Cautious outlook for Nigeria’s deepwater oilfields
Passage of a new oil law will not remove all obstacles to deepwater investments by IOCs, according to Welligence Energy Analytics
WHAT: Nigeria’s plans for building up production at deepwater oilfields have lost momentum in recent years.
WHY: The slowdown stems partly from disruptions in world energy markets and partly from developments within Nigeria.
WHAT NEXT: IOCs are likely to remain cautious about deepwater projects until they learn how Abuja intends to implement the PIB.
Just a few years ago, Nigerian National Petroleum Corp. (NNPC) was decidedly confident about the potential of its deepwater oilfields. It was so confident, in fact, that it said it expected the share of total crude output coming from the deepwater section of the offshore zone to rise from around 50% in 2018 to nearly 67% by 2022.
Many industry observers were similarly upbeat. In late 2018, for example, Cheta Nwanze, the head of research at Lagos-based risk advisory service SBM Intelligence, told Bloomberg he expected deepwater projects to steal the spotlight from onshore fields with respect to both production and revenues. “The fiscal terms are much better than onshore as of today, and this implies that in addition to less concern about security, international producers get a bigger share of the pie,” he commented.
This confidence was not much in evidence earlier this month, when Ovie Omo-Agege, the deputy president of Nigeria’s Senate, fretted about the slow pace of development in the deepwater offshore zone. At a virtual colloquium organised by NewsGuru.com, Omo-Agege said Nigeria was having trouble on this front because it was not offering sufficiently attractive terms to international oil companies (IOCs). Indeed, he asserted, the country is losing investment to other African states because its deepwater regime is one of the least competitive in the region.
Omo-Agege indicated, though, that he believed Nigeria could regain some momentum once it passed and enacted the Petroleum Industry Bill (PIB). Taking this step should make the country’s oil industry more competitive, more profitable and more capable, he said.
Nigeria’s apparent loss of confidence is not surprising, given that conditions in the country’s oil industry have changed since late 2018.
One reason for that is the fact that oil prices have declined markedly since that time. But another is the Nigerian government’s passage of an amendment to the Deep Offshore and Inland Basin Production-Sharing Contract Act in 2019. Its ostensible reason for doing so was to ensure that it received a fair share of the total income from deepwater projects, but many IOCs interpreted it as a revenue grab at their expense.
It is not yet clear which side was correct. Abuja never really had a chance to make the grab that investors feared because of the disruption that accompanied the coronavirus (COVID-19) pandemic. With oil prices and energy demand dropping fast, many IOCs decided quite abruptly that it was time to postpone or reduce the pace of their work in Nigeria. This compounded the impact of other slowdowns at deepwater fields such as Preowei, Bonga South West and others mentioned in a Wood Mackenzie report in February 2020, before the pandemic forced most of the world into lockdowns and other restrictive measures.
Gas monetisation and competitiveness
Despite this disruption, Omo-Agege and other Nigerian officials are still optimistic that passage of the PIB will help the oil industry regain the ground it has lost. However, the legislation has weaknesses as well as strengths, according to Obo Idornigie, vice-president of sub-Saharan African research for Welligence Energy Analytics.
In response to questions from AfrOil, Idornigie praised the PIB for establishing a stronger foundation for the development of Nigeria’s abundant reserves of natural and associated gas, as well as crude oil. “From an offshore gas perspective, a key strength of the PIB is the inclusion of fiscal terms for offshore gas monetisation. This has always been a stumbling block for developing offshore gas fields based on production-sharing contracts [PSCs]. Also, overhauling some of the dated laws and providing a holistic document is a huge step in the right direction.”
He also pointed out that the PIB might not make Nigerian deepwater projects more competitive. “A key weakness is the deepwater fiscals. Its front-loaded approach through higher royalties, cost recovery ceiling and limit on allowable deductions is a big industry concern,” he commented. “The government will also replace investment tax allowances and credits with production allowances. We do not believe the terms are competitive in the current environment.”
Additionally, he pointed out that the legislation did not cover all the bases with respect to improving conditions for the development of gas reserves. “Introducing gas fiscal terms is not enough,” he remarked. “The commercial terms around gas midstream infrastructure in the PIB are unclear.”
Costs, cycle time and fiscal regimes
When asked how Nigeria might attract more investment to deepwater oilfields, Idornigie suggested that the country should work to reduce the expenses and time involved in bringing new fields into production.
“First of all, the development costs and cycle time for delivering deepwater projects in Nigeria is above the global average,” he told AfrOil. “The last deepwater project in Nigeria was delivered at about $25 per barrel (just development costs excluding operating costs), and the cycle time was around 60 months. The industry average for a project of similar scale is now around $10-15 per barrel. The government will need to work with the industry to adopt measures to simplify the approval cycle process and use more standardised solutions for delivering offshore infrastructure.”
Fiscal reforms are also necessary, he added. “From a fiscal perspective, improving the allowable deductions for tax purposes will be key,” he said. “The industry is also pushing for royalty to be based on cumulative production as opposed to the flat 10% plus link to oil prices. The high royalties and other front-loaded elements will discourage investment in marginal deepwater fields which have been lying fallow for decades. Nigeria holds over a billion barrels spread across several marginal deepwater fields, which could be developed under the appropriate cost structure and tax terms.”
Nigeria’s government is not unaware of these issues. As Idornigie noted, both IOCs and local companies were able to air their concerns during public hearings on the PIB in January of this year.
Even so, the government and legislators have not made any major changes, and the bill is now on track to pass in the third reading and be sent to President Muhammadu Buhari for signature in the second quarter of 2021. As such, officials in Abuja should not be surprised if investors remain cautious about deepwater projects for the time being, at least until they see exactly how the government treats the companies involved in such initiatives under the new rules.