Has the PIA unlocked the key to Nigeria’s long-term production stability?

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The Nigerian Petroleum Industry Act (PIA) 2021 aims to provide a regulatory, legal, fiscal and governance framework for the Nigerian petroleum industry as well as fund the development of host communities. It was signed into law by President Muhammadu Buhari in August 2021 and is the boldest attempt to overhaul the country’s oil sector which alone accounts for more than 40% of total GDP and up to 70% of budget revenue.

The new PIA has attempted to improve the country’s tax attractiveness by changing many facets of the regimes that apply to oil and gas assets. These include:

  • Royalty (RT) – Two levels (oil production rate and price, previously oil price and water depth) ranging from 5% to 15% for oil and 5% (export) or 2.5% (domestic) for gas and liquid gases.
  • Petroleum Profits Tax – replaced by a tax on hydrocarbons (HCT), the biggest change of the overhaul. A flat rate of 30% is applied to crude profit for fields under development or in commercial production in onshore or shallow waters. It appears that no HCT for deepwater assets is now applied due to its absence in Section 267 of the PIA. Therefore, it is used for the purposes of this analysis and corresponds to IHS Markit’s assumption of the PIA.
  • Tax allowance for investment – followed by a production allocation based on water depth (ranging, for example, from shallow water, 8 USD/bbl and 20% of the fiscal price of oil up to a cumulative maximum of 100 million barrels (MMbbls).
  • Other taxes – Ley Education and Development of the Niger Delta. These amount to 2% and 3% respectively and have remained unchanged apart from a few accounting subtleties.

An area of ​​particular concern and which is crucial to preventing Nigerian production from declining is the sanctioning and timely construction of new deepwater projects such as Bonga Southwest and Owowo. Figure 1 clearly highlights the reality of the importance of unauthorized projects, but especially deepwater projects, to Nigeria’s production growth and ultimately stability. Deepwater projects expected to start between 2025 and 2030 are estimated to hold recoverable resources of 2.3 Gbbl. Figure 1 shows that without the approval and commissioning of currently unlicensed projects, Nigeria’s overall production is likely to decline from the end of the decade and reveals that it is deepwater projects that can supply this production necessary to compensate for the expected drop in production. Therefore, unauthorized deepwater projects are seen as the main target area for tax and regulatory improvement which, as shown in Figures 2 and 3, should have occurred if the assets are converted to the new tax terms of the PIA. (cases executed at $95/barrel and 10% discount rate).

These deepwater projects at legacy RT conditions upon conversion will see their combined NPV increase by 89%, although in terms of the overall value of all new deepwater projects, this is still a small number due of only two developments under these conditions – parts of Egina South and Preowei, where for example an increase in NPV is observed of almost 100% for Preowei bringing its NPV to more than 1,500 MM$. Deepwater assets on PSA terms are expected to experience a combined total NPV increase of 116%, with some assets seeing increases of over 300% in the case of producer Bonga/Bonga North and over 200% in the case of development of Owowo taking its NPV. over $3,500 million. This is positive news for the projects and their operators and has prompted some of them and other joint venture (JV) partners to release reports that these changes have boosted progress towards an eventual final investment decision. (IDF). An example being Preowei, where operator TotalEnergies (TTE) has announced that it will accelerate development with a possible early conversion to PIA conditions (which would have taken place in August 2022) due to the new tax structure which contains advantages tax. These are the 0% HCT and the new incremental royalty based on production which has gone from a set of 10% for water depths greater than 200m to 5% for less than 50,000 bpd or 7 .5% for greater depths. The Shell (SHEL) Bonga/Bonga North expansion and the Bonga Southwest developments, both under PSA terms, are also believed to have progressed as the partners recognize the benefit the new terms will bring to their valuations, further from 400% to around $3,000 million in the case of Bonga SW, although hurdles remain.

These projects should remain an area of ​​special interest to the government. Indeed, they could find themselves blocked if the available conditions are not acceptable to the licensees. However, as demonstrated by the renegotiation in May 2021 of the terms of PSC Bonga Southwest and the subsequent renegotiation in August 2022 of six other blocks, including OMLs 125 and 130, if the government and the international oil companies (IOC) are in able to find common ground on such projects, this could lift Nigeria’s production prospects, as shown in Figure 1, towards the end of the decade, which would also likely help secure the country’s production at longer term.

Nigerian production outlook broken down by sanction status

Figure 1 – Nigerian Production Prospects Split by Sanction Status (Author)



Other important large resource projects that are critical for Nigerian production to remain stable are the deepwater Agbami field which has also benefited from the new conditions, if implemented, with an increase in the NPV of 50% bringing it to nearly $6,000MM, the deepwater field production of the Erha field which would see an increase in NPV of over 400% to over $4,000MM and the next development in Bosi Phase 1 deep water, where an increase of around 225% to over $1,300MM has been modeled. These increases are significant and illustrate the government’s intentions to move forward by putting project partners and fiscal attractiveness at the forefront when designing the PIA.

The trajectory of Nigeria’s future oil and gas production largely depends on the PIA and whether it is deemed sufficiently favorable to investors. This is largely unknown as operators and partners have generally remained silent apart from announcements made by development JVs Preowei and Bonga. Whether Nigeria’s boldest attempt to overhaul the country’s oil sector will work remains to be seen, but it is a positive step that has been welcomed so far and should help retain and attract new investments that will ultimately benefit the country – providing funds to help continue its journey towards diversifying its economy and improving gas and electricity infrastructure on its road to energy transition.

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.

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