The Nigerian Federal Government has set its sights on a significant revenue boost from the oil sector in 2024, aiming for a staggering 214% increase in Petroleum Profit Tax (PPT) collections.
This ambitious target is outlined in data from the Federal Inland Revenue Service (FIRS), which indicates plans to rake in N9.96 trillion from PPT.
The proposed figure marks a substantial leap of 214% from the N3.17 trillion generated in 2023 and represents an 89% hike over the initial projection of N5.26 trillion for the same year.
The Petroleum Industry Act (PIA) introduced significant fiscal reforms in response to the challenges posed by falling oil prices on the profitability of oil and gas operators. Notably, the Act phased out the Petroleum Profits Tax (PPT) and introduced the Hydrocarbon Tax (HT), targeting crude oil, condensates, and natural gas produced from associated gas in onshore and shallow waters. This new tax framework specifically excludes both associated and non-associated natural gas as well as exploration in frontier acreages.
Under the HT, tax rates will vary based on the type of license held. For operations in onshore and shallow waters, converted Petroleum Mining Licenses (PMLs) will be taxed at a rate of 30%, whereas converted Petroleum Prospecting Licenses (PPLs) will see a lower rate of 15%.
Furthermore, the PIA mandates that companies engaged in upstream activities, including those operating in deep offshore regions, upstream gas, and both midstream and downstream sectors, will be subject to the Companies Income Tax (CIT) at a standard rate of 30%. This adjustment sets the maximum income tax rate for oil and gas companies at 60%, a marked decrease from the previous 85% under the Petroleum Profits Tax Act (PPTA).
The application of these revised fiscal terms will be triggered by the conversion of existing Oil Prospecting Licenses (OPLs) and Oil Mining Licenses (OMLs) to PPLs and PMLs, respectively, as well as upon the expiration, termination of unconverted leases, or the renewal of OMLs. This overhaul in the taxation structure is aimed at making the Nigerian oil and gas sector more adaptable and financially viable amidst the fluctuating global oil prices.
Therefore, the PPT figure covers HT and CIT from operators in the oil and gas sector.
Oil sector’s poor tax performance in 2023
According to data from the Federal Inland Revenue Service (FIRS), the agency faced challenges in meeting its Petroleum Profit Tax (PPT) collection targets for 2023, achieving only around 60% of its projected goal. This shortfall positions PPT as one of the least successful areas in the FIRS’s tax collection efforts for last year, ranking it at the lower end of the performance spectrum.
Specifically, PPT emerged as the third lowest-performing tax category, only outpacing the Police Trust Fund (PTF) tax, which had a compliance rate of 26%, and the NASENI levy, with a collection efficiency of 31%. This data highlights the difficulties encountered in optimizing revenue from the petroleum sector within the broader context of tax collection challenges.
- The FIRS justified the reason for not meeting its PPT target for 2023 in a document obtained from the agency and seen by Nairametrics. It blamed it on “lower production (approx. 1.46mbpd) compared to budget (1.69mbpd); conversion of some deep offshore PSC OMLs to PMLs under PIA terms and arrears from NNPC.”
The Federal Government has been consistently missing its revenue targets from the oil sector, indicating a persistent underperformance. In 2022, the sector only achieved 35.4% of its revenue goal, generating N776.35 billion out of a targeted N2.19 trillion. This trend of shortfall continued into 2023, with only about 60% of the target being met.
More Insights
- The Nigerian oil sector, a cornerstone of the country’s economy, is grappling with a series of significant challenges, prompting extensive discussions and actions at both national and international levels.
- The National Bureau of Statistics (NBS) recently revealed that the Nigerian oil and gas industry was totally side-lined by foreign investors in the second quarter of 2023 for the first time on record, as the once lucrative sector attracted no capital inflow in that quarter. This revelation is troubling statistics as about 62% of the Nigerian economy depend on the oil and gas sector, which is a major source of government revenue.
- In response to the critical issue of oil theft, Hon. Tajudeen Abbas, Speaker of Nigeria’s House of Representatives, established a Special Ad Hoc Committee to investigate the surge in pipeline vandalism, illegal oil bunkering, and theft. Abbas underscored the severe impact of these criminal activities, revealing that Nigeria loses over 300,000 barrels of crude oil daily. This loss translates to a financial blow of N1.29 trillion annually, a substantial drain on the nation’s resources.
- The global context of Nigeria’s oil challenges was underscored by Ms. Emmanuelle Blatmann, the outgoing French Ambassador to Nigeria. She noted that the escalating Russia-Ukraine conflict is prompting European countries to seek alternative oil sources. However, Nigeria’s difficulties in fulfilling oil contracts have deterred these nations from turning to the country, exacerbating the sector’s struggles.
- The NBS also reported a 0.85% contraction in the oil sector’s GDP for Q3/2023. Despite this decline, it marks an improvement from the -22.67% and -13.43% growth rates recorded in the same quarter of 2022 and the preceding quarter, respectively.
- The modest uptick in oil revenue in 2023 is credited to the current administration’s efforts to improve living conditions in the Niger Delta, enhance engagement with oil operators, and create a more inviting investment climate in the sector.
- For 2024, the Federal Government has cautiously set an oil price benchmark of $77.96 per barrel and a production estimate of 1.78 million barrels per day (mb/d). Yet, this target may be ambitious, considering the production cuts enforced by OPEC and its allies.
- An S&P Global Commodity Insights report features insights from Clementine Wallop, a senior adviser at Horizon Engage, who asserts that Nigeria’s oil sector faces ongoing challenges. The administration under Bola Tinubu is tasked with revitalizing this vital economic sector, signaling a critical period of work and reform ahead.
