“The Future of Nigeria’s Petroleum Industry”

“The Future of Nigeria’s Petroleum Industry”

Ministerial Keynote Address By Diezani Alison-Madueke (Mrs.)
Honorable Minister Ministry of Petroleum Resources At The Nigeria Economist’s Group Summit
Protocol:
I am honoured to be in your midst today to present a keynote address on the future of Nigeria’s petroleum industry. This forum offers tremendous opportunity for the government to bring its perspectives on the future of this vital industry sector and since the Nigeria Summit will bring together leading governmental and business leaders, I welcome the audience to which I will now share these perspectives.
In many respects, Nigeria’s economic future is inextricably tied to what it does with its petroleum industry going forward. For example, the oil industry remains the most important income earner for all governments in the federation even though oil and gas contribution to the Gross Domestic Products (GDP) represents about 14%.
In order to look into the future of the Nigeria’s oil industry, we must first understand the present state of the industry.
The Nigerian oil and gas industry has had many triumphs and also set-backs. In recent times, it has emerged from the scourge of militancy in the Niger-Delta when production was at a low of 1.6 million barrels per day in 2009 to current levels of about 2.4 million barrels per day mainly attributable to the government’s amnesty program. This current production comes from Joint Ventures (JVs) with International Oil Companies which accounts for about 64% of production and Production Sharing Contracts (PSCs) which accounts for about 36% of production.
Nigeria has also witnessed some asset transfer transactions largely from Shell, Total and ENI, which have seen the emergence of new largely indigenous led independent companies. This demonstrates a maturing oil and gas sector in which bigger players are re-aligning their asset portfolios to the benefit of newer non-major players.
Similarly, the Nigerian gas produced for sale has increased to a historic high level of 4.3 billion cubic feet per day in 2011 out of which 1.1 billion cubic feet per day is sold domestically.
The midstream and downstream have witnessed significant challenges which is why government has focused its reforms on liberalizing these sectors. Nigeria has three refineries with nameplate capacity of 445,000 barrels per day, 5,120 km of product and crude pipelines, 21 storage depots and one import terminal at Atlas Cove, all of which have suffered from vandalism and poor maintenance over the years because of the lack of a commercially viable framework for cost recovery.
The huge cost of a non-commercial midstream and downstream oil sector has been borne by government through various forms of subsidies. It is clear that for a viable oil and gas sector, these programs of government support are no longer sustainable and that reforms in these and indeed the entire oil and gas sector of the Nigerian economy needs a revamp.
Defining the Future Today
Having stated the foregoing, it will not be out of place to enumerate the broad outline of the reform and revamping agenda of government with respect to the oil and gas industry. An important starting point will be the country’s Energy Policy itself which has the following objectives:
To ensure the development of the nation’s energy resources, with a diversified energy resources option, for the achievement of national energy security and an efficient delivery system with an optional energy resource mix
To guarantee increased contribution of energy productive activities to national income
To guarantee adequate, reliable and sustainable supply of energy at appropriate costs and in an environmentally friendly manner, to the various sectors of the economy, for national development
To guarantee an efficient and cost effective consumption pattern of energy resources
To accelerate the process of acquisition and diffusion of technology and managerial expertise in the energy sector and indigenous participation in energy sector industries, for stability and self-reliance
To promote increased investments and development of the energy sector industries with substantial private sector participation
To ensure a Comprehensive, integrated and well informed energy sector plan and programmes for effective development
To foster international co-operation in energy trade and projects development in both the African region and the world at large
To successfully use the nation’s abundant energy resource to promote international cooperation
The reform agenda for the oil and gas industry is centred on the Petroleum Industry Bill (PIB) though not exclusively so. Others include National Content Act, the Amnesty Programme and Gas initiatives.
The PIB currently undergoing legislative processes at the National Assembly establishes the legal and regulatory framework, institutions and regulatory authorities for the Nigerian petroleum industry. It also stipulates guidelines for operations in the upstream and downstream sectors.
The objectives of the PIB are therefore as follows:
• To enhance exploration and exploitation of petroleum resources
• To significantly increase domestic gas supplies especially for power and industry
• To create competitive business environment for the exploitation of oil and gas
• To establish fiscal framework that is flexible, stable and competitively attractive
• To create commercially viable national oil company
• To create strong and effective regulatory institutions
• To promote Nigerian content and
• To promote and protect health safety and environment
The proposed reforms in the PIB can broadly be divided into two; non-fiscal and fiscal reforms. Non-fiscal reforms relate to institutional and policy re-orientation.
