Oil is and has been the dominant source of Nigerian government revenue, contributing 90 percent of total exports, and this approximates to 80% of total government revenues and as a result, oil has become the dominant factor in Nigeria’s economy since the oil discoveries in the early 1970s. The problem of low economic performance of Nigeria cannot be attributed solely to instability of earnings from the oil sector, but as a result of failure by government to utilize productively the financial windfall from the export of crude oil from the mid – 1970s to develop other sectors of the economy (Onaolapo 2013).The Petroleum Industry is the largest and main generator of GDP in Nigeria which is the most populous in African nations. Since the British discovered oil in the Niger Delta in the late 1950s; the oil industry has become the main stay of the Nigerian economy.
This was however not the case prior to the 1950s. Available literature on the Nigeria’s Economy has it that Nigeria was primarily an agrarian economy, whose revenue generation was based on agriculture. Statistics from the Federal Bureau of Statistics indicate that between 1958 -1969, the contribution of agriculture to Gross Domestic Product (GDP) at current factor cost was 52 percent while that of oil was just 0.007 percent. Agriculture formed the main stay of the country’s economy accounting for higher percentage of Gross Domestic Product (Success 2012).
The Nigerian petroleum industry has been described as the largest among all industries in the country. This is probably due to the belief that petroleum is one of the major sources of energy worldwide. The size, international characteristic, and role assumed by the petroleum industry were noted to have originated from the notion that petroleum is versatile as it currently satisfies a wide variety of energy and related needs. Petroleum is the most vital source of energy, providing over 50 percent of all commercial energy consumption in the world. The revenues obtained from crude oil in Nigeria are of absolute advantage to expenditure commitments on various projects at the local, state, and federal levels and as a result of this fact, Nigerian economy rely heavily on the revenue derived from petroleum products, as they provide 70 percent of government revenue and about 95 percent of foreign exchange earnings.
Apart from this, the contribution of petroleum to national development is many and varied; employment generation, foreign exchange earnings, income generation, industrialization, and improvements in other economic variables. While the major investors in the petroleum industry are the international oil companies (IOCs), the principal legislation governing petroleum operations in Nigeria is the Petroleum Profit Tax Act (PPTA) of 2007. Its main fiscal instrument is the Petroleum Profit Tax (PPT). Under the PPT, the tax rate was set at 67.5 percent for the first five years of operations by the oil company and 85 percent thereafter (Onyemaechi 2012).It is paradoxical to state at this point that, The Nigerian oil industry has served only international and elite domestic oil interests, in such that Nigeria exports crude oil but imports refined petroleum products for domestic consumption.
Despite state ownership, Nigeria is not in control of its oil industry, which has enabled the growth of a chasm between oil wealth and development and to some wide extent; this is one of the rationales for the proposition of the Petroleum Industry Bills.The proposed Petroleum Industry Bill (PIB) a new fiscal regime for Nigeria’s oil industry which would govern the economic benefits derived from petroleum exploration and production. The fiscal regime is a critical element of any oil industry which aims to balance Government tax take with incentives to invest in oil exploration and production.
In addition, robust legislation provides the foundations of relationships between operators, government and communities. This article considers the implications of the fiscal regime currently proposed by the PIB; arguing that the bill will provide short-term gains for government revenue, while deterring long-term prospects for increased investment the offshore petroleum exploration and this fiscal regime relates to the overall tax and cost implication imposed by the Federal Government of Nigeria on the oil industry. These relate mainly to Nigerian Hydrocarbon Tax, Companies Income Tax & Royalties.Accordingly, Petroleum Industry (PIB) proposes that a Nigerian Hydrocarbon Tax (NHT) will replace The PIB proposes that a Nigerian Hydrocarbon Tax (NHT) will replace the Petroleum Profits Tax (PPT). This will stand at 50% for onshore & shallow water exploration and 25% for deep-water activities.
New regulations on tax deductions will provide a disincentive for deep-water investment. Initial capital employed in production sharing contracts (these are a type of contract signed between a government and a resource extraction company concerning how much of the resource extracted from the country each will receive) will not be deductible and this is of a major concern to oil operators and investors because most of the production are done in deep waters with its associated cost of production. It is worthy of note that, majority of proven Nigerian reserves that are not yet developed are held in deepwater offshore fields representing a significant opportunity for oil exploration and investment and as such, if the PIB is aimed at increasing production, for this aim to be achieved, the new fiscal regime must promote investment in these offshore reserves.The major change in the PIB is the introduction of Corporate Income Tax (CIT) and this is now payable on upstream (exploration and production) operations. Companies involved in both upstream and downstream (refining and distributing) will have to compute CIT separately on each operation. Various tax incentives are offered for greater involvement in downstream oil investment. This is a great step towards incentivizing the gas market and improving Nigeria’s refining capacity.
1.2 Statement of ProblemThe implication of the proposed fiscal system on the overall performance of the petroleum industry is still a subject of research. Several researchers have concluded that the proposed dual tax system will encourage the development of marginal fields by small Nigerian owned companies owing to the fact that very small fields will have a low government take compared to current and international conditions. Another researcher also noted that despite the higher royalties and taxes, the proposed fiscal terms are competitive with other deep water terms in the world.
Ascertaining the willingness of foreign investors to invest under this proposed system is a function of the difference in the contractor’s Net Present Values (NPVs), method of administration and political/social concerns. This research therefore set to quantify the economic impacts of dual tax system on the overall economics of oil production in Nigeria.
