The Nigerian government cannot afford further delay to the planned reform of its energy sector as regulatory uncertainty delays key investments by oil majors, an issue that could cost the country more than a quarter of oil output within a decade.
An increase in offshore oil royalties last year rendered billions in planned investments unprofitable for companies, along with a VAT increase that has raised costs. That, coupled with an uncertain fiscal landscape, has made international oil firms wary.
A decision on a multi-billion expansion (the Bonga Southwest) by Royal Dutch Shell and its partners has been delayed. Investing in Nigeria without regulatory clarity would be “challenging,” Jeffrey Ewing, Managing Director of Chevron Nigeria, was quoted as saying by Reuters. “They’re competing against the world.”
This comes even as other majors downsize operations in the country. Chevron is selling its assets, Total’s stake in the Bonga offshore field is up for sale, while ExxonMobil plans to shed Nigerian fields in line with its global retrenchment strategy.
Industry executives have said the planned oil reform expected to be ushered in by the Petroleum Industry Bill is urgently needed to attract investment into the Nigerian energy sector, which accounts for 90 percent of the country’s foreign currency earnings.
Total Chief Executive Patrick Pouyanne told Reuters that he took a forceful message to President Muhammadu Buhari, who doubles as the country’s oil minister. “My message there was … please lift the uncertainty, because today operators in Nigeria are waiting, which is not good for the Nigerian economy,” he said. “It is not good for investments in the country, so we are waiting.”
Moreover, Wood Mackenzie in a recent report said the cost increases and uncertainty in Nigeria’s crucial energy sector are forcing companies to delay investments in key oilfields, and that could lead to a 35 percent decline in oil output over 10 years.
Nigeria, despite being Africa’s largest oil exporter, with output close to 2 million barrels per day (bpd), needs continual investment to maintain output as fields naturally decline. Particularly, three deep offshore fields, which would generate more than $2 billion a year for the government at peak production, are likely to be delayed as companies put their money in regions with better and clearer terms, the energy consultant said.
“Nigeria is going to enter quite a steep decline in production,” said Lennert Koch, principal analyst of sub-Saharan Africa upstream with Wood Mackenzie. “In order to keep its revenue up… it needs to develop additional fields.”
The PIB is expected to totally overhaul the oil and gas industry, covering operations, policies, structures, funding, and accountability – from who allocates exploration licenses to where the money goes once it lands in government accounts. But its passage has been delayed for several years while the law has generated controversy among stakeholders and operators.
Reports indicate that the legislation is split into two bills – one covering fiscal terms and the other the share that goes directly to oil-producing communities. Minister of State for Petroleum, Timipre Sylva, said last week the revised law would be presented to the National Assembly this week. The Minister also added that there would be a clear fiscal landscape by June.
Beyond the consensus that removing regulatory uncertainty is crucial for investment, companies are also wary about whether terms of development will change and hope that taxes and fees become more transparent under the new law, of which there are no details yet.