Institutional & Policy Reforms
At the heart of the PIB is the separation between policy, regulation and monitoring and commercial operations. Based on this model idea, the PIB seeks to build institutions around these core principles. Under this, the Ministry of Petroleum Resources has responsibility for the evolution of policy in the oil and gas sector. Under the Ministry are the Regulatory Institutions charged with regulation and monitoring and thirdly, the National Oil Company with responsibility for commercial operations.
The building blocks of these institutional and policy reforms are as follows:
• The Unbundling of NNPC as presently constituted through the Creation of a National Oil Company that promotes indigenous operational capacity development
• The Creation an Asset Management Limited Liability Company to manage the JV assets on behalf of the federation
• The excision of Nigerian Gas Company (NGC) from NNPC as a separate partially privatised entity to cater for domestic gas marketing and gas infrastructure development. The intention here is to accelerate national gas infrastructure development for effective gas supply to power and industrial sectors of the economy. This will be realised through private equity participation of up to 49%.
The proposed PIB will change the role of NNPC. Currently all NNPC’s revenues arising from the management of federal government assets flow directly to the Federation Account and its funding for the JVs is then provided by the government. This role will now be taken over by the Asset Management Company which will be capitalized with a two year loan in place of the annual cash calls and would later be expected to be self-financing through the retention of its earnings. All royalty and taxes would however be paid to the government as and when due.
The new National Oil Company will broadly consist of the PSC assets which shall be used to capitalize the National Oil Company, the National Petroleum Development Company (NPDC), the current three domestic refineries (WRPC, KRPC and PHRC) and the Pipelines and Products Marketing Company (PPMC).
The new National Oil Company will also be partially privatised. It is expected that up to 30% equity shall be divested to provide private participation as done in other NOCs such as Petrobras, Petronas etc. Government expects the partial privatization to provide a culture change to a fully accountable and commercial company.
Along with the unbundling of NNPC, two new regulatory institutions; upstream petroleum and downstream petroleum inspectorates are to be created to promote effective regulation and monitoring in line with operational best practices. These regulatory entities are expected to perform both commercial and technical regulation in the upstream and downstream petroleum sectors respectively.
Nigeria’s quest to grow its reserves will be engendered in the proposed new PIB through a robust acreage management system to be superintended by the Upstream Petroleum Inspectorate. Similarly, the PIB proposes the establishment of a Technical Bureau in the Ministry of Petroleum Resources charged with the responsibility for frontier exploration services.
Over the years, Nigeria has underexploited its bitumen resources. The Frontier Exploration Services will provide necessary coordination and preliminary work for the Upstream Petroleum Inspectorate, which will through its acreage management system offer opportunities for investors. In order to underpin this, the PIB incorporates a fiscal regime for these frontier areas and specifically incorporates bitumen under the upstream fiscal framework.
Additionally, a Petroleum Host Community Fund is proposed in the PIB. The Fund is a mechanism to formally recognize host communities as important stakeholders by assigning oil and gas infrastructure security to the Host Communities and minimizing environmental degradation due to vandalism and crude oil theft. As a freedom to operate tool, it incorporates penalties to host communities in the event of vandalism in their localities. The proposed legislation includes modalities for using regulations to increase flexibility in managing host community issues.
Fiscal Reforms
The PIB represents the largest overhaul of the government petroleum revenue system in the last four decades. This overhaul has four central objectives:
· To simplify the collection of government revenues,
· To cream off windfall profits in case of high oil prices
· To collect more revenues from large profitable fields in the deep offshore waters, and
· To create Nigerian employment and business opportunities, by encouraging investment in small oil and gas fields.
Simplification of the collection of government revenues is accomplished through extensive revision of allowable deductions for the purposes of tax. Only direct costs wholly and necessarily incurred in petroleum operations are eligible for deductions.
Given the recent upward oil price movements, the PIB introduces price based royalty for crude prices beyond $70/bbl and gas prices beyond $7/mmbtu.
Thirdly all cost based incentives have now been replaced with production based incentives because government revenues is impacted by oil production and efficient cost management. This therefore imposes strict discipline on cost escalations and de-incentivizes gold plating. The proposed new fiscal regime also seeks to harmonize oil and gas fiscal systems. Gas fiscal terms are fully integrated into oil fiscal systems for the first time in Nigeria.
