Oil Majors Pick Up Campaign to Modify Nigeria's Petroleum Industry Bill

IOC Alignment

The campaign by oil majors to change terms in the controversial Petroleum Industry Bill has regained focus in recent weeks as the National Assembly embarks on its third reading of the bill, against a backdrop of strong support from Nigerian lawmakers who feel that the country has been overly generous to its upstream investor community when compared with other regional producers.

Shell, which has been a vocal and public voice against aspects of the legislation for some time, has recently been joined by the usually reticent ExxonMobil as well as Chevron in voicing concerns about some provisions of the bill, which will see increased tax liabilities for those operating in deepwater areas (among others), which investors fear will materially change the economics of their existing and new operations. This is especially so as most new production in Nigeria is tabled to come from these deepwater areas, in part because of the difficult operating conditions onshore.

In recent days, Shell's outgoing executive vice-president of Shell Exploration and Production, Africa, Ann Pickard, said that the bill would make Nigeria's production sharing contracts (PSC) "among the harshest in the world" and that "all or almost all proposed deepwater projects between now and 2020 will become uneconomic". That was followed up by more recent comments from Shell's Nigeria managing director, Chike Onyejekwe, who said that the " PIB proposes multiple increased royalties and fiscal terms .. (and) will also exclude a number of legitimate costs from being recovered". The supermajor had net production of 361,000 boe/d in the country in 2008, from 12 deep- and shallow-water fields, as well as onshore operations. The usually reticent ExxonMobil has also entered the public fray on the issue, with Nigeria managing director Mark Ward stating this week that companies are aligned in their position that deepwater development is threatened by the terms of the bill. "Offshore Nigeria has a lot of hydrocarbon potentials and we hope that there would be a good balance between what the government wants to achieve and providing a reasonable return for our shareholders," he said in comments carried by The Vanguard newspaper. Chevron's Andrew Fawthrop said: "Dialogue is needed to ensure that the government’s well-thought out aspirations are achieved by the Petroleum Industry Bill and not inadvertently derailed," in comments carried by NEXT news portal.

Of the other major operators (and holders of joint ventures), Total has tried to strike a more conciliatory note in public, with head of African Exploration and Production Jacques Marraud des Grottes telling Reuters that he hoped for a mutually agreeable outcome from discussions: " I know the bill is very important for Nigeria, so I'm confident the outcome will be good for the industry," he told the news agency. Eni's chief operating officer, Claudio Descalzi also said recently that the company planned to double its investment in Nigeria and had confidence that the government would take the opportunity to elaborate reforms that will safeguard the investments in the sector when considering the PIB.

Backdrop to Controversy

The PIB was presented to Nigeria's National Assembly towards the end of 2008 and was meant to represent a once-in-a-generation chance to overhaul the Nigerian petroleum industry. It contained clauses touching on upstream, downstream, gas, and institutions and, once passed, will completely overhaul the country’s energy sector. It will replace all previous legislation, change the functions of ministries, agencies, and companies, create new bodies and disband others. The system of royalties and taxation applied to the upstream industry will also change considerably.

In upstream ventures, a new tax called the Nigerian Hydrocarbon Tax (NHT) would replace the Petroleum Profits Tax. Companies would be liable to Companies Income Tax (CIT), which is not applicable to the upstream sector at present, and NHT would not be deductible from assessable profits for CIT purposes. The draft bill also included a two-tier royalty scheme with rates based on both production levels and price, with smaller fields being incentivised with lower government take but larger fields paying more. The new system would also contain separate scales for oil and gas, consistent with the greater attention now being given to the latter in government policy in the wake of the 2008 Gas Master Plan.

IHS Global Insight estimates that, for a mid-size deepwater oil field with production of around 50 million barrels a year and an oil price of US$75/b, the impact of the bill would be to increase take from current levels of 72.9% under existing PSC, to as high as 81.8% over the project life. The new system would significantly increase the sensitivity of take to production rates and oil prices with the operator currently reaping a greater share from higher production and oil prices at present.

Other important provisions of the bill, including reform of the state-owned Nigerian National Petroleum Company (NNPC) and also, the loss-making downstream sector, with price deregulation an important element in making the bill effective in its goals (see Nigeria: 9 March 2010: NNPC Outlines Planned Transformation within Wider Nigerian Reforms). 

Outlook and Implications

A version of the Petroleum Industry Bill looks certain to be passed this year after nearly two years of discussion, with substantial impetus behind the measures and a feeling that Nigeria is losing out compared with other regional states including Libya and Algeria, with some of the highest take rates in the world. The NNPC, which has been particularly bullish in pushing for the legislation, has estimated losses from not passing the bill running at US$287 million a month to the Nigerian Treasury.

Nevertheless, with such an alignment of investors—and a number of projects awaiting investment—the Nigerian government is not completely insensitive to investor pressure, with the IOC's hoping that a unified focus on a few key points will yield more. Last week, Minister of Petroleum Rilwanu Lukman said that 56 changes had been made to the draft in circulation after presentations by oil companies, with a further 36 changes made in response to the Federal Inland Revenue, and 66 other changes based on presentations from other stakeholders. This week Nigeria's Punch newspaper reported that further changes are now under consideration by the Joint National Assembly Committee before the bill is considered by lawmakers in the coming weeks, reflecting advice from the absent President Yar'Adua that the PIB should be passed in such a way that it is not "anti-investment".

That suggests that while Nigeria's take-rate is likely to increase as a result of the PIB, the impact may yet be mitigated from the drafts in circulation currently, with discussions in the coming weeks crucial to the outcome given pressure on the government to clarify the legislation and investment conditions and move swiftly ahead with resulting reforms.