100% of zero: NLNG and the Bonga SW tax incentive

Bloomberg recently reported that the Federal Government has agreed to an $11.5-per-barrel tax incentive to enable Shell’s $20bn Bonga South West project to finally proceed.

Some commentators have described the tax incentive as “unusually generous” — reportedly double the standard fiscal terms for deepwater projects in Nigeria. They argue that a previous Executive Order had capped such tax credits at 20 per cent of a licensee’s annual tax liability.

But before we answer it, it is worth starting with a simple truth: an untamed river does not irrigate any farm; a locked vault, however full, pays no one’s school fees.

That is the essence of “100 per cent of zero is zero”.

The Bonga South West field — 150,000 barrels a day, discovered in 1995 — has sat stranded since 2010. This is nearly two decades of idle oil that has paid no dividends, created no jobs, and funded no roads, simply because it has never been allowed to flow.

Nigeria does not have the capital or technical means to develop it alone.

Meanwhile, capital that could have come here has instead gone to Mozambique, Guyana, Brazil, and Angola — countries that made their fiscal terms attractive enough to compete for it.

The Petroleum Industry Act has considerably improved our fiscal and regulatory climate, but amendments are still being considered to further enhance it. But legislative amendment of this nature is a slow tide, and yet the world’s shift away from hydrocarbons will not wait for us to finish adjusting the sails.

Nigeria has been here before, and the story is worth telling plainly because it did not end the way sceptics had feared in 1989.

The Nigeria LNG project was first imagined in 1965. For nearly 25 years, it went nowhere — one false start after another — until 1989, when NNPC, Shell, Total, and Agip finally signed the NLNG Shareholders’ Agreement.

What broke the deadlock was not swagger, persuasion or goodwill; it was the Nigeria LNG Act, which offered concrete, time-bound incentives: a ten-year exemption from company income tax, alongside other evergreen incentives, exemptions and guarantees designed to give investors the confidence that the ground would not shift beneath a multi-decade, multi-billion-dollar commitment.

To be precise, because the honesty of the comparison depends on it: NLNG’s incentive consists of both a holiday – a ten-year runway after which full company income taxation resumed- as well as some permanent exemption from tax, fees, and levies.

Whether the Bonga SW arrangement is only a time-bound design, or is structured as a standing per-barrel term for the life of the field, is a detail that would be visible to the public when the agreement is gazetted, and/or passed into law as the NLNG incentives were.

What is no longer in dispute is what the NLNG tax holiday and evergreen incentives brought.

It persuaded international shareholders to commit $7.5bn to build the first two production trains, with Nigeria contributing $2bn of its own.

That initial trust has since grown into five additional trains and a further $30bn in capital investment — a single seed that became an orchard.

By NLNG’s own published “Facts and Figures,” the project has generated nearly $130bn in sales revenue since 1999. It is worth understanding which of these figures represent money that landed directly in the government’s hands, and which represent broader economic activity that the project set in motion — the difference between the fruit you can hold and the shade the tree provides to everyone standing under it.

Direct fiscal revenue to government has included over $22bn in dividends, roughly $10bn in Company Income Tax and Education Tax paid after the 10-year holiday expired, about $0.6bn in PAYE, $2bn in withholding tax, and $2bn in VAT and port charges — a genuine fiscal harvest north of $36bn, against Nigeria’s original $2bn stake.

Broader economic activity – separate from, but no less real than direct fiscal revenue – includes some $21bn in feedgas purchases paid to the government and $10 billion spent on local goods and services. These represent economic activity that would not have existed at all had the project not moved.

A market that never opens sells nothing to anyone.

Layered on top of both are the harder-to-price, easier-to-feel benefits: LPG supply at a time when domestic refineries had gone quiet since 2008; 1,500 direct and 5,000 indirect Nigerian jobs; twenty-four-hour electricity in Bonny Island, where much of the country still measures light in hours rather than assuming its constancy; and roughly half the cost of the N280bn Bonny-Bodo Road.

In 2015, NLNG’s first CIT payment — at $2.1bn, the largest single Company Income Tax payment in Nigeria’s history – arrived at the exact moment that the federal and state governments needed it to pay salary arrears. It became, in effect, an unplanned bailout fund, proof that a well-timed harvest can matter as much as a large one.

It bears saying plainly: these are NLNG’s results, achieved over twenty-five years under its own specific terms. They demonstrate what unlocking stranded capital can do.

What Bonga SW delivers over time will depend on its own execution, timeline, and oversight. But the key is to unlock it now rather than to continue to leave it stranded. The country needs it during these challenging times.

Nigeria Is Not Alone in This Calculation

Every major hydrocarbon nation competing for scarce global capital has reached for similar tools, each shaped to its own circumstances:

Guyana offered ExxonMobil a two per cent royalty on its Liza, Payara, and Yellowtail projects, an unusually fast cost-recovery ceiling of up to 75 per cent, exemption from corporate income tax, and a promise that fiscal terms would not change for the life of the contract.

The United Kingdom ring-fenced its North Sea reliefs so upstream profits from Shell’s Victory gas field could not be diluted by unrelated losses elsewhere in the business — a roughly 90 per cent saving that made the field’s economics work.

The United States used federal and state tax credits alongside immediate expensing of drilling costs to make its Gulf Coast carbon-capture and blue hydrogen megaprojects viable for ExxonMobil.

Norway paired tax credits with accelerated depreciation and refundable exploration credits to bring its Northern Lights offshore electrification and CCUS projects to life.

None of these governments handed away their patrimony. Each simply recognised that a smaller share of a project that is executed is worth more than a full share of one that remains stranded.

Another worry beneath the “unusually generous” critique is about precedent. Nigerians have, through experience, become worried about what a generous deal for one investor becomes once every investor expects the same.