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After years of consideration and several failed attempts,
Nigeria may finally overhaul its oil sector legal framework in 2021
- potentially within the next few months. However, investors have
pushed back against some of the changes proposed in the Petroleum
Industry Bill (PIB), 2020 such as the new fiscal terms and host
community development regulations (see graphic). E&P companies
argue - and IHS Markit agrees - that if these provisions are not
revised to make the country more competitive, then over 30% of its
recoverable reserves are at risk of being stranded. Given the
headwinds that the global hydrocarbon industry faces from the
energy transition, there may be only a narrow window of opportunity
for some large Nigerian new source projects to be sanctioned (see
graphic). If this window is missed, Nigeria's future output could
be severely constrained.
Figure 1: Nigeria: Key proposals contained in the 2020
PIB
Figure 2: Nigeria: Crude and condensate capacity outlook by
project sanction and terrain
At long last, in the face unrelenting pressures, a
breakthrough looks increasingly likely
The country now appears to be on the cusp of a definitive
petroleum sector revamp. This is important because hopes for such
"reforms" have been repeatedly dashed since the first PIB was
introduced in 2008. Since then, many international oil companies
(IOCs) have trimmed their Nigerian portfolios, particularly onshore
and shallow water assets with the most exposure to insecurity,
sabotage and oil theft, while waiting for clarity on the applicable
investment terms to use for making final investment decisions
(FIDs) on undeveloped discoveries under existing licenses.
Meanwhile, the government has imposed relatively high local content
requirements in 2010 and raised deepwater royalties at the end of
2019 and indirect taxes for upstream firms in early 2020. These
moves have made Nigeria less attractive as an E&P venue than
many of its large producer peers.
Unless clear and acceptable investment terms - at least the same
as existing contracts if not better - are made available soon,
licensing and drilling, which have trending down since the late
2000s (see graphic), are unlikely to recover to where they were in
the mid-2010s. And the country's hydrocarbon production will
probably be held well-below its potential, with liquids output
stagnating further or increasing only modestly from 2019 levels.
Although there is greater scope for gas production to grow
regardless of what happens with the PIB, given Nigeria's prolific
gas resource base, electrification and industrialization needs, and
new recently completed or soon-to-be-completed gas pipeline
projects, lackluster regulations could still retard the development
of the gas sub-sector - a cornerstone of the government's
medium-to-long term economic strategy.
Figure 3: Nigeria: Contract block awards and wells drilled
by year
However, there is a good chance that the reforms may end
up falling short, limiting the upside for both investors and the
state
The PIB currently before the National Assembly is better than
what was previously put forward, but is still flawed in the eyes of
investors. E&P companies have made their criticisms known -
calling out the expected adverse impact of the proposed fiscal
terms and host community development regulations on existing
licenses and current and future operations in particular - and are
lobbying for revisions. However, economic difficulties and
competition for oil rents between different interest groups
stemming from Nigeria's deep-rooted hydrocarbon dependency could
limit the extent for investor-friendly revisions in the finalized
bill, thereby blunting its impact. To avoid or mitigate such an
outcome, the Nigerian National Petroleum Corporation (NNPC) is
talking with investors about potentially renegotiating contracts
under the existing framework - presumably to try to facilitate the
sanctioning of at least a few key upstream developments in the near
term.
Although neither the NNPC-led contract renegotiations nor the
PIB are expected to significantly reduce the operational risks that
investors face such as facility and personnel violence and labor
unrest, they may finally provide the clarity on terms and
regulations that license holders have been yearning for to make
empowered decisions on stalled E&P investments. For the
Nigerian oil and gas industry, the stakes could not be higher.
