Between 2010 and 2019, Nigeria’s oil production has been in decline. During that period, only three deepwater projects have been placed on-stream to help stem the fall, these are: Usan (ExxonMobil), Aje (Yinka Folawiyo Petroleum Company Limited), and Egina (Total). Looking ahead, several projects are stalled but a further four deepwater projects may come online between 2020 and 2024. The forecast additional production increment from these upcoming projects will not be enough to reverse Nigeria’s projected production decline without new exploration investment. These trends also suggest that the sector will be unable to meet the government’s production target of increasing crude oil output to three million barrels of crude oil per day by 2023.
In November 2019, the government introduced an amendment to the PSC Act, which increases royalty rates payable for production in deepwater areas and imposes penalties for non-compliance.
The introduction of higher royalty rates further reduces the attractiveness of the regime for future deepwater projects. At oil prices between $50-$60 per barrel, a project’s IRR is lower under the new royalty rates and the break-even price increases. The potential upside of higher oil price scenarios is also further degraded. These changes could make it more difficult for a project to be sanctioned and could reduce potential additional supply volumes available to reverse the projected decline and meet the government’s 2023 production target.
In 2020, Nigeria will be one of many countries along the West African margin seeking to attract exploration investment through licensing round activity. Prior to the amendment, Nigeria’s PSC regime was already one of the least attractive in West Africa. With the further reduction in competitiveness going forward, companies may choose to preferentially invest in other countries with more attractive fiscal frameworks, particularly given the provisions under the recent amendment allow for the new terms to be reviewed every eight years, which creates additional investment uncertainty. This could further stunt possible future supply that could contribute to Nigeria’s crude oil production outlook.
In addition to its application to new projects, the government is also looking to generate immediate revenue from the PSC amendment, meaning that current producers may face an additional fiscal burden. Though stability clauses in existing contracts may prevent this, these measures could further destabilise Nigeria’s investment environment and deter future investment.
Overall, it is possible that Nigeria’s burdensome regime may increase revenue accruing to the government in the short term, however, in the longer term it may dissuade investment, which could exacerbate the country’s forecast insufficient supply, and encumber the government’s efforts to meet its 2023 output target.