By Peter Reat Gatkuoth**
Abstract
In order to successfully exploit the Hydro- carbons in the Republic of South Sudan, the National Petroleum and Gas Corporation (Nile Petroleum Corporation, Nile Pet) was established and incorporated to act as a commercial entity and safeguard National interest on behalf of the Government of Republic of South Sudan. This paper critically examines the Economy and Budget allocations of the Republic of South Sudan, the Role of the National Oil Company, the fiscal instruments applied by the National Oil Company to capture Revenue shares from the sector, challenges, and recommendations thereof. The author notes that while the Nile Petroleum Corporation (Nile Pet) was incorporated to participate in the upstream activities of oil and gas sector on behalf of the Republic of South Sudan, the corporation faces a number of constraints and challenges.
This national petroleum and gas corporation, Nile Pet, is wholly owned by the Republic of South Sudan with the ability to compete with the International Oil Company (IOC) in the development and production of oil and gas resources. The company has been able to achieve its goals and objectives by venturing with oil exploration companies operating in the country, as well as investigating and proposing new upstream, mid-stream, and down-stream ventures locally and internationally to improve revenue maximization of the state.
Introduction
South Sudan is an infant nation that joined the United Nations as the 193rd member of states. The new nation is located in East-Central Africa. It is a landlocked country that borders with six countries. Ethiopia in the East, Central Africa in the West, Sudan in the North and Kenya, Uganda and DRC in the South. Before the independence, it was part of the Republic of Sudan. “The history of the Republic of South Sudan is identified more by conflict and violence; itself is the product of conflict with Northern Sudan which was resolved through the peaceful agreement in 2005 (Young, 2012).
South Sudan is endowed with an abundance of natural resources that include Oil, Gas, and mineral resources in most of the country. The history of the Oil and Gas discovery began in the 1970s when the country was still a united Sudan. “The discovery of Oil and Gas was part or partial to the cause of civil war which led into the separation of the two nations (Nyaba, 1997).” Oil and Gas was discovered by Chevron and Talisman in Western Upper Nile region (Unity Oil Field) in 1979 to 1983. The Oil and Gas industry in South Sudan has a potential of producing an estimate of 150, 000 to 200, 000 per day before the crisis (Rueskamp, 2014).
In early 1980s, Sudan government signed Exploration and Production Sharing Agreement (EPSA) with many companies that including China National Petroleum Company (40%), PETRONAS (30%) and Sudapet (5%). These EPSA legal documents highlighted the regulations governing exploration and production in Sudan. When South Sudan separated from Sudan, the government of the Republic of Sudan left all Oil facilities to the newly government of Southern Sudan and all the Oil and Gas companies operating in Sudan moved to Juba, the capital of Republic of South Sudan.
The new country continues extracting Oil and Gas, using the same companies that signed the EPSA with Sudan government. The government of South Sudan continued to use the old policies and regulations governing the Oil and Gas in Sudan until a new agreement (EPSA) is signed. In September 2012, the government of South Sudan established South Sudan Petroleum Act which supposed to formulate strategies, plans and programs for the development and management of the petroleum sector. “The main purpose of the Act is to manage the petroleum sector in an ethical, efficient, transparent and accountable manner, on the basis of environmentally, socially, and economically sustainable principles.
Legal and policy framework of South Sudan’s oil and gas sector.
Fundamentally, the Oil and Gas sector in the Republic of South Sudan is governed by the Transitional Constitution and the Petroleum Act 2012. The act provides for a legal framework for oil development and activities in the country. There is also the Petroleum Revenue Management Law which governs the collection and management of Revenues arising from oil and gas sector. The Petroleum Policy thereof provides guidance and principles for the oil industry. The Public Financial Management and Accountability Act dictates how the government of South Sudan can assess and issue Reports on all public finances. The Company Act.2012 as well as the Procurement Act plays a vital role in administering the oil and gas sector as well as the process of incorporation of companies in the Republic of South Sudan (Young, 2012).
The Petroleum Act empowers the Ministry to establish a model EPSA to coordinate the Ministry of Finance and Planning. The petroleum Act provides further, that, the oil and gas exploration can only be granted a license through open and competitive bidding. In South Sudan, most of the important oil blocks were already allocated by the Sudan Government before South Sudan became independent in July 2011. However, there are other oil exploration licenses, Joint venture agreements, and production-sharing contracts awarded. The Act further establishes a Petroleum Registry within the Ministry of Petroleum and Mining. It must be noted that the licenses are open to public bidding and can also publish model petroleum agreements.
Economic performance of the Republic of South Sudan
The Republic of South Sudan’s economy is largely underdeveloped, the infrastructural framework of the country is very poor and under-developed which largely depends on goods, services and capital from the bordering countries. The GDP, Percapita of South Sudan is equivalent to USD 1,505 before the crisis. The GDP, Percapita is much more than the East African neighbours due to oil production. The Gross National Income (GNI) Percapita was much lower at USD888 in 2017 reflecting large income outflows to oil companies. The Financial Budget of 2016/17 was SSP 9bn (around USD 300 million) of humanitarian assistance.
Diagram. 1: Showing Budget priorities of F/Y 2016/2017
Source: Ministry of Finance and Economic Development (JUBA) FY 2016/2017.
Global Perspective to National Oil Company (NOC).
