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Nigeria’s Deepwater Projects Under Threat Over Amended Act

The fate of deepwater oil projects in Nigeria hangs in the balance following the amendment of the Deep Offshore and Inland Basin Production Sharing Contract Act 2004.

several deepwater oil projects that have not been sanctioned by international oil companies operating in Nigeria may have suffered a further setback as the bill that amended the Deep Offshore (and Inland Basin Production Sharing Contract) Act has been signed by President Muhammadu Buhari.

In the last 10 years, only three new deepwater projects – Usan, Aje and Egina – have come on stream in the country, with the US Energy Information Administration raising concern that several planned projects had been repeatedly pushed back because of the uncertainties over the Petroleum Industry Bill.

Last week, the House of Representatives concurred with the Senate by passing the bill amending the Deep Offshore and Inland Basin Production Sharing Contract Act 2004.

The IOCs and their local counterparts under the aegis of the Oil Producers Trade Section had said the Federal Government’s planned increase in deepwater royalty would worsen Nigeria’s competitiveness and make $15bn of currently planned deepwater investments economically unviable.

Projects without final investment decisions are Shell’s Bonga South-West Aparo (with a capacity of 225,000 barrels per day) and Bonga North (100,000bpd), Eni’s Zabazaba-Etan (120,000bpd), Chevron’s Nsiko (100,000bpd) and ExxonMobil’s Bosi (140,000bpd), Satellite Field Development Phase 2 (80,000bpd) and Uge (110,000).

“As the bill stands, we have concerns about it not being the ideal for the country in terms of foreign direct investment. Of course, the government has the right to do whatever it wants to do. We have not seen the signed bill by the President. When we get a hold of it, we will be able to make a comment on it,” the Executive Director, OPTS, Mr Bunmi Toyobo, told our correspondent on Wednesday.

The nation’s oil and gas production structure is majorly split between joint ventures onshore and in shallow water with foreign and local companies and Production Sharing Contracts in deepwater offshore, to which many IOCs have shifted their focus in recent years.

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Under the PSCs, the Nigerian National Petroleum Corporation holds the concessions, and the contractors fund the development of the deepwater offshore blocks and recover their costs from the production after royalty payments.

Over the past few years, some stakeholders had highlighted the need for the government to renegotiate the terms of the 1993 PSCs between the Federal Government and the IOCs.

A former Minister of Petroleum and Presidential Chief Economic Adviser, Philip Asiodu, noted in 2013 that the PSCs executed in 1993 had three re-opener conditions for renegotiating the fiscal terms including the increase of oil price to $20 per barrel.

Asiodu stated then that he could see no rational explanation for not negotiating within the existing contracts to optimise the nation’s revenue up to the targets hoped for in the PIB, while waiting for it to become a law.

In 1993, the PSC was widely introduced to address some of the issues faced by the Joint Operating Agreement and to provide a suitable agreement structure for encouraging foreign investments in offshore acreage.

The NNPC had said in 2016 that it was reviewing existing PSCs “to negotiate more favourable terms and improve the revenue base of the federation.”

An energy law expert and Partner, Bloomfied Law Practice, Mr Ayodele Oni, said the amendment of the Act could not have taken any of the operators by surprise.

“What most investors in the upstream space are concerned about is certainty. If you look at the Production Sharing Contracts, there are stabilisation clauses, which give them an opportunity to renegotiate. There is an argument that if you are even going to amend the law, you would even talk to us first – you need to know what our challenges are. I am not sure that was done, and that can be a problem.”

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Oni said there might be some arbitration cases, adding that “the chances are that many of the IOCs may slow down on their projects.”

The OPTS, in its October presentation to the Senate obtained by our correspondent, said the “proposed unilateral change” to the current terms would damage investor confidence and make the country’s deepwater and inland basin PSC less attractive in the wake of stiffening global competition for investable funds.

The group said the Deep Offshore and Inland Basin Production Sharing Contracts (Amendment) Bill sought to introduce an additional price-based royalty on revenues above $35 per barrel, which ranges from 0.2 per cent to 29 per cent as the oil price increases.

“This is in addition to the existing water depth-based royalty. Furthermore, the industry is burdened by a plethora of other taxes, fees, levies and other tariffs. This rate increase would result in future deepwater projects becoming economically unviable and leading to at least a $15bn reduction in planned near-term investments,” the OPTS added.

According to the group, Nigeria has one of the least competitive deepwater fiscal terms in Africa and is currently losing substantial amount of potential investments in the oil and gas industry to other countries, particularly Mozambique, Angola and Ghana.

Last year, the International Monetary Fund said it supported the Nigerian authorities’ objective to ensure that government’s take from oil exploration was appropriate.

“To that end, it welcomes the minimum royalty payment on all oil and gas production but notes that the proposed combination of price-based and production-based royalties is overly complicated and risks posing an unnecessary barrier to investment,” it added.

Source: Punch

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