Recently, the Nigerian Senate finally approved the amendment to the Deep Offshore and Inland Basin Production Sharing Contract 1993 Act. For context, the Act was initially created to encourage investment in Nigeria’s offshore assets, by providing lower royalties, taxes and allowances. Meanwhile, the newly passed bill is centred on boosting government revenue, especially towards the implementation of the 2020 budget. Herein, we highlight some of our concerns below.
Notably, the royalty rates on production within the Inland Basin was reviewed downwards from 10.0% to 7.5% – a positive for oil firms operating in that region. However, while the previous bill assigned varying royalty rates that depends on the water depth (12.0% for areas from 201m–500m water depth, 8.0% for 501m-800m, 4% for 801m-1000m and 0.0% for below 1000m), the amended bill plans to assign a fixed rate of 10.0% for all oil fields below 200m. Also, the bill proposes an additional royalty rate based on price, such that when crude oil prices trade around $20/b – $60/b, it attracts to an incremental rate of
2.5%, while a price between $60 – $100 attracts an incremental royalty of 4.0%.
Bearing the above in mind, we believe this bill might discourage new investments, as well as delay Final Investment Decisions on pending offshore projects – with over 11 offshore oilfields yet to commence production. Considering the volatile nature of crude prices, we could see new capital inflows directed towards countries with better fiscal terms and less regulatory uncertainty.
United Capital Research