The Competitiveness of the Nigerian Deepwater Oil and Gas Sector

Wisdom .P. Enang (Author), Benjamin Akande

SPEAKER
Dr. Wisdom Patrick Enang (AMIMechE)
MEng, MPhil, PhD Mechanical Engineering
+2348173555667, wisdom_Enang@yahoo.co.uk

4th Deep Offshore West Africa Congress 2020, January 16 – 17 Accra Ghana
AFRICAN OIL AND GAS INDUSTY AT A GLANCE

BP Statistical Review (2018), Rystad, IGU World Gas LNG Report, Global Data
KEY OIL AND GAS PRODUCERS IN SUB-SAHARAN AFRICA
• Nigeria is the 10th largest oil producer in the
world and the third largest in Africa, with a total
of 159 oil fields and 1481 wells in operation.

• Nigeria is the largest producer of low-sulphur

sweet oil in OPEC.
• The Nigerian government has an average of 60
percent ownership interest in JVs with the IOCs.

• About 52% of the Nigerian total proven gas

reserve is associated (natural gas obtained during
the production of crude oil).

• Contributes 90% foreign exchange earnings and

70% government revenues

• There are ongoing gas export and domestic

utilization projects in Nigeria, as a means to
create more wealth and diversify the economy.
 PETROLEUM LEGAL ARRANGEMENTS

• Various legal systems have

been developed globally to
address the rights and
obligations of host
government and private
investors: collectively grouped
under concessionary systems
and contractual systems.

• The host government and IOCs

often have competing rather
than complementing
objectives.
Fiscal terms objectives
• Fiscal terms are intended to
act as the contractual
balance between the
financial objectives of the
host government and the
investor company.
COMPARISON OF THE FOUR PREVALENT FISCAL SYSTEMS
 CURRENT OIL AND GAS FISCAL REGIME IN NIGERIA

>80% of Nigeria Oil & Gas Production

CURRENT OIL AND GAS FISCAL REGIME IN NIGERIA (CONTD)
CURRENT OIL AND GAS FISCAL REGIME IN NIGERIA (CONTD)
 EVOLUTION OF THE NIGERIAN DEEPWATER OIL AND GAS FISCAL TERMS
Date and Legislation Fiscal Terms
1999: Deep Offshore and Inland Basin
Production Sharing Contracts Decree No. 9:
Introduction of PSCs.
• Corporate Income Tax Royalty regime
• Graduated Price Based Taxes
1999: Deep Offshore and Inland
Basin Production Sharing Contracts
(Amendment) Decree No 26 of 1999
• Profit Oil Sharing
2009: Deep offshore and inland Basin PSC Revisions
2008 - Till Date: Petroleum Industry Bill (PIB)
Details
Corporate Income Tax: 50% flat rate on chargeable profits for the duration of
the PSCs. Chargeable profits are Assessable profits less Capital allowances;
Royalty regime graduated: Up to 200 mL 16.67%; 201-500 m: 12%; 501-800
m: 8%; 801-1000 m: 4%; 1000 m+: 0%; Inland basin: 10%;
Price based Taxes: The realizable price as defined in the Production Sharing
Contract established in accordance with the provisions of the Production
Sharing Contract shall be used to determine the amount payable on royalty
and petroleum profit tax in respect of crude oil produced and lifted pursuant
to the Production Sharing Contract.
Profit Oil Sharing: If price of oil exceeds $20/barrel, the PSC can be amended
to increase the share of the government

2015 - Till Date: PIB split into 4 bills namely: the Petroleum Industry Governance Bill (PIGB), the Fiscal Regime Bill, the Upstream
and Midstream Administration Bill, and the Petroleum Revenue Bill.
2019: Deep offshore and inland Basin PSC Revisions (SB 21)
COMPETITIVENESS OF THE NIGERIAN DEEPWATER OIL AND GAS INDUSTRY:
DOIBPSC 2009
What do industry experts have to say?
• Not long ago, West Africa was at the top of the
list for international E&P companies looking
for high impact growth.
• Angola and Nigeria production peaked at 3.8
million b/d of oil as recently as 2010 – as big
as the North Sea and equivalent to more than
40% of OPEC production outside the Middle
East.
• Due to oil price collapse, capital investment in
the region has fallen 60% from US$50 billion in
2014 to just US$20 billion per annum in 2018
– worse than the global average of 40%.
• High costs, a history of tortuous project
execution, and exorbitant government takes,
have proved a near-fatal combination, forcing
IOCs to choose to spend their limited capital
where the risk / reward ratio is better.
• Breakeven for some pre-FID projects in Nigeria
average US$58/bbl, NPV15。
Wood Mackenzie (2018): https://www.woodmac.com/news/the-
edge/signs-of-life-in-west-africa/
 HOW THE DOIBPSC2019 (SB 21) FISCAL TERMS COMPARE WITH THAT OF 2009
DOIBPSC 2009 Terms DOIBPSC 2019 Terms Implications

