveaway on production YddgoYf[]k ^gj ]paklaf_ ]d\k& The Fifth Schedule seems to adopt the production allowances approximately as provided for under the Government Memorandum or House Bill 159. Nevertheless, there is an important difference with respect to the application. Under the Government Memorandum the production allowances applied only to petroleum mining leases that started production after the enactment of the Act. The purpose was to encourage new production. The production allowances were meant to replace
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the existing investment tax allowances. This was, for instance, clearly provided for under Subsection 353(8) of the Government E]egjYf\me& Làk kh][a[ kmZk][lagf oYk j]egn]\ ^jge l`] Fifth Schedule (in fact, interestingly the numbering was not even adjusted Subsection 9 is missing in PIB 2012). This means that the production allowances now apply to all leases. Producers of existing production will now be able to double dip and claim the production allowances, in addition to the investment tax allowances already claimed prior to the promulgation of the Act. Section 312 (2) Fifth Schedule (3) This section provides for an allowance for tax purposes of the lower of $1 per MMBtu and 100% of the value of dry gas. Yet all costs still j]eYaf \]\m[laZd]& Làk e]Yfk Zq \]falagf l`Yl l`] Fa_]jaYf Hydrocarbon Tax on dry gas under a gas price of $1 per MMBtu oadd YdoYqk Z] kljgf_dq f]_Ylan]$ oà[` j]kmdlk af Y ka_fa[Yfl lYp loss. This is not a sensible tax practice. Section 312 (2) Fifth Schedule (1) (i) Confusion on Production Sharing Contracts. A general production allowance Yhhda]k lg [gehYfa]k oal` hjg\m[lagf%k`Yjaf_ [gfljY[lk oal` FFH; l`Yl Yj] fgl Z]f]laf_ ^jge Afn]kle]fl LYp ;j]\al gj Investment Tax Allowance. It seems contrary to legal principles l`Yl [gehYfa]k ogmd\ [gflafm] lg Z]f]l ^jge l`] Afn]kle]fl LYp Credit and Investment Tax Allowance when the PPT Act has been repealed. Section 312 (2) Fifth Schedule (1) (ii) Joint venture companies with NNPC not entitled to the production allowance. It seems puzzling that companies in joint venture with FFH; ogmd\ fgl Z] YZd] lg Z]f]l ^jge l`] hjg\m[lagf YddgoYf[]k for new petroleum mining leases. This is contrary to the concept ]klYZdak`]\ af l`] ?gn]jfe]fl E]egjYf\me l`Yl f]o ]d\ production should be encouraged in Nigeria, regardless of who afn]klk af km[` f]o ]d\k& Roles of National Oil Company and Government Agencies as well as some other provisions deleted. Under the Government E]egjYf\me ka_fa[Yfl j]khgfkaZadala]k o]j] Ykka_f]\ lg l`] National Oil Company and Government Agencies to provide ZY[c_jgmf\ af^gjeYlagf lg l`] K]jna[] lg eYc] l`] lYp assessment of the Service more effective. These provisions have been deleted from PIB 2012. Furthermore, some other provisions
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that enhance the power of the Service to effectively collect tax, such as the power to distrain, were deleted. Section 344. Penalty for failure to pay tax reduced to afka_fa[Yfl Yegmflk& The penalty for failure to pay tax was 200% of the tax not paid plus interest under the PPT Act and subsequent Government Memorandum. This has been reduced to Yf afka_fa[Yfl Yegmfl g^ )( h]j[]fl hdmk afl]j]kl& :Yk]\ gf km[` low penalty amounts it seems that it could be advantageous to simply not pay tax, since the rate of return on the tax amount not paid and retained may be higher than the penalty plus interest. In other words it pays not to pay tax.
