DISCUSS THE FISCAL ASPECT OF PETROLEUM BUSINESS IN NIGERIA

QUESTION 1 
DISCUSS THE FISCAL ASPECT OF PETROLEUM BUSINESS IN NIGERIA

INTRODUCTION

The high place of petroleum resources within the Nigerian economy cannot be underestimated, because of the source of revenue derived therefrom. Its account for 35 per cent of gross domestic product and petroleum export revenue represent over 90 per cent of the total export revenue.[1] In 2017 alone Nigeria earn staggering amount of 7.3trillion from the petroleum industry and 77trillion in 17 years.   Mining of crude oil can take place offshore or onshore.

WHAT IS PETROLUEM

Petroleum is a generic name for hydrocarbons composed of hydrogen and carbon. Petroleum also refers to liquid mixture of hydrocarbons obtained from deep wells, known as crude oil. It is also known as premium motor spirit(PMS).  Hydrocarbon can exist in three formed namely liquid, gaseous or solid sates, in a liquid form it is called crude oil which when refine bring out petroleum

WHAT IS FISCAL ASPECT OF PETROLEUM BUSINESS

Fiscal aspect of petroleum in Nigeria simply means the monetary aspect of petroleum industries in Nigeria, how the government generated revenues from that sectors. The various methods and ways the government make money through this particular sector.

OWNERSHIP AND CONTROL OF PETROLEUM

The ownership and control of all minerals, mineral oil and natural gas in, under or upon any land in Nigeria, its territorial waters and exclusive economic zone is vested in the Federal Government based on the provision of section 44(3) of the 1999 Constitution of the Federal Republic of Nigeria. The Federal Government is mandated to manage such minerals in a manner as may be prescribed by the National Assembly[2].The Petroleum Act of 1969 is the primary legislation governing petroleum activities in Nigeria. It provides comprehensive provisions for exploration, production and transportation activities in the sector. The Act, like the constitution, vests ownership of petroleum resources on the Federal Government of Nigeria.

WHAT IS PETROLEUM OPERATION

it must be noted that PPT is only applicable to companies engaged in petroleum operations is defined by section 2 of the act to means;

the winning or obtaining and transportation of petroleum or chargeable oil in Nigeria by or on behalf of a company for its own account by drilling, mining, extracting or other operations or process, not including refining and refinery, in the course of a business carried on by the company engaged in such operations, and any sale of or any disposal of chargeable oil by or on behalf of the company.

THE FOLLOWING ARE WAY IN WHICH THE GOVERNMENT GENERATE REVENUE THROUGH THE PETROLEUM INDUSTRIES IN NIGERIA

ROYALTIES

Royalty refers to payments, either in cash or in kind, made by a holder of a concession to the Federation based on the value of the quantity of crude oil produced (saved after the oil has been separated from its components) from the field within the concession area in line with the fiscal terms approved statutorily by the Government.

This refers to the amounts payable to the owner of the natural resources as compensation for the exploration of a renewable, yet irreplaceable natural recourses. The current law on royalties is reflected in the Nigerian petroleum (Drilling and production) amendment regulation 1995[3] in section 61, 62 of the law. The deeper an investor go off shore the lesser he paid royalties.

THE CALCULATION AND PAYMENT OF ROYALTY ON OIL IS GUIDED BY SECTION 61 OF THE 1969 PETROLEUM ACT AS AMENDED.

THE ROYALTY RATES FOR CRUDE OIL ARE;

a) Onshore areas                                                                                   20%

b) Offshore areas

o Areas up to 100m water depth                                                           18.5%

o Areas up to 200m water depth                                                           16.5%

o Areas from 201 to 500m water depth                                                12.5%

o Areas from 501 to 800m water depth                                                 8%

o Areas from 801 to 1000m water depth                                               4%

o Areas beyond 1000m water depth                                                       0%

LICENSE FEES

LICENSE FEE FOR APPLICATION IS PROVIDED UNDER SECTION 59 OF PETROLEUM (DRILLING AND PRODUCTION) REGULATIONS 1969

The following shall be payable

(a) on an application for oil prospecting license……………………………………... US$10,000;

(b) for processing fee………………………………………………………………… US$10,000;

(c) on an application for an oil mining lease……………………………………….....US$500.000
(d) on an application for an oil renewal of an  oil mining lease………………………US$1,000,00;
(e) on application for a renewal to withdraw any of the applications specified in paragraphs (a), (b), (c) and (d) of his regulation……………………………………………………………………………….N20,000;
(f) on an application to assign or sublet on contract an oil prospecting license or an oil mining lease……………………………………………………………………………………N500,000
(g) on an application to terminate or effect a partial surrender of an oil prospecting license or an oil mining lease…………………………………………………………………………N50,000;
(h) on an application for license to operate a drilling rig………………………………..N20,000;
(I) for a license to operate a drilling rig…………………………………………………N100,000
(j) for a permit to export samples for analysis…………………………………………...N10.000
(k) for a renewal of a permit to export samples for analysis…………………………….N5,000.