In line with our National Content objectives and the provision of employment opportunities for Nigerians, there is a distinct preference for Nigerian goods and services through a cap on deductions on foreign based capital expenditure, thus creating incentives for domestication of capital spending.
Of course, with fiscal changes there may be concerns by investors as to project profitability and long term sustainability of production in Nigeria. From our models of profitability, the proposed fiscal terms in the case of onshore/offshore JV projects delivers comparable value to investors to the current system, but additionally improves the economics of small fields significantly through generous production allowances and smaller royalty rates.
With respect to the deep offshore production sharing contracts (PSCs) the 1993 fiscal terms were designed for oil prices of $20 per barrel and below. Section 16 of the Deep Offshore Act prescribes that changes be made to this fiscal regime to restore benefits to the government commensurate with the increased oil prices once oil prices have exceeded $20 per barrel in real terms or 15 years after the commencement of the PSC (2008).
I wish to state that Nigeria is not alone in “tightening” of fiscal terms during successive bid rounds or ad-hoc awards. The goal has always been to achieve a fair balance between government and contractor share. This is to ensure that Nigeria remains competitive when compared to other countries with similar petroleum resource base.
Nigeria remains one of the most attractive countries in terms of fiscal regimes (Government Take). As an indicator of competitiveness, the latest Angola rounds shows Government Take (GT) at the level of Nigeria’s 2005 PSC terms which is less favorable to contractors than the current terms proposed in PIB 2012. Interestingly, these terms will also apply to the National Oil Company as it is not intended to be discriminatory.
The PIB as a first step
Passing the PIB into law however represents the first step. The next step is implementing the law in such a manner as not to disrupt oil and gas operations or negatively impact Government Take. This is not going to be an instantaneous event but a process. To this end, an implementation framework is planned with cross-functional teams chaired by the Hon. Minister providing steer and context for organisation transition and /or start-up.
A further step is in developing regulations called subsidiary legislation through the powers conferred on the Minister by the Act and models which would provide templates for model contracts and licenses. These would include the following:
Institutions and Appointments Regulation
Upstream Petroleum Regulations and Models &
Downstream Petroleum Regulations and Models
It is envisaged that over 80 regulations with differing quantum and complexity would be developed. In developing regulations the government would choose the path of reducing the economic cost of regulations to both the regulator and the regulated as long as safety and the environment is not compromised.
In a nutshell, what the next five years presents to us are great endeavours which are at a first glance very challenging but also opportunities for great accomplishments. Some of these include:
The challenge of organisational start-up, institutional strengthening and human capacity development. For example, the area of gas regulation with respect to pipeline network codes, open access regimes and tariff methodologies whether incentive based rate of return based is relatively new in Nigeria.
Similarly, managing the anticipated 100 fold increase in acreages while improving access and availability through the new acreage management system will require high levels of capacity. The same will apply to the electronic information management system. The challenge is however tempered by the opportunity for Nigeria to receive its commensurate share of global exploration dollars taking into consideration its current production ranking and resource base.
Funding and the capitalization of the new national oil company in the midst of competing demands by other sectors of the economy would continue to require special attention. Passing the PIB will bring investment certainty in the oil and gas sector and a robust, clear and transparent acreage management system will provide competitive access to all qualified investors and remove rent seeking and arbitrage in the upstream sector.
In the future, our midstream/downstream assets such as refineries and oil pipeline infrastructure will qualify for generous incentives under CITA section 39 as applicable to gas investment in Nigeria. Coupled with price deregulation of the downstream and the abrogation of section 6 of the Petroleum Act (which prescribes the right of the Minister to set petroleum product prices in Nigeria), these measures will improve the economic viability of refineries and oil infrastructure projects going forward.
In the long term, our analysis of the challenges for the Nigerian oil and gas industry and proposed remediation can be stated as follows:
Impact of Tight Oil, Shale Oil and Gas
The most important event in the horizon of the oil and gas industry is actually the direction the US shale oil and gas will take in the medium to long term. In the US, tight oil, shale oil and gas resources are proving to be much larger than previously thought. Oil supply has a large price upside and break-even price of most tight oil are in the range of $40 – $60 per barrel. This production cost is economic in view of current $100/bbl oil prices.
