Nigeria risks paying escalated costs for deepwater projects in the oil and gas sector which have been lined up for development when the Petroleum Industry Bill (PIB) is eventually passed.
An average deepwater project costs between $10 billion and $12 billion to develop. The projects are very capital intensive because of the complex nature of the terrains.
The delay in the passage of the PIB has resulted in lengthening of deepwater project timelines by almost double what they were a few years back.
Another consequence of this development, industry analysts say, would be a sharp decline in oil production in the near future, especially now that international oil companies (IOCs) have decided to leave onshore and concentrate on the deepwater. But developments there are held back because of the controversies around the fiscal terms in the bill. This has to do with the determination of taxes, royalties and related matters.
Victims of the PIB intrigues so far are the upcoming projects such as Bonga North West (NW), Zabazaba-Etan, Egina, Bosi, Nsiko, Bonga SW-Aparo, Bonga North and Uge.
The deepwater projects are the oil and gas projects carried out in deepwater. Deepwater oil is found in water depths of over 500 metres.
In addition to the prolonged timelines, there is the attendant increasing costs arising from inflation, which experts say will likely have a telling economic impact on the country.
The average time cycle for projects brought on stream prior to 2013 was nine years, but now the projects are expected to have longer cycles averaging 15 years due to sanction delays resulting from the uncertainty surrounding the PIB.
Confirming these fears, Natznet Tesfay, head of Africa, IHS Country Risk, emphasised the need for stakeholders in the PIB project to resolve their differences and pass the bill.
Speaking to BusinessDay on the sidelines of a meeting organised by the Lagos Oil Club with the theme ‘Is Nigeria’s Energy Sector Open for Business? Opportunities and Risks for Investors in the Oil and Gas Sector’, Tesfay said it was anticipated that project cycle times would lengthen, averaging 15 years, adding that the projects that had already fallen victim of political intrigues would have to have their costs reviewed upwards.
The PIB has faced stiff resistance from both the international oil companies (IOCs) and politicians from certain parts of the country. While the IOCs are against the fiscal terms, the politicians are against the 10 percent allocated to host communities.
But Ngozi Okonjo-Iweala, minister of finance and coordinating minister for the economy, said recently that the aim of the PIB, which has been with parliament for several months, is to institute a systemic reform of the oil sector to make it more transparent and accountable to the Nigerian people.
“This draft law contains provisions to transform the oil and gas sector, including turning the NNPC into a commercial enterprise. This would open up the corporation and the oil industry, making them more transparent and accountable to Nigerians,” she said in a recent article titled ‘Recent setbacks will not undo Nigeria’s progress’.
The minister regretted that the passage of the bill “has been delayed in the National Assembly as a result of intensive lobbying by interest groups – some Nigerian, some foreign – who benefit from the status quo either through favourable oil deals or favourable treatment by the Nigerian tax system”. She therefore called on these groups to allow the bill’s passage and urged the National Assembly “to have the courage to pass this long overdue bill now”.
Analysts say the current fiscal terms with the Production Sharing Contract (PSC) for the deepwater projects are progressive as government’s take rises from 40 percent to 60 percent as oil prices rise from $50 to $100 per barrel.
Government’s take under the inferred PIB is anticipated to range between 70 percent and 80 percent for a similar size project.
The IHS boss said the inferred PIB fiscal terms could increase the Nigerian government take by 20-30 percent for a P50 size deepwater project.
Mark Ward, helmsman of ExxonMobil, has consistently advocated for the review of the fiscal terms in the bill, saying it would otherwise likely bleed the industry by an estimated $109 billion.
The amount represents N17.2 trillion, more than three times the 2014 federal budget and more than double the foreign reserves currently hovering at $48 billion.
Ward, who spoke in his capacity as chairman of the Oil Producers Trade Section (OPTS) of the Lagos Chamber of Commerce, said the landmark legislation intended to reform Nigeria’s oil sector was set to introduce harsh fiscal terms in the coming years. It would make Nigeria one of the harshest investment climates in the world for the oil industry, he added.
The unfavourable fiscal terms would result in Nigeria’s oil production hitting a plateau of about 3 million barrels a day around 2016, and then start to decline as $109 billion in planned new investment would no longer be economically feasible.
Meanwhile, the organised labour in the oil industry has called on the National Assembly to arrange a meeting between the government, represented by the Nigerian National Petroleum Corporation (NNPC), and the OPTS to reconcile the disagreements on the fiscal regimes in the long-delayed PIB.
Chika Onuegbu, chairman, Joint Committee on PIB of the Nigerian Union of Petroleum and Natural Gas Workers (NUPENG) and the Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN), in the committee position, insisted the government would need to strike a balance between taking a significantly higher stake from industry operations and ensuring the sustainable growth of the sector.
NUPENG and PENGASSAN contend that having engaged both sides of the argument, government should critically examine the implications of the proposed changes in the fiscal regime.
By: Olusola Bello
