Nigeria’s newly signed law to govern deep offshore oil operations set a record for the fastest bill so far passed under President Muhammadu Buhari.
Under the new regulations, energy producers that pump about 80% of Nigeria’s crude will now pay levies for fields where they previously paid none. The measure will add at least $1.5 billion to the treasury next year, according to Senate leader Ahmed Lawan. These will come from a 10% royalty on output from water depths starting at 200 meters and from a price-based system that compels producers to pay extra rates between 2.5% and 10%, which could see payments potentially reaching 30%, depending on crude prices.
“A combination of complicity by Nigerian politicians and feet-dragging by oil companies has, for more than a quarter-century, conspired to keep taxes to the barest minimum,” Buhari said.
Nigeria Wants $62 Billion From Oil Majors on Offshore Ruling
It’s the latest in a slew of policies unfolded by a government confronted by declining oil output and price and a burgeoning sovereign debt, as officials seek to sustain high levels of public spending. The administration has also moved aggressively against companies for suspected tax arrears, even demanding $62 billion from the oil companies. A claim they disputed.
“The indisputable intent of the amendment is to increase government earning,” said Dayo Okusami, head of energy and projects at at Lagos-based Templars Law.
The Nigerian National Petroleum Corp. has production-sharing contracts with producers including Royal Dutch Shell Plc, Chevron Corp., Exxon Mobil Corp., Total and Eni SpA governing deep-water fields that currently account for about two-thirds of average daily production of 2 million barrels.
“This rate increase would result in future deep-water projects becoming economically unviable and leading to at least a $15 billion reduction in planned near-term investments, and a 20% decline in deep-water production by 2023,” said the Oil Producers Trade Section of the Lagos Chamber of Commerce, which groups all the oil majors in Nigeria. The amendment is “a disincentive to investment in the deep-water and it is further eroding Nigeria’s global competitiveness,” the group said in an emailed response.
Nigeria has been roiled by revenue shortfalls in the past year since exiting its worst economic downturn in 25 years, leaving the government of Buhari, who won re-election in February, hard-pressed to fund infrastructure and a bloated wage bill. The government also plans to increase value-added tax to 7.5% from 5% in January.
“Chevron believes a stable business environment with competitive fiscal policies is essential to encourage investment, and the passing of this amendment will make Nigeria less competitive,” said Ray Fohr, a spokesman.
Total and Eni declined to comment, while Shell is “in discussions with the government and our co-venture partners on the development and options to ensure the attractiveness of Nigerian deep offshore investments,” said Bamidele Odugbesan, a Lagos-based spokesman.
Over the past 15 years, a raft of new offshore discoveries have joined Nigeria’s potential project lineup, including the massive Owowo field made by ExxonMobil. Planned projects such as Shell’s Bonga expansion, Eni’s Zabazaba and Total’s Preowei, an expansion of the Egina field, now stand a risk of being suspended because of the new law.
In Brazil, oil majors stayed away from recent oil-block auctions faced with high price tags and some outstanding regulatory uncertainties.
“We believe this bill will discourage new investments, as well as delay final investment decisions on pending offshore projects,” said Oluwabusola Jeje, an analyst at Lagos-based United Capital Plc. “Considering the volatile nature of crude prices, we could see new capital inflows directed toward countries with better fiscal terms and less regulatory uncertainty.”