The US has been cutting back on imports of light sweet crude and the rate of total imports has decreased by 10% in the last two years. US dependence on oil imports is expected to continue declining over the next 10 years reaching a share of about 43% of total oil consumption by 2020 from 67% in 2005.
The impact of US shale oil can be seen in declining imports from countries such as Nigeria. This new realignment in the oil markets has not escaped the attention of the government of Nigeria. We are committed to finding new markets and processing most of our crude domestically to meet our growing demand for refined products. In other words, in the future, the Nigerian oil and gas industry may have to be domestically focused and the potential exists that in order to meet domestic demand, all of governments equity crude will be dedicated to government refining and the only oil available for export may actually be IOCs entitlement crude.
Between 2007 and 2011, US shale gas share of total gas supply increased from 8% to 32%; consequently pipeline & LNG import share of total gas supply declined from 16% and 3% in 2007 to 12% & 1% respectively. As a result of shale gas production, it is projected that U.S. will become a net exporter of natural gas in the year 2020. This is already evident in the decline of Nigeria’s LNG exports to the US from 12% in 2007 to 1% in 2011.
Impact on Nigeria
· Unprecedented growth in USA gas reserves inevitably eliminates USA as a destination for Nigerian gas.
· Increased competition for the Far East market as excess supplies target this market.
· Apart from direct challenges in gas, the growth in gas reserves, re-establishes the USA as a major location for gas based industries such as petrochemicals, fertilizer etc., effectively reducing the market options for such products for Nigeria too.
Nigeria’s Strategic Response
· Nigeria’s resource base is significant and its cost of supply remains relatively competitive. The strategy in Nigeria is therefore to assure long run competitiveness of gas supply from Nigeria to ensure that the landed cost of gas from Nigeria in target far east markets is competitive enough to assure market share. Major focus in future gas legislation PIB is implicit effort to structurally reduce costs in Nigeria, through well designed fiscal terms that discourage inefficient costs and incentivizes difficult developments, whilst assuring a balanced reward scheme for both investor and FGN
· Nigeria will leverage the fact that its’ planned export LNG projects are in a reasonably more mature phase than many of the competing options to ensure early market penetration. Focus is on the acceleration of FID of the Brass LNG project and the rapid maturation thereafter of the other LNG projects – OKLNG and NLNG T7
· Finally, unlike many of the competing nations, Nigeria also has a huge and rapidly growing domestic gas market. The domestic market is currently about 1.6bcf/d but poised to grow rapidly to 5bcf/d over the next 5 years and approach 10bcf/d within the next 10 – 15yrs. A major policy intervention is ongoing to assure the bankability of the evolving domestic market, coupled with major infrastructure development to facilitate widespread penetration of gas across the country. In addition, Nigeria is well suited to supply the growing regional gas market in the West African sub-region, estimated to grow to about 1bcf/s by the end of the decade.
The combination of the above will ensure that Nigeria’s position is effectively well managed and responsive in a rapidly evolving gas market.
New Discoveries in Sub-Saharan Africa (SSA)
Africa’s petroleum sector offers a tremendous diversity of world-class opportunities and would increasingly play an important role in the overall energy mix. Independent explorers are leading the industry’s exploration campaign and opening key new plays across the continent.
Huge gas finds in East African deepwater, together with the continuing strength of some West African oil plays, saw 61% of volumes and nine out of the ten largest discoveries added in SSA in 2012. Exploration success especially in Mozambique (which alone accounted for one-third of the new volumes during the year) and Tanzania has been huge and in the next five years, analysts have predicted that the export capacity potential for gas supply from East Africa would have risen steeply. This would impact positively on global energy markets.
Despite these huge discoveries, Nigeria remains Africa’s most important hub offering many advantages that makes it competitive in Africa and around the world.
· It is at the fulcrum of the Gulf of Guinea, one of the World’s most important oil provinces. Similarly the resource sizes are quite significant at current production rates, reserves production ratio is at 41 and the R/P ratio for gas is 128.
· Nigeria has the highest FDI Inflows into Sub-Saharan Africa(SSA).
· Impact of the global economic crisis on Nigeria’s oil and gas industry has been minimal.
· Nigeria has highest production in SSA
· Sub-Sahara Africa hosts many of the world’s most prolific and exciting petroleum basins.
