The Impact of the Proposed Petroleum Industry Fiscal Bill PIFB, 2018 Tax Scheme on the Economics of Oil Production in Nigeria

Revenue from petroleum operations remains the most important contributor to government expenditures in Nigeria. Hence, the onus is on the central government to design fiscal regime that would maximize economic rents to the nation. The Petroleum Industry Fiscal Bill (PIFB) of 2018 seems to be the awaited bill that may satisfy the economic objectives of the Nigerian government. PIFB 2018 proposes the replacement of the default petroleum profit tax with single tax system, petroleum income tax and additional petroleum income tax to cater for windfall profits. This research uses deterministic spreadsheet approach to evaluate the impacts of this new tax scheme on the profitability of oil ventures in Nigerian deep-water production sharing contracts. The deterministic results were subjected to Monte Carlo Simulation using Crystal Ball Risk analysis software to account for risks and uncertainties inherent in the business. The typical project examined under PIFB (2018) generated a positive Net Present Value (NPV) of MM$595.18, an Internal Rate of Return (IRR) of 23.7% which is higher than opportunity cost of capital, Profitability Index (PI) of 1.34, Contractor take of 11.9% and Host Government take of 88.1%. All evaluated indicators gave positive results meaning that investments under this new fiscal regime will be profitable giving the government higher take as compared to the current regime. The results also show that the contractor take can increase to as high as 25% taking advantage of Reserves Replacement Ratio (RRR) tied to additional production allowance. The bill however, does not explicitly state the conditions for cost recovery limit and profit oil sharing, as such could create a lot concerns to investors and may also hamper investment in the industry. Hence, the bill should be reviewed before passage into law.