Financial Energy Review
The Federal Government is set for another bid round as seven deep water oil blocks has been marked for auction. The chief executive of the Nigerian Upstream Petroleum Regulatory Commission, Gbenga Komolafe said the bid may kick start next month November.
The Government issued dozens of such permits between 1993 and 2007 to open up the ocean floor to oil and gas production.
The blocks available are at depths of between about 1,200 meters (3,936 feet) and 3,100 meters, according to Komolafe.
They are located off the city of Lagos in southwestern Nigeria rather than off the coast of the Niger Delta further to the east where most of the country’s oil industry is concentrated, he said.
Nigeria’s oil output fell to a multi-decade low of less than 1.2 million barrels a day in September and has almost halved since the first quarter of 2020. The government blames rampant crude theft on the pipelines that crisscross the Niger Delta for shutting down wells and killing off investment.
In recent years, deep-water production led by international companies such as Shell Plc and TotalEnergies SE has accounted for about 35% of oil output but its share has risen this year as onshore operators have struggled. In addition to granting new licenses, the government is encouraging current block-holders to develop more of their offshore acreage.
Earlier this month, the NUPRC also resumed a separate bidding round for firms interested in commercializing gas that is burned off – or “flared” – by oil producers. While Nigeria possesses Africa’s largest proven gas reserves, most of it is untapped, flared or re-injected into oil wells.
Nigeria’s deepwater projects which are expected to come on stream between 2025 and 2030 will have the capacity to add at least 2.3 billion barrels of crude oil to Nigeria’s existing reserves, S&P Global Commodity Insights, a market intelligence agency has stated.
In the report, S&P stated that deepwater projects hold the key to Nigeria’s production growth and ultimately stability, explaining that if properly implemented , the Petroleum Industry Act (PIA) could transform the fiscal side of the Nigerian oil industry.
“The deepwater projects that are due to start up between 2025 and 2030 are estimated to hold recoverable resources, of 2.3 Barrels. Without the sanctioning and commissioning of currently unsanctioned projects, Nigeria’s overall production will likely decrease from the end of the decade.
“It’s the deepwater projects that can provide this extra production required to offset the expected production decrease. Therefore, unsanctioned deepwater projects are seen as the prime target area for fiscal and regulatory improvement which is thought to have occurred if the assets convert to the new PIA fiscal terms,” it stated.
A number of oil companies have recently begun to exit Nigeria’s shallow waters as well as divesting their onshore assets for the deepwaters as a result of frequent attacks on their facilities in the Niger Delta.
According to the report, some of the deepwater projects on legacy terms upon conversion will see their combined Net Present Value (NPV) increase by as much as 89 per cent.
According to the firm, this is positive news for the projects and their operators and has spurred some of them and other joint venture (JV) partners to release news that the changes in the fiscals have stimulated progression towards a possible Final Investment Decision (FID).
“An example is Preowei, where operator TotalEnergies announced that it is to accelerate the development with a possible early conversion to the PIA terms due to the new fiscal structure which contains tax advantages,” S&P said.
It listed one of advantages of the document as the new incremental production-based royalty which went from a 10 per cent for water depths of greater than 200m to either 5 per cent for less than 50,000 bpd or 7.5 per cent when greater.
“These projects should remain an area of particular focus for the government. Indeed, they could become stranded if the terms available are not acceptable to licence holders.
“However, as the May 2021 renegotiation of the Bonga Southwest PSC terms demonstrated and the subsequent August 2022 renegotiation of a further six blocks including OML 125 & 130, if the government and international oil companies (IOCs) are able to find common ground on such projects, this could raise Nigeria’s production outlook towards the end of the decade, which would also likely help to secure the country’s output over the longer term,” the report said.
Further important large projects that are key to Nigerian production remaining steady, it said, are the deepwater producing Agbami field which has also benefitted from the new terms.
If implemented, it stated that this will have an NPV increase of around 50 per cent as well as the deepwater producing Erha field which would see an NPV increase of over 400 per cent.
Titled: “A Deepwater Dive: Has the PIA unlocked the key to Nigeria’s long-term production stability?”, the report stressed that the PIA seeks to provide a regulatory, legal, fiscal and governance framework for the Nigerian petroleum industry as well as funding the development of host communities.
According to S&P, the new PIA has attempted to improve the country’s fiscal attractiveness by altering many facets of the regimes that apply to oil and gas assets, including royalty tax as well as Petroleum Profit Tax (PPT).
“One area of particular interest and that is crucial in preventing Nigerian production from declining is the sanctioning and timely construction of new deepwater projects such as Bonga Southwest and Owowo.
“These increases are significant and illustrate the intentions of the government, moving forward, that on its designing of the PIA they have put project partners and fiscal attractiveness at the forefront.
“The trajectory of Nigeria’s future oil and gas production largely hinges on the PIA and if it is considered to be sufficiently favourable to investors. This is widely unknown as operators and partners have remained generally silent apart from the announcements made by the Preowei and Bonga development JVs,” it added.
However, it stated that it remains to be seen if Nigeria’s boldest attempt to overhaul the country’s petroleum sector will work, but stressed that it has been a positive step which so far has been commended and should help retain and attract further investment ultimately benefitting the country.
