Single-Tier or Dual-Tier Tax Systems: Implication for Petroleum Project Economics in Nigeria
- Joseph C Echendu (Emerald Energy Institute and International Institute for Petroleum, Energy Law, and Policy) | Adekunle Joseph Idowu (African University of Science and Technology) | Adedapo Adejumo (Emerald Energy Institute) | Omowunmi Iledare (Emerald Energy Institute) | Adeyemi Joseph Akinlawon (Emerald Energy Institute)
- Document ID
- Society of Petroleum Engineers
- SPE Reservoir Evaluation & Engineering
- Publication Date
- May 2019
- Document Type
- Journal Paper
- 789 - 799
- 2019.Society of Petroleum Engineers
- petroleum profit tax, sensitivity, tax system, petroleum project economics, dual tax
- 9 in the last 30 days
- 54 since 2007
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In this work we evaluate the effects of the single-tier tax system (STS) at its current rate in comparison to the proposed dual-tier tax system (DTS) in the National Petroleum Fiscal Policy in Nigeria on project economic performance. We also expound on the arguments between two schools of thought (single tax and dual tax proponents) toward understanding the rationale underlying the divergent viewpoints. The methodological approach applies the discounted cash flow modeling framework to evaluate the performances of terrainbased projects using selected metrics, such as internal rate of return, discounted payout, net present value, and government take (GT) under the two tax systems. This approach calibrates the unit technical cost for typical deepwater projects in Nigeria and imposes the current and proposed fiscal terms. Varying cost treatment options and alternative allowables/incentives are investigated in the modeling framework using global best practices.
We conclude that whichever tax system is adopted, it is possible to achieve equivalent economic metrics. However, the DTS presents a better, more flexible option over the STS because one of the split rates—especially the hydrocarbon resource tax—could serve as an instrument to incentivize investment, promote conservation, and expand the resource base through technology innovation more easily without denying the mineral owner an outright revenue through taxation. In a classical case such as Nigeria, in which the national fiscal budget is largely financed using hydrocarbon revenue, the DTS seemingly offers a better option for revenue sharing among the stakeholders—the resource owners and the Federal Government—than the current single upstream tax system. Our discussion in this paper bridges the gap between the divergent viewpoints on the taxation system in Nigeria by proffering a pathway. We suggest that the overall objectives of stakeholders could be achieved using either STS or DTS metrics if the mechanics in designing the fiscal system is better understood. This will lead to progressive application in achieving divergent expectations.
|File Size||773 KB||Number of Pages||11|
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