Historically, NOCs have controlled oil product imports, applying a variety of barriers: taxes, subsidies, duties, access to distribution infrastructure, and even retail licenses. Many of those obstacles are still in place but are seen as costly and ineffective. Some Latin American countries that once controlled oil product retail sector are becoming more liberalized (e.g., Mexico). Others (Peru, Colombia, and Venezuela) have been forced to import in spite of persistent economic barriers because domestic demand growth outpaces domestic supply and oil refining investment. Refined product imports from Middle Eastern NOCs are increasingly seen as the new normal and the clear lines that once characterized a company as either a NOC or IOC are starting to blur. With a few notable exceptions, NOCs have largely focused either on their own domestic oil product markets or very clearly defined integrated entries into key export markets, largely in Asia. To date their investments have been principally about securing crude oil export outlets in return for equity in downstream companies and retail concessions. But as NOCs expand their export-oriented capacity, they will increasingly be looking commercially for markets for their own surplus refined products.
In some jurisdictions, the National Oil Companies focus on looking and on maintaining domestic oil refining capacity in balance with growing demand. NOC product exporters are therefore increasingly likely to find themselves competing with IOC majors, traders and eventually themselves as they look to carve out routes to market for their growing surplus of products. Importantly too, Middle East exporters will soon find that their own crude exports to refiners in Asia will put them in competition with their own refined product exports.
Formation and Rationale of National Petroleum and Gas Corporation (South Sudan’s National Oil Company)
The National Petroleum and Gas Corporation of the Republic of South Sudan was incorporated in 2009 under the Companies Act 2003 of the Republic of South Sudan as a commercial entity to safeguard the National Interests in the upstream activities of the oil and gas sector. The Company is further provided for under the Petroleum Act.2012, Laws of Republic of South Sudan. Upon independence of the Republic of South Sudan, the Company took over the properties of Sudapet (a Sudan state oil company). The Nile Petroleum Company is an integrated National Oil Company with shares and Joint ventures with Oil Companies operating in the area such Companies include Sudd Petroleum Operating Company (SPOC), Dar Petroleum Operating Company (DPOC), and Greater Pioneer Operating Company (GPOC).
Government Participation through the national petroleum and gas corporation (Nilepet) has been minimal usually between, 5%-10% and Government carry is not mandatory under the EPSA. Under the Petroleum Act 2012, it is required that where a contractor decides to dispose of all or part of its interest under the Petroleum Agreement, the National Petroleum and gas Corporation (Nilepet) shall have the right to the first option in order to acquire the interest on the same terms as agreed upon by the contractor.
How to finance the South Sudan’s National Oil Company?
The Petroleum Act 2012 and Petroleum Policy of the Republic of South Sudan provide that the National Oil Company shall take active involvement in petroleum activities and that such a company shall represent the Commercial interest of the government in petroleum activities; this makes financing of such entity more relevant. The Petroleum Revenue Management Law which governs the collection and management of Revenues arising from the oil and gas sector provides that all funds that fund the company are charged and deductible from the central government. However, unlike the Uganda National Oil Company (UNOC) which has been newly incorporated and established, Uganda as a newly emerging oil and gas-producing country that demands for huge sums of capital and investments, the National Petroleum and Gas Corporation of Republic of South Sudan is self-sustaining and has formed a Joint Ventures with oil exploration companies operating in the area like Sudd Petroleum Operating Company (SPOC), Dar Petroleum Operating Company (DPOC) and Greater Pioneer Operating Company(GPOC). It is also argued that the National oil Company (NOC) shall use Such funds as seed money/finance and develop the blocks that would have been relinquished by the IOC after production and of the new acreage that they would have applied for and been licensed.
Fiscal instruments applied in South Sudan’s oil and gas sector.
In order to determine how the National Oil Company (NOC) can maximize Revenue from exploitation of oil and gas Resource and Extractive industry in general, it is very important to look at the fiscal Regime and Fiscal instruments applied therein. Like other Jurisdictions, the National Petroleum and Gas Corporation (Nilepet) of the Republic of South Sudan operates as a general commercial enterprise and it is subject to income tax as well as the rules and procedures that apply to a commercial company as per the table below. Table 1: Fiscal Instruments applied by South Sudan’s oil and gas sector.
| 1 | Income Tax | 15% | Applicable to all Companies operating in South Sudan. |
| 2 | Capital Gain Tax | 25% | Charged and applicable on the disposal of Company assets. |
| 3 | Withholding Tax | 15% | Applicable on all dividend payments. |
| 4 | Import Duty | Applicable to all imports made by the Company. | |
| 5 | VAT | No VAT, it uses a sales tax of 5% on goods and services (15% during austerity period when no oil is produced) | |
| 6 | PAYE | Charged on all Employees income earned, it is withheld and remitted by the company. | |
| 7 | Stamp Duty Fees and Licences | Applicable to all companies in the Republic of South Sudan. | |
| 8 | Resource Rent Tax | It is Charged on oil Companies operating in South Sudan. |
Source: Ministry of Finance and Economic Development (JUBA)
All these instruments are designed and should be applied by National Petroleum and Gas Corporation (Nilepet) during its operations and are meant to maximize Revenue for the government. This equally includes both the dividend from the state participation and revenues from sub-contractors in the oil and gas sector.
