Nigeria's Deep Offshore Focus: Navigating Fiscal Incentives for Petroleum Production
Background
Deep offshore refers to upstream petroleum operations conducted in waters exceeding 200 meters in depth.[1] Deep offshore operations involve complex technicalities and challenging environments, which are significantly more demanding than onshore and shallow water settings. To attract investments and boost oil production, the Nigerian government has been deliberate about incentivizing investors to commit resources to develop deep offshore areas.?
In this piece, we reveal key provisions from the Petroleum Industry Act and, most recently, the Notice of Tax Incentives for Deep Offshore Oil and Gas Production 2024 conceived to stimulate growth in deep offshore development. Upon closer examination, it becomes clear that the tax credit structures for deep offshores are to incentivize early production with a higher allowance, which are then gradually reduced after a significant production volume is reached, balancing fiscal benefits with long-term resource management.
1.0. Exemption from hydrocarbon tax
Holders of Petroleum Prospecting Licenses (PPL) and Petroleum Mining Leases (PML) are subject to both Hydrocarbon Tax and Companies Income Tax. However, production in deep offshore acreages are exempt from hydrocarbon tax.[2]
2.0. PIA’s Production Allowance for Deep Offshore
The Petroleum Industry Act outlines production allowance for deep offshore crude oil operating under leases issued after the enactment of the Act.[3] The allowance is structured in two phases:
Illustration:? In a scenario where fiscal oil price is $30 per barrel: In the initial phase of production, the allowance is $6.00 per barrel (20% of $30), rising to $8.00 only if the price exceeds $40 per barrel (where 20% exceeds $8.00). In subsequent production (post-500 million barrels), the allowance drops to $4.00, as 20% ($6.00) exceeds the new cap.
3.0. Reduced royalty rates
In determining royalty rates by production, crude oil and condensates in deep offshore areas attract 7.5% royalty rate on their chargeable volume. For deep offshore fields with a production of not more than 50,000 bopd in a month, the royalty rate shall be 5%.? In contrast, onshore leases attract 15% royalty rates.[4]
4.0. Improved terms for Deep Offshore Licenses
A Petroleum Prospecting License (PPL) for deep offshore or frontier acreages has a maximum duration of 10 years, consisting of an initial 5-year exploration period and an optional 5-year extension.[5] Additionally, a Petroleum Mining Lease (PML) in deep offshore has a development period of 7 years, unless otherwise specified in the field development plan.[6] Notably, these licenses have longer lifespans compared to standard PPLs and PMLs.
5.0. Notice of tax Incentives on Deep Offshore Oil and Gas Production 2024 (The Notice)
The Notice, issued on February 28, 2024, introduced further tax incentives to stimulate investments in deep offshore oil petroleum activities. The incentives apply to OMLs and PMLs with production sharing or profit-sharing contracts. It specifically targets:
5.1. Production tax credits for crude oil
The Notice provides a tax credit of US$3 per barrel or 20% of the fiscal oil price, whichever is lower, in respect of crude oil production in a deep offshore with producible reserves not exceeding 400 million barrels. This tax credit is applicable until there is a cumulative production of 150 million barrels. To calculate this, you may refer to the illustration given earlier.
In the case of deep offshore development with producible reserves exceeding 400 million barrels, the Notice provides for an increased tax credit of US$4.50 per barrel or 20% of fiscal oil price, whichever is lower. This applies up to 500 million barrels of cumulative production.
Furthermore, new leases are eligible for an additional $1 per barrel tax credit, applicable from the start of production until a cumulative total of 500 million barrels is reached. However, for the tax credits under the Notice, if crude oil prices drop below $50 per barrel, the tax credits will be reduced by 50%.
5.2. Production tax credits for non-associated gas development
Non-associated gas is natural gas found in reservoirs that do not contain significant amounts of crude oil.
The Notice provides for a tax credit of US$1.00 per thousand standard cubic feet (mscf) of gas sold or 30% of the fiscal gas price (whichever is lower) for gas fields with hydrocarbon liquid content not exceeding 30 barrels per million SCF. This incentive applies up to a cumulative volume of gas sold of 5 trillion cubic feet (TCF).
Where the hydrocarbon liquid content of the non-associated gas field is between 30 - 100 barrels per million SCF, the Notice provides for a tax credit of US$0.50 per mscf of gas sold or 30% of fiscal gas price (whichever is lower). It applies up to 5 TCF of cumulative gas sold.
5.3. Further conditions
It is important to note that the production tax credits cannot be combined with other production allowances (such as the production allowance under the sixth schedule to the PIA or Associated Gas Framework Agreement). In addition, the respective production tax credits will be reduced by 10% where the Unit Technical Cost of Development exceeds the benchmarked cost levels as determined by the NUPRC. Also, in utilizing the tax credits, unused tax credits can be carried forward for a period not exceeding three years.
Conclusion
The Petroleum Industry Act has been an instrumental driver of policies directed at boosting oil production in Nigeria. Nigeria’s deep offshore reserves present an opportunity for further development. The inherent challenges of deep offshore development must be mitigated to give investors an assurance of good returns. Following the issuance of the Notice, it is expected that the Federal Inland Revenue Service and the Ministry of Finance will issue implementation guidelines for the incentives to be utilized. Lastly, it is expected that the regulators will establish detailed procedures for determining the production allowances.
[1] Section 318 of the Petroleum Industry Act (PIA)
[2] Section 260(3) PIA
[3] Sixth schedule to the PIA
[4] Part 3, Seventh schedule to the PIA.
[5] Section 77 (2) PIA
[6] Section 86 (4) PIA