LICENSE FEE PROVIDED UNDER SECTION 31 OF PIPELINE ACT[4]

31. (1) The applicant for a permit to survey shall pay a fee of twenty naira upon submitting his

application, and a fee of fifty naira upon the grant of such permit.

(2) The applicant for a license shall pay a fee of fifty naira upon submitting his application, and

a fee of two hundred naira upon the grant of such license.

(3) The holder of a permit shall pay a fee of fifty naira in respect of each variation of such

permit.

(4) The holder of a license shall pay a fee of two hundred naira in respect of each variation of

such license.

(5) An annual fee shall be paid on each license of twenty naira per mile of the length of the

pipeline subject to a minimum of two hundred naira.

(6) The holder of a license shall pay a fee of one hundred naira upon submitting his application

for a restriction order under section 12 of this Act, and a fee of such amount as the Minister

may determine not exceeding four hundred naira on such order being made.

By virtue of section 3 of petroleum Acts provide that license fees must be paid before you can operate and construct a refinery in Nigeria, the fees prices is  $150,000.

TAXES

Taxes on petroleum products contribute generously to the nations revenue.  The basis stared in section 9 of companies income tax act while Petroleum taxation in Nigeria is governed by the petroleum profit tax act.[5]  Section 8 of the petroleum profit tax act provides as follows;  

There shall be levied upon the profit of each accounting period of any company engaged in petroleum operation during that period, a tax to be charged assessed and payable in accordance with the provision of this act.

The taxes are accessed over the accounting period which is usually between 1^st January to 31^st[6] except of the newly incorporated or the wants wounding up by virtues of section 2 of PPT Act. Section 10 of PPTA provides for the necessary deduction that are made before the tax is imposed by the FRIS.  Profit needs to be adjusted so as to remove amounts which have been incurred wholly, exclusively and necessarily for the business. Chargeable profit is the amount left after capital expenses have been deducted and it is on these that tax will be levied for that accounting year.

CHARGEABLE PROFIT OF AN ACCOUNTING PERIOD CAN BE COMPUTED IN THE FOLLOWING MANNER UNDER SECTION 10 OF THE PPTA.

1 adjusted profits minus losses incurred by the company

2 assessable profits minus capital expenses.

3 chargeable profits are, therefore, profit to which the applicable tax rate can now be applied at the rate of 85% or 65.75% or 50% as the case may be.

4 assessable tax is profit minus section 17 deductions

5 chargeable tax is the money that is actually paid to the government

BONUSES

This is the amount a company pays to the states at agreed designated periods, either at the time he signs the contract, or when production has reached a certain level. If they are made when the contract has been signed, this is called signatory bonus. Production bonus is also paid by a company to contactors. Where discoveries are less economic values signature bonus could make the entire unprofitable? They are nonrefundable. Obasanjo government cancelled is sharing contract in which 20million signature bonus where paid.

SECTION 3 OIL PROSPECTING LICENSES (CONVERSION TO OIL MINING LEASES, ETC. REGULATIONS, 2004 PROVIDE PAYMENT OF SIGNATURE BONUS 

The payment of a signature bonus on conversion shall be as prescribed by the Minister and the quantum of signature bonus payable for the conversion to the additional oil mining lease shall be at the discretion of the Minister who shall take into consideration the following- 

the current market value of the area to be covered by the oil mining lease

(b)  the level of operational activity and expenditure so far carried out by the licensee holder before     the application; and 

(c)  the competitiveness of signature bonus paid on the oil prospecting licensee

MARKET FOR OIL AND GAS OPERATION IN NIGERIA

The NNPC owned several hundred filling station in Nigeria, they are also engaged in importing and oil of crude oil in Nigeria, they also operate four refineries in Nigeria. Through such activity carried out by NNPC the government generate revenue through the

RENT

Since the land they are operating under must especially oil production have to pay rent to the government and also the government owned the land they are operating under so they have to pay rent to the government.

Section 60 of   petroleum (drilling and production) regulation 1969 provide

      (1) a rent of N500 shall be payable for each calendar year for which an oil exploration license is in force; and, were the license is in force for only a part of a calendar year, that part shall be regarded as a calendar year for the purpose of this paragraph.

(2) The annual rent payable on an oil prospecting license or an oil mining lease shall be

(c) on an oil prospecting license, for each square mile or part thereof ………..US$10;
(b) on an oil mining lease…….
           (i)  for each square kilometer or part thereof of a producing oil mining lease for ten             years…………………………………………………………………………….US$20

            (ii) Thereafter for each square kilometer or part of until expiration of the lease and on renewal…………………………………………………………………………US$15.

by Abdulkadir muhammad

abdulmjabubakar@gmail.com

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[1] http//www.opec.org/opec

[2] The 1999 constitution of the federal republic of Nigeria

[3] LN 69 of 1969

[4] Cap 7 LFN 2004

[5] Cap 13 LFN 2004

[6] Section 2 of PPT ACT