Value creation and addition of the National Oil Company.
Fundamentally, Value creation refers to the process through which the value of the aggregate output exceeds the value aggregate of the inputs. Analysts and authors like myself argue that value creation is fundamental in determining the viability and relevance of the project, and also assesses the ramification and continuance of the project on other hand. The formation of National Oil Company (NOC) with sound and strong structure is a key and a core principle in achieving value addition and other related benefits. Essentially, the National Oil Company (NOC) creates value as its operators in the petroleum production process, where it has control over the costs and operationalization of the project.
| Geology and Geography |
| State Context |
| Petroleum Sector Value Creation |
| Sector Policy and Institutional Framework |
| NOC Organization and Strategy
|
| Organization and Strategy |
Figure 1: Petroleum Sector Value Creation
The National Petroleum and Gas Corporation of Republic of South Sudan has been able in one way or another to maximise profits and capture a share of economic Rents from the oil and gas sector due to favourable government policies and objectives that are geared towards value creation and as such Nile petroleum corporation (Nilepet) as a commercial entity has been able to compete and had a share or joint venture with oil and gas companies operating in the Republic of South Sudan like Sudd Petroleum Operating Company (SPOC), Dar Petroleum Operating Company (DPOC) and Greater Pioneer Operating Company(GPOC) and other oil exploration companies in general.
Secondly, the National petroleum and gas corporation of Republic of South Sudan has been able to branch into different sectors and this has led to forward and backward linkages in both the oil sector and other auxiliary non-oil sectors, hence broadening of the tax base and sources of government revenues. The National petroleum and Gas Corporation of Republic of South Sudan in the bid to increase its effectiveness in maximizing Revenue has engaged into vertical integration by partnering with other companies in extractive industry to reduce their operational costs, improve on the technology knowledge as well as reduce their risks over the different segments of the value chain.
| NOC Value Creation Index |
| Financial Performance |
| National Mission Performance |
| Operational Performance |
| Ø Revenue Ø Total Assets (%) Ø Net cash flow (%) |
| Ø E&P production growth Ø Reserve replacement ratio (%) Ø Refinery Utilization (%) |
| Ø Share of local content Ø Domestic output use Ø NOC employment share of the country work force Ø Price subsidiary / revenue |
Figure 2: State participation and value creation index
Analysts and authors contend that the ability of the National Oil Company (NOC) to maximize government revenue largely and substantially depends on the legal and policy objective that a country intends to archive, however, other factors like geology, the nature of topography, Resource abundance, market, Domestic output and institutional set up must be put in consideration. Funding state participation in upstream activities with specific reference to development and production in the Extractive segment is associated with sorts of issues that are too complex to resolve and remedy.
The resource sectors and private partners generate a lot of cash, but significant officers are corrupt and money minded. Funding significant participation and viable projects take away and draws funds from other sectors of economy which halt and hinders development hence creating social and political tensions. Thirdly, state participation may affect and counter the macroeconomic and fiscal policies designed to protect and guarantee certainty and consistency in Exploration and development of oil and gas resource.
Baur et al, define Revenue collection as a mechanism through which Host governments (HG) allocate and share Revenue from extractive activities. In some jurisdictions, Revenue collection and sharing is based on sub -national Authorities depending on a particular context, sub- national authorities include states, provinces, districts, municipalities and traditional authorities. Sub- national authorities also refer to sub -national levels or jurisdictions. In South Sudan, resource revenue sharing arrangement is viewed as a mechanism for dividing resource revenues between the national government and resource producing sub- national jurisdictions. In this case, sub- national jurisdictions refer to states, counties and communities which receive resource revenues from the national government.
Several Reasons have been advanced to justify the rationale for Revenue collection and allocation in extractive industry among which include; (1) granting sub-national jurisdictions the right to collect and retain taxes from specified tax bases and (2) giving the national government the right to collect and distribute revenues between the sub-national entities and the national government. Analysts and Authors contend that the concept of Revenue collection and allocation is based on two core principles and these are; derivation and indicator, the concept of derivation provides that the Revenue received must be allocated and transferred to the Jurisdiction where the Resource was explored, developed and produced from. Like other jurisdictions in the low developing countries, the Republic of South Sudan has adopted and incorporated a derivation-based formula to allocate the 2% and 3% of net petroleum revenues to producing states, counties and communities out of the petroleum revenue accounts managed by the national government. The indicator principle provides that Revenues must be allocated based on population, Income and Revenue generation.
Challenges that hinder National Oil Company to Maximize Revenue.
By the year 2009, 52 million dollars were deducted from GoSS revenues to cover all expenses of preparing for the national elections of 2010. This was held for a period of four months before it was stopped. Furthermore, by this period, Khartoum was claiming a three percent management fee and pipeline fees from the revenues shared with the Republic of South Sudan, which in August to September 2008 consisted of 3-8 percent of the value of the government’s oil. Thirdly, there was a conflict concerning Sudapet which was the state-owned company by then that it does not share their revenues with the South at all. Oil paid by the national refineries is 10 USD lower per barrel than export price, and makes one wonders who cashes out the difference. According to the CPA the oil-producing state shall keep 2 percent of the revenues. However, there are few evidences on whether this has happened, nor what the money has been spent on; all these issues have greatly affected the operation and activities of the National Oil Company in the Republic of South Sudan.
