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Business News

Hunger Games: DPR and the chase for signature bonuses

The DPR’s approach is akin to eating your broth while it is cooking and then burning your tongue in the process, rather than waiting till it is cooked.

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Oil, DPR, FG announces commencement of bids for marginal oilfields despite court injunction

In March 2021, the Department of Petroleum Resources (DPR) announced the provisional award of licenses for 57 marginal fields in the 2020 marginal fields licensing rounds to 161 indigenous oil companies. While the selected companies are yet to be publicly announced, the DPR has written a series of letters to them, the most recent of which requested payment of the signature bonuses within a 45-day period.

According to Sarki Auwalu, the DPR Director, “We expect Nigeria to net $500 million from the signature bonuses on the fields.” However, projections from observers estimate the country could realize as much as $1.14 billion from the signature bonuses alone.

READ: Oil & Gas: DPR announces 2020 marginal field licensing round

The DPR chase of the provisional awardees for swift payment of signature bonuses is revealing. When the bid rounds launched last year (the first in almost 20 years) with a 3,300% increase from what was paid as signature bonuses in the 2003/2004 rounds even in the heart of the pandemic, it was clear the DPR’s focus was shoring up as much financial gains from the fields as possible – perhaps not fiendish if long-term interests rather than immediate gains were prioritized.

The signature bonuses which start at $5 million and go all the way to as much as $20 million, come after the initial payment of a host of fees – N3 million bid processing fee, $15,000 data prying fee, $25,000 data leasing fee, $50,000 competent person’s report fee and $25,000 field-specific report fee. Currently, provisional awardees are running helter-skelter seeking financing for exorbitant signature bonuses in a very challenging oil and gas market. The nature of signature bonuses allows the federal government to gain from the fields upfront irrespective of the economic success of the awardees on the fields eventually.

READ: FG explains why it revoked 4 Addax Petroleum Oil Mining Licenses

Could it then perhaps be that the excessive bonuses are the government’s means of trying to maximize benefits and hedge any possible losses in the event that, as with 15 of the 24 fields in the last licensing rounds, most of these 57 fields fail to achieve commercial production? Is the DPR bearish on the marginal fields market? Should investors be worried?

Many challenges face the provisional awardees at this time, first of which is funding for the signature bonuses, for which many of them would require third-party financing. Some of this financing may be sourced from offshore lenders, given the reluctance of Nigerian financial institutions to lend to upstream oil and gas development, due to legacy non-performing loans reported to amount to at least N1.21 trillion as at the end of H1 2020.

READ: Nigeria’s revenue burden to ease off as DPR announces bids for marginal oilfields

These non-performing loans constitute the greatest liquidity barrier for the country’s financial sector. Financial institutions are also wary of the opaqueness of the current rounds- the fact that the bid winners are unknown to the public, awardees are unaware of the co-holders of interests in the fields that they have been forcefully grouped with and the award letters are merely ‘provisional’ and cannot serve as sufficient security for any lending.

The DPR’s approach is akin to eating your broth while it is cooking and then burning your tongue in the process, rather than waiting till it is cooked. The frenzy to earn as much as it can from the fields prior to the commencement of production or even prior to constituting the partnership amongst the joint awardees, could end up being counterproductive.

READ: DPR warns against hoarding of petroleum products by depot owners, threatens sanctions

The uncertain regulatory and fiscal framework of the industry, the non-passage of the PIB, the lack of commencement of the gas flare commercialisation programme, the paucity of midstream gas infrastructure (where large gas deposits are realized) equally create a significant challenge. Has the government attempted to close these gaps in the build-up to finalizing the licensing or is it merely focused on the fat signature bonuses? The shift to renewables is also certainly a major challenge for any current fossil fuel investment as is the lack of regulatory clarity around dealing with host community clamour for percentages in the equity of producing companies.

The DPR seems to forget the very nature of marginal fields, which is that they are fields not considered by the original licence or leaseholders for development because of assumed marginal economics under prevailing fiscal and market terms. In light of the even steeper current economic and fiscal market conditions, it should aim to be more of a partner than a brute taskmaster.

READ: FG’s plan for N350 billion revenue from oil field licensing suffers setback

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Wood Mackenzie has estimated that the 25 largest oilfields in these rounds have the potential to unlock $9.4bn of investment over the first five years, generating more than $38bn in revenue over their lifetime. The DPR should take a long-term view and look to providing support for these awardees to achieve commercial production from these fields, which will in the end earn taxes and royalties for the country and lead to significant economic development as well as increased domestic supply of fuels, rather than a short-term view that will quell the country’s immediate hunger to fund the national budget and may eventually result on the 2003/2004 scenario playing out again.

Additionally, the DPR should provide more transparency in the process which will ensure more accountability for not just them, but also the companies awarded the fields.

Caleb Adebayo is an LLM Candidate, Energy and Environmental Law at New York University School of Law. His interest lies at the intersection of Energy, Environment and Finance and he is keen on the interplay between Law, Policy and Energy Markets. Prior to taking up his LLM, he worked on the Energy team of a tier 1 Nigerian law firm. A nominee for The Future Awards Prize for Lawyers, he has written widely on the subject of Energy and Environmental Law. He is also a member of the New York City Bar Energy Subcommittee

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Economy & Politics

FG places high profile Nigerians under security watch for terrorism financing

The FG has said that it is currently profiling a large number of high profile Nigerians who have been alleged to have reasonable links to terrorism financing.

