Nigeria loses N2.56 trillion to eight-year oil pricing dispute

Nigeria may have lost an estimated N2.56 trillion ($8 billion) to the lingering price dispute between the International Oil Companies (IOCs) and Crude Oil Marketing Division (COMD) of the Nigerian National Petroleum Corporation (NNPC).

The sum which is more than a third of the 2016 budget of N6.1trillion, represents the estimated cumulative revenue losses from the under-assessment of the fiscal valuation on crude oil between 2006 and 2013, using the current exchange rate of N321 to $1, judging by the Nigerian Transparency International (NEITI) 2013 audit of the petroleum industry.

Based on the Official Selling Price (OSP), NEITI estimated that at least $1billion is lost yearly to crude price under-assessment.

The Joint Ventures (JVs) recorded the highest under-assessment of over $410.9 million followed by the Production Sharing Contracts (PSCs) with over $13.8 million and Marginal Fields/Sole Risk.

Since the parties are yet to resolve the dispute, it means that Nigeria, currently suffering from economic depression and in dire need of every petro-dollar it can get has lost even much more than that till date.

The development underscores the need for an adequate pricing framework to be clearly defined in the Petroleum Industry Bill (PIB), even as fiscal legislation is anticipated to be the last of the four bills on industry regulation to be presented to the National Assembly for consideration.

The Guardian learnt that the under-assessment recorded was mainly as a result of price differentials between the official government position and the oil companies’ estimates.

The IOCs in defence, faulted the pricing methodology by the NNPC/COMD, saying that the method contravened the provisions of the Petroleum Profits Tax Act (PPTA) 1959.

According to NEITI, the under-assessments were computed based on the advised pricing methodology by the NNPC in contrast to the pricing methodologies used by the oil companies.

For instance, the Shell Production Development Company (SPDC), applied a different pricing methodology against the prices advised by NNPC, which resulted in revenue losses of over $6.2 billion in the eight-year period.

NEITI stated that the differences in the method of pricing arose from the fact that while the Nigerian Government and NNPC insist on the OSP for value determination, the IOCs preferred the Realisable Price (RP).  The lingering price dispute is a major challenge in the assessment of taxes and royalties in the country.

Reacting to the prices differential in the latest NEITI’s report, SPDC defended that it is not aware of any such provisions in the Petroleum Act, which provides for the use of fiscal prices advised by NNPC as the basis for determining royalty payable.

It added that the concept of Official Selling Price (OSP) is not recognised under the Act, and as such not recognised by SPDC.

Also, Total Exploration and Production Nigeria disagreed with the application of OSP prescribed by NEITI.

It noted that this approach of computing the fiscal value of crude oil based on the OSP as provided by NNPC/COMD contravenes the provisions of the Petroleum Profits Tax Act (PPTA) 1959.

It said: “Section 9(2)(a) of the Petroleum Profits Tax Act (PPTA) stipulates that the value of oil for the purpose of royalty shall be in accordance with the provisions of any enactment applicable thereto and any financial arrangement or arrangements between the Federal Government of Nigeria and the oil producing company.

“In furtherance to this directive, Section 21(5) of the PPTA provides for a ‘posted price’ established by the company, after agreement with the Government of Nigeria as to the procedure to be followed for the purpose, as its posted price for Nigerian crude oil of that gravity and quality.”

Furthermore, the Shell Nigeria Exploration and Production Company (SNEPCo), noted that Section 61, subsection 2a and 2b, of the Petroleum Act, prescribes that in the event of a dispute or disagreement as to royalty due, the tax payer is permitted to apply the rate it believes in, pending the resolution of the issue.

Also, the Nigerian Agip Exploration stated: “NAE applied the actual sales price in computing the royalty because the RP mechanism as enshrined in the PSC Agreement has not been agreed by NNPC and contractor.

“It should be noted that even though the RP mechanism has not been agreed by the parties (NNPC & Contractor), NNPC lifted their royalty oil entitlement based on their computations, which used the OSP.”

Going forward, NEITI stressed the need for an adequate pricing framework to be clearly defined in the PIB. It urged the Minister of Petroleum Resources, to compel the Department of Petroleum Resources (DPR) to finalise the appropriate pricing methodology for royalty computation.

It added that the controversy over the new pricing regime of 2013 and the court ruling of 2015 on the application of OSP should be speedily resolved. “DPR, FIRS and NNPC should conclude the ongoing discussions on pricing methodology,” it said.

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