Oil Companies in Nigeria

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Oil Companies in Nigeria THE ECONOMIC PERFORMANCE OF INTERNATIONAL OIL COMPANIES IN NIGERIA: The Effect of Fiscal Taxation and the Separation of Ownership and Control CORNELIUS BABATUNDE ALALADE A thesis submitted in partial fulfilment of the requirements of Bournemouth University for the degree of Doctor of Philosophy July 2004 BEST CO" AVAILABLE ABSTRACT Name of Author: Cornelius Babatunde Alalade Title of the Investigation: THE ECONOMIC PERFORMANCE OF INTERNATIONAL OIL COMPANIES IN NIGERIA: The Effect of Fiscal Taxation and the Separation of Ownership and Control. This research investigates the tax policies of the Nigerian government and the separation of ownership and control and the possibility that they impact on the economic performance of the international oil companies operating in Nigeria. The key areas of the research include a literature review which concentrates on both shareholder and stakeholder theories in corporate governance and on the separation of ownership and control. The literature review is also on government control mechanisms, including state ownership of corporations and taxation. Another key part of this research is the investigation of the relationship between types of contract between host government and the operating companies, and the companies' economic performance in relation to contract type. The second part of this research examines the relationship between the variables representing fiscal taxation and those representing economic performance. Given that there are essentially two types of contracts operating in Nigeria's oil and gas exploitation business, that is, Joint Venture (JV) and Production Sharing Contract (PSC), these two formed the basis of the research. For the purposes of measuring economic performance, the ii for unit cost of production and gross margin per barrel were chosen as the variables measuring the impact of the separationof ownership and control and the impact of fiscal taxation on the economic performanceof the operatingcompanies. Data obtained from secondary sources served as the basis for the quantitative analysis before employed in this research, and the results obtained were statistically tested any for interpretation and recommendationswere suggested.Interviews were also conducted factors the qualitative aspect of this study in order to obtain information on the that in influenced Nigeria's oil and gas exploration and production fiscal policy formulation the past. if This research provided the opportunity to arrive at certain conclusions which, even they sometimes appeared obvious, were never previously empirically substantiated, and the corroboration of some existing theories as being applicable to the Nigerian situation. They also provided a basis for suggesting the inappropriateness of some existing concepts or theories in their application to Nigeria's oil and gas exploration and producing companies. For example, the results suggest that the existence of separation of ownership and control does not guarantee optimization of economic performance (or maximization of wealth) for in the production sharing contract type in oil companies operating Nigeria, even if they do elsewhere. Fiscal taxation was also suggested as critical to economic performance but possibly not the only variable impacting on the economics of petroleum exploitation in Nigeria. This research provided other possible areas for further research in both fields of corporate governance and fiscal taxation. 111 LIST OF CONTENTS TTTLE PAGE i ..................................................................... ABSTRACT ii ........................................................................ LIST OF CONTENTS iiiiii .............. .............................................. LIST OF MAPS x .................................................................... LIST OF TABLES xi ................................................................. LIST OF FIGURES xii ............................................................... LIST OF APPENDICES........ xiii PREFACE .......................................................................... X1V DEFINITIONS ..................................................................... xvi ACKNOWLEDGEMENT xvii ........................................................ DEDICATION ............. xviii 1. CHAPTER 1: INTRODUCTION 1 ............................................. 1.1: Background to the Study 1 ..................................................... 1.2: Structure the Thesis 2 of ........................................................ 1.3: Overview the Petroleum industry 2 of ....................................... 1.3.1: What is Petroletun? 2 ........................................................................... 1.3.2: How is Petroleum Formed? 3 ............................................................... 1.3.3: Occurrence 4 .................................................................... 1.3.4: Uses Petroleum Oil Gas 4 of and ............................................ 1.3.5: Structure Petroleum Industry 5 of the ...................................... 1.3.6:The Upstream Sector 7 ....................................................... 1.3.7: Oil Gas Reserves Figures 7 and and Production .......................... 1.3.8: Oil and Gas Business Economics 13 and ................................... IV 1.4: Conclusion 14 ........................................................................ CHAPTER 2: DESCRIPTION AND STRUCTURE OF THE PETROLEUM INDUSTRY IN NIGERIA 15 ....................................... 2.1: Historical Overview 15 ............................................................. 2.2: Economic Overview 15 ............................................................. Structure Government Supervision Oil Industry 16 2.3: of of the ................ 17 2.4: Legislation Governing Oil and Gas Exploration & Production........... 2.5: License License Tvves.......... 17 and ....................................... .... 2.6: Fiscal Regime 18 .................................................................... 2.7: Marginal Fields for Indigenous Participation & Entrepreneurship...... 19 2.8: Conclusion 22 ........................................................................ CHAPTER 3: DESCRIPTION AND STRUCTURE OF THE PETROLEUM INDUSTRY IN THE UNITED KINGDOM.. 23 3.1: Historical Overview 23 .............................................................. Structure 24 3.2: GovernmentSupervisory and Management ....................... 3.3: UK Oil Gas Legislation 26 and ..................................................... 3.4: Joint Operating Agreements 28 ..................................................... 3.5: UK Oil Gas Fiscal Regimes 29 and ................................................ 3.6: The UK Continental Shelf Taxation 30 ............................................ 3.7: Conclusion 32 ........................................................................ V CHAPTER 4: REGULATORY LEGISLATION AND FISCAL TAXATION MECHANISM IN NIGERIA AND THE UNITED KINGDOM 33 ... 4.1: Exploration Production 33 and .................................................... 4.2: Federal Inland Revenue Service (FIRS) 34 ..................................... 4.3: Other Legislation Oil Gas Operation in Nigeria 35 on and ................... 4.4: Nigeria's Oil Gas Petroleum Profit Taxation (PPT) 36 and ................... 4.5: Memorandum Understanding in Nigeria 39 of .................................. 4.6: UK Oil Gas Regulatory Legislation 44 and .................................... 4.7: UK Oil Gas Taxation / Fiscal Regime 45 and ................................... 4.8: Key Issues in UK Petroleum Revenue Tax 50 ................................. 4.9: UK Corporation Tax Ring Fenced Activity 51 and ........................... 4.10: Other Key Provisions Affecting Computation of Corporation Tax... 55 4.11: Conclusion 56 ..................................................................... CHAPTER 5: LITERATURE REVIEW I 57 ....................................... FISCAL TAXATION AS INSTRUMENT OF GOVERNMENT CONTROL 5.1: Background ..................................................................... .57 Fiscal Taxation Control 59 5.2: -A Form of Government ........................ 5.3: Government Control Objectives National Resource Taxation..... 59 and . 5.4: Fiscal Policy Defined 61 ......................................................... 5.5: Government Control Fiscal Policy 62 and .........:........................... 5.6: Tax Incentive As Part Fiscal Policy 66 of ..................................... 5.7: Principal Characteristics Tax System 70 of a ................................. 5.8: National Tax Income Maximization 72 ........................................ 5.9: Corporation Tax 72 ............................................................... vi 5.10: Corporate Taxes Financial Risks 74 and ........................................ 5.11: The Disincentive Taxation 75 of ................................................. 5.12: The Development of GovernmentControl of Petroleum Resources Fiscal Taxation in Nigeria the UK 76 through and .............. Relationship............ 80 5.13: The Petroleum Industry - Government Control 5.14: Control Economic Profitability 81 and .......................................... 5.15: The Development Nigeria UK Oil Gas Policies 83 of and and ............... 5.16: Critical Issues in Petroleum Fiscal Taxation 87 ................................. 5.17: Conclusion 92 ........................................................................ CHAPTER 6: LITERATURE
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