Secondly, most of National oil Companies in low developing countries and third world countries are poorly financed, coupled with inefficiencies and weak economies. Consequently, most of the revenues collected by the National Oil Companies are remitted to the consolidated fund and nothing is retained by the National Oil Company, which is then expected to wait for financing and funding from the state that was never sufficient to enable the National Oil Company undertake the ventures that it proposed or sought to undertake. This greatly affects the National Oil companies’ ability to expand and compete with the IOC.
Essentially, some of the oil exploration companies in the Republic of South Sudan are also to be blamed for not taking any responsibility for the well-being of the country and its population. Before the split of Sudan, analysts and authors argue that South Sudan’s oil and gas industry is possibly the least socially responsible on earth. If the CPA falls apart and war breaks out, the oil companies bear a heavy responsibility. They have no development strategy, and limit themselves to feel-good projects. Community Development programs by oil-companies are of small scale and no need-assessment are known to be carried out and no development potential analyzed these hinder and affect Revenue maximization in the oil and gas sector.
Most investments in South Sudan today come from Asia, mainly from China, Malaysia and India. China is the main export destination. In January to September 2016, they exported 83.6 percent (or 5040.1 Millions) of Sudan’s total export earnings. 7-8 percent of Chinas energy imports come from Sudan. Malaysia is the second largest investor, and Petronas have invested 1.45 billion alone. India is also a large investor, and oil-investments in Sudan are in progress. Secondly, it is said that the National Oil Company of the Republic of South Sudan is politically motivated and influenced due to dual role of a participating entity in the production process as well as the regulator in the oil and gas sector. This has in one way or another affected the decisions of the National Petroleum and gas corporation and its ability to be impartial in participating in the upstream activities of oil and gas sector.
Country Comparison.
Oil and gas Resource in the Republic of Gabon, was first discovered near the African nation’s capital of Libreville in 1931 when it was still a French colony. In the year, 1960s, the Republic of Gabon commenced exploration and production activity, which led to dramatic increase in production. Today, the Republic of Gabon is the fifth largest producer of oil in sub-Saharan Africa. Oil and gas Resource is considered to be the major source of Revenue in the country. The World Bank Reports that for over the past five years, Gabon’s licensed deep-water plays cover an area of 128,000 square kilometres, representing around half of the country’s total acreage.
On average, Gabon has 19 deep water plays, which are operated oil and gas exploration companies and these include’ Marathon Oil, Shell and Vaalco. In order to achieve such goals, the country has invested in exploration and is offering several blocks in deep water acreage for tender. To actualize this plan, The Ministry of Petroleum and Hydro-carbon of the Republic of Gabon has offered several tenders to oslo-listed Spectrum and the French geoscience firm CCG to conduct a multi-client seismic survey of 25,000 square kilometres in Gabon’s South Basin area.
Economic performance of Republic of Gabon.
Gabon’s oil and gas industry accounts for 80 percent of exports, 45 percent of GDP, and 60 percent of government revenue. Gabon largely relies on oil exports; the country’s near-term economic outlook depends on oil production and prices. Gabon’s mature oil fields are in decline, with peak production in 1997 at 370,000 barrels per day (bpd) according to the U.S. Energy Information Administration. The Republic of Gabon’s economy is largely underdeveloped and largely depends on exports from oil and gas Resource as the major source of revenue. The GDP, Percapita of Republic of Gabon is equivalent to USD 2,505 and is much more than the sub-Saharan- Africa due to oil production, the Gross National Income (GNI) Percapita was much lower at USD988 in 2017 reflecting large income outflows to oil companies.
The National Oil Company of Republic of Gabon.
In order to successfully explore, develop and produce oil and gas resource, the Republic of Gabon incorporated, the Gabon Oil Company (GOC) as a commercial entity to represent the National Interest of Republic of Gabon. GOC is wholly owned by the government of the Republic of Gabon and its incorporation is a sign of ambition of the government to become a more active player in the domestic oil and gas sector. The Gabon Oil Company is based on four core principles which include; acquiring producing assets, reviving marginal fields, taking over operatorship of license-exploring oil fields and participate in new exploration ventures.
Fiscal instruments applied by Gabon’s oil and gas sector.
Like other jurisdictions, Gabon Oil Company (GOC) has designed several instruments as a way to maximize revenue from exploitation of its oil and gas resource. The company is subject to income tax as well as the rules and procedures that apply to a commercial company as per the Table below.
Table 2: Fiscal Instruments applied by Gabon Oil Company (GOC)
| 1 | Income Tax | 20% | Applicable to all Companies operating in Gabon |
| 2 | Capital Gain Tax | 15% | Charged and applicable on the disposal of Company assets. |
| 3 | Withholding Tax | 25% | Applicable on all dividend payments. |
| 4 | Import Duty | Applicable to all imports made by the Company. | |
| 5 | VAT | 15% | It’s charged on sales. |
| 6 | PAYE | Charged on all Employees income earned it is withheld and remitted by the company. | |
| 7 | Stamp Duty Fees and Licences | Applicable to all companies in the Republic of Gabon | |
| 8 | Resource Rent Tax | It is Charged on oil Companies operating in Gabon. |
Source: Ministry of Finance and Economic Development (Republic of Gabon)
Comparison between the South Sudan and Gabon’s oil and gas sector
The research reveals that both South Sudan and Gabon‘s oil and gas sector have failed to archive economic efficiency and neutrality and the two regimes have deliberately turned their backs on them. The Republic of South Sudan through its National Oil Company (The National petroleum and gas corporation) has tried to design fair instruments as a move to incentivize investors and International Oil Company (IOC). The sector has failed to archive total neutrality and efficiency. The concept of efficiency and neutrality can be considered in the figure below.
