Poor negotiation skills and a lack of supervision that encourage corruption have resulted in the loss of huge sums of revenue to international oil and gas companies (IOCs). Contracts negotiated and legislations put in place to govern the agreements between Nigeria and international partners, put the country at a disadvantage.
Incentives such as a 10-year tax holidays and 90 percent capital allowance after the tax holidays has meant that the Nigeria Liquified Natural Gas Limited (NLNG) has not been in a tax paying position until this year.
According to Ngozi Okonjo-Iweala, the minister for finance and coordinating minister for the economy, “The effect of a ten-year holiday and capital allowance always results in an additional 5-year tax free period. In 2014, NLNG will be in a tax paying position, so we expect to see an initial tax payment by NLNG in 2014.
However, experts say that the arrangement that governs the operations of NLNG which gave it a 10 year tax holiday was good for a pioneering project. The company has contributed $10bn to government coffers as profit and another $1 billion was paid as tax in 2014.
They however advise that any such project in future should not be given more than a five-year tax holiday. For instance, indigenous companies who are acquiring the divested assets from the IOCs are given pioneer status, with a 5-year tax holiday.
Victor Onyenkpa, partner and head, tax, regulatory and people services, KPMG, at a recent discussion had noted that the 5-year tax holiday would help to boost the capacity of the indigenous firms.
The skill to negotiate such deals is what is cramping Nigeria’s ability to capture fair value from its oil wealth. Paul Collier, a professor at Oxford University, argues that asymmetric information between African host governments and international companies, plus a lack of supervision that encourages corruption, are crippling burdens.
Poorly negotiated legislations give the IOCs operatorship of oil and gas assets and the government does not have much insight into how they spend the budgets for the assets.
The legislations as regards the Joint Operating Agreement (JOA), Production Sharing Contract (PSC) and Service Contract, are skewed to the advantage of the international oil companies which allegedly drafted the legislations and afterwards gave them to the Nigeria government to sign, before commencing operation on the assets. This exposed the legislations to several influences on how the law would be written.
Analysts say the PSC, JV, and service contracts are not the normal agreements in the oil and gas industry elsewhere in the world. But in Nigeria, as in much of Africa, they have to be adopted as business models because of government’s failure to honour its financial obligations. Government inability to honour its own cash call in the past had led to series of initiatives that led operators to look for money elsewhere to execute some projects.
Nigeria in most cases contributed little or nothing in the legislations that are governing the operations of the oil and gas industry. Most of these legislations were written during the military era, and were signed by military fiat.
Because of the undue advantage the legislations conferred on the operators, they were able to inflate costs of productions at will and in some cases, use the money meant to drill three wells for one well and later go to the government to say they needed more money.
The IOCs, according to analysts, don’t observe budget discipline, hence their penchant to always go to the government for money. Nobody supervises their operations, because of this, whatever claim they make is always difficult to verify by government.
The legislations favoured the international oil companies to operate the oil and gas assets belonging to the government. Because of this, corrupt practices are perpetrated with the connivance of governments officials that are more interested in lining their pockets.
However it is not all the agreements entered into with multinational oil companies by the government that are bad, analysts say. Collier suggests that pre-negotiation training, well conducted auctions and corporate transparency, are critical to drawing up better contracts and fair value from deals.
In January, the Monetary Policy Committee of the CBN, at the end of its first meeting for the year, had urged the government to review “terms around production sharing agreements with oil companies, while awaiting the passage of the Petroleum Industry Bill (PIB).”
Ayodele Oni, an energy law and policy expert and senior associate in top law firm, Banwo & Ighodalo, had said that “It is important to note that the deep offshore and Inland Basin Act empowers the government to do that under certain circumstances, which I know had since crystallised. These circumstances include an oil price of 20 dollars or more, amongst other factors.”
In 1993, PSC was widely introduced to address some of the issues faced by the JOA and also to provide a suitable agreement structure for encouraging foreign investment in offshore acreage.
Olusola Bello
