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Nigeria’s National Assembly has voted through the first-ever change to royalty within the country’s Deep Offshore and Inland Basin Production Sharing Contract (PSC) Act

tanker 1242111 640Wood Mackenzie estimates it will result in a loss of value of US$2.7bn. (Image source: Gerhard Traschütz/Pixabay)

According to consultant Wood Mackenzie, the main points of the amendment bill are:

-It removes the current water depth-based royalty and replaces it with a uniform 10 per cent royalty for all deepwater PSCs

-It introduces a price-based royalty which will add 0 per cent to 10 per cent, depending on oil price.

-Deepwater fields currently pay between 0 per cent and eight per cent royalty, but could expected to pay 14 per cent once the bill is enacted

-The terms can be reviewed every eight years.

The change applies to all deepwater PSCs, regardless of vintage. Wood Mackenzie estimates it will result in a loss of value of US$2.7bn over the remaining life of the assets, a value reduction of 18 per cent.

Gail Anderson, director, sub-Saharan Africa upstream oil and gas, said, “The toughening of royalty is, relatively speaking, not as bad as investors feared. 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 US$65 per 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 US$50-55 per 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.

“Although in the short term, the change will deliver the intended increase in revenues for Nigeria, in the long-term it won't if investors allocate capital to better projects elsewhere.

“Finally, royalty is only one piece of the fiscal framework. Deepwater investors know that when their contracts expire over the next five years or so, they will likely face more fiscal changes in return for a 20-year renewal. Do they have the appetite for another long slog?”