Figure 3: Illustrating fiscal efficiency: Ideal and Actual.
Source: Ernst & Young (2012): Global Oil & Gas Tax Guide, 2012
The Republic of Senegal: Overview of Senegal’s oil and gas sector.
The history of Oil and Gas exploration in the Republic of Senegal can be traced back in the 1950s. Whilst more than 140 offshore wells have been drilled since the 1950s, proven reserves remained very limited until recently. Basically, Senegal’s expectation of progressing production levels accordingly appears slim. This picture changed dramatically when Cairn Energy announced two concurrent exploration success in the fourth quarter of 2014, complemented by Kosmos Energy’s announcement of two gas discovery wells in the first quarter of 2016. In order to successfully, explore, develop and produce oil and gas resource, the Republic of Senegal with support from the Ministry of Energy, Petrosen and the National oil company of Republic of Senegal, small at first but recently larger, particularly since the promulgation of the 1998 Law, designed to make exploration and exploitation more attractive and to give greater consideration to environmental issues. For quite long, the Gadiaga Field No.2 on the onshore Tamna has been in production with small natural gas reserves and production, at just 363 million and 41 million m3 respectively.
Senegal’s Economic and financial performance.
The Republic of Senegal is a mid- sized nation with an estimated population of 15.3 million inhabitants, of which 43.5% lives in the country’s cities. With a median age of 18.2 years, “the population is young and growing at a rate of (2.9% per year); by 2030, the country is expected to have a total population of 22 million people.” Gross National Income (GNI) per capita is below the sub-Saharan African average (USD 2,739 for Senegal compared to USD 3,363). The research reveals that out of 15.3 million inhabitants, men earn significantly high salaries than women, (USD 2,739 for men, USD 1,657 for women).
Senegal is categorized as a country with Low Human Development. The country ranked 162 of 188 countries on the Human Development Index in 2016, which puts the country at a similar level of development as South Sudan and Afghanistan. Like other jurisdictions in Africa, the Republic of Senegal is undeveloped with poor infrastructural frame-work; this puts the country at equal footing and level of development with the Republic of South Sudan. Health and education facilities as well as other public services such as access to drinking water are quite dense in the coastal areas due to urbanization, but become scarce in rural areas. The frequency and inconsistencies in electricity generation is the chief constraint in the country, and this has hindered development and other sectors of the economy leading to poverty.
Diagram. 2: Showing Budget priorities of F/Y 2016/2017
Source: Ministry of Finance and Economic Development (Republic of Senegal) FY 2016/201
Current oil and gas activities in Senegal.
Table 3: Showing oil and gas activities in Senegal.
| No Block | Well | Operator | Partner | Oil/gas | Content | Phase | Remark |
| 1. Sangomar Block | FAN-1 | Cairn Energy PLC(40%) | Woodside (35%), FAR (15%), Petrosen (10%) | Oil | 330 MMBbI | Field Appraisal | Well depth 1430 metres |
| 2. Sangomar Block | SNE-well | Cairn Energy PLC(40%) | Woodside (35%), FAR (15%), Petrosen (10%) | Oil & gas | 270-900 MMbbl oil and several Tcf gas | Field Appraisal | Well depth 1000 metres |
| 3. Torture and Teranga | Geumbeul wells 1 & 2 | Kosmos (60%) | Timis (30%) Petrosen (10%) | Gas | 15Tcf | Field Appraisal | Well depth 5000 metres Field interconnection Mauritania and Senegal |
| 4. Grand Torture | Teranga – 1 | Kosmos (10%) | BP (62%) Petrosen (10%) | Gas | 25-50 Tcf | Field Appraisal | Extending from Marsouin in Mauritania |
Comparison between the South Sudan and Senegal’s oil and gas sector.
By comparison, the Republic of Senegal appears to have a progressive fiscal Regime as compared to the Republic of South Sudan. The Research reveals that tax rate and all instruments designed by the oil and gas sector in the Republic of Senegal increases as the size of the tax base grows. Conversely, this is not the case in the South Sudan because their fiscal regime provides for a higher rate of tax payment for a small size of tax base which is Regressive in nature as opposed to the republic of Senegal. In a progressive fiscal regime, the percentage of government take is higher for more profitable projects than for the marginal or less profitable. In a regressive regime, the least profitable projects are taxed at a higher rate than the more profitable ones.
Figure 4: Illustrating progressive and Regressive Taxation.
Source: Ernst & Young (2012): Global Oil & Gas Tax Guide, 2012.
Figure 4 shows that if the tax rate increases as the size of the tax base grows, the tax or the fiscal regime is “progressive”. In general terms this addresses the demands of both “efficiency” and “equity”. In most countries personal income tax is progressive
Any fiscal regime which provides for a higher rate of tax payment for a small size of tax base is “regressive”
The Republic of Guinea Bissau: Over view of the Republic of Guinea Bissau’s Economy.
