The proposed 35 percent tax hike on oil revenues from 50 percent to 85 percent was reported by ERHC On The Move last week.
Here is the in-depth story of the oil majors' revolt from Thursday morning's editions of This Day Online, a leading Nigerian news site:
Oil Majors Threaten to Halt Offshore Investment
By Mike Oduniyi
March 3, 2005
ABUJA -- Multinational oil companies operating in Nigeria’s deep offshore oil region, have threatened to halt further investment in protest against plans to significantly amend the tax laws governing operations in the area.
The threat, if carried out, may affect the $15 billion expected to be invested in exploration and drilling in Nigeria’s deep offshore over the next five years.
The oil majors under the aegis of the Oil Producers Trade Section (OPTS) of the Lagos Chamber of Commerce and Industry, in a joint statement of response to the ongoing review of the Production Sharing Contract (PSC) Decree by the House of Representatives, oppose plans to raise the Petroleum Profit Tax (PPT) regime from 50 percent to 85 percent.
However, the presidency has washed its hands off the proposed amendment to the PSC law, as such a move could erode investors’ confidence, and leave Nigeria’s strategic oil sector without the multi-national alliances which have been instrumental to many of the successful projects so far achieved.
The House Committee on Petroleum Resources last week, began a public hearing on the planned review of the Petroleum Act and the Deep Offshore and Inland Basin Production Sharing Contract Act, with the objective of increasing the PPT from 50 percent to 85 percent.
The first generation PSCs agreements were signed for 12 oil blocks between 1991 and 1993, yielding major discoveries as Bonga field, 1.2 billion barrels of crude; Erha, 600 million barrels; Abo field, 500 million barrels; Akpo, 800 million; and Agbami, 1.0 billion barrels.
Total reserves booked till date from fields explored under the PSC agreement now being reviewed, represent some 25 percent of Nigeria's total reserves put at 35 billion barrels as at the end of 2004.
The OPTS members namely Shell, ChevronTexaco, ExxonMobil, Elf, Agip, ConocoPhillips, Addax and Petrobras, said an upward review in the PSC tax rate, would not only affect investment already committed to deep offshore operations but stall future investment in the deepwater oil industry.
The OPTS in the position paper, contended that reviewing the tax regime would be a breach of contract by the Nigerian government after the companies had committed well over $10 billion to hydrocarbons exploration in the region.
Under the PSC agreements, all the risks of exploration, appraisal and development are absorbed by the contractor (the oil firms). Consequently, PSCs universally require the State to contractually bind itself (through the national oil company) to guarantee the fiscal terms at the onset of the PSC.
"This is the arguments marshaled in the OPTS position paper," said a source close to the group.
“Increase of the tax burden to 85 percent will negate the deepwater cost structure and risk…Current projects would not be sustainable and new projects will be terminated,” the official added.
According to official figures from the Ministry of Petroleum Resources, the Federal Government forecast is to rake in a total of 15 billion barrels by 2010, from discoveries in the deep offshore.
The firms have proposed a joint appearance before the committee by the middle of this month.
Implementation of the PSC law has been a subject of heated debate recently, with government officials arguing that the agreement weighed against Nigeria’s interest.
Under the existing PSC law, the country would not earn revenue from oil exported from fields in deep offshore at least in the first five years of production, as the companies are allowed to first recover fully their investment in developing the fields, before subsequent sharing of the profit with the government.
According to the Chairman of the House Committee on Petroleum, Hon. Cairo Ojougboh, the agreement posed a threat to revenue generation by the Federal Government. By next year, deepwater fields would account for about 40 percent of Nigeria’s total crude oil production and exports.
Industry officials, however, told THISDAY that given the high risk nature of deepwater offshore operations as well as the sophisticated and high-cost nature of technology to be deployed, the terms agreed under the existing PSCs were in recognition of the necessity for long-term investment.
“How would you tell Shell, which has committed $3.5 billion on developing the Bonga or ExxonMobil with $2.5 billion on the Erha field that they cannot recover their costs?” asked an official.
“Any reasonable change in the PSC at all, should apply to new contracts especially those that will evolve from the 2005 bidding round and not for existing contracts,” the official said.
However, mindful of the implications, the Federal Government has cautioned against tampering with any of the parameters in the PSC law by the National Assembly without proper consultation with appropriate agencies.
Speaking to THISDAY yesterday on the controversy over the deepwater regulations, the Special Advisor to the President on Petroleum and Energy, Dr. Edmund Daukoru, said care must be taken not to scare away investors from the nation’s oil industry which is lately facing stiff competition from emerging regions including the Gulf of Guinea.
According to Daukoru, the PSC had really been packaged to take care of the interest of the investor as well as the interest of the nation. Noting that although the National Assembly has constitutional right to make laws for the good governance of the country, he advised lawmakers to seek expert advice on technical issues on which they need to be fully briefed so that they can make more effective laws.
“If you structure it (PSC law) in a way that the end result leaves too little for the investor, you will not just get that investor. He will take his money elsewhere,” warned the Special Advisor.
“And unfortunately in the Gulf of Guinea we are not alone, there is Angola, Gabon, Equatorial Guinea and there is Cameroon. We are competing, especially Angola which is coming up strongly, we need to be competitive.
“In a world where opportunities abound for alternatives for most of the investments, we need to get a good slice of that investment.”
Daukoru said that while he would hope that the National Assembly did not intend to make retroactive laws in business related investments, he assured the oil majors that the Federal Govern-ment would respect agreements entered into with multinational investors.
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