New energy bill creates uncertainty for investors in Nigeria

New energy bill creates uncertainty for investors in Nigeria

Nigeria tries to develop its stagnating oil reserves by attracting foreign investment through a new Petroleum Industry Bill. But the bill seems more likely to create greater political risk and scare investors away.

Nigeria has been Africa’s energy giant for the past 50 years. The country currently produces 2.5 million barrels of oil equivalent per day, generating approximately US $60 billion per year, which accounts for more than 80% of the country’s yearly national income. However, the fifth largest crude oil producer in the world has so far failed to optimally harness its enormous oil and gas potential.

For the past five years, the Nigerian government has attempted to save itself from the chaos facing its petroleum industry by introducing a Petroleum Industry Bill (PIB), aimed at establishing a modern petroleum fiscal framework and ultimately strengthen the regulatory framework across the entire oil and gas value chain.

However, the way the proposed revolutionary legislation has been handled has created uncertainty among foreign investors, forcing some to go back to the drawing board, reducing investments and even considering exiting the country.

Opening up the oil and gas industry

The comprehensive energy bill has been debated for years and the government believes its passage would open up hydrocarbon industry to new indigenous and foreign investors for competitive growth and sustainable development in line with international standards. Key objectives of the bill are to create a modern petroleum fiscal framework, enhance transparency, and establish good governance and processes.

According to the Department of Natural Resources (DPR), Nigeria currently boasts of harboring 33 billion barrels of oil and 180 trillion cubic feet of natural gas reserves, which requires significant influx of investments across the entire value chain to meet the country’s economic demands that strongly depends on petro-revenues.

To increase revenues and at the same time develop the smaller fields, the proposed bill will not only include higher tax and royalties, but also will provide attractive terms to marginal fields under low prices.

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Government Take Compared to Other Jurisdictions for Large Deepwater Fields (Source: NNPC Group)

The PIB also provides some incentives for international oil companies (IOCs) that choose to develop gas fields in the planned PIB as the government hopes to increase investment in this area.

Investors fear low returns on investment

Nigeria’s oil and gas reserves have always been on the rise, but it was not until recently that the crude oil reserves began declining due to low investments in reserves replacement (the reserves replacement ratio was 70% as of January 2013).

Investors fear that some of their investments may be rendered uneconomical due to the proposed higher taxes and royalties terms in the PIB as the proposed legislation will increase government’s take in Joint Venture (JV) and Production Sharing Contracts (PSC). Of paramount concern is the proposed increase in taxation on deep-water oil and gas fields which could fend off investments in offshore Nigeria.

Rising insecurity, complex contractual environments, and uncertainty surrounding the delayed PIB seem to explain why some foreign investors prefer to stay away from the risky oil and gas business.

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Source: NNPC Group

The PIB, though intended to boost development of smaller oil and gas fields, may fail to meet its objective of attracting investments into the segment due to worsening security situation in the producing areas.

Most of the marginal undeveloped oil and gas fields expected to benefit from the PIB’s economic incentives are located onshore or in shallow waters where they are vulnerable to kidnappings, oil theft and pipeline vandalism. As sources suggest, crude oil theft and output disruption may have caused a US $12 billion shortage from last year’s revenues.

Since its introduction in 2008, the PIB has raised concerns among stakeholders across the oil and gas value chain leading to some foreign investors and IOCs to re-evaluate investing in the country. With global crude oil prices dropping to below $80 per barrel, investors will continue to assess opportunities elsewhere if the Nigerian government does not provide a business environment that can offer reasonable returns on investment.

Already, investors are looking into new frontier regions like East Africa, where major oil and gas reserves have recently been discovered and whose governments are offering favorable fiscal terms.

Recently, Mozambique’s parliament approved a draft law for the oil and gas industry introducing a special fiscal regime for Eni and Anadarko’s Rovuma basin Area 1 and 4 LNG development. Although the full details about the regime have not been disclosed, it is believed that it includes the possibility of certain “relief” in the contract.

There is a potential for the Nigerian government to transform its oil and gas industry if they improve security, reduce bureaucracy, and establish stable fiscal conditions in the PIB that promote and protect investments. Only then, can foreign investors regain confidence and leverage the opportunities of Nigeria’s oil and gas industry.

About Author

John Sisa

John is a Sub Saharan Africa expert and consultant on Energy and Mining. He has previously worked as a Lead Upstream Analyst for GlobalData, a research and consultancy firm, where he specialized in the Sub Saharan African oil and gas industry. He holds an MSc in Mineral and Energy Economics from Colorado School of Mines and a BA in Economics from Kenyatta University, Kenya.