EY comment O] à_`da_`l l`] k[Yd af[]flan]k mf\]j K][lagf +1 g^ l`] Companies Income tax Act (CITA) being extended to companies engaged in export gas operations with respect to LNG, as well as to companies engaged in downstream gas distribution, gas extraction facilities and companies operating downstream crude oil hjg[]kkaf_ ^Y[adala]k km[` Yk j]f]ja]k& L`]k] af[dm\]2 (a) An initial tax-free period of three years that may, subject to the satisfactory performance of the business, be renewed for an additional two years (b) As an alternative to the initial tax-free period granted under paragraph (a) of this subsection, an additional investment allowance of 35% which shall not reduce the value of the asset, so however that a company that claims the incentive provided under this paragraph shall not also claim the incentive provided under paragraph (c)(ii) of this subsection (c) Accelerated capital allowances after the tax-free period, as follows: this is (i) an annual allowance of 90% with 10% retention, for investment in plants and machinery and (ii) an additional investment allowance of 15% that shall not reduce the value of the asset (d) Tax-free dividend during the tax-free period, where the investment for the business was in foreign currency, or the introduction of imported plant and machinery during the period was not less than 30% of the equity share capital of the company (e) Interest payable on any loan obtained with the prior approval of the Minister for a gas project shall be deductible
Kh][a[ [gee]flk gf l`] ;gehYfa]k Af[ge] LYp

Section on Companies Income Tax not numbered. Part B of Part VIII relating to the Companies Income Tax follows Section 353 but is not numbered. The subsections are numbered. Subsection (1). Nigerian Hydrocarbon tax not deductible. Subsection 1 maintains the provisions of the Government Memorandum and House Bill 159 that made the Nigerian Hydrocarbon Tax not deductible for Companies Income Tax purposes. This provision strengthens the government revenues from the two taxes. KmZk][lagf 0! Y!& =pl]fkagf g^ K][lagf +1 Z]f]lk ^gj DF? projects is reasonable. Under the Government Memorandum l`] Z]f]lk mf\]j K][lagf +1 ^gj DF? o]j] daeal]\ lg [gehYfa]k [geeallaf_ lg DF? hjgb][l hjagj lg +) <][]eZ]j *())& Subsection (8) does not provide such restriction. Given the delay af l`] HA: Yf\ l`] af[j]Yk]\ [geh]lalan]f]kk g^ l`] ogjd\ DF? eYjc]lk$ làk Y\bmkle]fl ak j]YkgfYZd]&
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Subsection (8)(b). Extraction is imprecise. The word extraction is imprecise and could lead to confusion with exploitation. It would be better to use the word processing. Subsection (9). Incentives for upstream operations not f][]kkYjq Yf\ [gmd\ [j]Yl] ka_fa[Yfl lYp dgkk]k gf gad revenues. It is not necessary to provide tax incentives for mhklj]Ye hjg\m[]jk l`Yl hjg\m[] _Yk ^gj l`] \ge]kla[ eYjc]l& Egkl _Yk kgd\ af l`] \ge]kla[ eYjc]l Zq mhklj]Ye hjg\m[]jk oadd be associated gas, which is produced together with crude oil or [gf\]fkYl]k& Hjgna\af_ ka_fa[Yfl [gjhgjYl] af[ge] lYp af[]flan]k for the production of crude oil and condensates for companies l`Yl \]dan]j _Yk gfdq lg l`] \ge]kla[ eYjc]l [gmd\ j]kmdl af n]jq ka_fa[Yfl [gjhgjYl] af[ge] lYp dgkk]k&
Part IX Repeals, transitional and savings provisions

This part now also includes what used to be Part X under the House Bill 159 and the Government Memorandum related to interpretation. Section 354. PIB 2012 does not repeal a number of Acts. The list of Acts repealed under the PIB 2012 is shorter than under the House Bill 159 and the Government Memorandum. A legal analysis is required to determine the implications of this. Section 362. Interpretation. The definitions of upstream and downstream are rather confusing. Upstream now includes pipelines from the fields to refineries or export points. These are typically not considered part of the upstream. The large upstream transportation systems are not regulated under Part III. No open access or tariff provisions apply to these systems. In principle the Inspectorate has the power to impose such provisions, but without guidance in the Act, this may be a difficult concept to implement. As a result it may be difficult for small companies to have access to these systems. The Interpretation section contains various errors, and concepts are defined that are not used in the Bill. For instance production allowances refers to Schedule Three rather than to Schedule Five. The concept of a Domestic Gas Aggregator is not used in the Bill.
21
Annex B
:][Ymk] l`] da[]fk]k$ d]Yk]k Yf\ HK;k mf\]j l`] HA: `Yn] mf[d]Yj l]jek$ o] Ykc]\ Dr. Pedro van Meurs to evaluate the Bills economic impact using current royalty and hjg\m[lagf k`Yjaf_ l]jek& Làk ak àk _gn]jfe]fl lYc] Yf\ hjgâlYZadalq YfYdqkak&
Fiscal analysis of the bill

Following is an economic analysis for Gfk`gj] Yf\ k`Yddgo oYl]j d]Yk]k$ Yf\ <]]hoYl]j HK;k The analysis is done for the leases and production sharing contracts under existing production.
