In February 2024, the President of the Federal Republic of Nigeria, President Bola Ahmed Tinubu issued the Oil and Gas Companies (Tax Incentives, Exemption, Remission, Etc) Order, 2024 (the “Order”) pursuant to powers conferred on him by sections 23 (2) and 89 of the Companies Income Tax Act 2004 (as amended) which empowers the President of the Federal Republic of Nigeria to exempt from tax, all or any profits of any company or class of companies from any source, on any grounds which appear sufficient and to remit any tax payable by any company. The Order is also made pursuant to section 48 of the Nigerian Oil and Gas Industry Content Development Act 2010 which empowers the Minister of Petroleum Resources to consult with the relevant arms of Government on appropriate fiscal framework and tax incentives for foreign and indigenous companies which establish facilities, factories, production units or other operations in Nigeria.
Paragraph 10 of the Order provides that the Minister of Finance and Coordinating Minister of the Economy (the “Minister”) shall introduce fiscal incentives to ensure that investments for deep water oil and gas projects achieve a competitive Internal Rate of Return (IRR).
Pursuant to the Order, in February 2024 the Minister of Finance issued the Notice of Tax Incentives on Deep Offshore Oil and Gas Production, 2024 (the “Notice”). The highlights of the Notice are discussed below:
Scope of the Tax Credit Incentives
The Notice emphasises that the tax credit incentives provided therein are intended to incentivize investments in deep offshore developments and are to exclusively benefit production sharing contracts parties, who are directly providing the funding for developments that lead to production.
The tax credit incentives in the Notice apply to two (2) categories of deep offshore developments within oil mining leases and petroleum mining leases with production/profit sharing contracts: (i) existing deep offshore leases with a field development plan where the lessee makes a final investment decision (FID) within the period from 28 February 2024 (the “Effective Date”) till 1 January 2029; and (ii) future leases awarded after the Effective Date including leases derived from existing or future licences.
Where a lessee intends to take the benefit of an incentive under the Notice, it will communicate its FID to the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) within 30 days of making the FID. Where the lessee is unable to make an FID during the above period (i.e. between the Effective Date and 1 January 2029) due to a force majeure event, the lessee may apply to the NUPRC for an extension of the period.
Where a lessee cannot make its FID within the specified period, it is still eligible to obtain the tax credit incentives but at a reduced rate of 50%. Thus, the Notice incentivises lessees to make their FID during the specified period to obtain a higher rate of tax credits.
Tax Credit Incentives Applicable to Deep Offshore Oil Development
The applicable rate of tax credits on crude oil production depends on the total reserves in the relevant field.
Where the total reserves are less than 400 million barrels, the tax rate is US$3.00 per barrel or 20% of the fiscal oil price (whichever is lower) from the commencement of production up to a cumulative production of 150 million barrels. Where the total reserves exceed 400 million barrels, the tax rate is US$4.50 per barrel or 20% of the fiscal oil price (whichever is lower) from the commencement of production up to a cumulative production of 500 million barrels.
For future leases awarded after the Effective Date, there will be an additional tax of US$1.00 per barrel from the commencement of production of up to a cumulative production of 500 million barrels.
The Notice provides that if the price of crude oil falls below US$50 per barrel, the tax incentives above will still apply but at 50% across board. This will ensure that the tax incentives continue to benefit companies involved in crude production in adverse market conditions, thereby providing some level of financial support. The reduced incentive rate also ensures that as companies continue to receive fiscal benefits, the Government will not be disadvantaged in terms of lost tax revenue. Since January 2024, the price of Bonny Light crude oil has ranged between US$72.41 – US$96.61 (Central Bank of Nigeria, “Daily Crude Oil Price” available at https://www.cbn.gov.ng/rates/DailyCrude.asp).
Tax Incentives Applicable to Deep Offshore Non-Associated Gas (NAG) Development
NAG in the deep offshore may be obtained from NAG wells or wells with crude oil and NAG gas. The rate of tax credit depends on the Hydrocarbon Liquids (“HCL”) content in the field. HCL content in a NAG field is determined by the NUPRC’s Guidelines for the Determination & Measurement of Hydrocarbon Liquids Content in Non-Associated Gas Fields 2024.
Where the HCL content does not exceed 30 barrels per million standard cubic feet (mmscf), the tax rate is US$1.00 per thousand standard cubic feet (mscf) or 30% of the applicable fiscal gas price (whichever is lower) from the commencement of production up to a cumulative sold gas volume of 5 trillion cubic feet (TCF). Where the HCL content exceeds 30 barrels per mmscf, but does not exceed 100 barrels per mmscf, the tax rate is US$0.50 per mscf or 30% of the applicable fiscal gas price (whichever is lower) from the commencement of production up to a cumulative sold gas volume of 5 TCF.
Where the HCL content exceeds 100 barrels per mmscf, no tax credits will be applicable. The reason for such exclusion may be that such field will be deemed as primarily producing HCL rather than natural gas and would not be eligible for deep offshore NAG incentives.
Profit Gas Sharing Formula
The Notice applies to exclusively benefit parties in production sharing contracts funding fields that lead to production and it has established the following minimum profit gas allocation to the Government under existing NAG deep offshore production sharing contracts:
- i. Up to 1TCF – 20%;
- ii. Over 1 TCF and up to 3 TCF – 35%
- iii. Over 3 TCF and up to 5 TCF – 45%;
- iv. Over 5 TCF and up to 7 TCF – 50%; and
- v. Over 7 TCF and up to 9 TCF – 60%.
Reduction of Tax incentives due to High Cost of Development
Where the field development costs exceed the periodic benchmark set by the NUPRC, the production tax credits for that project will be reduced by 10%. The Notice provides that the production cost benchmark for 2024 is US$20 per barrel. This aligns with the NUPRC’s goal to drive down the cost of production of a barrel of crude to below US$20 per barrel from the current range of US$25 – US$40 which industry experts regard as sub-optimal and inefficient.
Calculation of Production Tax Credit and Surplus
The same fiscal price will be used to calculate the production tax credit and royalties and the production tax credit is calculated based on the total amount of oil or gas produced each year after production commences. The tax credit will be apportioned among the investors based on each investor’s capital contributed to the project.
Unutilised production tax credit surplus can be carried forward for up to three (3) years from the relevant year.
Reduction of Tax incentives due to High Technical Cost of Development
The production tax credit accruable in any year cannot be combined with the production allowances incentives provided in the Sixth Schedule to the Petroleum Industry Act or the Associated Gas Framework Agreement. This will ensure companies cannot “double dip” and enjoy multiple tax benefits or incentives on the same subject matter in the same financial year.
For more information, please contact aoenergy@aluko-oyebode.com
