PROGRESS ON OIL AND GAS-RELATED LEGISLATION HALTED

UNCLAS SECTION 01 OF 02 LAGOS 000253

SIPDIS

SENSITIVE BUT UNCLASSIFIED - HANDLE ACCORDINGLY
SIPDIS

DOE FOR GPERSON, CGAY
TREASURY FOR ASEVERENS, SRENENDER, DFIELDS
COMMERCE FOR KBURRESS
STATE PASS USTR FOR ASST USTR FLISER
STATE PASS TRANSPORTATION FOR MARAD
STATE PASS OPIC FOR ZHAN AND MSTUCKART
STATE PASS TDA FOR NCABOT
STATE PASS EXIM FOR JRICHTER
STATE PASS USAID FOR GWEYNAND AND SLAWAETZ

E.O. 12958: N/A
TAGS: ASEC EPET NI PTER ENERG
SUBJECT: PROGRESS ON OIL AND GAS-RELATED LEGISLATION HALTED
BY RECESS

REF: LAGOS 0097

LAGOS 00000253 001.2 OF 002


Sensitive But Unclassified; Handle Accordingly


1. (SBU) Before the five-week recess was called
unexpectedly on March 21 by the National Assembly, observers
predicted pending legislation of interest to the oil and gas
industry would pass before the legislature adjourned sina die
on May 29. Now however, observers decline to predict what
bills may be reached. According to Victor Olaiya, Manager
for Government and Business Relations, ExxonMobil, bills
passed by one house carry over to the next session of the
National Assembly, while legislation that has not passed
either house lapese and must be reintroduced. Bills which
have a direct impact on the industry are:

-- Downstream Gas Act: According to Olaiya, the industry,
through the Oil Producers Trade Section (OPTS) of the Lagos
Chamber of Commerce, has provided input to the House of
Assembly and Senate Committees considering the legislation.
The industry-advocated amendments urge independence for the
downstream regulatory agency, and transparency throughout the
downstream regulatory process. ExxonMobil believes the
amended legislation is acceptable to the industry. Although
both the House and the Senate have held hearings on and
amended the bill, neither Committee has reported the bill for
consideration by the full House or Senate. (Ref) Olaiya
believes that given the effort both houses have put into this
bill, it is possible that at least one Committee may report
the bill out in time for that house to take action before the
May 29 adjournment.

-- Fiscal Regime: Two bills to amend the Petroleum Profits
Tax Act and the Company Income Tax Act (CITA) have been under
consideration by Committees of the National Assembly,
according to Dr. Tim Okon, General Manager, Development
Planning, ExxonMobil. The bill drafted by the Federal Inland
Revenue Service (FIRS) would grandfather the consolidation of
gas costs against income received from oil for both projects
on the ground and planned, and provides for a date by which
grandfathering would end. Current law does not allow the
consolidation, as the National Petroleum Investment
Management Services (NAPIMS) recently reminded international
oil companies (IOCs),some of whom had been using the
consolidation method of computing tax based on informal
assurances from NAPIMS that the method was acceptable. The
FIRS bill would also allow a lower tax of 30 percent for gas
projects. The second bill, the Nigeria Associated Gas
Federal Revenue Act (NAGFRA) provides for an "r-factor" tax
rate computed by dividing cumulative revenue minus taxes paid
by cumulative capital expenditures plus operating
expenditures. This bill, which was submitted by NNPC
Managing Director Funsho Kupolokun and is supported by the
President, would tax the income from add-on projects at a
higher rate than the original project, creating a
disincentive to produce gas. The House of Assembly has
passed the FIRS bill and OPTS members have been working with
the Senate on the bill which is now on third reading.
Because the FIRS bill has already passed the House of
Assembly, it will carry over to the next session of the
National Assembly whether or not the Senate takes action
before adjournment; absent action by the House or Senate, the
OPTS bill would have to be reintroduced for the new National
Assembly to consider it.

-- Local Content: The industry worked hard to make changes

LAGOS 00000253 002.2 OF 002


in this legislation, which was not acceptable as originally
drafted. Olaiya said "perhaps 95 percent" of the industry's
suggestions have been incorporated into the draft.
Importantly, the industry managed to have criminal sanctions
for noncompliance with local content targets excised from the
bill. The Senate appointed an attorney as a consultant to
the Committee considering the legislation, which allowed the
Committee to complete consideration and vote the legislation
out for consideration by the full Senate. The House of
Assembly has not yet considered the bill. Unless the Senate
acts before adjournment, this legislation will have to be
reintroduced.


2. (SBU) OPTS is watching a number of bills which also have
an impact on the industry, including:

-- Nigerian Extractive Industries Transparency Initiative
(NEITI): The legislation has been passed by both the House,
and the Senate passed the legislation in mid-March following
a final study tour to the United Kingdom in February.
According to Dr. Bright Okogu, Executive Secretary of the
NEITI Secretariat and Special Assistant to the Minister of
Finance, the House and Senate bills must be reconciled by a
conference committee, but according to Olaiya, the bill is
"as good as passed." Even if no action is taken prior to
adjournment, the legislation will carry over for
consideration by the newly elected National Assembly when it
reconvenes. Olaiya noted the industry has had an
opportunity to provide input during the drafting of the
legislation and is satisfied with the bills. The Senate bill
provides for penalties of not less than naira 30 million
(approximately USD 238,000) for any extractive industry
company which gives false information to the government
regarding its production, sales or income.

-- Fiscal Responsibility: According to Olaiya, the industry
is monitoring the progress of the legislation to forestall
the possibility of any unintended negative impact, but
believes that the legislation is a positive step toward
fiscal responsibility for Nigeria. The legislation clarifies
inter-governmental fiscal relations and the role of the
executive and legislative branches in the budgetary process,
sets out transparency requirements, sanctions for
non-compliance, guidelines for budgetary practices and a
fiscal framework based on oil price. Although the Senate has
passed the legislation, the House of Assembly has not yet
acted, according to press reports. Because the bill has been
passed by one house, the legislation will carry over for
consideration by the subsequent National Assembly.


3. (SBU) Even before the recess, members had been
increasingly absent from National Assembly meetings as they
engaged in election-related activities, making achieving a
quorum in committee and in the full House and Senate
increasingly difficult, both Tim Okun and Paul Foster, Gas
and Power Commercial Manager for ExxonMobil, pointed out.
According to Kingsley Onukwe, Special Assistant to the Senate
President, similar scheduling difficulties are likely to
plague the scant four week session between May 2 and May 29.


BROWNE