Replacing Petroleum Profit Tax with a Dual Petroleum Tax System: Implication on Petroleum Project Economics in Nigeria

Abstract

Abstract The paper evaluates the impact of the single tax system at its current rate in comparison to the proposed dual tax system in the National Petroleum Fiscal Policy in Nigeria on project economic performances. The paper also expounds on the arguments between two schools of thought (single tax and dual tax proponents) towards understanding the rationale underlying the divergent viewpoints. The methodological approach applies the discounted cash flow modelling framework to evaluate the performances of terrain based projects using selected metrics such as internal rate of return (IRR), discounted payout (DPO), net present value (NPV) and government take (GT) under the two tax systems. It calibrates the unit technical cost (UTC) for typical deep water projects in Nigeria and imposes the current and proposed fiscal terms. Varying cost treatment options and alternative allowable/incentives are investigated in the modelling framework using global best practices. The paper concludes that whichever tax system is adopted, it is possible to achieve equivalent economic metrics. However, the dual tax system presents a better flexible option over the single tax system as one of the split rates – especially the hydrocarbon resource tax – could serve as an instrument to incentivize investment, promote conservation, expand resource base through technology innovation more easily without denying the mineral owner an outright revenue via taxation. In a classical case like Nigeria, where national fiscal budget is largely financed using hydrocarbon revenue, the dual tax system 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. This paper bridges the gap between the divergent viewpoints on taxation system in Nigeria by proffering a pathway. It suggests that the overall objectives of stakeholders could be achieved using the same metrics if the mechanics in designing a fiscal system is better understood. This will lead to progressive application in achieving the divergent expectations.