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New PSC may create loss of value of $2.7b

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Buhari assented to the Bill amending the Deep Offshore (& Inland Basin Production Sharing Contract) Act, recently passed into law. Photo: TWITTER/NNPCGROUP

Stakeholders in the oil and gas sector yesterday, lauded the quick passage of the new Deep Offshore and Inland Basin Production Sharing Contract (PSC) Act, as well as the assent by President Muhammadu Buhari, but warned that the move may not achieve projected objectives.

In a move that took the industry by surprise with the whole process taking only 26 days, Buhari signed the bill into law on Monday, expecting the development to create additional revenue for the government.

While signing the bill, Buhari said the amended bill will generate an estimated $500million in additional revenues for the Federal Government in 2020 and over $1billion from 2021.

Reportedly, Nigeria has lost about $21billion to the failure of the government to review the PSC as required by the Act.

Although the new terms could be reviewed every eight years, the new changes apply to all deepwater PSCs, regardless, a global think-tank, Wood Mackenzie estimated that the Act would result in a loss of value of $2.7billion over the remaining life of the assets, a value reduction of 18 per cent.

The amendment removed the current water depth-based royalty and replaced it with a uniform 10 per cent royalty for all deepwater PSCs, as noted by Wood Makenzie, the revised Act also introduces a price-based royalty, which would add 0 per cent to 10 per cent, depending on the oil price.

The research body estimated a long-term price assumption at $65 per barrel, noting that the assumption could be an extra four per cent.

Deepwater fields currently pay between zero and eight per cent royalty but could expect to pay 14 per cent when the Act became operational.
Wood Makenzie’s Director, Sub-Saharan Africa upstream Oil, and Gas, Gail Anderson, said: “The toughening of royalty is, relatively speaking, not as bad as investors feared,” adding that the average remaining government share increases by five per cent.

“Production will continue and most pre-FID deepwater projects could still make money at a long-term oil price of $65/bbl, even with a 15 per cent discount rate. So what’s the problem?

“Deepwater investors the world over need to ensure their projects can withstand low oil prices of $50-55/bbl, given recent price fluctuations and long-term forecasts of declining oil demand.

“This means delivering low breakevens, and here, Nigeria already struggles to be globally competitive. By increasing royalty, deepwater projects in Nigeria will move further up the breakeven curve, considerably increasing the risk of being stranded.

According to him, although in the short term, the change will deliver the intended increase in revenues for Nigeria, but won’t in the long-term if investors allocate capital to better projects elsewhere.

He said the royalty is only one piece of the fiscal framework, noting that deepwater investors know that when their contracts expire over the next five years or so, they would likely face more fiscal changes in return for a 20-year renewal.

Partner and Head of Odujinrin & Adefulu’s Energy Practice, Real Estate, and Mining Teams, Dr. Adeoye Adefulu, called for cautious optimism over the development.

Noting that the provisions of the Act applied not only to companies in PSCs with NNPC but also to licences obtained under the sole risk awards made in the 1990s, he said these licences have no protection from the economic consequences of the change to the royalty terms under the new law.

Stating that there could be potential legal consequences that may arise as a result of the passage of the Bill and assent by the President, Adefulu said there are other strategic considerations for both the government and the contractors, which may influence the outcome.
He said: “The chief consideration in this regard is the expiry of the 1993 PSCs. These contracts have a 30-year tenure, and renewal discussions are ongoing. Another consideration is the pending final investment decisions (FIDs) on a few 1993 PSC projects. FIDs on such projects will be delayed to take into account the impact of the royalty changes in the act, and the government will need to consider the impact of such delays.”

While decrying the delay in the amendment, Chairman, International Energy Services (IES) Ltd., Dr. Diran Fawibe, said it was better reviewed than never.

He noted that the move would create increase in government in government revenue, offering legislation to work with instead of asking oil companies to pay for what had been done.


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