· Spectacular exploration successes have raised expectations of transformational revenues in the past five years
• Nigeria has massive opportunities for growth Early phases of oil and gas exploration when risks are higher, fiscal terms are often skewed in favour of the investor compared to mature provinces where risk is lower
• Fiscal comparisons are best done within peer groups
• Nigeria’s frontier terms reflect the higher risk in frontier basins and are competitive with new SSA oil producers
Nigeria has moved from low to COMPETITIVE government take in SSA
Aftermath of Japan Nuclear Crisis
The crisis at Japan’s nuclear plants has caused a re-assessment of nuclear power plants and projects worldwide and could cause an uptick in demand for other sources of energy including coal, oil and natural gas.
Before the earthquake and tsunami that hit northern Japan in March 2011, nuclear energy had been making a comeback. Concerns about global warming had led a range of environmentalists to set aside their concerns and join in pushing for the revival of an industry whose growth had stalled after the Three Mile Island accident in 1979 and the Chernobyl disaster in 1986. Countries such as Germany have given indicative dates when their nuclear plants will be shut.
Rising cost of Exploration and Production especially in the Deep-Water mainly as a result of rising oil prices. These rising costs also means increased competition for government funding in the sector amidst other priorities.
Increased security threat arising from piracy and vandalism.
Industrial scale illegal bunkering (Oil theft) now a major source of revenue loss to the Nigerian Economy and its Investors.
New discoveries by Nigeria’s African neighbors amidst the discovery of tight oil, Shale Oil & Gas globally is a challenge to the Nigeria’s oil and gas industry and destination market.
Some of our indigenous contractors lack proper business structure; they are small, fragmented and often times incapable of packaging or attracting loans. Only a few of them can deliver turnkey projects without resorting to some form of partnership agreement for equipment, expertise or technical support.
Furthermore some of our local banks also lack the financial base to make any meaningful impact on local content development. Even the biggest Nigerian banks are limited when it comes to energy financing although a couple of loans syndication has recently been achieved.
Lastly, managing the timing of the specific actions prescribed in the law and there dependencies is my responsibility – which is why Nigeria’s PIB journey which has elicited such intense interest and debate would in the end be an enduring l journey of transformation. The Ministry of Petroleum resources is committed to both the passage of the bill and the effective implementation of the Act.
Let me wish all the participants fruitful deliberations. Thank you
• Oil prices are holding steady (half year price)
• PMS availability country-wide
• The National Content Law has been in effect for over a year
• PIB
The theme of this year’s conference; Entering a New Dawn for Nigeria’s Oil & Gas Industry aptly describes Nigeria’s current situation of transiting to the next chapter on the journey to maximizing our resources for the development of our Nation. The oil & gas sector undoubtedly plays a critical role towards Nigeria’s economic prosperity.
Nigeria’s production currently stands at an average of 2.5 million barrels per day and proven reserves of 36 billion barrels are expected to last about forty six years. However, Nigeria has set for itself ambitious targets of achieving 4 million barrels of production by 2020.
There are often various factors that contribute to these expected outcomes. I therefore would like to engender both interest and debates to the strategies that would underpin this roadmap into our energy future.
Given that oil & gas projects tend to engender medium-long term gestation periods particularly gas projects, this is the right time to be talking about 2020, because the decisions we make today will shape the outcomes in our 2020 future.
I propose here to speak on the strategies’ needed to bring to realization these targets as follows;
· More attractive fiscal terms for investors in onshore and shallow water areas.
· Higher profitability for fields in deep water areas with specific new fiscal incentives to encourage re-investment in Nigeria as will be discussed in more detail below,
· More acreage availability through mandatory relinquishment of unused acreage. This will enable the Government to attract large scale new investment through new bidding rounds, and
· Strong work commitments and effective acreage management on new PPLs through the application of the “drill or drop” system
This production target is to be met through investments in oil production, while significantly reducing gas flares through gas utilization and reservoir maintenance strategies.
Challenges:
Cost of environmental remediation from years of militancy and pipeline vandalism.
Maintaining the level of government investment in oil and gas while meeting pressing social needs.
Funding required to achieve gas flare out is significant and grows with increased oil production.
Ageing oil production facilities built in the early and mid-seventies requiring modernization.
Building indigenous technology capability in complex deep water environments.
Indigenous participation and the pace of human capacity development (Institutional development and organisational strengthening).
Crude oil and petroleum product theft
The country’s gas utilization policies are in three strategic areas namely:
Gas to power to deliver at least three folds increase in power generating capacity by 2015.(12,000MW)
Deliver on the President’s gas revolution agenda by
creating industrial hubs for gas based industries (fertilizer and petrochemicals) and
Establishing better linkages between the gas sector and the domestic economy.
