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Uk Fiscal System

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ABSTRACT: Nigeria's existing oil reserve base of 35.9 billion barrels, which is currently producing 2.4 million barrels of oil per day, is projected to have been depleted in 33 years time. As the nation displays an acute petroleum dependency for its revenue, the government has understandably initiated a policy intended to boost the reserves to 40 billion barrels by 2010. One of the approaches to achieve this objective is the development of marginal petroleum concessions. This approach may result in the introduction of 300 million barrels to the existing reserves. Nigeria's marginal concessions' fiscal regime stands to influence the success of the government's objective. This paper, compares the Nigerian approach to the United Kingdom's petroleum fiscal regime, and is intended to ascertain the Nigerian regime's attractiveness with regard to investment.


API American Petroleum Institute

APRT Advance Petroleum Revenue Tax

CFA Cross-field Allowance

CT Corporation Tax

DPR Department of Petroleum Resources

ITF Industrial Training Fund

JV Joint Venture

NNPC Nigerian National Petroleum Corporation

NPV Net Present Value

NSITF Nigeria Social Insurance Trust Fund

OA Oil Allowance

PRT Petroleum Revenue Tax

∗ Iretekhai Akhigbe is an Engineer (Imperial College London, UK), and Energy Economist (CEPMLP - University of Dundee, UK). His experiences include petroleum investment analysis (Oceanic Minerals Ltd, UK) and regulation involving petroleum exploration and exploitation (Nigeria - Sao Tome & Principe Joint Development Authority).


PSA Production Sharing Agreement

PSC Production Sharing Contract

ROR Rate of Return

S Safeguard

SCT Supplementary Charge to Corporation Tax

SPD Supplementary Petroleum Duty

UKCS United Kingdom Continental Shelf


In 20021 the Federal Republic of Nigeria embarked upon the licensing of 24 marginal oil fields containing about 300 million barrels of crude oil. Awards were made to indigenous companies in 20032. The prospects of the successful development and production of these fields rest upon the attainment of commerciality thresholds via oil price appreciation, and the propriety of the applicable fiscal regime.

One condition for the development of these fields is currently present - a high oil price regime prevails. However, the unpredictable and widely fluctuating nature of oil prices is such that the current regime cannot be solely relied upon to sustain the economic development of these fields. Accordingly, the propriety of Nigeria's fiscal regime, as it applies to the marginal fields, comes into question.

The significance of the subject under review is a component of a looming threat to the country's revenue. Nigeria's economy displays considerable petroleum dependence, and retains a much greater relative dependence than many other oil-producing nations. This dependence is illustrated in Table 1.3.

1 Alexander's Oil and Gas Connections, Nigeria Pre-qualifies Indigenous Firms for Marginal Field Blocks, (last viewed on 1 May 2006).

2 Alexander's Oil and Gas Connections, Nigeria Awards Oil Fields to Local Companies, (last viewed on 1 May 2006).

3 Joint United Nations Development Programme / World Bank Energy Sector Management Assistance Programme (ESMAP), Taxation and State Participation in Nigeria's Oil and Gas Sector. (August 2004),$FILE/057-04+Nigeria+Taxation_McPherson.pdf (last visited on 23 March 2006).


Table 1: Relative Petroleum Dependence

Nigeria's proven petroleum reserves were estimated in January 2006 to be 35.9 billion barrels of oil, with a production rate of 2.4 million barrels per day4. The country's Department of Petroleum Resources (DPR) has stated that there will be a depletion of the reserves within 33 years.

As depletion directly impacts upon 70 per cent of governmental revenue and 95 per cent of the country's foreign exchange earnings, the government has adopted a policy in an attempt to secure its oil revenue. In particular, it intends to increase its reserves and production capacity to 40 billion barrels, and 4 million barrels per day respectively, by 20105.

To achieve these ends, arguably only two options are available to a country. First, opening up previously unavailable acreage or second, improving the existing fiscal structure. Nigeria has subscribed to both options, with the licensing of the marginal fields falling within the latter strategy.

Licence holders are unlikely to independently fund the oil field developments, but instead compete with other oil and gas provinces for investment from the global financial markets. The attractiveness of their region's fiscal regime6 features significantly in the decision making processes which ultimately result in the success or loss of investment capital, with further implications for Nigeria's policy as regards its 2010 target.

4 The Energy Information Administration, US Government, Country Analysis Brief: Nigeria., (last visited on 1 May 2006).

5 ibid.

6 Although the fiscal regime is one of the most significant factors, one must note that several factors feature as part of the international competitiveness of a countries petroleum sector.


This paper commences with a synopsis of the key issues relating to investment in marginal field development projects. The subsequent section then describes



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