Guinea-Bissau is highly dependent on subsistence agriculture, cashew nut exports, and foreign assistance. Two out of three Bissau-Guineans remain below the absolute poverty line. The legal economy is based on cashews and fishing. Illegal logging and trafficking in narcotics also play significant roles. The combination of limited economic prospects, weak institutions, and favourable geography have made this West African country a station for drugs bound for Europe. Guinea-Bissau has substantial potential for development of mineral resources including phosphates, bauxite and mineral sands and Offshore oil and gas exploration has begun. The country’s climate and “soil make it feasible to grow a wide range of cash crops, fruit, vegetables, and tubers; however, cashews generate more than 80% of export receipts and are the main source of income for many rural communities.”
With renewed donor support following elections in April-May 2014 and a successful regional bond issuance, the Government of Guinea-Bissau began to make progress paying salaries, settling domestic arrears and gaining more control over revenues and expenditures, but it was deposed by the president in August 2015.
A political stalemate since then has resulted in weak governance and reduced donor support. The country is participating in a three-year, IMF extended credit facility program that was suspended because of a planned bank bailout. The program was renewed in 2017, but the major donors of direct budget support (the EU, World Bank, and African Development Bank) have halted their programs indefinitely. Diversification of the economy remains a key policy goal, but Guinea-Bissau’s poor infrastructure and business climate will constrain this effort altogether.
The National Oil Company of the Republic of Guinea Bissau.
In order to successfully explore, develop and produce oil and gas resource, the Republic of Bissau incorporated a National Oil Company (UNOC) known as “Petroguin.’’ Petroguin is wholly owned by the government of Republic of Bissau. The company is a commercial entity incorporated to safe guard the National Interests in the upstream activities of oil and gas sector. The Company is further provided for under the Petroleum code Law, Laws of Republic of Bissau. Petroguin is an integrated National Oil Company (NOC) with shares and Joint ventures in Oil Companies operating in the area such as Bissau Exploration Co., a wholly owned subsidiary of Geo-Partners Ltd of the UK, has been established specifically to assist Petroguin, the national oil company (UNOC) of Guinea Bissau, in accelerating the development of its hydrocarbon resources.
Comparison between the South Sudan and Guinea Bissau’s oil and gas sector.
It’s obvious that from a purely Fiscal point of view, it doesn’t matter which one of the two regimes Bissau adopts. The Importance of the distinction between the two regimes is a matter of politics when it comes to sensitive issues of tittles, Ownership and sovereignty. On the Fiscal front, what really matters in the authors opinion is the way in which different instrument are Combined to archive government objectives be it Under Royalty tax or PSC. An ideal fiscal package has been described as ‘one that the parties have an incentive to adhere to. ‘It is one that not only adapts well to price fluctuations but also ensures that “government take” corresponds to increase in economic rent, without causing the IOC to feel too much of a pinch. Both Bissau and South Sudan’s fiscal package for petroleum should therefore aim at achieving as much as possible the characteristics of neutrality, efficiency, progressivity, flexibility and stability. There should also be an attractive combination of allowances guaranteed to complement the tax elements. Additionally, the roles of petroguin (National Oil Company of Republic of Bissau) and Nile petroleum Corporation (the National Oil Company of Republic of South Sudan) in monitoring of operations and tax administration will be crucial to successfully explore, develop and produce oil and gas Resource. Unlike South Sudan, the Republic of Bissau has an attractive Fiscal Regime that is open for foreign Investments. However, much higher Corporate Income Tax rate is levied as opposed to South Sudan. Conversely, South Sudan may be less attractive to Investors and appears to be non-neutral especially due to high rates of taxes levied.
The Kingdom of Saud-Arabia: Overview of Saud Arabia’s oil and gas sector.
The kingdom of Saud-Arabia is one of the leading oil and gas producing country on the globe. Essentially, the research reveals that Saud-Arabia accounts for 13% of world output and 35% of total OPEC output; the kingdom’s dominance of international crude oil markets is unchallenged. Although reluctant to play the role, Saudi Arabia has become the “swing producer,” balancing international oil demand and supply. Therefore, within limits, Saudi oil production policies can have a profound impact on international prices. It has been revealed that oil and gas sector contribute over 70% of Saud-Arabia’s revenue and this places the country at annual figure of US$5 billion to US$7 billion or less than 10 percent of total budgetary expenditures.
Formation and Rationale of the National Oil Company of the Kingdom of Saud-Arabia.
In order to successfully explore, develop and produce oil and gas resource, the Kingdom of Saud-Arabia incorporated a National Oil Company (NOC) known as “Aramco.’’ Aramco is wholly owned by the kingdom of Saud-Arabia. The company is a commercial entity incorporated to safe guard the National interests in the upstream activities of oil and gas sector and mineral resource in general in Saud-Arabia. Saudi Aramco was created by an agreement between Saudi Arabia and California-based oil company Socal.
