Expectations of an Oil Producing Company in the Petroleum Industry Bill Tunji Mayaki Deputy Managing Director, Corporate Services Addax Petroleum Development (Nigeria) Limited Nigerian Bar Association Conference Abuja August 2015

Outline Overview Broad Objectives of the PIB Government Take PIB Terms and Industry Expectations: Fiscals PIB Terms and Industry Expectations: Non Fiscals Summary.

Overview The PIB was officially introduced in September, 2008. Not yet passed into law Objective to restructure the regulatory and fiscal frameworks to achieve transparency, efficiency, growth and maximize benefits from the oil and gas sector Notably, Government seeks to achieve 40 billion barrels of crude reserves and oil production of 4 MMBOPD by 2020 Contentious issues include NOC Funding, Sanctity of Contract, Power of the Minister, Funding of New Frontier Agency, Application of Petroleum Host Community Fund and the Onerous Fiscal Terms A balanced PIB will create a stable, globally competitive investment climate that enables stakeholders to achieve their objectives

Broad Objectives of the PIB To create conducive business environment. To enhance exploration and utilization of petroleum resources in Nigeria To optimize domestic gas supplies, particularly for power generation and industrial development. To establish a progressive fiscal framework that encourages investment in the petroleum industry while optimizing revenues accruing to the Government. To deregulate and liberalize the downstream petroleum sector. To promote transparency and openness in the administration of petroleum resources of Nigeria. To create efficient and effective regulatory agencies. To protect health, safety and the environment in the course of petroleum operations. To create employment and business opportunities by encouraging investment in small oil and gas fields.

Government Take Source: Wood Mackenzie

Government Take Source: Wood Mackenzie

PIB Terms and Industry Expectations: FISCALS Computation of NHT and CIT. NHT is not deductible in calculating CIT (section 353.3) “In determining The Company Income Tax payable, the Nigerian Hydrocarbon Tax under this Act shall not be deductible”. Profit Oil Order- Allocation of profit oil before deducting cost oil is contrary to standard business practice and will have onerous impact on the timing and level of cost recovery. Sliding Scale Royalty- Uncertainty in the computation of price and production based royalties on a sliding scale. (Highest rate vs. incremental basis) Windfall tax is based on price and production. Allowance for NHT to be deductible in computing CIT. Retain current model of PSC cost oil before profit oil allocation- The deduction of NNPC profit oil before cost recovery practically turns profit oil into a royalty. Computation of effective royalty to be based on an incremental basis so as not dissuade production from small fields. Windfall tax to be driven primarily by profitability. This will account for high cost regimes associated with high oil price.

PIB Terms and Industry Expectations: FISCALS Shift from ITA/ITC to Production allowance on consolidated/company basis. Significantly decreases allowances for companies with existing production. 80% cost recovery limit 80% Cap on foreign costs deductible for NHT. Production allowance to be determined at project level to encourage new investment in existing fields. Zero cost recovery limit Provision for the deduction of 100% of foreign cost So far it can be demonstrated that such costs incurred pass the “WEN” test. PPTA Section 10 – “In computing the adjusted profit of any company of an accounting period from its petroleum operations, there shall be deductions all outgoings and expenses wholly, exclusively and necessarily incurred, whether within or without Nigeria…”

PIB Terms and Industry Expectations: Non- FISCALS Licenses and leases Short duration of PPL & PML (section 177, 184.1) One-time PML renewal for max 10 years (section 184.3) Up to 100% relinquishment of PPL acreage upon expiration will restrict investment and dissuade exploration (section 186) Contract Sanctity- Possibility of repealing fiscal terms in existing PSC contracts. – Investors will be reluctant if existing contracts are not honoured. Measurement point (section 362) – Well head vs Sales point. Royalty at well head means that bunkered crude will also attract royalty. Longer duration of PPL and PML PPL duration: 5 years (onshore); 10 years (deep water) PML duration: 20 years (30 years for gas); 20 year renewal up to end of field life subject to fulfilment of obligations. 50% relinquishment at the end of PPL. Honour existing contracts to protect and keep existing investments whole. Respect for stability clauses as well as honoring existing contracts is a globally recognized component of a stable and attractive business environment. Examples are Angola, Brazil, UK, and Norway did; Royalty to be measured at sales point (on realised crude).

PIB Terms and Industry Expectations: Non- FISCALS Arbitration- Provision for federal agencies to resolve dispute without recourse to judiciary (Section 293.3). Lack of access to independent arbitration heightens investors uncertainty Ministerial discretion on royalties. Creates Uncertainty Domestic Gas Supply Obligation and Penalties- Supply obligation to be determined solely by production and reserves (Section 269.4) Penalty for non-compliance by forced suspension of export supply (section 272.1&2) may not increase domestic supply and will reduce government revenue from LNG Arbitration by local courts and international arbitration if necessary- Access to independent arbitration is a key part of a secure investment environment. Inclusion of a provision to allow for dispute referrals to arbitration under the Arbitration and Conciliation Act Predetermined royalty rates set in the legislation as seen in most countries In addition to production and reserves, DGSO should also take into account: A regulated price that allows projects to achieve economic viability Gas infrastructure availability in the domestic economy Viable demand outlook Non-compliance penalty should not interfere with other contracts (e.g. LNG contracts), but should only target actual contracts where non-compliance is observed (e.g. GSAs).

In Summary… A sound PIB will create a stable, globally competitive investment climate that enables stakeholders to achieve their objectives. A world class investment climate achieves the following: Creates value from a country’s natural endowments Ensures the country benefits from created value Attracts foreign investment Guarantees a stable and efficient investment climate A B C D E F G I H Stimulates investment to continuously bring new fields into production Provides extra incentives for Deepwater and frontier exploration and development to mitigate enormous capital and technological risk Maximizes reservoir recovery and provide sustainable investment climate Maximize impact on broader economy through multiplier effect on employment/supply chains Incentivizes investment across the full value chain to deliver power Creates a globally competitive environment to attract investment Provides sufficient license and lease duration to achieve full life cycle development of projects Decreases investor risk through a stable regulatory environment Derives taxation and royalty on a fair basis (e.g. on sold crude, rather than measured at wellhead)

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