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FG to establish a new anti-corruption agency, P&ID, FG, malami, $9bn fine is a scam - Federal Government , UPDATED: P&ID operations shut down, assets forfeited by court order

The Federal Government has said that it is currently profiling a large number of high profile Nigerians who have been alleged to have reasonable links to terrorism financing.

This follows the arrest of an undisclosed number of suspects recently after the convictions of some Nigerians on terrorism financing in the United Arab Emirates (UAE).

This disclosure was made by the Attorney General of the Federation and Minister of Justice, Abubakar Malami, during a chat with the press at the Presidential Villa, Abuja on Friday.

What the Attorney General of the Federation is saying

The Minister said that the convictions of Nigerians in the UAE has given rise to wider and far-reaching investigations in Nigeria.

Malami in his statement said, “As you will actually know, sometimes back, there were certain convictions of Nigerians allegedly involved in terrorism financing in the United Arab Emirates (UAE).

That gave rise to a wider and far-reaching investigation in Nigeria and I’m happy to report that arising from the wider coverage investigation that has been conducted in Nigeria, a number of people, both institutional and otherwise, were found to be culpable, I mean reasonable grounds for suspicion of terrorism financing have been established, or perhaps has been proven to be in existence in respect of the transactions of certain high-profile individuals and businessmen across the country.

I’m happy to report that investigation has been ongoing for long and it has reached an advanced stage. Arriving from the investigation, there exists, certainly, reasonable grounds for suspicion that a lot of Nigerians, high-profile, institutional and otherwise, are involved in terrorism financing and they are being profiled for prosecution.

In essence, it is indeed true that the government is prosecuting and it’s indeed initiating processes of prosecuting those high-profile individuals that are found to be financing terrorism. It is indeed true.

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However, Malami did not give the number of such suspects as he maintained that investigation was still ongoing until a conclusion is arrived at.

“As to the number, the investigation is ongoing and it has to be conclusive before one can arrive at a certain number, but one thing I can tell you is it is a large number and they are being profiled for prosecution.

It is indeed a large number and I’m not in a position to give you the precise number as at now because the profiling and investigation are ongoing.”

Malami warned that government will not hesitate to invoke the full wrath of the law on anyone found culpable in sponsoring terrorism in the country as nobody found culpable in terrorism financing will be spared.

What you should know

It can be recalled that in March 2021, the Association of Bureau De Change Operators of Nigeria (ABCON) confirmed the arrest of some of its members by security operatives over the investigation of some of their transactions which border on money laundering, terrorism financing and Know Your Customer status.

ABCON in its statement said that it considers these as serious allegations especially given the security challenges facing the country. It appealed to the authorities to expedite action to ensure that innocent people who have been caught up in this investigation can be released and so that they can return to their anxious families and resume their lives.

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Macro-Economic News

Nigeria’s VAT collection surges to N496.4 billion in Q1 2021

Nigeria’s VAT collection surged by 52.93% (year-on-year) to stand at N496.4 billion in Q1 2021.

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VAT

Nigeria generated a sum of N496.39 billion revenue from Value Added Tax (VAT) in the first quarter of 2021, a surge of 52.93% year-on-year compared to N324.58 billion recorded in the corresponding period of 2020.

This is contained in the sectoral distribution of value added tax report, recently released by the National Bureau of Statistics (NBS).

According to the report, VAT collections in the period represents a 52.93% increase as against N324.58 billion recorded in Q1 2020; and a 9.17% increase compared to N454.7 billion recorded in the previous quarter.

The increase in VAT collections could be attributed to increased economic activity in the country, compared to the previous year, where most economic activities were put on hold as a result of the covid-19 pandemic.

Highlights

  • Highlights of the report showed that the manufacturing sector generated the highest amount of VAT with N49.41 billion generated, closely followed by Professional Services, having generated N42.50 billion, and State Ministries & Parastatals, which generated N26.96 billion.
  • Mining generated the least, closely followed by Pioneering, Textile & Garment Industry with N48.36 million, N77.01 million, and N289.41 million generated respectively.
  • Also, out of the total amount generated in Q1 2021, N224.85 billion was generated as Non-Import VAT locally while N171.66 billion was generated as Non-Import VAT for foreign.
  • The balance of N99.88 billion was generated as NCS-Import VAT.

Manufacturing sector topples professional services

The manufacturing sector toppled the professional services sector to lead the list of sectors with the highest VAT remittances in the first quarter of 2021. A total of N49.41 billion was collected as Value Added Tax from the manufacturing sector.

  • Professional services followed closely, having remitted N42.5 billion in VAT to the government, State ministries and parastatals stood in third position with N26.96 billion VAT.
  • Others on the list include; Commercial and trading sector with N22.8 billion, oil-producing (N15.8 billion), Transportation and haulage services (N14.9 billion), Breweries, bottling, and beverages (N11.9 billion).
  • Federal ministries and parastatals (N8.8 billion), banks and financial institutions (N3.3 billion), and oil-marketing (N3 billion).

Why this matters

  • The increase in VAT collection is a development in the right direction, especially given the recent positive growth recorded in global crude oil prices, indicating an increase in government revenue.
  • However, the government needs to intensify its effort in creating innovative ways of increasing revenue given growing overheads and statutory spending, coupled with increasing debt profile.

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