This agreement, like many granted to big U.S. and British oil companies at the time gave it the exclusive right to explore and extract oil on Saudi territory. The California Arabian Standard Oil Company was renamed the Arabian American Oil Company or as we now know it, by its acronym Aramco. It was run by a consortium of U.S. oil companies including the predecessors of Chevron, Texaco and Exxon Mobil. Consequently, the kingdom of Saud–Arabia in collaboration with other oil and gas producing Country’s began nationalizing their resource following the creation of OPEC.
Comparison between the South Sudan and Saud Arabia’s oil and gas sector.
Well as the Republic of South Sudan has designed favourable instruments with the view of incentivising investors and the International Oil Companies (IOC) on other hand, the rate at which the South Sudan’s National Oil Company (NOC) can maximize revenue is too low as compared to Saud’s Aramco. The author submits that the rate at which Saud’s Aramco maximize revenue is unchallengeable and uncomparable to most of emerging oil and gas producing countries and South Sudan inclusive due to a number of reasons and these are: (1) The kingdom of Saud-Arabia has had the objective of maximising tax revenue over the life not just of a single project, but over the life of a whole sector of mining or petroleum development for a considerable period of over 85 years as opposed to oil and gas sector of Republic of South Sudan which is just emerging. (2) Saud’s Aramco seeks to maximise the NPV (net present value) of the tax revenue from present and future projects for present and future generations as opposed to the National oil company (NOC) of Republic of South Sudan. The author concludes that Saudi oil production policies can have a profound impact on international prices. It has been revealed that oil and gas sector contribute over 70% of Saud-Arabia’s revenue and this places the country at annual figure of US$5 billion to US$7 billion or less than 10 percent of total budgetary expenditures which can’t be compared to emerging oil and gas producing countries, the Republic of South Sudan inclusive.
Recommendations for Revenue Maximization of Republic of South Sudan.
Financing the National petroleum and gas corporation of Republic of South Sudan.
Raising funds to finance the National petroleum and gas corporation (Nilepet) may be difficult and complex especially in early stages because the available revenues will be utilized to cover costs incurred by International Oil Companies (IOC) and other contractors that invested in exploration, Development and production of oil and gas resource. However, the need to finance the National Oil Company (NOC) is more urgent in order to strengthen the entity’s capacity in performing its obligations and implementing its decision on behalf of the country. Secondly, the National petroleum and Gas Corporation as a body incorporated should start with minimal resource available and grows slowly by learning from other jurisdictions.
Embrace Local content policies in South Sudan.
South Sudan as oil and gas producing country must ensure that national content programs by International Oil Companies (IOC) and recruitment plans are intended to give preference to goods and services available in the country. This will ensure that local oil and gas suppliers have the necessary information to enable them prepare in terms of what consortia to build and investment capital to acquire. Ultimately, the ability to respond and meet the procurement requirements for sector goods and services will benefit the International Oil Companies (IOC) to meet regulatory requirements.
Using finite Resources to create lasting benefit to South Sudanese and the society as well
The government of the Republic of South Sudan, through the National oil Company (NOC) as the participating entity on behalf of the country, must opt for strategies designed to use finite resource sparingly. Oil and gas are non-renewable finite Resources and the benefits accruing from them is subject to depletion and exhaustion from the field. Therefore, this makes it incumbent to National Oil Company (NOC) to design mechanisms that are intended to safe guard and manage oil and gas resource in a manner that will create lasting benefit to the society. Archiving such benefit can be through using such resources to develop competencies through education, infrastructure development together with financial and social capital that can extend even beyond production and decommissioning of the field.
Furthermore, both the National Oil Company (NOC) and International Oil Company (IOC) must take into account the basic principle of intergeneration equity, that is to say, by utilizing the resource not only for the current but also for the future benefit. The activities of the current generation should not put a burden on future generations especially with regard to depletion of non-renewable resources. This is in line with petroleum policy and petroleum Act.2012 (Laws of Republic of South Sudan) which mandates the state to exploit, develop and produce oil and gas Resource in the manner that promotes and guarantees Intergenerational equity and sustainable Resource management as opposed to accelerated revenue generation.
Efficient Resource Management
The government of the Republic of South Sudan should exploit oil and gas resource efficiently in order to maximize its returns. This can be achieved by Mitigating Risks and losses arising from the same and reducing the Costs of operation, by increasing maximum levels of production. On the other hand, this will create mechanism that may promote effective revenue management and engineer economic growth and development. Secondly, revenues accruing from oil and gas resource must be utilized effectively, equitably and sparingly in order to archive the desired goals for the country.
Spirit of Co-operation
The Relationship between the governments, international Oil companies (IOC) and other stakeholders in oil and gas industries should be maintained in spirit of mutual respect, Co-operation and trust. Building mutual trust and lasting relationship between the International Oil Company (IOC) and National Oil Company (NOC) can be gained through mutual cooperation and constructive dialogues on other hand. Co-operation can be extended to communities in oil and gas producing regions and pipeline corridors. It must also be noted that Royalties and other rents arising from extraction of oil and gas resource must be shared in accordance with the constitution and petroleum Laws. Thirdly; efforts must be made to avoid development of conflicts between the government, international oil companies (IOC) and other stake holders in order to maintain peace and security in the sector.
Transparency and Accountability of National petroleum and Gas Corporation of Republic of South Sudan.