22
Government Take analysis

Onshore
For the onshore it is assumed that the royalties will remain unchanged. Of course, if royalties would be lowered, the revenue losses to Nigeria would be higher than estimated in this Annex B. The onshore evaluation is based on two cases: ;Yk] ) Ykkme]k l`Yl l`] >gmjl` K[`]\md] ak af\]]\ af ]jjgj& ;Yk] * Ykkme]k l`Yl l`] >gmjl` K[`]\md] ak af\]]\ e]Yfl Yk Y perpetual uplift for the investor. Furthermore, the cases with and without NNPC participation are being evaluated for existing production. Chart 1 illustrates the case of leases in which NNPC does not hYjla[ahYl]& 9k [Yf Z] k]]f ^jge [`Yjl l`] ;Yk] * afl]jhj]lYlagf ogmd\ j]kmdl af jYl`]j ka_fa[Yfl _gn]jfe]fl j]n]fm] dgkk]k& >gj l`] Yn]jY_] ]d\ kar] l`] dgkk]k ogmd\ Z] Yk em[` Yk **& However, it should be noted that in reality the losses would be more since most companies will be able to double dip. They eYq `Yn] Z]]f YZd] lg lYc] l`] - mhda^l Ydj]Y\q$ Yf\ oal` l`] afljg\m[lagf g^ l`] HA: *()* l`]q ogmd\ Z] YZd] lg lYc] l`] production allowances also. Chart 1. Government Take of Nigerian PIB for onshore leases in which NNPC does not participate
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 5 10 20 50 100 200 500 Onshore oil eld sizes (million barrels) Current Case #1 Case #2
Chart 2 illustrates the case of leases in which NNPC would participate. Such leases would not be subject to production YddgoYf[]k& L`]j]^gj] mf\]j ;Yk] ) l`]j] ogmd\ Z] fg ka_fa[Yfl change in economics. However, also in this case if the Fourth Schedule indeed represents an uplift, the losses would be 6% for l`] Yn]jY_] ]d\ kar]& 9_Yaf Y[lmYd dgkk]k eYq Z] egj] o`]j] [gehYfa]k \gmZd] \ah Zq `Ynaf_ Ydj]Y\q lYc]f l`] - mhda^l Yf\ ogmd\ fgo Z] YZd] lg lYc] l`] h]jh]lmYd mhda^l& Chart 2. Government Take of Nigeria PIB for onshore leases in which NNPC participates
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 5 10 20 50 100 200 500 Onshore eld sizes (million barrels) Current Case #1 Case #2
A loss of revenues on existing production is not in the interest of Nigeria. It should be noted that production from new mining leases should be stimulated with better terms since a higher d]n]d g^ hjg\m[lagf ogmd\ Z] Z]f][aYd ^gj Fa_]jaY&
Government Take (%) (real)
Shallow water
The results for shallow water will be very similar to the onshore results. Only the royalties are somewhat less.
Deepwater
In deepwater there are three different types of PSCs. The year 2000 type was used to analyze the Current Terms. These PSCs are competitive from an international perspective.
Government take (%) (real)
23
Many issues would affect the revenues in the PIB 2012. Here are the cases as a result of interpretation issues with PIB 2012. KlYjlaf_ oal` ;Yk] *$ al ak Ykkme]\ l`Yl l`] ]^^][lk g^ ]Y[` f]pl case are cumulative. The cases are: ;Yk] ) Ykkme]k l`Yl l`] >gmjl` K[`]\md] ak Yf ]jjgj& ;Yk] * Ykkme]k l`Yl l`] >gmjl` K[`]\md] ak af\]]\ e]Yfl lg be a perpetual uplift. ;Yk] + Ykkme]k l`Yl oal` l`] j]h]Yd g^ l`] <]]h G^^k`gj] Yf\ Inland Basin Production Sharing Act will indeed result in the loss of royalties. ;Yk] , Ykkme]k l`Yl FFH; oadd Z] hjanYlar]\ Yf\ l`Yl fg arrangements will be made to transfer the production sharing profit oil revenues to Nigeria from NNPC to Nigeria. In other words it is assumed that the privatized NNPC can retain these profit oil shares and will pay corporate income tax and hydrocarbon tax on its income. It should be noted that the dividend policy would not be determined by a Board in which private investors participate. It is assumed that dividends will be retained. If Nigeria is to achieve the goal of a Petrobras style national oil company, profits would have to be reinvested rather than paid as dividends for a very long period. ;Yk] - Ykkme]k l`Yl l`] ;gYklYd KlYl]k oadd j][]an] )( g^ the profits and that these amounts will be credited against the revenues to the Federal Government. As can be seen the revenue losses to Nigeria based on the [memdYlan] j]kmdlk g^ ;Yk]k *$ +$ , Yf\ - ak -( ^gj l`] Yn]jY_] ]d\ kar] Yf\ egj] ^gj l`] HK;k oal` dYj_]j ]d\k& Chart 3. Government Take of Nigeria PIB for deepwater PSCs
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 50 100 200 500 1,000 2,000 Deepwater eld sizes (million barrels) Case #1 Case #2 Case #3 Case #4 5,000 Case #5
Again it should be noted that actual revenue losses may be more where companies will be able to double dip by having been able to lYc] l`]] -( mhda^lk hjagj lg l`] hjgemd_Ylagf g^ l`] HA: *()* and subsequently still receive the production allowances and the perpetual uplift. Also for the deepwater PSCs a loss of revenues from existing production is not in the interest of Nigeria. Only production from new mining leases should be stimulated with more favorable terms. Also the terms of the 1993 series of PSCs should be improved for government, while the 2005 series of PSCs should be improved for investors.
