COMPARATIVE ANALYSIS OF NIGERIA PETROLEUM FISCAL SYSTEMS USING ROYALTY AND TAX OPTIMISATION MODELS TO DRIVE INVESTMENTS

Abstract

Declining Foreign Direct Investment (FDI) in Nigerian Oil and Gas Industry (NOGI) has been attributed to inappropriateness of the country’s petroleum fiscal regimes and tax systems. Extant literature identified knowledge gap relating to the analytical measurement of the relationship between key fiscal terms and economic metrics, which provides understanding of the effects of the proposed Petroleum Industry Fiscal Bill (PIFB), 2012 on FDI. This study was designed to compare Nigeria’s current and post PIFB fiscal regimes against selected world fiscal arrangements to determine if the proposed legislation, when enacted will improve competitiveness and FDI in the NOGI.

The study, adopted a quantitative research design, based on petroleum taxation theory used purposive sampling technique to select five fixed offshore crude production projects, labeled PRJI, PRJ2, PRJ3, PRJ4 and PRJ5; of an international oil company operating in Nigeria based on Joint Venture model with concession in shallow waters with less than 50 meters (m) depth and crude production uplifts of less than 40,000 barrel per day (kbd). The selected projects were used to develop Fiscal Terms Optimisation Model (FTOM) comprising - Discounted Cash Flow Rate (DCFR), Net Present Value (NPV), Profit-to-Investment Ratio (PIR), Maximum Cash Impairment (MCI), Actual Value Profit (AVP), and Payout that were combined with Global Competitive Index (GCI) from fifteen countries based on their competitiveness and global regional distribution to develop a meta-model that was used to determine Optimal Royalty and Tax Competitive Window (ORTCW) that predicts the relationship between the various economic metrics (DCFR, NPV, PIR, MCI, AVP, Payout) and fiscal terms that drive investment decisions.

The characteristics of the selected projects were (kbd, m) [PRJ1(26.1, 27.13); PRJ2(20.3, 28.04); PRJ3(36.4, 28.04); PRJ4(6.5, 27.43) and PRJ5(18.8, 42.67)]. The output FTOM data were DCFR(%)[(21.0 - 197.0);(13.0 - 492.0);(11.0 - 479.0);(35.0 - 346.0) and (21.0 -160.0)]; NPV(12%) in million dollars ($M)[(56.32 – 630.24);(3.44 -64.32); (2.20 - 47.24);(10.09 - 194.75) and (1.40 - 20.56)]; PIR [(2.4 – 10.7); (0.3 - 1.2); (0.2 - 1.1); (1.2 - 6.8) and (0.9 - 3.8)]; MCI($M) [([-34.9] – [-26.2]); ([-10.1] – [-2.8]); ([-10.1] – [-2.8]); ([-5.5] – [-4.2]) and ([-7.8] – [-3.7])]; AVP($M) [(925.1 - 4287.3); (57.7 - 101.8); (15.0 - 71.8); (79.2 - 465.2) and (8.4 - 35.7)]; PYT in years [(2.3 – 4.9); (1.2 - 3.3); (1.2 - 3.1); (2.2 - 3.1) and (1.5 - 2.0)]. There was a positive relationship between Royalty(R), Tax(T) and Profitability indices with correlation coefficients ranges: DCFR:R(0.65); DCFR:T(0.96); NPV12:R(0.63); NPV12:T(0.97); MCI:R(0.45); MCI:T(1.00); PIR:R(0.62); PIR:T(0.97); AVP:R(0.62); AVP:T(0.97); PYT:R(0.57) and PYT:T(0.90). The ORTCW showed that optimum royalty and tax rate for competitiveness were (0.15 - 0.20) and (0.28 - 0.55) respectively, while the current and post PIFB royalty and tax rate for the NOGI obtained were (0.19 – 0.31) and (0.80 – 0.85) respectively, this shows that Nigeria’s current and post PIFB fiscal and tax rates were not competitive.

The current and proposed fiscal and tax regime of the Nigerian oil and gas sector are unlikely to drive investment, improve competitiveness and foreign direct investment in the sector and a review of the proposed Petroleum Industry Fiscal Bill is recommended.