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Nigeria oil contracts review could add uncertainty to the industry

Nigeria is planning to review its offshore production contracts. The contracts were negotiated over 20 years ago with several international oil companies like Royal Dutch Shell Plc, Exxon Mobil Corp., Chevron Corp., Total SA, and Eni SpA. These companies have production-sharing contracts with the Nigerian National Petroleum Corp (NNPC) and the tax rates and royalty terms differ a lot from those for onshore projects. Fiscal terms are at about 50 percent compared to 85 percent for onshore fields while royalties range from 12 percent in water depths between 200-500 meters to nothing where depths exceed 1,000 meters. The reason for this discrepancy in terms is because when contracts were negotiated, offshore drilling was being pioneered by these companies. Though now the output of these fields is about half of Nigeria’s total production.


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The goal is to increase revenue for the government from these fields. This revenue has been reduced by 50 percent in the past year as a result of the decline in the price of crude. The reduction has put pressure on recently elected President Muhammadu Buhari, who is having trouble delivering on electoral promises, who took power after winning an election earlier this year. Emmanuel Kachikwu, group managing director of the NNPC, identified the offshore oil fields and their terms one area where the government can increase revenue. This has added uncertainty in an industry where regulations are already unclear according to analysts. The lack of regulatory clarity has prompted some to state that there are more pressing matters than renegotiating terms, even if they are favorable to oil companies.

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A new oil bill would help a lot, according to Philipp Chladek who states, “Putting in place a new law is a bigger and more pressing priority than renegotiating the offshore contracts because it will have a much more beneficial impact on the Nigerian economy. The upside from having a regulatory and legal system in place is considerable because it will help increase investment and enable the smaller companies to develop their onshore oilfields.”

An oil bill has mostly languished since 2008, mostly over the fiscal terms being opposed by energy producers and political issues. According to Shell about $50 billion in investment has been lost to Nigeria as a result of the uncertainty these last seven years. Another $100 billion in investments could be lost in 10 years. The Oil Ministry acknowledges that exploration in Nigeria is close to the lowest in more than a decade because of investment plans that never happened. Favorable fiscal terms are what lead to deepwater exploration in Nigeria in the first place and lead to the Bonga field discovery in 1995 and together with other discoveries proved the potential of the Gulf of Guinea.

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The latest version of this oil bill proposed in 2011 aims to increase offshore taxes to 73 percent, and drop onshore taxes to 83 percent. Discussions between the NNPC and international oil companies are already underway, but most company officials have declined to comment on these ongoing negotiations. Although Osagie Okunbor, chairman for Shell in Nigeria, did say that at the current stage nothing should be seen as a win or loss.


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