HjglYZadalq YfYdqkak
The following Charts 4, 5 and 6 provide the IRR analysis of the kYe] [Yk]k Yk ^gj l`] _gn]jfe]fl lYc] YfYdqkak& Charts 4 and 5 illustrates how current terms for the onshore [j]Yl] mf][gfgea[ [gf\alagfk ^gj keYdd ]d\k oà[` Yj] egj] costly than $20 per barrel (capital and operating costs). Chart 4 illustrates how the proposed production allowances would [j]Yl] Y ka_fa[Yfl aehjgn]e]fl af ][gfgea[k& L`]j]^gj]$ làk system is an important and required stimulus for new production ^jge keYdd à_`%[gkl gfk`gj] ]d\k& L`] ]p[]kkan] \]hj][aYlagf hjgnakagfk ogmd\ eYc] l`] AJJ kge]o`Yl egj] YlljY[lan]& @go]n]j$ kaf[] l`] Z]f]l ak dYl] af l`] da^] g^ l`] ]d\$ l`] _Yaf af IRR is modest. Chart 4. IRR of Nigerian PIB for onshore leases in which NNPC does not participate
50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 5 $45 10 $36 20 $28
50 $20
Government Take
IRR (%) (real)
100 $15
200 $10
500 $6
Field sizes (million barrels) and costs ($/bbl) Current Case #1 Case #2
Current-2000PSC
24
Chart 5 illustrates how not applying the production allowances to bgafl n]flmj]k oal` FFH; ogmd\ d]Yn] l`] keYdd à_`%[gkl ]d\k af these leases uneconomic and therefore undeveloped. Chart 5. IRR of Nigeria PIB for onshore leases in which NNPC does not participate
50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 5 $45 10 $36 20 $28 50 $20 100 $15 200 $10 500 $6
IRR (%) (real)
Field sizes (million barrels) and costs ($/bbl) Current Case #1 Case #2
Chart 6 illustrates how under current terms of the year 2000 k]ja]k g^ HK;k keYdd gad ]d\k Yj] mf][gfgea[ Yk Y jkl ]d\ af the contract area if costs are higher than about $23 per barrel (capital and operating costs). The production allowances ;Yk] )! Yf\ dgo]j lYp]k ogmd\ ka_fa[Yfldq aehjgn] l`] economics. Fields costing $31 per barrel are economic under these terms. This would be a welcome and adequate stimulus if applied to new production. 9k [Yf Z] ]ph][l]\ ][gfgea[k aehjgn] ^mjl`]j oal` ;Yk]k *$ + Yf\ ,& ;Yk]k , Yf\ - ogmd\ j]kmdl af l`] kYe] ][gfgea[k Z][Ymk] l`] hjgl k`Yj] lg l`] ;gYklYd KlYl]k ogmd\ Z] [j]\alYZd] against other government payments. Chart 6. IRR of Nigeria PIB for deepwater PSCs
50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 50 $45 100 $36 200 500 1,000 2,000 $31 $25 $21 $17 Field sizes (million barrels) and costs ($/bbl) Case #1 Case #2 Case #3 Case #4 5,000 $13 Case #5
IRR (%) (real)
Current-2000PSC
27 September 2012 (EA comments)
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How Ernst & Young can help

Our dedication to oil and gas
L`] H]ljgd]me Af\mkljq :add HA:! ak Y ka_fa[Yfl j]^gje afalaYlan] of the Nigerian Government with the objective of creating a conducive business environment for petroleum operations. The recent draft PIB submitted by the President to the FYlagfYd 9kk]eZdq k]]ck lg ]klYZdak` [gee]j[aYddq gja]fl]\ Yf\ hjgl%\jan]f gad Yf\ _Yk ]flala]k Yf\ Y hjg_j]kkan] k[Yd ^jYe]ogjc l`Yl ]f[gmjY_]k ^mjl`]j afn]kle]fl af l`] k][lgj$ while optimizing revenues accruing to the Nigerian Government. We can help you operate in this changing business environment. Ernst & Youngs Global