Terrain or water depth based Flat rate + Price based

0 - 12% 10% for deep offshore
<$20/bbl = 0% Deep water fields in
201 to 500 meters water depth - 12% PSCs > 200 meters
>$20/bbl to $60/bbl = 2.5% excess of 1000 meters
Royalties 501 to 800 meters water depth - 8% water depth
PSC (oil) >$60/bbl to $100/bbl = 4.0% would see their
(% of total revenues) 801 to 1,000 meters water depth - 4%
>$100/bbl to $150/bbl = 8.0% royalty rates change
> 1,000 meters water depth - 0% 7.5% for frontier /
>$150/bbl = 10.0% from 0 to 14%.
Inland Basin - 10% inland basin PSCs
Taxes (% of taxable
PSC (oil) 50% PPT 50% PPT
base or profit)
Investment allowance Investment allowance
-
Allowance (deducted
PSC (oil) 50% of capex credit or allowance 50% of capex credit or allowance
from tax base)
Cost deductibilit (from tax base) 100% of costs incurred 100% of costs incurred

Economic Impact:
• The front-loading of government share in favour of revenue, rather than profit reduces investor returns which are largely
driven by early year's cash flow when production peaks.
• For the government, royalty ensures revenues from day one of production rather than waiting years for tax and profit oil to
materialise.
• Wood Mackenzie estimate that DOIBPSC2019 fiscal terms will reduce the remaining value of the commercial assets to
Investors by $2.7 billion or 18% overall.
• Wood Mackenzie estimate that the DOIBPSC2019 would lead to an increase of about 5% in remaining government share
across the biggest producing PSC.
 NON-FISCAL INSIGHTS INTO DOIBPSC2019 (SB 21)
Provisions Description Implications
Periodic review of PSCs Inclusion of section 17 of the bill This is a much shorter review cycle
requiring the Minister of Petroleum than originally provisioned in
to call for a review of PSCs by the DOIBPSC2009.
NNPC every 8 years.
For most deepwater projects, an 8
year review cycle could mean that
the terms could be reviewed and
toughened by NNPC near the point
of peak production which is the
most cash-generative point.
Contact renewal From 2024 onwards, all 1993 deepwater PSCs will begin to expire and
investors expect NNPC to renegotiate tougher PSC terms in exchange for a
20 year renewal.
 FISCAL COMPETITIVENESS OF THE DOIBPSC2019 (SB 21)
Government Take

Nigerian Government take increases from 68% to 70%

Comparison of government share for all global deepwater regimes Nigerian lawmakers vote to increase
using the most recent terms a new entrant investor would receive. deepwater royalties (2019). Wood Mackenzie.
 FISCAL COMPETITIVENESS OF THE DOIBPSC2019 (SB 21) CONTD
Cost Competitiveness

Nigerian lawmakers vote to increase

deepwater royalties (2019). Wood Mackenzie.

• Deepwater projects in Nigeria are relatively more expensive relative to its competitors mainly due to: Local content，
security and a lack of focus on costs by deepwater operators (which originated during the period of high oil prices).
 WHY THE NIGERIAN OIL AND GAS FISCAL STRUCTURE IS CONCERNING

THREATENING
FORCES Industrial Energy Shift Oil producers with better Shrinking Upstream Increase in world crude
from fossil energy-to- fiscal terms and Capital Investment inventories
renewable energy competing volumes

DISTURBING INDICATORS FOR NIGERIA AND AFRICA Distribution of Oil and Gas Capex

Huge decrease in
amount spent (CAPEX)
between 2014 and
2018 (42% drop).

A fall in Nigeria’s export volumes due to declining reserves

and reduced CAPEX investment.