Consolidating Nigeria’s position and market share in the export markets through regional gas pipelines and LNG.
The enabling policy interventions with respect to gas domestication are being implemented inc luding the following:
Domestic supply obligation to jump start gas availability in the short and medium terms.
The provision of bankable commercial framework reforms in pricing and revenue securitization to enable sustainable investment in domestic gas supply.
The development of a national gas infrastructure blueprint for which supply flexibility through the use of open access rules will be encouraged.
In the case of oil development the policy interventions include:
Amnesty programme
Fiscal rules of general application for the upstream, midstream and downstream sectors (PIB).
Deregulation of product prices and the opening up of the downstream petroleum sector.
Nigerian energy infrastructure has been solely financed by government because of the social and economic impact, high investment requirements and long gestation period. Over 5000km of petroleum product and gas pipelines, storage depots, refinery, power generation, transmission and distribution infrastructures were all built through direct government funding.
Due to competing needs for government resources from other public sector services such as education, health and transportation infrastructure etc. most energy infrastructure development projects should be financed and managed through private sector participation. It is in the light of this that comprehensive energy reforms to fast track the development of energy infrastructure and deregulate the energy market for effective competition and efficient service delivery was embarked upon.
Financing for downstream energy infrastructure such as gas pipeline is different from financing upstream oil and gas development. The former requires longer term commitment for service delivery and hence the need for effective legal, regulatory and fiscal framework to ensure level playing field for all stakeholders.
As you are aware, the Government has embarked on reforms within the petroleum sector in order to make the industry attractive to both local and international investors. Some of these reforms include; the National Content Act, the Amnesty Programme and an omnibus legislation called the Petroleum Industry Bill (PIB).
The PIB currently undergoing legislative processes at the National Assembly establishes the legal and regulatory framework, institutions and regulatory authorities for the Nigerian petroleum industry. It also stipulates guidelines for operations in the upstream and downstream sectors.
The objectives of the PIB are therefore as follows:
• To enhance exploration and exploitation of petroleum resources
• To significantly increase domestic gas supplies especially for power and industry
• To create competitive business environment for the exploitation of oil and gas
• To establish fiscal framework that is flexible, stable and competitively attractive
• To create commercially viable national oil company
• To create strong and effective regulatory institutions
• To promote Nigerian content and
• To promote and protect health safety and environment
The proposed reforms in the PIB can broadly be divided into two; non-fiscal and fiscal reforms. Non-fiscal reforms relate to institutional and policy re-orientation.
Institutional & Policy Reforms
At the heart of the PIB is the separation between policy, regulation and monitoring and commercial operations. Based on this model idea, the PIB seeks to build institutions around these core principles. Under this, the Ministry of Petroleum Resources has responsibility for the evolution of policy in the oil and gas sector. Under the Ministry are the Regulatory Institutions charged with regulation and monitoring and thirdly, the National Oil Company with responsibility for commercial operations.
The building blocks of these institutional and policy reforms are as follows:
• The Unbundling of NNPC as presently constituted through the Creation of a National Oil Company that promotes indigenous operational capacity development
• The Creation an Asset Management Limited Liability Company to manage the JV assets on behalf of the federation
• The excision of Nigerian Gas Company (NGC) from NNPC as a separate partially privatised entity to cater for domestic gas marketing and gas infrastructure development. The intention here is to accelerate national gas infrastructure development for effective gas supply to power and industrial sectors of the economy. This will be realised through private equity participation of up to 49%.
The proposed PIB will change the role of NNPC. Currently all NNPC’s revenues arising from the management of federal government assets flow directly to the Federation Account and its funding for the JVs is then provided by the government. This role will now be taken over by the Asset Management Company which will be capitalized with a two year loan in place of the annual cash calls and would later be expected to be self-financing through the retention of its earnings. All royalty and taxes would however be paid to the government as and when due.
The new National Oil Company will broadly consist of the PSC assets which shall be used to capitalize the National Oil Company, the National Petroleum Development Company (NPDC), the current three domestic refineries (WRPC, KRPC and PHRC) and the Pipelines and Products Marketing Company (PPMC).
The new National Oil Company will also be partially privatised. It is expected that up to 30% equity shall be divested to provide private participation as done in other NOCs such as Petrobras, Petronas etc. Government expects the partial privatization to provide a culture change to a fully accountable and commercial company.