Oil & Gas Center has more than 9,000 oil and gas professionals in over 100 countries. Ernst & Young Africa has a presence in 33 countries and provides support in the remaining African continent. In addition, we can provide kmhhgjl ^jge gmj Dgf\gf 9^ja[Y <]kc Yf\ HYjak 9^ja[Yf ;]fl]j& Gmj f]logjc l`jgm_`gml l`] j]_agf `]dhk ]fkmj] l`Yl o] Yj] responsive to the needs of our clients. Ernst & Youngs integration across Africa means our clients Z]f]l ^jge2 Consistent quality standards everywhere Utilization of a single point of contact service The right Ernst & Young resource irrespective of country location O] \jYo mhgf gmj _dgZYd Yf\ dg[Yd cfgod]\_] lg `]dh qgm j]lYaf l`] [gf\]f[] g^ afn]klgjk$ eYfY_] qgmj jakc$ klj]f_l`]f qgmj controls, grasp opportunities and achieve your potential.
We understand your business

Our oil and gas professionals are organized within four service daf]k2 YkkmjYf[]$ lYp$ ljYfkY[lagfk Yf\ Y\nakgjq& Ogjcaf_ af conjunction with local Ernst & Young staff, they bring broad and deep oil and gas industry experience to the table and offer extensive experience with the major industry players, including national oil companies. Our experience and services offerings particularly relevant to the oil and gas sector include: Assurance services: KlYlmlgjq Ym\al Afl]jfYd Ym\al KmklYafYZadalq Ym\al >A<K Tax services: <ge]kla[ lYp [gehdaYf[] Afl]jfYlagfYd lYp'ljYfk^]j hja[af_ LYp hdYffaf_ @meYf [YhalYd Transaction services: LjYfkY[lagf \m] \ada_]f[]'kmhhgjl LjYfkY[lagf lYp ;YhalYd ljYfk^gjeYlagf af[dm\af_ nYdmYlagf$ j]kljm[lmjaf_$ merger integration) Advisory services: Jakc Y\nakgjq Kmhhdq [`Yaf KmklYafYZadalq
26
Our presence in Africa
Tunisia
Eg jg [[ g
9d_]jaY
O]kl]jf Sahara ;Yh] N]j\] K]f]_Yd L`] ?YeZaY ?maf]Y Bissau ?maf]Y Ka]jjY D]gf] DaZ]jaY Cl] \dngaj] Mauritania Mali
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Fa_]j Chad
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Ethiopia ;]fljYd 9^ja[Yf South Sudan J]hmZda[ Uganda ;Ye]jggf Togo <]eg[jYla[ =imYlgjaYd ?maf]Y C]fqY J]hmZda[ g^ Congo KYg Lge] Gabon Rwanda Congo Tanzania Burundi :]faf Angola
Ghana
Fa_]jaY
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=jfkl Qgmf_ g^[] Fg =jfkl Qgmf_ g^[]$ Zml kmhhgjl YnYadYZd]
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27
Contacts
Elias Pungong
Africa Oil & Gas Sector Leader T: +237 7524 3172 =2 ]daYk&hmf_gf_8[e&]q&[ge
Ernst & Young

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*()* =Q?E Daeal]\& All Rights Reserved. EYG no. DW0186

This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. F]al`]j =Q?E Daeal]\ fgj Yfq gl`]j e]eZ]j g^ l`] _dgZYd Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor. The opinions of third parties set out in this publication are not necessarily the opinions of the global Ernst & Young organization or its member firms. Moreover, they should be viewed in the context of the time they were expressed.
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How Ernst & Young can help..................................................................................................................... 26