Professor Wumi Iledare
…Collaboration among stakeholders should be imbibed
…Research and Development: key to industry reforms
…Friendly fiscal framework for investors by the government
-By Felix Douglas
The perturbation of every stakeholder in Nigeria oil and gas industry, is lack of virile fiscal bill to enhance the oil sector. There has been hue and cry on the aspect of friendly fiscal policy that will be favourable for the industry.
Thus, the Facility For Oil Sector Transformation (FOSTER), in partnership with Energy Institute, Nigeria branch, jointly held a webinar with to champion the cause to address the lingering issue of fiscal regime for the oil and gas industry.
Oil industry players and other interests have stood in total stupefaction while a country that has been in exploration and production activities for over five decades, will not have an enhanced fiscal policy to govern its oil sector.
Giving his opinion on the issue, Professor Wumi Iledare, who has been in the industry for more than thirty years basically across the lines both academia and the professional sectors. He currently serves as Chair in Oil and Gas studies at the University of Cape Coast in Ghana. An expert in International Petroleum and Fiscal System Economics and also International President of the National Association of Energy Economics (IAEE).
Professor Iledare spoke from professional point of view that there should be mutuality of interest among stakeholders, investors and the community, “Nigeria is not running out of oil, the country is actually running into it, but there are drivers. What are these drivers? They are called the key elements of fiscal regime.”
He revealed that in designing a fiscal system, three things should be put into consideration in executing it, and they are inter-related; economics, technology and public policy. “These are very critical, if a country is to develop its petroleum resources and reserves to make sustainable development.”
The significance of research and development cannot be undermined, there must be an interplay among different stakeholders: the university, government and industry. This is one of the missing links in terms of fiscal system design with respect to sustainable development in a petroleum resource endowed nation. Tectonic role of government is significant.
Mistakes have been done in the past, but lessons of the past are helpful to focus in the future to make amends. Nigeria has not fair well in terms of developing its fiscal system for sustainable economic growth.
Professor Iledare made it known that industry experts have opportunity to project an enhanced fiscal regime to drive reforms to a concluding end in order to add value to the economy. In his words, “When you have an economy that is driven by oil but contributing less than 10% to the GDP then something is wrong with the deployment of our resources. This reform is inevitable and this is the time to do it.”
Specifically, in designing a fiscal regime, the objective of government is to use petroleum to benefit its citizens and use the leverage to develop national capacity in terms of training young professionals. In building capacity, there has to be indigenous participation in the industry.
Professor Iledare emphasised that there is need to develop policies that will limit barrier to entry and make asset of oil and gas business bankable to indigenous firms without restrain for international flow. The key determinant for flow of investment is how competitive and attractive the fiscal regimes are. It has to be stable with attention to investors” objectives.
In the global petroleum resource distribution, there are considerations for oil and gas funded by investors. Core mandate is profitability after investments. Thus, optic matters. Therefore, after viewing geological endowment, the next focus will be on fiscal system that is going to enhance development.
On the contrary when “host government shy in their responsibility they blame international players and local participants that made it impossible for them to reform the industry. In my opinion this is the time for government to take responsibility and present a stable fresh fiscal system for the industry.”
At present in the industry, there are royalties, taxes and incentives, these are blueprint of a fiscal system and the combinations of these three are critical to determining the reward given to investors and asset that is being generated.
Professor Iledare gave example of Brazil whose oil is one of its access to its revenue but does not get much from taxes. The South American country is operating a friendly system in terms of Production Sharing Contract (PSC) whereas PSC in Nigeria and access to government revenue is with different dimension.
The Petroleum Industry Fiscal Bill (PIFB) of 2018 depended more on taxes than royalty. The PIFB is industry friendly because royalty is not contributing much revenue to the government compared to tax. This is probably a new way of thinking. The purpose of a virile fiscal system is to expand the outlook and sustenance of the oil and gas industry.
The astute oil industry professional disclosed that possession of immense revenue by a country does not necessarily translate to money, “government take may be high but the access to revenue is different.”
In project economics, before investment decision are taken, multinational oil companies top management deliberate on their limited fund and access to profitability for certain period. The country with resound profitability index is where they will invest. A government that is the driver of fiscal system should put index into consideration. Nigeria fiscal system is ranked low in global project economics.
Professor Iledare was of the opinion that, for the petroleum industry to move forward government should separate petroleum income tax from corporate income. It should not be viewed by operators in the oil industry as a dual tax, “it is not dual tax.” This however will enhance incentive to resource development.
Hence, he recommended that necessary adjustments in the industry need urgent attention because the future is bright for Nigeria. With 40 billion barrels in reserves and the country is producing 2.5 barrels per day (bpd), there is capability to produce 10 million bpd if economy revives.
He gave example of the United States of America with population of 300 to 340 million, with less than 20 billion barrels, this country is producing 12 and half million bpd.
Nigeria, with population of 200 million plus and has 40 billion barrels, “there is nothing that says the country cannot produce 7.5 million bpd if its fiscal system is attractive for investment.”
Thus, the International President of IAEE advised Nigeria to improve on its fiscal system being in oil exploration for more than five decades, the present situation of its oil industry cannot attract foreign investors with threat to profitability. The country should also bear in mind that other countries in Africa are discovering oil almost on a yearly basis hence the industry is competitive. Before the International Oil Companies and potential investors abandon Nigeria’s oil industry for other friendly countries, the government should wake up from its slumber and fix the industry.
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