Nigeria's Oil Industry Stalls over an Energy Bill

4 MINS READJun 27, 2013 | 10:15 GMT
Nigeria's Oil Industry Stalls over an Energy Bill
Total Nigeria's offshore oil and natural gas production platform in the Niger delta.

If the Nigerian oil industry is going to reverse the decline caused in part by regulatory uncertainty over the fate of the Petroleum Industry Bill, it will need additional investment in its deep-water oil fields. It made some progress June 21, when French energy firm Total and China National Offshore Oil Corp. announced that they had received approval from the Nigerian National Petroleum Corp. to award construction contracts on the delayed Egina deep-water oil project. Production is expected to begin by the end of 2017, and could reach 200,000 barrels per day.

Failure to pass the controversial bill, which would replace all of Nigeria's existing oil and natural gas laws, could cause the country's oil production to fall 20-40 percent by 2020, a problematic issue since oil represents about three-fourths of the country's exports. However, the bill's passage would cause problems of its own because certain provisions could make some offshore projects uneconomical. The bill is unlikely to pass anytime soon, and is even less likely to pass in its current form.

In the early 2000s, Nigeria's oil production was undergoing a transformative shift toward capital-intensive deep-water oil fields and away from older, declining, shallow and onshore fields. Deep-water oil production in Nigeria began in 2003 and eventually reached 1.3 million barrels per day, roughly half the country's output. However, shortly after the Petroleum Industry Bill's proposal in 2008, the pace of investment in deep-water oil fields declined dramatically because of uncertainty concerning future taxes and royalties.

The Oil Industry's Response

The bill includes higher taxes and other measures that could make deep-water production in Nigeria unattractive to foreign energy companies. Mark Ward, the chairman of ExxonMobil's Nigerian subsidiary, said in May that the bill would prevent all investments in deep-water projects. Abuja has defended the high taxes, royalties and tougher fiscal environment by comparing it to other oil-producing countries such as Angola. But the problem for Nigeria is that the high cost of the country's deep-water oil production limits the profit margins to the point that even small taxes can render projects unprofitable. Production costs for Nigeria's deep-water projects could approach $70 to $80 per barrel, and profitability further depends on royalties and taxes assessed on profits. Nigeria will also be competing for deep-water investment and drilling rigs with other deep-water basins in Africa, the Gulf of Mexico and Brazil, many of which would offer a better regulatory environment if the Petroleum Industry Bill is passed.

Ever since the bill's proposal, projects have been delayed or shelved while investors such as Royal Dutch/Shell await a resolution on the bill. Deferred investment has been most pronounced in the deep-water areas. The bill has also prevented Nigeria from holding another licensing round for offshore exploration blocks. While proven oil fields such as Egina are likely far enough along that they would remain viable under a new regulatory environment, unproven resources in exploration blocks could be passed over because of the high cost of exploration that goes along with the high cost of development.

Delays have already had a quantifiable effect on Nigeria's oil production. The country's deep-water oil production has fallen by 15 percent each of the last two years and is now around 800,000 barrels per day. And the effect of the delays will last for years after the bill issue is resolved. For instance, Egina was originally slated to come online in 2013, but now will not begin production until 2017.

The Energy Bill's Fate

Several factions in Nigeria's political and economic realms oppose the Petroleum Industry Bill. The bill would require oil companies to put 10 percent of their revenue into a special fund set aside for oil-producing regions. Nigerian politicians from outside the oil-producing Niger Delta have rejected this proposal on the grounds that the country's oil revenue should benefit the entire country. Additionally, Nigerians have protested the parts of the bill that would remove price controls and subsidies on petroleum products.

Reconciling all of the country's interests on such a large piece of legislation is difficult, especially with a presidential election scheduled for 2015. Current Nigerian President Goodluck Jonathan is preparing to run for re-election, but in order to win he cannot afford to pass a piece of legislation that would generate further political backlash from voters outside his support base in the Niger Delta. At the same time, he cannot afford to alienate his supporters within the Niger Delta. Finally, he cannot lift fuel subsidies if he wants any reasonable chance of victory. Simply put, Jonathan does not have enough political support to push the bill through in its existing form before the presidential election; at the earliest, he must wait until after his People's Democratic Party holds its congress in late 2014.

International oil companies will likely use this period of uncertainty to continue dialogue with Abuja to amend the bill's royalty and tax structure so as not to make proposed deep-water oil projects unviable. Supermajors such as ExxonMobil, Total, Shell and Chevron have a long history of working with Nigerian politicians, and the years of experience and contacts will likely mean this dialogue will end in their favor. However, until the Petroleum Industry Bill is passed — which is unlikely to happen in the near future — there will be further investment delays, likely preventing Nigeria from maintaining its current production of 2.5 million barrels per day over the next five years.

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