Along with the unbundling of NNPC, two new regulatory institutions; upstream petroleum and downstream petroleum inspectorates are to be created to promote effective regulation and monitoring in line with operational best practices. These regulatory entities are expected to perform both commercial and technical regulation in the upstream and downstream petroleum sectors respectively.
Nigeria’s quest to grow its reserves will be engendered in the proposed new PIB through a robust acreage management system to be superintended by the Upstream Petroleum Inspectorate. Similarly, the PIB proposes the establishment of a Technical Bureau in the Ministry of Petroleum Resources charged with the responsibility for frontier exploration services.
Over the years, Nigeria has underexploited its bitumen resources. The Frontier Exploration Services will provide necessary coordination and preliminary work for the Upstream Petroleum Inspectorate, which will through its acreage management system offer opportunities for investors. In order to underpin this, the PIB incorporates a fiscal regime for these frontier areas and specifically incorporates bitumen under the upstream fiscal framework.
Additionally, a Petroleum Host Community Fund is proposed in the PIB. The Fund is a mechanism to formally recognize host communities as important stakeholders by assigning oil and gas infrastructure security to the Host Communities and minimizing environmental degradation due to vandalism and crude oil theft. As a freedom to operate tool, it incorporates penalties to host communities in the event of vandalism in their localities. The proposed legislation includes modalities for using regulations to increase flexibility in managing host community issues.
Fiscal Reforms
The PIB represents the largest overhaul of the government petroleum revenue system in the last four decades. This overhaul has four central objectives:
· To simplify the collection of government revenues,
· To cream off windfall profits in case of high oil prices
· To collect more revenues from large profitable fields in the deep offshore waters, and
· To create Nigerian employment and business opportunities, by encouraging investment in small oil and gas fields.
Simplification of the collection of government revenues is accomplished through extensive revision of allowable deductions for the purposes of tax. Only direct costs wholly and necessarily incurred in petroleum operations are eligible for deductions.
Given the recent upward oil price movements, the PIB introduces price based royalty for crude prices beyond $70/bbl and gas prices beyond $7/mmbtu.
Thirdly all cost based incentives have now been replaced with production based incentives because government revenues are impacted by oil production and efficient cost management. This therefore imposes strict discipline on cost escalations and de-incentivizes gold plating. The proposed new fiscal regime also seeks to harmonize oil and gas fiscal systems. Gas fiscal terms are fully integrated into oil fiscal systems for the first time in Nigeria.
In line with our National Content objectives and the provision of employment opportunities for Nigerians, there is a distinct preference for Nigerian goods and services through a cap on deductions on foreign based capital expenditure, thus creating incentives for domestication of capital spending.
Of course, with fiscal changes there may be concerns by investors as to project profitability and long term sustainability of production in Nigeria. From our models of profitability, the proposed fiscal terms in the case of onshore/offshore JV projects delivers comparable value to investors to the current system, but additionally improves the economics of small fields significantly through generous production allowances and smaller royalty rates.
With respect to the deep offshore production sharing contracts (PSCs) the 1993 fiscal terms were designed for oil prices of $20 per barrel and below. Section 16 of the Deep Offshore Act prescribes that changes be made to this fiscal regime to restore benefits to the government commensurate with the increased oil prices once oil prices have exceeded $20 per barrel in real terms or 15 years after the commencement of the PSC (2008).
I wish to state that Nigeria is not alone in “tightening” of fiscal terms during successive bid rounds or ad-hoc awards. The goal has always been to achieve a fair balance between government and contractor share. This is to ensure that Nigeria remains competitive when compared to other countries with similar petroleum resource base.
Nigeria remains one of the most attractive countries in terms of fiscal regimes (Government Take). As an indicator of competitiveness, the latest Angola rounds shows Government Take (GT) at the level of Nigeria’s 2005 PSC terms which is less favorable to contractors than the current terms proposed in PIB 2012. Interestingly, these terms will also apply to the National Oil Company as it is not intended to be discriminatory.
Conclusion
Based on the foregoing, Nigeria’s strategy is therefore to address the challenges highlighted above and transform the oil & gas industry in line with the proposed PIB. This will ensure the realisation of the national objectives of 4 million barrels per day oil production and 40 billion barrels crude oil reserves by in the next 7 years.
Source: NNPC
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