The National petroleum and Gas Corporation as a participating entity on behalf of the country must be transparent and honest in operationalization of its duties and obligations. In addition, the Company must embrace public participation in oil and gas activities and access to information pertaining oil and gas sector. Furthermore, the Company must increase high standards of transparency and accountability in Licensing, Procurement, Exploration, Development, and other significant departments of the sector. Additionally, the production Sharing Agreements (PSA) and other Petroleum Sharing Contracts (PSC) must be accessible for public inspection and participation.
Competitiveness and Productivity
It is through competiveness that licenses, operators and suppliers, that cost effective choices can be achieved. Competitiveness enables the participating entities in the oil and gas sector specifically the National Oil Company (NOC), the operator, contractor, Local oil companies (LOC) and international oil company (IOC) to maneuver and venture all options designed to archive a competitive advantage. Furthermore, competiveness in the newly created oil and gas sector enables selection of capable operators, efficient and reliable suppliers to make procurement tenders in the sector.
Capacity and Institutional Building
National capacity building is essential to enable the country participate in oil and gas activities, international and locally. Ironically, the government should put more concern on programs designed to enhance economic development and transformation as a tool to archive Development, Sustainability, endurance and financial prosperity. Economic Development and transformation must put more focus on development of Infrastructure necessary in archiving the desired goals in line with 2030 South Sudan’s vision and strategies.
Protection of Environment and Conservation of Biodiversity
The oil and gas industry is always a high risk and extremely associated with environmental damage especially during decommissioning phase when the oil and gas resource is depleted. The environment, human development and biodiversity should be neatly balanced for mutual benefit and survival.
Essentially most of the stakeholders in oil and gas sector specifically contractors, international oil Companies (IOC), local oil companies (LOC) and private patterns in the business should not engage in activities that are harmful and adversely dangerous to eco-social flora and fauna. Therefore, National petroleum and Gas Corporation, the participating entity in the upstream activities of oil and gas sector on behalf of South Sudan, International Oil Companies, Civil society Organizations, Environmental actors and other Initiatives must work together and put all efforts needed to preserve the environment especially in the leading oil and gas producing region/State.
Financing Infrastructure
Exploring, Developing and producing oil and gas resource in the Country require established infrastructural framework/policy. Such infrastructures include but not limited to Oil refinery, processing plants, pipelines and others. Secondly, oil and gas sector is always high Risky and capital intense and financing infrastructural development demands huge sums of capital. This call for the government to pattern with private sector in order to acquire such capital. Public private partnership should also be considered in order to raise funds for required infrastructural development.
The Transitional Constitution of Republic of South Sudan, the petroleum Policy and The Petroleum Act 2012, recognize the right of the state to explore, develop and produce oil and gas resource through a state-owned company (National Oil Company) and encourage the Host Governments (HG) to create value and over-role benefit for the citizens. In line with that submission, the Republic of South Sudan under the Companies Act.2003, incorporated the National Petroleum and gas corporation (Nilepet) as a commercial entity to participate in the upstream activities of oil and gas sector and safeguard the National interest of the Republic of South Sudan. However, to achieve such goals, the Company must embrace public participation in oil and gas activities and access to information pertaining to oil and gas sector. Furthermore, the Company must increase high standards of professionality, transparency and accountability in Licensing, Procurement, Exploration, Development and other significant departments of the sector.
LEGSLATION
The Petroleum Revenue Management Act. (Laws of Republic of South Sudan)
Petroleum Act.2012 (Laws of Republic of South Sudan)
Revenue Management Act (The Republic of Senegal)
Petroleum and policy Act (Republic of Gabon)
Petroleum Code law (The Republic of Senegal)
Mineral Code Law (The Republic of Bissau)
POLICY
Petroleum Policy (Republic of south)
Energy policy (Republic of Gabon)
Books
Johnston.D. The International Exploration Economics Risk and Contract analysis (USA, Tulsa, Oklahoma: Penn Well, 2003)
Nakhle. C, Petroleum Taxation: Sharing the Oil Wealth – A study of petroleum Taxation yesterday today and tomorrow, (USA, New York: Rutledge, 2008).
JOURNALS
National Oil Companies and Value Creation, SilvanoTorda, Brandon S.Tracy, NooraArfaa. World Bank Paper, 128
Prof. Stevens.P.(2008) A methodology for Assessing the performance of National Oil Companies, Background Paper for a study on National Oil Companies and Value Creation World bank Washington DC.
State Participation in the natural resource Sector, Evolution, issues and outlook, Charles McPherson. The Taxation of Petroleum and Minerals: Principal, Problems and the Practice, published in 2010 by Rutledge, 2 Park Square, Milton Park Oxon OX14 4RN.
Holmstrom, B. (1979). Moral Hazard and observability. The Bell Journal of Economics, 10 (1), 74-91. Hovland, K. M. (2013, March 13). The Wall Street Journal. Retrieved April 8, 2014 from TheWallStreet Journal: http://online.wsj.com/news/articles/SB10001424127887324077704578358193199729 074.
EIA. (2014). Total Petroleum and Other Liquids Production 2014. Retrieved April 05, 2015 from U.S. Energy Information Administration: http://www.eia.gov/beta/international/?fips=sa
Critchlow, A. (2015, June 13). Oil investment cuts threaten new price spike. Retrieved June 13, 2015 from The Telegraph: http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/11673318/Oilinvestment-cuts-threaten-new-price-spike.html