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VAT data shows Nigeria’s offshore operations becoming stagnant

Full-year 2018 Value Added Tax (VAT) data published by the National Bureau of Statistics (NBS) show Nigeria’s offshore operations have been stagnating in the last five years.

Offshore operations contributed N2.20 billion to a VAT pool of N298 billion in 2014; N2.67 billion out of N759 billion in 2015; N2.12 billion out of N777 billion in 2016, and N2.27 billion out of a total of N972 billion in 2017. In 2018, offshore operations contributed N2.26 billion to a record total of N1 trillion.

A value-added tax (VAT) is a consumption tax placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale. VAT compensates for the shared services and infrastructure used in the development of a product or service, provided in a certain locality by a state and funded by taxpayers.

The NBS’ full-year 2018 VAT data show there has been little value addition going on in Nigeria’s offshore operations. Experts say that with the degree of risks, pressure, temperature and costing associated with deep offshore projects, the provisions of current laws, such as the Petroleum Act, were grossly inadequate to address the concerns of would-be investors. This has practically cut off new investments into the segment.

This also means the Federal Government’s drive to increase crude oil reserve by one billion a year to 40 billion barrels by 2020, from 37 billion currently, may not be feasible given paucity of new investments. The Nigerian National Petroleum Corporation (NNPC) had announced the target in its outlook for 2018.

“There are funds everywhere open for access, but the problem we have is our wrong laws. Investments cannot be attracted with such laws; rather, potential investors will migrate with their funds to climes where the right laws exist,” Andrew Ejayeriese, president, Nigerian Association of Petroleum Explorationists (NAPE), said in an interview.

A report in May 2018 said International Oil Companies (IOCs) operating in Nigeria may have devised means to compel the Federal Government into changing its fiscal policy on the Petroleum Industry Governance Bill (PIGB).

The IOCs have deliberately put on hold the Final Investment Decision (FID) on five offshore oil and gas projects to make government alter fiscal terms in the new bill deemed unfavourable to deep-water projects, some analysts have said.

Already, the FIDs on the 225,000bpd Bonga Southwest-Aparo project; 120,000bpd Zabazaba-Etan project; 140,000bpd Bosi project; 110,000bpd Uge project, and 100,000bpd Nsiko deep-water projects have been stalled.

Estimated at over $23.5 billion, the projects were expected to assist the Federal Government achieve its 40 billion-barrel target and daily production of 4 million barrels per day (bpd).

FIDs on these projects were to have been taken before the end of 2018 but have not been done. They may be further delayed because Nigeria on February 21 shocked oil firms with a demand of $20 billion in back taxes, which Royal Dutch Shell says will delay FID on Bonga Southwest-Aparo project.

Nigeria’s oil and gas observers have persistently called for significant reforms in the sector.
It was difficult passing a comprehensive petroleum industry bill in the past 17 years until it was broken down into four aspects – the Petroleum Industry Governance Bill (PIGB), the Fiscal Regime Bill, the Upstream and Midstream Administration Bill, and the Petroleum Revenue Bill, otherwise known as the host community aspect – with a decision to pass the less controversial ones first. But none of these has become law.

“Continued delay sends a wrong signal to current and would-be investors,” Ayodele Oni, energy partner at Lagos-based Bloomfeld Law Practice, said.

“It is either government wants to amend the laws regulating oil and gas or they don’t, and whatever it is, they should come out clear,” Oni said.

Source: Business Day