Exploration spend by African region

Huge decrease in
amount spent in
exploration
Decrease in O &G deals across the African Value chain between 2014
between 2016 – 2018 (due to concerns regarding fiscal terms) and 2018.
 FISCAL INCENTIVES OFFERED BY COMPETITORS TO PROMOTE DEEPWATER INVESTMENTS
What competitors are doing differently:
• In 2018, Angola introduced marginal field terms for deepwater
fields and offered gas terms for the first time, re-igniting
deepwater interest from the majors.
• In 2019, Gabon improved its Petroleum Code including flexible
terms for marginal fields and gas terms, after its 2014 version
turned-off investors.
• Congo-Brazzaville's 2016 fiscal terms allow royalty to be reduced
and cost recovery ceilings to be increased for technically
challenging projects, with other terms open for negotiation.
• In 2019, Cameroon passed a law that offers project incentives on a
case-by-case basis as well as new gas terms.
Thoughts from leading industry experts on the Nigerian
exploration and production sector fiscal terms:
• The timing of the increase in government share from deepwater
moves Nigeria out of line with the global industry amid the
lower oil prices since 2014.
• Fiscal flexibility and terms of gas, both of which are prominent
themes in the Industry today, are missing from the Nigerian
PSCs.
• The oil and gas industry now is very different compared to
2014, and the fiscal changes implemented by Nigeria’s regional
competitors reflects that.
Nigerian lawmakers vote to increase deepwater royalties
(2019). Wood Mackenzie..
• The Nigerian oil and gas industry experienced a continuous
decline in FDI because of the country’s fiscal terms
arrangement.
Comparative Analysis of Nigeria Petroleum Fiscal Systems
Using Royalty and Tax Optimization Models to Drive
Investments (2017). Wahab and Diji.
• Adequate tax incentives needs to be put in place for the
attraction of more capital inflows in form of foreign direct
investment to strengthen the industry, which will in turn
stimulate global competitiveness.
• The effectiveness of a fiscal policy depends largely on the
attractiveness of its underlaying tax regime, which in turn
depends on the effectiveness of its design and implementation.
An Assessment of Nigeria Petroleum Tax Regime Strategy on
Foreign Direct Investment (2018). Ibrahim, Adamu, Mamuda.
 FISCAL INCENTIVES OFFERED BY COMPETITORS TO PROMOTE DEEPWATER INVESTMENTS
(A CASE STUDY OF GUYANA)

Analysis considers the

entire E&P sector and not
just deepwater projects.

• Guyana’s fiscal terms: In the current fiscal regime, the government collects its share through a 2% royalty and a 50% profit
oil levy. Rystad Energy estimates that this will give the government 60% of the profit from the various projects
(government take), while the remaining 40% will go to international E&P companies.
• On average, the government take for all offshore projects is around 75%, while rates in major producing countries such as
Nigeria, Norway, Mexico, Indonesia and Trinidad are all above 80%
IMPACT OF FISCAL UNCERTAINTY IN THE NIGERIAN UPSTREAM OIL AND GAS INDSUTRY
ON THE WIDER ECONOMY

• Foreign direct investment (FDI) inflows into West Africa

fell to US$9.6bn in 2018—their lowest level since 2006—
according to the latest data from the UN Conference on
Trade and Development.

• FDI inflows into Nigeria dropped by 43% between 2017

and 2018 to US $2bn. This is in addition to a 21% decline
between 2016 and 2017.

The bitter truth:

• The question all investors are asking is: why invest a dollar in Nigeria when that same dollar will deliver much greater
returns elsewhere in our global portfolio? Breakeven prices have become critical to how industry measures investment
attractiveness. And the process of ranking global portfolios has never been so rigorous and disciplined.
• An increase in the royalty take for deepwater projects may look reasonable from within Nigeria, but in the global
competition for investment, it pushes Nigerian projects down the attractiveness ranking and possibly out of the money.
• It will increase government revenues in the near term, but may impede the progress of new major deepwater projects
(thus reducing deepwater revenues in the long term), particularly with the added uncertainties of contract renewal and
the challenging business environment.
 A HEALTHY BALANCE OF FISCAL TERMS TO SATISFY COMPETING OBJECTIVES
An effective fiscal policy will create a stable and globally competitive investment climate that enables stakeholders to achieve
their objectives. A world class investment climate achieves the following:

A Stimulates investment to continuously bring new fields into production.

Creates value from a
country’s natural Provides extra incentives for deepwater and frontier exploration and development to
B
endowments mitigate enormous capital and technological risk.

C Maximizes reservoir recovery and provide sustainable investment climate.

Ensures the country

D Maximize impact on broader economy through multiplier effect on employment/supply chains.
benefits from the
created value E Incentivizes investment across the full value chain to deliver power.

Attracts foreign F Creates a globally competitive environment to attract investment.

investment
G Provides sufficient license and lease duration to achieve full life cycle development of projects.

Guarantees a stable H Decreases investor risk through a stable regulatory environment.

and efficient
investment climate I Derives taxation and royalty on a fair basis.