Thursday, September 24, 2015

Nigeria Reconsiders Its Oil Contracts



Nigeria is in a quandary when it comes to energy. Its onshore and shallow-water oil reserves are maturing, and increasingly being eclipsed by the potential of the country's deep-water oil reserves. Yet, having neither the technological know-how nor the finances to develop deep-water wells, the Nigerian government relies on international oil and natural gas companies such as ExxonMobil and Shell to exploit its offshore fields. Nigeria has been trying since 2008 to renegotiate its archaic contractual terms with the companies it has come to depend on. There are deep-seated concerns that the Nigerian government in Abuja is missing out on billions in oil revenues. Though keen to maximize its revenue share, Nigeria has historically faced difficult market issues that have constrained its ability to negotiate the best terms. 
An announcement last week by the head of the Nigerian National Petroleum Company (NNPC) that contract negotiations were underway is revealing, but perhaps premature. Speaking at a Nigeria-France business forum in Paris, general managing director Ibe Kachikwu said that contractual terms with international oil and natural gas companies (IOCs) were under review, especially those relating to deep-water offshore fields. Nigeria has been in discussions for some time, but will have to tread carefully to avoid alienating the very companies it so desperately needs, which will take finesse.


Nigeria has long been considering how best to reform its contractual terms with IOCs. Yet, any previous attempt by the National Assembly in Abuja to push through legislation supporting new fiscal terms has resulted in political gridlock and opposition from IOCs. Unfortunately, the Nigerians are not in a position to delay. Like the majority of oil producing nations, Nigeria is suffering as a result of low oil prices. The price of a barrel of oil is almost at $40 and is unlikely to recover in the immediate future. The corporate finances of the NNPC as well as the coffers of the Nigerian treasury are increasingly depleted. This depletion has led to widespread austerity measures throughout the country and a reinvigorated desire to increase revenue from oil companies operating in Nigeria.
But first, parliament must agree on how best to proceed, which is problematic in itself. The ill-fated Petroleum Industry Bill floundered for over six years before it was effectively nullified as a result of former Nigerian President Goodluck Jonathan's polarization of Nigeria's key energy stakeholders. Now it is unlikely to be considered in its entirety because of the serious complications associated with reforming Nigeria's oil industry as a whole. The NNPC is the conduit through which the government regulates energy production and interacts with the global industry. It is far from a transparent organization. Nigeria has also come to depend on the same coterie of oil companies to handle the bulk of its energy extraction. These are the same IOCs that are expecting to be called upon to develop the new deep-water fields.
Abuja is aware that drastically modifying or cancelling existing contracts is a good way to alienate the companies that Nigeria desperately needs to access its enduring oil reserves. Still, low oil prices will likely force Abuja to proceed on the contract reform aspect of the Petroleum Industry Bill separately. Nigeria relies on oil for over 70 percent of its overall revenues and wants to ensure a greater return, but any renegotiation of contracts will not come quickly or easily.

The Difficult Road to Change

Nigeria's oil production can be loosely grouped into three areas: onshore production, shallow-water production and deep-water production. Each area produces roughly one third of Nigeria's oil. However, onshore production is waning as the most important fields reach the final stages of their lives. As a result, IOCs are starting to withdraw from the depleted onshore developments. Royal Dutch/Shell finalized a divestment plan in March, and Total completed a similar plan in the same month, to the tune of $1 billion. In July, Eni announced that it was considering a divestment of its onshore fields in Nigeria. In response, the Nigerian government has encouraged the development of its indigenous oil and natural gas operating environment. Increasingly, Nigerian operators are partnering with 2nd and 3rd tier international companies to take the place of the supermajors onshore in Nigeria.

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