Why NLNG’s Fiscal Incentive Has Become A National Burden

Why NLNG’s Fiscal Incentive Has Become A National Burden

By Kenneth Jukpor

The Nigerian Liquefied Natural Gas (NLNG) is one of the most celebrated organizations in the nation’s oil and gas sector. It has commendably converted about 119 Bcm (billion standard cubic metres) or 4.2 Tcf (trillion cubic feet) of Associated Gas (AG) to exports as LNG and Natural Gas Liquids (NGLs), thus helping to reduce gas flaring by upstream companies from over 60% to less than 25%.

However, NLNG has also become responsible for a rising threat to Nigeria’s economy with the recurring issues of non-payment of levies. The organization’s fiscal incentives accounted for in its establishing Act or its interpretation of these incentives, pitches it against the Nigerian Maritime Administration and Safety Agency (NIMASA) as it refuses to make statutory charges include the Cabotage 2% surcharge for NLNG vessels and the 3% freight charge which is in the NIMASA Act.

Both agencies have been at loggerheads as a result of the seeming conflict in their enabling Acts: the Nigeria LNG (Fiscal Incentives, Guarantees and Assurances) Act 1990 on one hand; and NIMASA Act 2007, Merchant Shipping Act and Coastal and Inland Shipping Act.

Having been one of the prime beneficiaries of the pioneer status policy of the Federal Government on gas monetization and flare reduction, NLNG has become accustomed to the fiscal incentives which now prove to be an extra hurdle to the nation’s ailing economy, a burden NIMASA has resolved to eliminate.

As a result of the commercial incentives built into the NLNG Act to serve as an empowerment plan for the maiden years of the company’s operations, NLNG has observed rapid growth from a single train gas processing company to an efficiently run six train companies shinning among the biggest commercial enterprises in Africa. With this development, some questions arise – what is the cost of NLNG’s rapid rise on the nation’s economy? Should NLNG be allowed to enjoy monopoly of tax evasion when it has emerged as a giant company in Nigeria and Africa? How long would the nation continue to protect a company which has grown financially and in all ramifications in the last three decades?

Although Section 2 of the NLNG Act provides the company tax waivers and other incentives for its investments in facilities to harness Nigeria’s gas resources for exports, how long should this waiver last? Where there time limits for the tax relief?

NIMASA rightly contends that its establishing laws exempt only military vessels from its various revenue payments.

Recall that in 2008, the House of Representatives secured the backing of the executive in its move to amend the NLNG (Fiscal Incentives and Assurances) Act as the Federal Government said the retention of the law is no longer necessary.

At that time, the Minister of Finance, Dr. Shamsudeen Usman in a document sent to the House of Representatives Committee on Gas stated that the pioneer status enshrined in Section 1 (4) of the Act, which qualifies the LNG company for income tax relief from commencement of the project until production day, “is no longer desirable and should accordingly be deleted.”

Usman had posited that the tax holiday granted to NLNG expired on October 9, 2009. Nevertheless, ten years after the expiration of the tax holiday, the issue of paying levies remains a burden for NLNG as only brute force engineered by NIMASA led to payments from the gas company under protest.

MMS Plus reached out to a legal expert on the matter who declared that there was no conflict in the Acts of both agencies, noting that NLNG only chose an interpretation that suits it.

The Senior Partner, Akabogu and Associaties, Mr. Emeka Akabogu told our correspondent that NIMASA is within its right to demand payments and levies which are due from NLNG.

According to him, these charges include the Cabotage 2% surcharge for NLNG vessels and the 3% freight charge which is in the NIMASA Act.

“NLNG has contended over the years that it is not liable to pay because by virtue of its establishment it is exempted from paying all taxes and it argues that it is exempted from paying forever. There is no conflict in the Acts establishing NLNG and NIMASA. NLNG is simply interpreting the law in the way it deems it. NLNG Act never empowered it to be exempted from taxes for all time. The Act only gave extension for an initial period of five years after its establishment for tax relief” he said.

“For that initial five years, there ought to be a certain threshold so that if the company was able to generate income upto a certain level before the five year period, they would be liable to pay taxes. They were only given a pioneer status and NLNG has been very profitable from the beginning. They achieved that threshold within the first three years. Despite achieving the threshold making the immense profit they are making and the expiry of the initial five years which later expanded to ten years; they have refused to pay these charges” he stated.

Akabogu who is also the Convener of the principal downstream petroleum event in Africa, OTL Africa Downstream Expo, faulted NLNG’s contention that they are entitled to be exempted from taxes in perpetuity, stressing that there is nowhere in the NLNG Act that they are entitled to be exempted from such charges in perpetuity.

“It was only for a period which is stated in the Act, which was five years and later reviewed to ten years, but it has long expired” he added.

Despite declaring that it would start paying some of the imposed levies in installment under protest in view of its contract commitments to its commercial partners, financial losses, dents on its corporate reputation, political pressure from government and the risks of losing market positions, the company has remained non-compliant.

The Nigerian National Petroleum Corporation (NNPC) holds overriding 49% financial interest in NLNG, while Shell Gas BV owns 25.6% operating interest. Total has 15% in the company, while Eni International N.V.S.a.r.l holds the remaining 10.4% interest.

The terms include incentives, concessions, guarantees and assurances in letters to lenders for the NLNG Trains 4 and 5 expansion by ministry of finance, ministry of justice and Office of the Attorney-General of the Federation, and the Central Bank of Nigeria (CBN).

From the monetization of gas hitherto being flared, NLNG has generated over $100 billion revenue since inception; paid over $36 billion to shareholders as dividends, and 49% of the total dividends goes to the federal government through the Nigerian National Petroleum Corporation (NNPC).

It is worrisome that NIMASA had to resort to the use of force and violence to extract payments from the gas company, which was given robust financial incentives during its infant stage as an indigenous company that needed protection.

For national interest and as part of efforts to actualize the Economic Growth and Recovery Plan of the government, President Muhammadu Buhari may have to invoke an executive fiat to compel NLNG to pay the NIMASA levies.

NIMASA has respectfully demanded payments of shipping levies based on gross freight on exports and imports, but the NLNG exempts arguing that it is exempted from payment of the Sea Protection Levy, the 3% freight levies on cargo exports shipped by NLNG, and the 2% Cabotage Levy.

NIMASA resorted to sending its security contractors to block the Bonny Channel for weeks, preventing passage of NLNG’s chartered vessels to get NLNG pay compulsory levies in the past.

MMS Plus investigations show that NLNG’s tax holiday ended on October 8, 2009; yet the company says it has no tax issues and has no obligation to pay duties to NIMASA. Why should a company which has generated over $100billion revenue since inception decline payment of compulsory levies on grounds of financial incentives it was given when it started off?

While NIMASA continues to pursue the judgment at the appellate court, it is unfortunate that a much celebrated indigenous company given fiscal incentives to guarantee its sustainability has decided to rob the nation of mandatory levies.

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