WoodMac Faults Nigeria’s New PSC Legislation

Global energy research and consultant group, Wood Mackenzie, has predicted that the Deep Offshore and Inland Basin Production Sharing Contract Act, which was recently signed by President Muhammadu Buhari will lead to a loss of value of $2.7 billion over the life of remaining oil and gas assets.
This, the firm argued, would lead to value reduction of 18 per cent.

Mackenzie also said the PSC amendment took investors by surprise, pointing out that both legislative and executive process in the amendment happened within 26 days, thereby giving investors no time to think about it.

In a report, the global energy, chemicals, renewables, metals and mining research and consultancy group, stated: “Using Wood Mackenzie Valuations powered by our LENS Platform, we analysed the economic impact of SB 21. Applying the change across all deepwater PSCs with commercial assets, remaining value to investors reduces by $2.7 billion or 18 per cent overall.

”There is a strong correlation between the remaining pre-tax value per barrel and the scale of impact. This is highlighted by OML 130 which is generating significant cash flow after a sustained period of investment. Its reduction in value is only 11 per cent.

”This increase in Deepwater royalty won’t be the end of fiscal change. Royalty is just one piece of the fiscal framework. From 2024 onwards, all 1993 Deepwater PSCs will begin to expire with Shell’s OML 118 the first of them.

”It is expected that NNPC will renegotiate tougher PSC terms in exchange for a 20-year renewal. A non-binding Heads of Agreement was signed with Shell in February which provided a ‘clear commercial framework for a potential Bonga SW Aparo FID.”

The firm added: “’That framework included a possible reduction in the cost recovery ceiling from 100 per cent to 80 per cent, and the removal of 50 per cent investment tax allowances. Even the removal of fiscal consolidation within the contract was raised.

”Higher royalty significantly alters this framework. FID on Bonga SW Aparo already looked unlikely this year, but now further negotiations will be needed if this project – and others – are to ever move forward. Fiscal uncertainty is set to continue for deepwater investors long after this change.”
It, however, stated that, ”it is worth noting that SB 21 is not the worst outcome for Deepwater investors. House Bill 89 would have resulted in a government share of 77 per cent.

”On the face of it, this change is relatively modest, a guaranteed 10 per cent royalty and a small price-based royalty on top which responds to fluctuations in the oil market. Deepwater fields, which contribute a third of Nigeria’s liquids production, will continue producing and most new projects could still make money at a discount rate of 15 per cent and a long-term oil price of $65/bbl.”

It added: ”This royalty change may look reasonable from within Nigeria, but in the global competition for investment, it pushes Nigerian projects another notch down the attractiveness ranking and possibly out of the money.

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