KPMG Backs Nigeria’s Efforts to Incentivise Oil Industry, Cautions on $20 Benchmark Price for Oil Production

Global audit, tax, and advisory firm, KPMG has backed the attempt by the federal government to incentivise operators in Nigeria’s oil and gas industry to, among others, cut the unit technical cost of oil production in the country.

In a commentary on the recent executive orders notice to industry by President Bola Tinubu to drive growth in the sector, KPMG, however noted that it was essential to ensure that the benchmark price, put at $20 per barrel, remains competitive for operators in the sector, especially considering some unique challenges in Nigeria.

For close to half a decade, Nigeria has struggled to raise crude oil as well as gas production, two natural resources the country has abundance of, without much success. The country blames unprecedented oil theft, waning investment, aging infrastructure, among others, for the current challenges.

In May 2023, the Oil and Gas Sub-committee of the Presidential Advisory Council had set performance targets for the country by 2030, with the aspiration to raise oil production to 4 million barrels per day and gas to 12bcf per day.

Following these ambitious targets, the federal government issued three Executive Orders in February 2024 and in October issued additional fiscal incentives for the oil and gas production.

They include: Value Added Tax (VAT) Modification Order 2024 as well as Notice of Tax Incentives for Deep Offshore Oil & Gas Production (Tax Incentives, Exemption, Remission, etc.) Order 2024.

In its analysis, KPMG argued that the decision to cap the hydrocarbons liquids content of a gas field to 100 barrels per million standard cubic feet (mmscf) was commendable.

The world-renowned consultancy firm explained that this will help to develop fields with lower liquid content, thereby making them more economically viable.

Generally, it explained that high hydrocarbons liquids in a field is considered desirable as it t enhances the field’s value, recovery, and production rates.

“ Consequently, there will be a tendency for operators to focus on only liquids to the detriment of gas production, which is required to help unlock Nigeria’s energy potential while also improving energy security on a sustainable basis.

“We also note the intention of the government to encourage operators to drive down unit technical cost of production by reducing the incentives granted under the Notice by 10 per cent for qualifying developments when costs exceed the benchmark set by the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), which is $20 per barrel of oil equivalent for 2024.

“While this is commendable, it is essential to ensure that the benchmark price remains competitive for operators in the sector if it considers the unique challenges faced by Nigerian oil and gas producers, such as security cost, bureaucracy, excessive regulatory oversight,” KPMG added.

Besides, it stressed that it was a welcome development that the government has now reintroduced tax credits rather than the production allowances contained in the Petroleum Industry Act (PIA).

“Undoubtedly, tax credits have a more significant impact than production allowances given that operators can claim 100 per cent deduction from the tax liabilities due, unlike production allowances whose impact is limited to the applicable tax rate.

“Under the PIA, Production Sharing Contracts (PSC) operators involved in deep offshore gas production cannot claim the production allowances as the allowances are limited to hydrocarbon liquids crude oil, condensates, and natural gas liquids.

“Even then, the operators are unable to utilise the allowances since they are only subject to companies income tax and there is no provision for the deduction of production allowances under the Companies Income Tax Act,” it explained in the review of the new oil and gas incentives.

However, it pointed out that the jury was still out on whether the incentive package was competitive enough to ignite the expected reaction from investors, as businessmen will only invest where there is an expectation of high returns on their investment

“Consequently, all potential projects will have to be evaluated in terms of the rate of return they generate. The government will need to monitor the response of investors on a periodic basis and make the necessary adjustments when needed given the competitive landscape for oil and gas projects,” it stressed.

Acknowledging that the Nigerian Oil and Gas Industry remains in dire need of investments to revitalise the sector, coupled with International Oil Companies (IOCs) divesting from onshore and shallow water assets and concentrating their efforts on deepwater operations, KPMG stated that it had become crucial for government to incentivise deep offshore operations to attract the required investment.

Earlier, Tinubu had signed the Oil and Gas Companies (Tax Incentives, Exemption Remission, etc.) Order, 2024; Presidential Directive on Local Content Compliance Requirements, 2024 as well as the Presidential Directive on Reduction of Petroleum Sector Contracting Costs and Timelines, 2024.

Dissecting the key provisions of the Notice and its implications for taxpayers, businesses in the oil and gas sector of the Nigerian economy and the public at large, including Tax Incentives for Deep Offshore Oil and Gas Production and Tax Credit on Crude Oil Production, KPMG highlighted that they introduce a Production Tax Credit (PTC) on crude oil production in the deep offshore petroleum operations.

It stated that for existing deep offshore leases with Field Development Plan (FDP), where the lessee makes a Final Investment Decision (FID) between 28 February 2024 and 1 January 2029, the following shall apply:

“Lower of $3 per barrel or 20 per cent of the fiscal oil price for crude oil produced in upstream petroleum operation from commencement of production until a total of 150 million barrels is reached, provided that the producible reserves for such deep offshore development do not exceed 400 million barrels of crude oil equivalent.

“Or lower of $4.50 per barrel or 20 per cent of the fiscal oil price for crude oil produced in upstream petroleum operation from commencement of production until a total of 500 million barrels is reached, provided that the producible reserves of such deep offshore development exceed 400 million barrels of crude oil equivalent.”

Emmanuel Addeh

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