FG Proposes Payments of NNPC’s Dividends into Sovereign Wealth Fund

Nigeria - The Federal Government has proposed that some of the dividends from the operations of the Nigerian National Petroleum Corporation (NNPC) expected to be re-organised in line with the Petroleum Industry Governance Bill (PIGB) should be paid into Nigeria’s Sovereign Wealth Fund (SWF).

This is with a view to growing the fund’s reserves and create stronger financial buffers for the country.

Contained in the final draft of the ‘Nigeria National Petroleum Fiscal Policy’, which the ministry of petroleum resources released on its website and obtained by THISDAY, the government also proposed to increase the amount of revenue it could take from oil production through royalty-based value system, which, in other words, mean capturing windfall profits.

It also stated that it would want the fiscal terms for extraction of hydrocarbons in the country to be cost efficient, adding that the cost of development to revenue often regarded as Cost Price Ratio (CPR) should not exceed 30 per cent.
Presently, Nigeria plans to review the laws guiding operations in her oil and gas industry. These laws have been described as outdated and out of touch with existing situations in the global oil and gas industry. They have also been blamed for the lack of progressive investments in the country’s oil industry.

Also, funding to Nigeria’s SWF comes from the government’s excess earnings from crude oil sales. The draft proposal, however, appeared to suggest an extra funding source for the Fund. It stated that the National Oil Company (NOC) would agree with the ministry of finance what percentage of the annual dividend would be paid to the SWF.

It said: “Creation of financial buffers: while Nigeria already has a Sovereign Wealth Fund (SWF), funding under the provisions of the enabling legislation has proven difficult at best.

“Significant revenues could have accrued to the SWF if the political will had been in place to avoid them being spent on subsidy payments. At the petroleum ministry level, the petroleum fiscal policy as it relates to the National Oil Company is that the National Oil Company shall agree an annual dividend policy with the ministry of finance for proceeds arising from its profits to be paid to the government and that the retained earnings consequent to this dividend policy shall be used for commercially sound investments.”

The policy further explained that it would seek to avoid the application of populist economics in the running of the NOC, saying that the NOC shall specifically be protected from exogenous intrusions in terms of its revenues.

“In other words, the government commits to market related pricing for crude and derivative products in the industry and price setting only in the case of natural monopolies such as pipeline and processing facilities, where prices shall be non-discriminatory and regulated on a rate of return basis.

“Additionally, government is committed to incentivising investment in domestic production through backward integration strategies in the oil and gas industry by extending Section 39 CITA Fiscal Incentives to all mid-stream oil and gas utilisation projects,” it added.

The draft document said the government would push to have it passed into law within one year, and that under it, the government would equally take reduced royalties from productions in the onshore and shallow water, where the burden of development are too high impeding development of new fields, in particular by small companies.

“It will also aim to achieve the following – increase the government take in deep water consistent with Section 16 of the Deep Offshore Act comparable to international levels, make petroleum revenues easier to collect by improving the petroleum revenue governance framework, make the collection process more transparent through the petroleum revenue information system, adjust the system to a modern international taxation framework,” it explained.

Its overall objective was to have all companies engaged in upstream petroleum operations pay Company Income Tax (CIT), including the NNPC and its successors, introduce a resource tax called the Nigerian Hydrocarbon Tax (NHT) which is a simplified version of Petroleum Profit Tax (PPT), and eliminate tax offsets and upstream investment tax allowances, as well as introduce volume and price based royalties.

On cost efficiency in oil production, the policy said, “The fiscal design principles that underpin the government’s fiscal policy is that the fiscal terms for extraction of hydrocarbons should be such that the cost of development to revenue (the Cost Price Ratio or CPR), should not exceed 30 per cent. In other words, the fiscal system is designed to support cost efficient operations in order to reverse the six-fold increase in cost per barrel of production in Nigeria from 2004 to 2014.”

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